Lenders have long relied on credit scores alone to make lending decisions. While traditional credit is a useful risk indicator, relying on just credit scores means nearly 49 million US adults with thin or no credit are unable to finance a car, purchase a home, or build generational wealth. This also leaves lenders blind to potential risks — and opportunities.
Increased access to cash flow data for underwriting is changing how loan applicants are being evaluated.
The rise of cash flow underwriting is making it easier for lenders to make more informed lending decisions, offer new products, and increase credit access in underserved communities. The future of financing will be powered by intelligent analysis of cash flow.
What is cash flow underwriting?
Cash flow underwriting is the process of using a borrower’s income and expense data to inform the approval or denial decision on a loan. Cash flow data provides real-time information on an applicant’s income, expenses, and bank account balances—giving lenders a better sense of their ability to repay a loan.
Cash flow underwriting can be used as an alternative to traditional credit scores, or used alongside them to provide greater insights. This additional data also helps lenders to fairly evaluate credit invisibles, many of whom are young people and recent immigrants. In fact, 19 million additional US adults could be evaluated for credit by using alternative data instead of credit scores.
Even traditional credit scoring companies like FICO believe a combination of traditional and cash flow data results in better risk models. A survey of 2,000 US loan applicants found that 72% say they are comfortable sharing this data with lenders.
Cash flow underwriting examples
83% of lenders say they’re open to using new types of data, the majority of which are cash flow related. To understand the versatility of cash flow underwriting, it's helpful to explore real-world examples of when this data can be used:
Payday and cash advance loans: Payday and cash advance loans are known for quick disbursement of funds. Cash flow underwriting can quickly and accurately assess the borrower's ability to repay the loan based on their income, expenses, and when they are likely to be paid. This helps lenders make smart lending decisions while allowing borrowers to access funds quickly.
Property management: Property managers can verify an applicant's income with cash flow data instead of paystub uploads or self-reported income, ensuring they can afford the rent and other expenses associated with leasing a property. This can expand housing access to consumers with thin credit files while limiting risk for property owners.
Mortgage and auto financing: Lenders can gain a more holistic view of a borrower's financial health and stability to determine eligibility and loan terms. It can also help better evaluate applicants who don’t have a traditional W2 income, such as freelancers, business owners, and gig workers.
Credit cards: By analyzing the income and expenses of credit card applicants, lenders can set more accurate credit limits and interest rates, enabling responsible credit card usage while minimizing the risk of default.
These examples highlight cash flow underwriting's ability to adapt and improve risk assessments across a variety of industries and lending scenarios. As technology improves, cash flow data will become easier to access, which may increase the use cases.
Cash flow underwriting vs. traditional underwriting
Traditional underwriting relies heavily on credit scores, collateral, and debt repayment history. Cash flow underwriting considers a borrower's current banking data, including income and expenses, to assess their ability to meet financial obligations.
Cash flow underwriting and traditional underwriting represent two distinct approaches, each with its own strengths and limitations. However, it's important to note that these approaches are not in competition; rather, they should work together to create a comprehensive financial assessment.
While some lenders may be concerned that consumers won’t want to share cash flow data during the loan application process, our research has shown that’s not the case (see below).
Loan applicant comfort level sharing financial information with lenders, by type:
Proof of primary income: 84%
Utility payment history: 74%
Bank statements: 74%
Rent payment history: 71%
Proof of secondary income streams: 65%
Savings/investment account balance: 64%
How cash flow underwriting is getting better with technology
Despite the benefits of cash flow underwriting, many financial institutions have been hesitant to leverage this data due to difficulties accessing and making sense of cash flow data. Today, technology is making the process better by enabling easier access and usability of cash flow data.
Plaid Income provides direct access to comprehensive identity, employer, and gross and net income data. But gaining access to the data is just the first step. Understanding that data is now easier thanks to solutions offered by Plaid's new consumer reporting agency (CRA). The CRA provides a consumer report on a borrower’s cash flow data with actionable insights to help lenders make better risk decisions, whether it’s for loan approvals, verification, or ongoing monitoring.
These solutions help lenders evaluate an applicant’s ability to pay, expand eligibility, and manage risk—while improving financial opportunities for millions of consumers with limited or low traditional credit scores.
Cash flow data is going mainstream
Hear what 400 lending professionals and 2,000 borrowers have to say about the next era of lending
Optimizing cash flow underwriting: 5 strategies for success
Despite the benefits of using cash flow data, lenders may struggle to understand how and when to use this data. The following strategies will help financial institutions make the most of cash flow data:
1. Use cash flow data to enhance data verification
Cash flow underwriting can aid in verifying data in the lending process. Leveraging this approach helps lenders verify applicant information, reducing the risk of erroneous or misleading data. For example, cash flow data can validate self-reported income and minimize income-related discrepancies.
2. Determine income and employment stability
Direct deposit data can confirm the borrower's place of employment, how long they've worked there, and how often they are paid. Additionally, lenders can estimate the regularity of a borrower’s income streams, providing insights into the borrower's overall financial stability.
3. Leverage additional data in second-look underwriting
A consumer who receives a “pending” or even an initial decline based on traditional credit data may be offered a "second look." Lenders can ask a borrower to provide bank data to determine whether the pending loan might be approved after considering this additional data.
4. Improve loan terms
Most unsecured loans, such as personal loans and cash advances are commoditized. Borrowers care primarily about rates, fees, loan amounts, and loan duration. Offering the best terms is important for financial institutions to grow origination volume in a competitive marketplace. Looking at cash flow data allows financial institutions to offer more competitive terms by evaluating a more robust borrower profile.
5. Get real-time insights into spending patterns
Traditional credit data lags by 30 days or more, which can make it difficult to catch sudden changes in spending patterns. Looking at banking data can help lenders spot changes in spending patterns quickly.
For example, a change to a consumer's average expenses or an increase in non-sufficient funds fees could suggest a borrower may be under financial duress. Alternatively, a lender could detect a higher paycheck amount based on a promotion or job change and then offer a higher credit limit.
Cash flow underwriting is taking lending into the future
Traditional credit scores only tell lenders part of the story. Cash flow underwriting is helping reshape the lending industry by empowering lenders to make more informed decisions. Cash flow underwriting is likely to become a cornerstone of responsible and inclusive lending, fueling economic growth and financial well-being for individuals and businesses.
However, lenders often struggle to use cash flow data due to the complexity of analyzing vast amounts of transactional information, which may require substantial technical resources. Solutions like those offered by Plaid's new consumer reporting agency are changing the game by making it easier than ever to both access and use cash flow data in lending decisions.
→ Learn more about Plaid’s new CRA and how it is helping lenders leverage cash flow data in the underwriting process.