Alternative lending is continuing to revolutionize the financial services landscape. From full-file public records to cash flow transactions, alternative credit data empowers financial institutions to make more informed lending decisions.
This article focuses on cash flow insights and how they help financial institutions drive profitable and inclusive growth.
Challenges with traditional credit underwriting
Traditional underwriting often limits access to credit for marginalized communities, including young adults, immigrants, and those from low-income backgrounds. Because the process relies heavily on credit history and credit scores to determine an applicant’s ability to pay, those with less-than-ideal credit profiles could be overlooked. This then creates a cycle — those who are already disadvantaged face further barriers to accessing credit, limiting their abilities to invest in opportunities that can improve their financial situations, such as education or homeownership.
Additionally, traditional underwriting models can be rigid. Consumers with stable incomes or significant assets may be denied credit if their financial profiles don’t fit the narrow criteria established by traditional models. As the financial landscape evolves, it’s important for lenders to adopt more inclusive and adaptive approaches to credit underwriting.
What is cash flow underwriting?
Cash flow underwriting is a modern approach to evaluating a borrower’s creditworthiness. It uses fresh, consumer-permissioned bank account transaction (balance, income and expense) data, giving lenders greater visibility into loan applicants’ financial situation. This process is made possible through open banking, an established, secure framework that enables consumers to quickly and easily share their bank account information with third-party financial service providers.
READ: Learn more about the open banking landscape.
Let’s look at a few quick examples:
- A prospective tenant is filling out a rental application. Instead of manually submitting paystubs to verify their income, open banking facilitates the digital sharing of full cash flow data in seconds, enabling property managers to quickly access the applicant’s full cash flow information.
- A consumer was previously denied credit due to insufficient credit history. With cash flow underwriting, the consumer is offered a second chance to qualify for the loan by including cash flow data in the lender’s decisioning model. The additional information gathered on the consumer’s ability to pay can transform the initial decline decision into an approval.
- Cash flow underwriting can also be used for credit line management. By assessing a borrower’s income and expense transactions, lenders can recommend optimal credit limits that cater to their spending potential while minimizing risk.
Benefits of cash flow underwriting
There are many benefits to integrating cash flow data into the credit underwriting process, including:
- Enhanced risk assessment. Going off credit scores and repayment behaviors alone won’t provide lenders with a complete or current picture of applicants. Through open banking, lenders can gain access to cash flow data in real-time, allowing them to more accurately assess consumers, increase approvals, and reduce credit risk.
- Inclusive lending. Millions of American adults are considered unscoreable, invisible, or subprime. However, 71% of consumers are willing to share their banking information if it could improve their chances of getting approved for credit.1 With deeper insights into consumers’ income and expenses, lenders can increase credit access in underserved communities.
- Improved customer experiences. Gaining a more comprehensive view of a consumer’s financial situation enables lenders to determine what loan products they’re eligible for and craft personalized options.
READ: Learn more about the benefits of leveraging alternative data for credit underwriting.
Get started
Cash flow underwriting represents a significant step forward in the world of lending. It offers a more comprehensive approach to assessing creditworthiness, helping financial institutions drive growth and profitability.
Cashflow Attributes are one of Experian’s open banking solutions that provides lenders with consumer-permissioned insights into borrowers’ financial behaviors. With 940+ attributes derived from transaction data across 133 categories, financial institutions can make smarter, more inclusive lending decisions.
Learn more about Cashflow Attributes Learn more about open banking
1Atomik Research survey of 2,005 U.S. adults online, matching national demographics, 2024.
