Cash flow underwriting has been “the next big thing” in the lending industry for several years now. And while several lenders use it as part of their underwriting, it hasn’t become a mainstream tool. That may change with today’s announcement from Plaid.

While before Plaid announced a cash flow underwriting initiative a year ago, today they are taking it to the next level with the launch of Consumer Report,

Let’s step back for a minute. Plaid became a consumer reporting agency (CRA) last year and the agency is called Plaid Check. This had profound implications for its cash flow underwriting goals. When you are a CRA you can provide not only data but, more importantly, insights from that data that lenders can use for underwriting. If you are not a CRA, you cannot provide such insights.

This is an important point because most lenders don’t want to deal with cash flow data itself, as it is notoriously complex and convoluted. The value is in providing insights into that data.

As such, Plaid will now provide lenders with insights into up to 24 months of consumer-authorized bank account data. It will also provide Income Insights, which checks the consumer’s ability to pay. But what’s perhaps most interesting about today’s announcement is Plaid’s expanded partnership with Prism Data, which will provide a unique cash flow risk score.

Prism Data was born last year from credit card fintech Petal and has been powering credit products since 2018. They have also developed CashScore, a creditworthiness metric not unlike a credit score, but based solely on credit data cash flow. Plaid will use this score as part of the Consumer Report.

How cash flow underwriting is used today

Plaid has run Consumer Report beta tests with nearly a dozen lenders across personal loans, BNPL and proptech, including big names like Oportun and H&R Block.

Jonathan Gurwitz, Credit Lead at Plaid, discussed how lenders will use Consumer Report. The two main use cases involve taking a second look at borrowers who were initially rejected for credit and increasing acceptance rates by providing a better interest rate to borrowers who have already been approved.

“This is not a small population, a set of marginal declines by a lender,” Gurwitz said. “Even in certain situations, marginal approvals, where you feel like you don’t have a competitive rate to offer to that customer, giving them the ability to link their account and improve their offering. Overall this is a pretty large population and I think there can be a real impact here.

When I tried to get Gurwitz to share what kind of borrower pool growth lenders can expect, he was reluctant to provide concrete numbers.

“I hesitate here, because it’s so varied, but I think, overall, an estimated 5 to 15% growth in originations without adding risk… there’s not a lot of initiatives you can do like, you know, pretty developed credit space where you can get that kind of lift.

Lenders use Consumer Report in addition to compiling a traditional credit report to expand their customer base and provide better pricing for those customers who have been marginally approved.

This is a win-win solution. It’s a win for the borrower, who has now been approved or received a better interest rate. It’s a win for the lender, who now has a paying customer. And it’s a win for Plaid, which generates revenue from using its data.

Lenders implement the Plaid user experience for linking bank accounts, which is something most people are familiar with by now. So, it is a light switch for the borrower with a significant reward.

We don’t want to gloss over the Income Insights tool because that’s a key part of the equation here and one that sets Cash Flow Underwriting apart from traditional credit reporting. Often, the credit side of a consumer’s bank account is complicated. Nowadays many people earn more than just W2 income. There’s often money from gig jobs, side hustles, and Venmo or PayPal payments flowing in and out.

“It’s not trivial to go from bank transaction data to the ability to actually develop a reliable estimate of someone’s gross income,” Gurwitz said.

Plaid includes over a dozen income streams categorized to provide your expected net and gross income, as well as an expected date for your next paycheck. This makes debt-to-income ratio calculations much more accurate.

Looking forward

The machine learning models powering Consumer Report will continue to improve, and Plaid is also looking to create new cash flow attributes to help lenders better predict short- and long-term credit risk.

The Plaid network is unique in that it includes 500 million connected accounts. Therefore, the company is currently examining account connection activity on the Plaid network as a risk predictor. This is in its infancy, but it contains a treasure trove of information, obviously used only with customer permission, that could further increase Consumer Report’s effectiveness.

There may come a day in the not-too-distant future when Plaid looks at all of a consumer’s linked accounts, including brokerage and money market accounts, and uses all of this information in real time to make an underwriting decision.

Regardless of where it ends up, the progress announced today by Plaid will have a dramatic impact on the future of lending in this country. It could be the starting point needed to bring cash flow underwriting into the mainstream.

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  Peter Renton is president and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and is the author and creator of the Individual fintech podcastthe first and longest running fintech interview series.

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