Cash flow underwriting: Benefits & how to access cash flow data

December 13, 2022

According to Pinwheel research, 75% of US workers believe that credit scores should not be the only criteria to qualify for a loan. However, accessing the vast majority of traditional credit products today still hinges on having a good credit score, excluding roughly one-third of US consumers.

On the one hand, consumers want more inclusive financial products. On the other hand, lenders need to find a way to decrease credit risk. To achieve this, lenders can include cash flow data in their underwriting models. Cash flow underwriting uses alternative credit data such as income or bank account transactions to understand a borrower’s cash flow and better assess their creditworthiness.

Traditional underwriting methods depend greatly on an individual’s credit profile, as calculated by credit bureaus that take into account factors such as payment history, credit history length, and amounts owed. Although cash flow data is excluded from this assessment, a growing number of lenders are now incorporating it into their underwriting methods — over half are utilizing cash flow or bank transaction data to determine a potential borrower’s creditworthiness.

With access to cash flow data, lenders are also able to better understand a consumer’s ability to pay back a loan. This is a critical advantage now that rising interest rates, economic uncertainty, and a potential recession are threatening to increase unemployment and potentially increase delinquencies.

The advantages of cash flow data

With cash flow data, fintechs, traditional financial institutions and lenders can improve their underwriting models, reduce fraud, and deliver better products.

1. Reduce default and portfolio risk

After a period of economic growth, financial service providers and consumers are once again grappling with financial turmoil and bracing for a potential recession. Cash flow data can help lenders navigate challenging economic conditions with in-depth insights into their customers’ financial health.

The use of cash flow data in loan underwriting improves lenders’ ability to determine a person’s default risk, ensuring they can still offer credit to individuals with a stable income. Likewise, cash flow data can support lenders in analyzing the health of their loan portfolio by providing a more granular overview of different borrower segments.

2. Reduce fraud

Addressing fraud is a top of mind issue for lenders. For every five loan applications, one has an inflated income statement. It’s also easy to create a fake paystub — there are over 300 websites that offer this service for a small fee, and lenders that still default to asking applicants to manually upload their paystub are at risk of receiving a fake one.

Cash flow data solves this problem by enabling lenders to verify an applicant’s earnings using data straight from source systems, such as a person’s payroll platform or bank account. While some financial service providers might worry that their customers would hesitate to grant them access to this data, our research indicates otherwise. The majority of US workers (82%) are happy to share this information.

3. Personalize financial tools and services

With consumer-permissioned access to cash flow data, lenders also benefit from real-time insights into their customers’ finances, which allows them to tailor their tools and services to evolving customer needs.

Credit reporting agencies update credit scores on average every month, but cash flow data can be updated in real time. When a customer gets a salary raise, for example, the lender can receive a notification and automatically offer the customer a credit line increase or another product they’re eligible for. If a customer’s salary decreases dramatically or if they lose their job, the lender can create a new repayment plan that lowers the delinquency risk.

Offering these types of personalized financial services represents a significant market opportunity. More than six in 10 (62%) US workers are interested in automatic credit line increases based on increases in income, while 63% are interested in proactive loan repayment plan recommendations if there’s a sudden decrease in income.

4. Expand consumer base

Cash flow underwriting allows lenders to factor in additional data for credit risk assessment. While a person’s credit score is a good place to start verifying their creditworthiness, this potentially excludes no-file, thin-file, and subprime applicants who might otherwise be safe to lend to. For example, someone who has recently emigrated to the US to work a high-earning job could be an excellent candidate, even though they don’t have any credit history.

However, these applicants are often turned away or offered high-interest options they can’t afford. Cash flow data provides a solution — an additional layer of data that lenders can use to lower the risk of extending credit to borrowers they would otherwise have to turn down. Consequently, financial service providers can expand their market and delight consumers who have been traditionally underserved in the financial system.

What is the best way to access data for cash flow underwriting?

Financial technology APIs are the best and safest solution for accessing consumer-permissioned cash flow data.

With an API, lenders can automatically connect to hundreds of data source systems — a much faster and cost-effective solution compared to manually integrating with every system. On the customer side, they can easily authorize access and provide the necessary data without having to manually upload any documentation.

Cash flow data can come from either the customer’s bank account (by analyzing their transaction data) or their payroll platform (by analyzing paystubs and shift data).

Payroll platforms have several advantages over bank transaction data — the first being that they sit at the top of the consumer financial data stack. A person might direct deposit their paycheck into several accounts, so their bank transaction data might not be 100% accurate with regard to their earnings.

Additionally, payroll includes data on tax withholdings, healthcare deductions, 401(k) contributions, unpaid leave, paid and unpaid time off, and other important income-related information that doesn’t exist in bank accounts. Connectivity to payroll is also critical to get immediate updates on any changes to a customer’s income or employment status.

To ensure regulatory compliance when accessing cash flow data for credit underwriting, lenders should only work with FCRA-compliant data vendors, like Pinwheel. The FCRA regulates the collection of and access to consumer data, providing consumers with recourse if the data proves to be inaccurate. Fines for violating the FCRA range from $100 to $1,000 per violation, and some cases have led to multimillion-dollar fines.

Power cash flow underwriting with Pinwheel Earnings Stream and Verify

To enable cash flow underwriting, getting access to consumer cash flow data is only the first step. The next step is to analyze the data to determine the person’s income, pay frequency, and other factors that influence their creditworthiness. Unlike other payroll data connectivity APIs that only provide data, Pinwheel completes both steps to deliver ready-to-use, real-time income data insights.

With Pinwheel’s Verify and Earnings Stream solutions, lenders can decrease risk, grow their customer base, and expand credit access to traditionally underserved customers.

Earnings Stream insights span historical cash flows, accrued earnings in the current pay period, and projections of future earnings and pay dates. The solution is supported by our income platform coverage, which is the highest in the market at 1,600+ payroll platforms and the top 40+ time & attendance systems, covering 80% of US workers.

In addition to enabling cash flow underwriting, financial service providers can use Earnings Stream to launch earned wage access, offer financial management tools, or develop brand-new products.

Verify enables automated income and employment verification for faster application processing (with support for document uploads), helps reduce fraud, and allows lenders to use income data for FCRA-permissible purposes such as credit decisioning.

Both products include recurring access, a feature that updates income and employment data in real time, so lenders are notified as soon as there are changes to a customer’s income or employment status.