How payment leaders can use cash-flow insights to boost lending | PaymentsSource

As digital transactions produce more data and the U.S. embraces open banking, an older form of lending is getting a second wind, opening credit opportunities for more borrowers.

Cash flow underwriting uses a would-be borrower’s income and expense information to inform a lender’s willingness to offer a loan to a consumer or small business, providing real time information on income, expenses, account balances and payments. 

Cash flow underwriting has been touted as a way to reach subprime and thin- and no-file consumers, but lenders’ hesitancy to add alternative data to their scoring models has left the practice in the starting gate. But the rise of digital payments, coupled with the U.S.’s new open banking framework, presents new opportunities – especially for payments companies. 

The process has been around for nearly a decade, but has started to gain new traction amid the wider digitization of payments and increased adoption of open banking technology. And the convergence of the two has the power to increase credit access for underserved populations, according to a December 2024 study of India’s Unified Payments Interface by the National Bureau of Economic Research, which found that credit access increased by an average of 15% in high-exposure areas after the introduction of UPI. 

In the U.S., Experian has launched a cash flow credit score, a proprietary credit model that allows lenders to provide the credit rating agency with transactional data. Experian then analyzes and categorizes the different types of transactions and uses machine learning and artificial intelligence to calculate those attributes and generate a score. 

“We believe [open banking] can be a really powerful tool that can both benefit consumers and ultimately give a more holistic view of those consumers to lenders to have a more inclusive system,” Scott Brown, Experian group president, financial and marketing services, told American Banker. 

Consumers are willing to provide the information, Brown said. Seventy one percent of consumers said they were willing to share some of their banking information in exchange for improved credit or improved credit offerings, according to Experian research. 

The score can be used to make lending decisions about credit cards, personal loans or auto loans for both first and second chance offers, Brown said. 

Banks and payment companies are evaluating their open banking strategy, Collin Galster, chief operating officer at Nova Credit, told American Banker. Nova Credit is a credit data and analytics infrastructure platform that specializes in cashflow underwriting and works with half of the top 10 banks in the country. 

“The credit and lending world is thinking about using open banking capabilities to do cash flow-based underwriting. The question really in the past year has shifted from ‘whether’ [to engage in cashflow underwriting], to ‘how?'” Galster said. 

“There’s no major consumer lender today who is not thinking about their open banking strategy,” he said. 

There are several potential benefits for lenders and payments companies. First, it provides a deeper view into a consumers’ financial health because lenders have more information about assets and liabilities as well as inflows and outflows. It also serves as a complement to traditional credit bureau data by providing a more complete picture of a potential borrowers’ financial health. 

“In a world where people care about basis points of predictive insight, you’re talking about many percentage points of lift on top of the old tool system, which is really powerful,” Galster said. 

Regulatory moves are also benefitting cash flow underwriting and open banking.The Consumer Financial Protection Bureau’s 1033 rule provided a formal clarity to a sea change that was already happening. 

“Open banking technology was already becoming ubiquitous [and]… because of the rise of digital payments, which I think is a secular trend, we’re going to keep moving in that direction over time. More and more of the fingerprints, the footsteps of the consumers’ outflows, are being recorded in digital formats,” Galster said. 

Open banking and digital payments can also help open credit access for small businesses, a nut that payments companies have recently been looking to crack. 

“Cash flow is one of the highest predictors of the health of the business [because] you can see the in and outs,” Bharat Poddar, managing director and senior partner at Boston Consulting Group, told American Banker. 

Hello Alice, a fintech and online platform that connects small business owners – particularly from historically underrepresented groups – to funding education and community resources, partners with Mastercard to use open banking rails to populate a questionnaire that determines its business health score, a proprietary scoring model that it sends to lenders, Chief Financial Officer Matthew Brewster told American Banker. 

“The way that I would describe that is we’re really taking the open banking data poll upstream from the point of application for capital earlier on, so that we can extract insights from the open banking information, streamline the experience of giving your score in the first place and of updating it [similar to] Credit Karma,” Brewster said. 

That score has helped open up access to capital for small businesses, Brewster said. “As it relates to access to capital, just having self-reported information, the best you could ever get a lender to do is use that as a pre-screen to inform targeted marketing. They’re not going to [make a lending] decision on it at all. But with open banking data, we can actually get some of them to prequalify.” 

For small business’ access to credit, the fundamental roadblock is underwriters’ reticence to underwrite the business versus the owner of the business, he said. 

That presents opportunities for point-of-sale payments providers to offer credit access to small businesses, because they have direct insights to the inflows and outflows of that business. And some payment processors already offer loans to small businesses. 

Stripe, for example, offers loans to small businesses ranging from $100 to $150,000 through Stripe Capital, and uses a percentage of daily sales to secure repayment on those loans, according to its website. 

Block’s merchant platform Square also offers loans ranging from $100 to $300,000, and takes into account “your time using Square, your processing volume and frequency, your customer mix and more,” according to its website. Square also takes a percentage of daily sales for repayment. 

But for small businesses, cash flow isn’t the only predictor of a businesses health, BCG’s Poddar said, including geographical, seasonal and sector differences. 

“A small bodega operates very differently than a small restaurant versus a small automobile shop. There are nuances that go beyond just the cash flow statements,” Poddar said. 

“Just to say that because you have open banking and access to the cash flow of a small business is enough in my mind is too simplistic,” Poddar said. “You have to marry that together with your understanding of different geographies and sectors, and potentially marry that with not just the cash flow of the business, but the cash flow of the individual.”