Projects

The Use of Cash-Flow Data in Underwriting Credit


Overview

Even before the Covid-19 pandemic massively disrupted the nation’s economy, millions of consumers and small businesses struggled to access affordable credit because of gaps and weaknesses in traditional financial information systems. Approximately 20 percent of U.S. consumers lack sufficient credit history to predict their repayment risk using conventional scoring models. Small businesses also face particular information barriers in accessing credit, especially those businesses that have not yet built financial track records.

To fill these gaps, both traditional incumbents and new entrants have been experimenting with various sources of “alternative” or “non-traditional” data. One of the most promising of these alternatives is cash-flow data — such as records from consumers’ deposit and card accounts and from small businesses’ accounting software — because it provides a relatively detailed and comprehensive picture of how applicants manage their finances on an ongoing basis. Yet while recent technological and market developments are making it easier for lenders to access cash-flow information electronically, the adoption of underwriting models that rely on detailed analyses of such information is uneven in the United States.

FinRegLab set out to investigate the use of cash-flow data in credit underwriting by conducting an empirical assessment of its benefits and risks, as well as market and policy analyses of the challenges to its wider adoption. We view the project as a useful case study at the intersection of two broader financial innovation trends: (1) the transformation of automated credit underwriting as firms experiment with new data and analytical techniques; and (2) efforts to structure the new data transfer system to enhance customer control and spur greater competition and innovation in financial services markets.

Our groundbreaking empirical research used data from six non-bank financial services providers—Accion, Brigit, Kabbage, LendUp, Oportun, and Petal—that are using cash-flow data in an effort to provide unsecured, relatively short-term credit to consumers and businesses who may have difficulty obtaining loans from traditional sources. We retained Charles River Associates to help us design and conduct an independent analysis of the participants’ cash-flow variables and scores relative to actual loan performance for purposes of assessing general predictiveness, inclusion, and fair lending risk in connection with credit eligibility determinations.



Related Publications

  • Consumer Financial Data: Legal and Regulatory Landscape

    FinRegLab partnered with the Financial Health Network, Flourish Ventures, and Mitchell Sandler to provide a working paper summarizing the current U.S. federal legal framework governing consumer financial data with the goal of laying a foundation for future policy analyses and discussions.


  • Data diversification in Credit Underwriting

    This update catalogues recent initiatives involving the use of non-traditional credit data, including cash-flow information. It considers how dramatic shifts in economic conditions due to the Covid-19 pandemic and mass movements for racial justice have increased incentives to adopt new data sources and models, but also created new market and policy challenges.


  • The Use of Cash-Flow Data in Underwriting Credit: Market Context & Policy Analysis

    This report provides a detailed snapshot of the use of cash-flow data in U.S. consumer lending and the development of the system for transferring data between firms, in addition to analyzing policy and regulatory issues raised by cash-flow underwriting in both consumer and small business credit markets.


  • The Use Of Cash-Flow Data In Underwriting Credit: Policy Overview

    This overview highlights key themes from our longer market context and policy analysis, including outlining options for action by industry, regulators, and Congress.


  • The Use Of Cash-Flow Data In Underwriting Credit: Small Business Spotlight

    This report details the evolution of the use of cash-flow data in small business lending. It explains the reasons why electronic cash-flow data may be particularly useful in the small business context, presents evidence of its increasing use by a diverse range of incumbents and new entrants, and notes market and policy issues that may…



Events


  • Data Symposium: The Role of Consumers in the Data Ecosystem

    FinRegLab and the Federal Reserve Bank of San Francisco fintech team hosted a symposium titled “The Role of Consumers in the Data Ecosystem” on November 4-5, 2019, in Los Angeles, California. The event involved more than 130 stakeholders from diverse backgrounds, including not only industry, advocates, researchers, and regulators who focus on U.S. financial services…

    Learn More: Data Symposium: The Role of Consumers in the Data Ecosystem

About FinregLab

FinRegLab is an independent, nonprofit organization that conducts research and experiments with new technologies and data to drive the financial sector toward a responsible and inclusive marketplace. The organization also facilitates discourse across the financial ecosystem to inform public policy and market practices. To receive periodic updates on the latest research, subscribe to FRL’s newsletter and visit www.finreglab.org. Follow FinRegLab on LinkedIn.

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