In the last couple weeks, QCash Financial advocated for credit unions to adopt a digital small dollar lending program for their 2021 budgets. There’s never been a more critical time to pull out all the stops and market these important assets to help your members achieve the liquidity and take the steps toward financial health they need during these turbulent times while giving your organization another revenue stream with which to grow.
According to tech innovation center FinRegLab, however, 45-60 million consumers lack the sufficient credit history to generate a reliable credit score in the mainstream credit system. Millions more struggle to acquire small dollar loans due to low credit scores. The situation comes down to a lack of access to reliable alternative data, and organizations’ ability to see a more nuanced and innovative, yet still comprehensive, view from consumers’ perspectives.
Partnering With Credit Unions
This is where using relationship-based, alternative cash flow data can afford credit union underwriting systems the reliable information they need. Taken from members’ deposit info and card accounts, cash flow data is one of the more promising bases for loan underwriting because it provides a detailed, 360-degree view of how the prospective borrower manages their finances.
It’s no wonder the Board of Governors of the Federal Reserve, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency issued a joint statement this year affirming they are aware of and recognize that alternative data may improve the speed and precision of credit underwriting while assessing members’ quality of credit. In addition, alternative financial health data may help borrowers discover added products or favorable pricing based upon certain assessments on repayment capacity. Such credit innovations further propel the evolution of automated underwriting and credit score ranking while offering the potential to lessen the cost of credit, increase loan access and ultimately increase member financial health.
The agencies recognize that alternative data-based loan underwriting has the potential to increase credit access, but they also encourage responsible use of such data. To date, the use of relationship-based alternative data has presented no more risk to borrowers than the traditional credit score evaluation process.
This is a constantly evolving innovation for credit evaluation, and cash flow data analysis generally focuses on whether or not a potential borrower is able to meet new, existing, or recurring loans by evaluating income and any additional expense activity over time, rather than the borrower’s overall financial health. Optimizing the measurement of income and expenses through cash flow evaluation would be valuable for borrowers who maintain reliable and financially healthy income patterns over a sustained period of time from multiple sources, thereby validating the borrower’s accuracy. In addition, having consumers volunteer access to their cash flow data may help their application even further by enhancing transparency.
Solving the Case for Cash Flow Data
FinRegLab conducted a report, The Use of Cash Flow Data in Underwriting Credit: Empirical Research Findings, that became one of the first independent studies to exhibit compelling evidence that cash flow variables and scores that were tested predicted credit risk across a diverse collection of companies that had begun using the information in the effort to provide unsecured credit to consumers who had difficulty securing loans.
The predictive results of relationship-based cash flow scores and attributes were at least as strong as the traditional credit scores and credit bureau attributes studied. Compared to traditional credit scoring, cash flow data frequently improved the capacity to predict credit risk among borrowers who were scored by traditional credit as showing similar risk to default.
The study also showed that the company participants had served a significant number of borrowers who had historically faced difficulty in accessing liquidity. By contrast, the percentage of borrowers with traditional credit scores below 650 was around 45 to 50 percent.
In determining the effects on fair lending, the cash flow data predicted credit risk to be relatively consistent across race, ethnicity, and gender. Compared to traditional credit scores, however, the cash flow data predicted credit worthiness at least as well as the traditional data, and even better in selected categories.
QCash Financial has dedicated itself to working with its partner credit unions to provide the most transparent, relationship-based small dollar lending solution possible. As shown above, cash flow data is at least as comprehensive–even more so in some cases–than traditional credit data, and serves the best interests of your CU and the ultimate financial health of the member. We encourage financial health, and invite you to consult with us in providing your membership with the best small dollar loan solution for you.