After decades–centuries, even–of inaccessibility, inclusion takes conscious effort. It’s more than demanding someone to pull themselves up by their bootstraps and force themselves through the door. Because sometimes that door is a wall and sometimes that wall lacks footholds and not everyone has a sledgehammer.
For many, unfortunately, inaccessibility is still familiar, despite notable strides society has made. And it doesn’t disappear when the media goes dark. Inclusion is a frequent consideration in workplaces and in college admissions. But what about in financial services?
The truth is, we can do better.
COVID-19 certainly hasn’t helped. But while some consumers are struggling to make credit payments, they still have money moving in and out of their accounts. The traditional risk assessment methods, however, will likely consider only the payments on their debt, effectively limiting who can get credit, even if they’re capable of repaying. That’s a missed opportunity.
By considering cash flow data in determining creditworthiness, lenders have the opportunity to improve financial inclusion as well as gain deeper insights into consumers’ financial habits. Here’s how.
Financial Inclusion and Insufficient Creditworthiness Assessment
Financial inclusion is the availability and equality of opportunities to access financial services. Many factors can influence financial inclusion, from income level, to community, to immigration status, and beyond. Recent research has also revealed that discrimination is still present in the financial services industry, and therefore hinders financial inclusion. Data collected through the Home Mortgage Disclosure Act (HMDA) found that lenders deny mortgages for Black applicants at a rate 80 percent higher than that of White applicants.
While some of these denials may be attributed to outright bias, others may be a result of the wealth gap: “We know the wealth gap is incredibly large between white households and households of color,” said Alanna McCargo, the vice president of housing finance policy at the Urban Institute in a recent New York Times article. “If you are looking at income, assets and credit — your three drivers — you are excluding millions of potential Black, Latino and, in some cases, Asian minorities and immigrants from getting access to credit through your system. You are perpetuating the wealth gap.”
In addition to the racial discrimination that certainly (and frequently does) excludes consumers from access to financial services, so can young age. In fact, according to the Consumer Financial Protection Bureau (CFPB), almost 40 percent of credit invisible consumers are younger than 25. This means that young consumers beginning to make significant purchases lack access to many financial services, because traditional credit scoring models view these “invisible” and “thin-file” consumers as higher risk. Those traditional models, however, likely aren’t telling the whole story.
McCargo proposes a way forward, suggesting that “government regulators and banks in the secondary mortgage market must rethink risk assessment: accept alternative credit scoring models, consider factors like rental history payment and ferret our algorithmic bias.” There’s certainly room for the secondary mortgage market to augment the data it considers in risk assessment as well as hone their processes to eliminate bias and enhance inclusion. And the opportunity is also open to primary lenders to make the mortgage process more inclusive from the start, which will only widen the market for them by finding ways to serve more consumers.
What Is Cash Flow?
Income, employment, assets, and credit history only provide a glimpse of a consumer’s financial story. Improving financial inclusion requires going beyond traditional credit scoring models to paint a more complete picture of a consumer’s financial habits.
Cash flow analytics breaks down a borrower’s credits, debits, and balances to reveal how money is moving in and out of consumer accounts. Understand that movement, understand how the borrower spends money. Understand how the borrower spends money, understand their risk.
Gathering cash flow data requires open banking technology that both empowers consumers and enriches the decisioning process for lenders. It’s simple: a consumer agrees to allow a third party to access their financial data, selects the accounts to be accessed, and is educated on how the data will be analyzed and used. Then, in the case of cash-flow, the third party receives real-time data, via the open banking platform, which shows trending and balance insights, inflow and outflow transaction streams, a credit vs. debit analysis, and identification of potential transactions from other lenders.
The approach to cash flow analytics may differ from business to business. Cash flow data in almost any context will benefit both financial service providers and consumers. As an example, here’s what Finicity’s cash flow analytics can be used for:
- Automates underwriting processes, eliminating the time and costs of manual work
- Provides up to 24 months of real-time, accurate, bank-validated cash flow data
- Easily informs cash flow forecasts and other financial models
- Provides FCRA-compliant services on personal accounts
- Enhances the customer experience with simpler, more convenient processes
- Opens up new lending opportunities with a more comprehensive picture of financial history
How Cash Flow Improves Financial Inclusion
Cash flow analytics offer one layer of the alternative credit scoring model suggested by McCargo. Even credit invisibles and consumers with thin files who haven’t built a credit score through traditional methods can gain access to financial services with the clearer financial picture offered by cash flow data.
While many creditworthiness assessments only consider debt payments, cash flow analytics allow service providers to see every transaction in an account. With access to more data, providers can more accurately see how consumers handle finances, rather than relying solely on the potentially limited credit the consumer may have. This more holistic picture reveals whether a consumer is a low risk for a loan because they have room in their budget and can handle extra expenditures. And all the borrower needs is a checking account.
For those with thin files like immigrants, consumers under 25, and those in low-income communities, cash flow offers an alternative perspective on a borrower’s financial history, one that may compensate for a lack of traditional credit history. For those who experience discrimination in lending, cash flow can compensate for the wealth gap by displaying a borrower’s financial responsibility. Using an alternative measure like cash flow can help 118 million consumers through real-time measurement directly from their bank accounts. Ultimately, by analyzing how consumers spend and save, expanding risk assessment can expand opportunity and inclusion.
In addition to fostering inclusion for the young and the discriminated, cash flow also enhances inclusion for consumers ostracized from credit access because their traditional credit history may not tell their whole story. Cash flow helps the consumer who had credit troubles years ago, but has increased their savings and is growing their discretionary income over time by managing their money correctly, but who the traditional creditworthiness models will inaccurately assess for seven years. Contrast this with the consumer who has a good credit score because they’ve made timely payments, but they’re drowning in debt and losing their discretionary income.
At a higher level, cash flow analytics, along with other open-banking solutions, can streamline lender processes with high-quality, comprehensive data that produces deeper insights and improves overall decisioning. Borrowers benefit from these solutions, too. In addition to the increased access to credit, consumers can also experience less friction and empowerment with more control over and greater literacy surrounding their financial data.
Improving financial inclusion for all will require change throughout the entire financial services industry. Cash flow is one step toward more inclusive risk assessment and fairer credit decisioning. Check out financial inclusion in action with Finicity’s Cash Flow analytics. And if you want to hear more about how cash flow improves financial inclusion, watch our co-founder and data science expert, Nick Thomas, talk about it here.