NEW YORK — JPMorganChase will use cash flow underwriting and credit bureau data from other countries in some credit decisions, the bank and technology partner Nova Credit said Wednesday.
The New York bank, which has 80 million customers and an $18 billion technology budget, will soon deploy Nova Credit's Cash Atlas software, which automates
JPMorganChase also plans to start using
"Chase is committed to being the bank for all and tools like Cash Atlas and Credit Passport will help with this mission by giving us a more comprehensive view into each individual and their credit needs," said Chris Reagan, president of Chase Branded Cards, in a statement. "With this new data source, we can better assess credit risk, make more informed lending decisions, and approve customers with right-sized lines of credit."
Cash Atlas' cash flow analytics aim to paint a picture of a consumer's financial health through trended data on income, expenses and assets. Other vendors, including Prism Data, Experian and Plaid also provide cash flow analytics to banks to help with credit decisions. Some AI underwriting software providers, including Cascading AI, Provenir and Ocrolus, offer cash flow analytics along with other credit variables.
Traditional loan underwriting systems rely heavily on FICO scores and a few other criteria like debt-to-income ratio. These tend to decline or offer only high-priced credit to young people, immigrants, people who haven't borrowed in the past and people who have had temporary setbacks through no fault of their own, for instance due to a medical emergency.
Cash flow underwriting is not a new concept, but it has been gaining momentum.
"Traditional credit evaluation methods, while historically reliable, struggle to capture the complete financial picture of modern consumers, particularly given the rise of nontraditional income sources and alternative credit products," wrote Stewart Watterson, a strategic advisor in the retail banking and payments practice at Datos Insights, in his March report on
A study FinRegLab published in June found that cash flow data can help lenders underwrite small businesses more accurately, particularly when evaluating early stage companies and financially constrained entrepreneurs whom lenders consider higher risk. The report,
Cash Atlas manages the gathering of bank account data through data aggregators like Plaid, MX, Akoya and Finicity to provide a broad view of a potential borrower's bank account activity. It provides credit risk analytics in a consumer report format. It can also produce compliance reports, for instance to meet Fair Credit Reporting Act requirements.
"We believe that long term, cash flow underwriting is going to supplement and augment credit processes across all consumer products in America," Collin Galster, chief operating officer of Nova Credit, told American Banker. "We think bureau data and the many other data sources that are used in underwriting still have an important role to play in the ecosystem. And cash flow data is a powerful and orthogonal data source that allows lenders to reach a lot more consumers and lend to them responsibly."
The time frame of the bank account data Cash Atlas will analyze, also known as the look-back window, is configurable and can range from three to 24 months' worth, Galster said.
"Smaller ticket items may not require as much look-back data," he said. "And different populations may require different look-back windows, too." For instance, students typically have irregular cash flows, so a 12-month window makes sense for them.
The mindset behind traditional credit decisions, and the basic idea behind the FICO score, is that the best way to predict whether a consumer will be able to repay a loan is to look at whether they have repaid loans in the past.
"I would say that it's not the complete story," Galster said. "It's true that someone's demonstrated ability to have repaid loans in the past is an important data point in predicting their future likelihood to repay. But it can miss certain information disproportionately for certain populations, and the ways in which it misses are artifacts of the way our system's set up."
Cash flow underwriting provides a much deeper look into someone's financial health, because "you're seeing their ability to manage their finances across all of their inflows and outflows, their expenditures, including debt repayments, but also discretionary spend, non-discretionary spend and their changing situation," he said.
Galster pointed out that consumer lenders sometimes provide grace periods, forbearance and other accommodations that may not show up in a credit report for 90 days or more.
"With cash flow data, you're seeing the actual transactions, and therefore can make judgments about someone's ability and capacity to manage credit in real time, as opposed to having this lagging indicator," he said.
