Thinking outside the (credit) box

Special-purpose credit programs build on data sharing to expand lending outreach.

By John Hintze

Banks are longtime users of customer cashflow information to help determine creditworthiness, but the move to user-permissioned data sharing has enabled banks to apply the analysis in a more automated fashion to a much broader swathe of borrowers, including those with weak or nonexistent credit scores from the credit bureaus.

Toolkit: ABA highlights the roles SPCPs can play in meeting the credit needs of economically disadvantaged small businesses on a new webpage at           Hear this: Listen to a conversation with Jevaughn Sterling on Zions’ SPCP on the ABA Banking Journal Podcast via the player below or at
The move beyond traditional credit scores has been fueled more recently by the emergence of buy-now-pay-later lenders that have grown like wildfire by using cashflow and other alternative indicators of creditworthiness to approve short-term loans in near real-time. Commercial banks are also starting to expand their use of especially cashflow data to broaden their customer bases.

Fueling that trend, in summer 2020 the OCC launched Project Roundtable for Economic Access and Change (REACh). Its mix of participants, including large and community banks, aims to explore alternative credit assessment methods — typically some form of cashflow analysis. The goal is to broaden access to credit for the estimated 50 million people in the U.S. with weak or nonexistent credit scores, many of whom are racial or ethnic minorities.

So far, only very large institutions appear to have announced pilots related to Project REACh, while other participants in the program have either yet to take steps or are mum about them.

For example, Fiserv, a program participant, provides core technology and a supermarket of fintech applications to hundreds of banks to help improve their businesses. But it has yet to announce initiatives related to Project REACh, and the same holds true for many regional and community bank signatories.

One exception is Zions Bancorporation, which introduced its Small Business Diversity Banking Program in May 2021, designed to address hurdles faced by businesses owned by women, minorities, veterans and LGBTQ persons.

“If the application is declined under our standard credit criteria, we can pivot to underwrite to the program’s expanded credit criteria,” says Jevaughn Sterling, EVP for regional commercial banking at Zions unit Amegy Bank, adding that 1,100 of 2,500 program-eligible applications have been approved, totaling $325 million.

A Huntington Bank spokesperson says the bank is “really excited by Project REACh” and “will have more to share” in 2023.

Citi is the most recent money center bank to announce an initiative. As of earlier this year, it was set to launch one pilot program under Project REACh to issue credit cards to people without credit scores, and a second that to make it easier to borrow for small businesses owned by minorities, women and veterans.

Bank of America launched a pilot program in September that eliminates down payments, closing costs, mortgage insurance and minimum credit score for some first-time homebuyers in minority neighborhoods.

JPMorgan Chase appears to be the furthest ahead. For the last five years it has analyzed consumer cashflows — the money entering and leaving their checking accounts — to gauge existing customers’ creditworthiness and whether to offer them credit cards.

“Each bank will have its own criteria, but generally for us when you have positive cash flow and an absence of negative events, that indicates a good credit,” says Mark Brucker, chief risk officer at JPMorgan.

A year ago the bank launched a pilot program in which it pulled cashflow data of prospective borrowers that currently are customers of other banks. Those banks, including JPMorgan, share their data through a partnership with bank-owned Early Warning Services.

“The big test when we rolled it out was whether all the same [cashflow]signals and insights hold when the candidate is not currently a Chase customer,” Brucker says. “With a year of this under our belt, the early read is that it is very consistent and performs well.”

The bank has since expanded the program “to a big piece of our book,” Brucker says, adding that compared to accounts with full credit files and a range of traditional credit scores, the cashflow-approved accounts “perform pretty much in line with our average customer.”

Brucker adds that those accounts — typically held by lower-income consumers — start with lower lines of credit that can grow as those customers “demonstrate the ability to handle unsecured credit.”

He adds that the five years of data clearly demonstrates those customers’ willingness and ability to make payments, even as the economy slows and a recession looms. “We have good insight into how macroeconomic shocks impact our portfolio, so we feel good about [those customers’]ability to withstand that,” he says.

A phenomenon known as user-permissioned data sharing (sometimes known as “open banking ” or “open finance”) allows bank customers to share their financial information with other companies, in many cases facilitated by a third party known as a data aggregator. This sharing might be conducted through an API built by the bank and accessed by the data aggregator, or it might instead use a process called screen scraping that requires the use of the customer’s log-in credentials.

The screen scraping method is much less secure and introduces significant risk and privacy concerns. An imminent proposal by the CFPB will place rules around the respective participants’ roles and responsibilities and has the potential to accelerate the trend towards more expansive user-permissioned data sharing. This may result in more banks obtaining current and prospective customers’ data from other entities, further broadening the criteria used in the credit approval process.

The Prism Data platform, spun off from the Petal credit card, analyzes consumer cashflow information including income-stream consistency, balance trends and discretionary and nondiscretionary spending. Erin Allard, general manager of Prism Data, also a participant in Project REACh under Prism’s parent, says recent comments by CFPB officials indicate the proposal arriving early 2023 and a final rule arriving by late 2024.

The fintech firm announced late last year a new version of its CashScore application, noting that it enables lenders to analyze anonymized, user-permissioned data, including a variety of data missing from traditional credit scores, such as rental payments and BNPL loans. It adds that the app reduces expected credit losses by as much as 30 percent and increases approval rates by up to 10 percent, without impacting loss rates.

“Cashflow data is truly the most fundamental mainstream consumer data that exists,” Allard says. “It provides a more complete, current and accurate picture of a consumer’s financial life than traditional credit bureaus.’”

Nevertheless, cashflow has its downsides. FinRegLabs, a nonprofit innovation center that tests new technologies and data to inform public policy, published a lengthy research report in December 2021 that analyzes lenders’ use of utility, telecom and rental, or UTR, data — elements of consumer cash flow. The study concluded that all three payment forms “could produce meaningful improvements in the inclusiveness and predictiveness of credit underwriting for at least some consumers.”

A caveat, the report points out, is that UTR data added to general credit profiles could instead adversely impact some consumers’ ability to recover from the pandemic or other economic downturns, exacerbating historical disparities.

“Momentum for using UTR data for credit underwriting appears to be growing, but many critical questions remain regarding the potential scale of various data access mechanisms, data quality and modeling issues, and opportunities and challenges in particular product markets,” the report concludes.

John Hintze frequently writes for the ABA Banking Journal.