Building a traditional credit history is more challenging than ever. Several factors are driving this trend: the rise of the gig economy, and young people and immigrants finding it difficult to establish their payment histories. This is why cashflow underwriting is gaining traction as a transformative solution—it provides lenders with a much more detailed and real-time view of financial behavior, enabling fairer and more accurate lending decisions.
What is Cashflow Underwriting?
Cashflow underwriting evaluates a consumer’s ability to repay loans using real-time financial data, such as consistent payroll deposits, recurring expenses, and liability payments. By analyzing transaction patterns from sources like bank aggregators, PDF statements, and deposit accounts, this approach moves beyond broad risk categories. Instead, it offers a granular and dynamic view of a person’s financial health, helping lenders make accurate and equitable decisions.
This innovation aligns with regulatory priorities. As Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra stated, “Today, many companies are now exploring new underwriting models that return to core principles – assessing ability to repay without attempting to use outside information to model a consumer’s presumed ability to repay. Transaction data will be especially useful for these purposes and help bring an end to the current reliance on the three-digit social credit scores derived from credit reports that are cloaked in secrecy and rife with inaccuracies.”
In this article, you’ll learn:
- The top reasons why regulators approve of cashflow underwriting
- Regulatory developments that support this industry’s growth
- The advantages of cashflow underwriting for more accurate repayment predictions beyond generic credit scores
FICO Isn’t Enough: Why Regulators Are Exploring Cashflow Underwriting
Essentially, cashflow underwriting has the qualities regulators seek in consumer lending: consumer protection, financial inclusion, fair lending, and innovation. The process is very straightforward. Consumers simply connect their bank’s data to an application programming interface (API), which can be websites, apps, or online platforms.
This connection allows lenders to access real-time transaction data. Since this process obtains the consumer’s consent and uses the latest cybersecurity practices and certifications, data sharing is safe, compliant, and transparent.
Below are the top reasons why regulators support cashflow underwriting:
1. FICO Overlooks Millions: Cashflow Data Includes Everyone
Traditional credit scoring, epitomized by FICO, relies on a one-size-fits-all model that excludes millions of borrowers. This outdated approach fails to reflect the diverse financial realities of modern consumers, leaving groups like freelancers—projected to reach 86.5 million in the U.S. by 2027—immigrants, and students without fair access to credit opportunities.
This group will not have a traditional credit history because of their work’s unpredictable nature. Yet, this doesn’t mean that they can’t be financially stable. Similarly, college students and new immigrants may find it difficult to rent an apartment because they have no credit history.
Traditional credit scoring’s one-size-fits-all setup fails to address these realities, making it increasingly incompatible with modern financial systems, which process millions of transactions daily for real-time decision-making. It’s no surprise that 58 percent of U.S. consumer lending institutions report reduced confidence in relying on traditional credit files and scores.
Cashflow underwriting provides a sharper, real-time lens into a borrower’s financial situation, addressing FICO’s blind spots. By analyzing real-time transaction data, cashflow underwriting enables lenders to evaluate both a borrower’s ability and willingness to pay. Instead of relying on outdated metrics like late payments from years ago, cashflow underwriting looks at recent trends:
- Is the borrower consistently receiving income, such as payroll deposits or freelance payments?
- Are they responsibly managing recurring expenses and liabilities?
- What is their liquidity after accounting for major obligations?
This level of nuance provides lenders with a dynamic and context-rich view of a borrower’s financial health, making it possible to approve deserving borrowers who might otherwise be excluded by FICO. Freelancers, for example, can demonstrate stable income patterns even if their paydays are irregular. Immigrants and students can highlight financial discipline through consistent savings or timely rent payments.
By offering this real-time, holistic perspective, cashflow underwriting doesn’t just supplement traditional credit scores—it redefines how lenders evaluate risk in a way that is more inclusive, fair, and actionable.
2. FICO’s Static Data Fails Lenders: Real-Time Risk Assessment Wins
Because of timely data sharing, lenders can perform real-time risk assessments. Since they can see what a typical transaction pattern looks like for each consumer, it’s easier to identify and address pre-delinquency triggers quickly.
Cashflow analytics leverages real-time transaction data to give lenders an up-to-date, precise understanding of borrower behavior. By analyzing cash inflows, recurring expenses, and liabilities like BNPL payments, lenders can make more accurate near-term repayment predictions.
At Pave, our tailored cashflow scores focus on timely insights, such as predicting the likelihood of making the next four personal loan payments. This actionable, near-term data helps lenders respond quickly to reduce defaults and uncover opportunities among underserved borrowers, enabling safe approval expansion while maintaining low default rates.
At Pave, our tailored Cashflow Scores have delivered measurable results for lenders. For example, our Small Dollar Loan Score helped a leading subprime lender increase approvals from 25.6% to 60.4%. By leveraging real-time data, the lender was able to swap out 32.9% of previously approved loans that carried higher risk and approve 58.2% of previously denied loans with stronger repayment potential.
Similarly, our Cashflow Attributes enabled another leading subprime lender to reduce default rates from 44.5% to 30%, while simultaneously increasing approval rates from 44% to 53%. These achievements demonstrate how actionable, near-term insights empower lenders to make better decisions, reduce defaults, and responsibly expand credit access.
FICO, by contrast, relies on outdated information. As Director Chopra stated,
“Lenders report to the CFPB that credit scores are just not predictive enough. Many major lenders build their own proprietary scorecards to evaluate applications.”
Data points like late payments from years ago or credit utilization often fail to reflect current financial behavior. For example, Millennials are credit-averse compared to the older generations and are less likely to use credit for large purchases.
Alternatively, cashflow underwriting can “help supplement and improve the accuracy of traditional credit histories and help more people obtain credit on better terms. Over the long run, this could reduce the system’s dependence on credit scores” (Chopra, 2024).
3. FICO’s Costs Are Skyrocketing: Cashflow Data Is the Cost-Effective Alternative
FICO Scores, first introduced in 1989, have become the centerpiece of traditional credit scoring. But, they have been slow to keep up with modern financial systems or consumers. The most obvious limitation is that their data is static.
Plus, the costs of generating credit reports and scores have steadily increased. Director Chopra said,
“Mortgage lenders have told the CFPB that costs for credit reports and scores have increased, sometimes by 400%, since 2022.”
While some lenders are starting to supplement FICO with their own predictive models, these can often be expensive to maintain in the long run. Cashflow analytics offer a much more cost-effective, dynamic, and accurate picture of a person’s near-term financial health since they are based on real-time bank transactions. Risk models incorporating cashflow learn from this holistic information to understand a consumer’s long-term behavior.
4. FICO Reinforces Bias: Cashflow Promotes Fair Lending
According to Kansas City Fed Economist Ying Tei Loh, traditional credit scores can punish marginalized or underrepresented groups.
“The credit scoring system may actually perpetuate this disparity by the way it confers benefits and advantages to people who come from more privileged backgrounds with good access to credit.”
This is why alternative credit solutions like cashflow underwriting are crucial. They can highlight potentially overlooked attributes, such as diverse income sources, instead of relying on outdated systems that can perpetuate biases. This discrimination is also why regulators like CFPB are focusing on fair lending and equal access to credit. In its 2023 report to Congress, the CFPB highlighted the organization’s strategy to enforce fair lending, including investigating technologies that target discriminatory targeting and collaborating with different stakeholders for possible solutions.
5. FICO Doesn’t Work for SMBs: Cashflow Fuels Small Business Growth
Cashflow underwriting not only enables credit access for underserved individuals but also opens doors for small and midsize businesses (SMBs) that may be facing the same credit history limitations. As more SMBs get access to funding, their financial growth will cascade to the larger economy through job creation and increased spending.
According to the U.S. Bureau of Labor Statistics, from 2013 to 2023, small businesses accounted for 55 percent of the total net job creation. Additionally, they employed 46 percent of the covered workforce.
6. FICO Hides Behind Opacity: Cashflow Empowers Borrowers Through Transparency
More consumers, especially younger ones, seek financial solutions that cater to their specific needs and situations. And they’re willing to share their financial data to access these products and services. According to an Experian survey, 80 percent of consumers are likely to share their financial information with lenders.
With Open Banking, power has finally shifted from banks to the consumers. It’s up to consumers now how and with whom they want to share their data. This transparency opens up more personalized financial services they will not otherwise receive from traditional financial institutions.
7. FICO Faces New Regulatory Pressure: How Cashflow Underwriting Aligns with the Future
Cashflow underwriting was made possible by Open Banking. This framework established the objectives, technology, and regulations that make real-time data sharing possible between financial institutions and third-party providers or FinTechs.
With Open Banking promoting responsible data-sharing, everybody wins. The consumer receives personalized financial products and services, banks expand their revenue streams through FinTech partnerships, and FinTechs get more funding to innovate and discover new solutions that enable decentralized finance.
In October 2024, the U.S. made a breakthrough in Open Banking adoption with the final rule for CFPB’s Section 1033. The rule states that financial institutions and other data providers must allow consumers to access and share their financial information through secure APIs.
This is a pivotal step toward more personalized and democratized financial services. Director Chopra said,
"With the right consumer protections in place, a shift toward open and decentralized banking can supercharge competition, improve financial products and services, and discourage junk fees."
From FICO to Cashflow: The Shift Regulators Are Backing
Cashflow underwriting’s ability to level the playing field has spurred regulators to research more frameworks and regulations (like Section 1033) to support its growth. However, with increased data sharing comes the need for safer and standardized APIs and systems.
Several initiatives are aiming to establish interoperability and standardization among APIs. One of them is the Financial Data Exchange, a movement that’s developing a common framework for data sharing to support Section 1033. The association currently has over 2,000 member institutions working together to align their financial APIs and systems.
CFPB is also actively releasing studies highlighting the potential of cashflow underwriting. An example is its 2023 survey of consumers who self-reported their cashflow data. The results showed that those who self-reported positive cashflow performed 20 percent better in loan repayments.
Pave’s Cashflow Underwriting: Better Insights, Smarter Decisions
Cashflow underwriting is leading the way to more accurate and fair consumer lending practices. This solution lets data do all the talking and gives underrepresented groups a fighting chance. The CFPB’s vision is clear: the future of underwriting is inclusive and precise. At Pave, we’re proud to help build this future through our suite of Cashflow products.. Our Cashflow-driven Attributes and Scores uncover growth opportunities through real-time cashflow data to help lenders expand approvals, minimize payment delinquencies, and comply with emerging regulations.
Contact us to learn how our cashflow underwriting solutions can help you make more confident risk decisions.
