Credit insights from Fintech firm Plaid are looking at what’s currently driving growth and how firms are managing risk.
In its latest Consumer Report, John He & Nikolai Oudalov noted in a blog from Plaid that the financial infrastructure Fintech has helped lenders, from enterprises to startups, bring cash flow data into their underwriting and verification workflows in order to “approve more applicants” and be able to more accurately assess credit risk.
Earlier, Plaid also launched a solution which reportedly makes cash flow data more accessible and “friction-less” by combining the Consumer Report along with Layer, which is described as their instant financial onboarding platform.
Now, Plaid are also unveiling various new product enhancements in order to make cash flow data more “actionable,” including valuable network insights that aim to considerably reduce risk, a primary account indicator, as well as notifications of changes in an applicant’s cash flow and financial stability.
According to the blog post from Plaid, finance has gone digital, meaning lenders increasingly acquire new borrowers online.
Plaid also noted that while this has fostered more choice, competition, and transparency for consumers, it also presents “challenges for credit issuers” who ask themselves: “How can I build a complete picture of the applicant in a world of increasing complexity, choice, and products?”
For individual firms, assessing the risk of a particular borrower or applicant may prove to be a daunting or overwhelming task, particularly in cases when you have fairly limited data on them.
Plaid further explained in a blog post that it is difficty to “fully assess risk” when you have an incomplete view of their activity across the “financial ecosystem, especially for services that aren’t consistently reported” to traditional credit bureaus, lie rent, buy-now-pay-later, cash advances, and earned wage access applications.
That’s why Plaid surfaced hundreds of attributes from account connection activity.
With credit insights powered by the Plaid Network, customers get differentiated risk signals that are complementary to traditional credit and cash flow, such as:
- Number of lifetime connections to lending applications
- Number of new connections to earned wage access applications in the last two days
- Days since first connection of any type
As the enabler of open finance, Plaid sees nearly 550,000 connections made to financial applications every day.
These insights are especially useful for expanding access to new segments of digitally savvy, thin-file applicants with confidence, while managing risk, especially first payment defaults.
Insight: Credit applicants who established three new active connections to a cash advance app in the “last 90 days were 6.3X more likely to be at least 30 days delinquent over the first three months of a loan compared to others.”
Conversely, applicants who have connected to a wealth management app were 20% less likely to be delinquent in this manner.
Although consumers may have several bank accounts, they typically use one as a “primary account” into which income is deposited and out of which bills are paid.
To minimize “friction,” most lenders we work with ask applicants to link a single account “for cash flow underwriting, income verification, or repayment setup.”
Plaid said that they recently added an indicator in the Consumer Report to give lenders more confidence that a given account in a “linked financial institution represents the account holder’s primary account.”
Returned both as a label and a probability, this helps customers determine if the linked account is sufficient to underwrite or “verify income with, and if not, they can prompt the applicant to link additional financial institutions.”
To determine if an account is primary, Plaid said its models carefully look at transaction volume, amounts, recency, and type (e.g., if the account sees recurring transactions or subscriptions).
As noted in the update from Plaid, cash flow data is said to be “underutilized” in servicing operations today even though it offers the “earliest signal” of changes in borrower behavior.
Consumers who are building financial stability—maybe they’ve built a savings cushion, or picked up steadier employment—may be able to “qualify for better loan terms.”
Businesses, whether they be lenders or property managers, also need to detect and support borrowers or tenants who are “at risk of becoming late or short on their obligations.”
Plaid added that customers can now get “pre-calculated insights” pushed to them on changes to borrower income and loan exposure after the “initial credit decision.”
Without pulling incremental raw data or building new models internally, lenders can proactively service their borrowers by evaluating if their recent income is different now versus when the original loan “was underwritten months ago, or if they’ve taken on new loan expenses since then.”
Plaid added that lenders may now be notified when certain criteria are met, such as if a borrower’s income stream is no longer detected or if the borrower’s average balances “change above or below a pre-set threshold.”
With Consumer Report, Plaid explained that they are getting started with servicing and other downstream applications for cash flow data.
Plaid further noted that more lenders are now want ongoing insights to expand credit limits, adjust loan terms, or reduce costs from repayments issues.
These new insights capabilities are currently available.