And what’s really stopping them from doing it
I believe that cash flow underwriting is the greatest innovation in lending in the last decade. And I don’t say that lightly. But here’s the thing that keeps bugging me: if cash flow underwriting is so great (and it is), why isn’t everyone using it already?
To get some answers, I sat down with three of the smartest people I know in this space: Martin Kleinbard, who recently authored an excellent white paper on cash flow underwriting (available here) and has worked everywhere from the CFPB to American Express and Bread Financial; Jason Rosen, CEO of Prism Data, whose company has been pioneering cash flow scores for years; and Misha Esipov, CEO of Nova Credit, which supports many leading banks & fintechs with cash flow underwriting, income verification, cross-border credit and more (they also have their own excellent white paper here).
What I learned from these conversations is that we’re at an inflection point. The technology works, the business case is proven, and the regulatory environment is benign. But there are still real barriers preventing widespread adoption, and some surprising opportunities that most lenders are missing. I had these conversations before the announcement by JPMorgan around charging for data access. That challenge notwithstanding, it’s clear that cash flow underwriting remains the future of lending.
The Case for Universal Adoption
Let me start with my perspective: every lender should be using cash flow underwriting today. Not just subprime lenders dealing with credit-invisible consumers (though they definitely should). Not just as a “second look” for declined applications (though that’s a great place to start). Everyone. For everything.
But why the urgency? Martin put it perfectly when he described what he sees as a coming “credit score apocalypse.” Between credit-building products, buy-now-pay-later services, and AI-powered “credit optimization”, not to mention all the TikTok credit score hack videos, traditional credit scores are becoming increasingly gameable and less predictive.
“I feel that the marketplace as a whole hasn’t really grasped how important [cash flow underwriting] will be to saving its bacon,” Martin explained. “It’s not just this nice-to-have piece that you can put at the bottom of the funnel to get you an extra couple of percentage points of approvals. It really can and needs to be a complementary piece at the top of the funnel.”
What’s Really Holding Everyone Back
It’s Not About Friction—It’s About Strategy
When I asked Misha what he saw as the biggest hurdle to adoption, his answer surprised me: “I think the biggest hurdle is strategic alignment. More so than a component of the workflow, like connecting bank accounts.”
This insight reframes the conversation. While I and others have focused on consumer friction, the challenge of getting people to connect their bank accounts, Misha argues that’s missing the point.
“I think it’s very difficult for lenders to work through a step change in how they access and use data,” he explained. “Unlocking the power of cash flow underwriting requires the alignment and collaboration of many different teams. At a big bank, it requires your digital and product teams, your credit risk teams, your fraud KYC teams, your compliance teams.”
The business case is clear, Misha noted: “More data, more approvals. And even with the friction, the business case is clear. So, the real issue is how do you help these institutions, which are traditionally more risk-averse, move quickly to align and adopt a new paradigm in the data that they can use to improve business processes.”
The Friction Problem (And Why It’s Almost Solved)
Jason Rosen is focused on the friction problem itself: “The biggest reason why it’s not used 100% of the time is the friction.” Currently, asking consumers to connect their bank accounts creates drop-off in the application process. Jason estimates that 50-80% of consumers successfully complete the connection, depending on the lender and implementation.
But here’s the thing: that friction is disappearing fast. The breakthrough technology is something called Plaid Layer, which recognizes returning users (here is an article I wrote about Plaid and cash flow underwriting last year). “They’ve seen 50% of the US population now,” Jason explained. “Based on just their phone number, they can prepopulate the bank connections. Just click this button, and you can connect it again. No username and password. No re-authentication into your bank.”
Martin is even more optimistic about the friction problem, calling current concerns “a lot of outdated information and myths.” His point: “Everyone uses Venmo now. Everybody uses Zelle. Everybody uses Credit Karma, a lot of other forms of open banking. And the credentialing has gotten so much better.”
The UK is already ahead of us here. As Alex Johnson of Fintech Takes explained in a podcast I published a few months ago, this is how connecting a bank account works in the UK: “Do you want to connect to your bank in order to streamline all of this. Yes, I would. Okay, great. We’re going to send a tokenized request to your bank. They will give you a notification that will pop up on your phone. Your mobile banking app on your phone pops up and says, hey, so and so is trying to get access to a thing. Is this you? You go, yes. You use your biometrics on your phone to authenticate it. So you don’t even have to log into your mobile banking app.”
We are not there yet in this country, but we will inevitably arrive at a similar user experience in the not-too-distant future.
The Real Friction Insight
But here’s something fascinating that Jason pointed out: not all drop-off is bad drop-off. “If you’re a fraudster and you’re asked to link the bank account and you don’t have a bank that matches the same identity, you’re going to drop off,” he explained. “Consumers know exactly what’s in their bank account, unlike a credit report. If they believe that the activity in their bank account is not going to reflect positively on their application for credit, why bother?”
In other words, some of that 20-50% drop-off rate represents positive selection, filtering out applicants you didn’t want anyway.
The Integration Challenge
The other major barrier is organizational inertia. As Martin described it: ” Lending is a risk-averse business. If things are working mostly fine at the moment, it can be a hard sell to shift things up. The problem is that you often don’t know you need something until you’ve lost a lot of money without it.”
This resistance often manifests as compliance concerns, though Martin is skeptical: “Having been in this industry, I think when you don’t want to do something, it’s tempting to pin inaction on compliance concerns. So I don’t know how much stock to put in that.”
The Infrastructure Imperative
One of the most interesting insights from my conversation with Misha is that cash flow underwriting isn’t just about analytics, it’s about building comprehensive infrastructure that can support multiple use cases across the customer lifecycle.
“I fundamentally believe that the right answer to this challenge of cash flow underwriting requires both infrastructure and analytics used in concert,” Misha explained. “There are many analytics providers, and there are many open banking infrastructure providers. But our solution combines both the infrastructure and the analytics and the FCRA compliance into one platform that can drive impact across the customer lifecycle.”
This broader view means Nova Credit doesn’t just sell underwriting solutions, they sell acquisition tools, fraud and KYC applications, account management capabilities, and early delinquency monitoring. “Banks can’t effectuate all of those at the same time,” Misha noted. “Where we’re seeing partners start is typically they pick one, either acquisition, underwriting, or account management. Then grow from there.”
The Smart Path Forward
Smart lenders are finding ways to get up and running with cash flow, with staged implementation strategies that minimize risk while maximizing learning.
Start with Second Looks
Second looks are when lenders run a second process, a cash flow underwriting process for a borrower, where the traditional underwriting model has resulted in a decline.
Every lender should begin with what Jason calls the “second look” strategy. The math here is compelling: “The worst thing that could happen is your approval rate stays the exact same. The upside is your approval rate goes up by double-digit percentage points, and the marginal unit economics that you brought in are much better than the people you’re just barely saying yes to before.”
Jason walked me through a specific example: “If your cutoff is 620 FICO, and you use cash flow on the 610 to 619s, if they don’t do it, a day or two later, you send an adverse action. If they do go through with it, then you underwrite them with cash flow, and I guarantee you can cherry pick some good 610s, 619s who will perform much better than your 620 to 629s who you’re already saying yes to.”
It’s essentially free money with limited downside risk.
Progressive Offer Improvement
Once you’re comfortable with second looks, the next step is what Jason calls “progressive offer improvement.” This is a two-step process where prime consumers get an initial approval based on bureau data, then have the option to connect their bank account for a better offer.
“We’ve had lenders say every single person who connects their bank account is going to get a better offer,” Jason explained. “Maybe they’re going to get a slightly higher credit line on the credit card or something. Because once you establish that bank account connection, there’s a lot of value to the lender right off the bat.”
Jason shared that they’re implementing exactly this strategy with a major auto lender: “They’re going to make their initial offer of auto financing. Here’s your down payment. Here’s your APR. And then they are going to give customers the opportunity to connect their bank account to further demonstrate their creditworthiness and receive a better offer.”
The Momentum is Building
Perhaps the most encouraging insight from my conversations is that adoption is accelerating, even if it’s not always visible publicly.
“Cash flow underwriting has gone from a leading edge idea to a capability that every major lender is testing or qualifying,” Misha told me. “I think we will see a continued acceleration in the next few quarters as more and more banks go public about the value they’re seeing.”
The regulatory environment is also shifting in favor of more openness. As Misha noted, “Six months ago, we had a different administration. The willingness to publicly disclose what data you use has changed.”
The Long-Term Vision
Where is all this heading? Martin has a bold vision that makes a lot of sense: cash flow scores should become the third leg of the stool alongside FICO and VantageScore for major lending decisions, including mortgages.
“There’s now two kings on the mountaintop,” Martin said, referring to the recent acceptance of VantageScore alongside FICO for Fannie Mae and Freddie Mac conforming mortgages. “There’s room for a third. Because a third would actually be orthogonal.”
This matters because, as Martin learned during his time at Bread Financial, the secondary market drives everything: “We studied FICO, Vantage, and one of the bureau’s proprietary scores and found that the latter was more predictive of default on our population. I showed that to our head of finance and head of capital markets and our CEO, with the idea that switching to the bureau score was basically free money. But it was just a nonstarter because the debt investors only wanted their facilities denominated in FICO.”
The path to changing this runs through Fannie and Freddie, just like it did for FICO in the 1990s. “No one securitized on FICO in 1993. Then in 1996 they did because in ’95 it became adopted by Fannie and Freddie.”
But Misha sees an even longer runway. “I think we’ve got a long way to go in using cash flow data to drive growth,” he explained. “There’s a big step change that happens in the many hundreds of basis points of approval rate lift improvement from using cash flow data. And I think that’s just step one.”
What This Means for Your Business
If you’re a lender and you’re not already experimenting with cash flow underwriting, you’re missing out on what Jason described as “essentially free money” through second looks, and you’re falling behind on what will likely become standard practice across the industry.
The technology is ready. The performance data is proven. The friction is manageable and improving rapidly.
The question isn’t whether cash flow underwriting will become standard, it’s whether you’ll be an early adopter who gains a competitive advantage, or a late adopter who’s forced to catch up.
As Martin put it, “I believe that all these scoring companies should be angling to be the third leg on the Fannie and Freddie stool. Because once you have that, of course, there will be a much higher demand for your services across the consumer lending marketplace.”
The window for early adoption advantage is still open. But probably not for much longer.
Want to learn more about implementing cash flow underwriting at your organization? Reach out to Prism Data or Nova Credit (I will be happy to do an intro). Also, the upcoming Cash Flow Underwriting Summit in New York should provide valuable insights into how major lenders are approaching implementation.
