Banks Toy With Dumping Credit Scores for Lending Decisions to Cash flow Analysis

The reasons for moving away from traditional credit scores include helping to bring the unbanked into the financial system, extending credit to younger consumers who have not yet built up a history, and reaching undocumented immigrants.

By The Financial Brand's Editorial Team

Is this the end of the credit score? It’s certainly been predicted many times over the years, and the idea is back at the forefront after several big banks including JPMorgan Chase, Wells Fargo and U.S. Bank announced this month a plan to offer credit card products to those who lack a traditional credit score.

As first reported in the Wall Street Journal, the plan “is aimed at individuals who don’t have credit scores but who are financially responsible. The banks would consider applicants’ account balances over time and their overdraft histories.”

There are several reasons offered for moving away from traditional credit scores. They include helping to bring the unbanked into the financial system, extending credit to younger consumers who have not yet built up a history, and reaching undocumented immigrants. The big banks’ plan includes working with Equifax, Experian and TransUnion on data sharing as well as with fintech data sharing firms such as Plaid.

Thousands of smaller banks and credit unions — as well as other lenders that don’t have the internal resources to create their own bespoke scoring system — still rely on credit scores to judge the likelihood applicants will repay loans, as well as to determine interest rates.

Cash flow Analysis can offer lenders real-time insights that credit scoring alone can’t deliver.

“Cash flow scoring is simply an analysis of creditworthiness based on a consumer’s recent banking history,” says Gross. “It measures economic fundamentals that don’t show up in traditional credit reports, like people’s income and employment status, the bills they pay each month, and the amount they’re saving. Cash flow data also reflects sudden changes in income, whether it’s the stoppage of paychecks or the receipt of stimulus payments or unemployment checks.”

Equifax also touts cash flow analysis as a way to help deliver lending products to consumers without credit scores. It cites its “Cashflow Insights” service, which lets individuals share their online bank account information, including balances, deposits and withdrawals from more than 7,700 participating U.S. financial institutions.