I’m starting to worry that we don’t have an economically viable way to distribute cash flow underwriting (CFU) products to consumers.

Before I dive in further, I want to make this clear: am I not a cash flow underwriting hater.

Quite the opposite. I’d love for it to work, as I think demand for my marketing agency — New Market Growth — could increase as a result.

But, something isn’t adding up.

Let’s start at the 30,000 foot level. I see a bunch of products like Cash Atlas (Nova Credit), Prism Data, and Plaid Check offering lenders CFU products.

And, these providers are raising big money. For example, Nova Credit raised a $45MM Series C last year to keep building their data platform. 

Meanwhile, cash flow lenders like Petal have stumbled. They launched in 2016, raised $300MM in equity capital, and then sold off their portfolio for an undisclosed amount to Empower in April of this year.

All signs point to a distress sale where the VCs backing Petal didn’t exactly hit their target returns.

But, one fintech that stumbles in the CFU world isn’t a story.

I talk to plenty of fintechs and bank lenders. And, I haven’t seen an example of a cash flow based lender who’s killing it right now.

That’s what doesn’t add up.

B2B CFU products are buzzy. But without lenders who are absolutely crushing it using these products, can these B2B providers keep growing?

Before I lay out the challenges (and potential solutions), let’s take a step back and review why CFU exists, some of the problems it could solve, and some of the challenges folks are already discussing.

Cash Flow Underwriting 101

If you’re new to CFU, do yourself a favor and check out Alex Johnson’s Deep Dive Essay. It’s called “Everything You Wanted To Know About Cash Flow Underwriting But Were Afraid To Ask.”

But, it’s nearly 5,000 words and a 20 minute read. So we’ll share some of the highlights here (quotes below are from the essay).

That’s how Alex defines CFU.

My version: Lenders look at the money going in and out of your checking account and decide if you’re going to pay them back.

This innovation is exciting because:

I hear: Tons of people don’t have access to credit through traditional credit bureau underwriting. Lending to these people — through CFU— means big $$$ for the lenders and B2B providers that enable it.

Cash flow data predicts risk. And, it’s orthogonal to credit bureau data. That’s pretty intuitive to me (and for most credit risk pros, I think). But, if you’re not convinced, check out Alex’s article. He’s got some compelling charts from Prism data that make the case.

To recap so far:

1. CFU is an alternative data source that banks can use to underwrite loans

2. A big population (at least 36MM U.S. adults) could benefit from this technology

3. Data shows that CFU works — it helps banks distinguish no-FICO customers who will and won’t pay back

But it’s not all flowers and sunshine. Alex points out some challenges in bringing this to market.

User Experience — CFU requires consumer-permissioned access to bank access. This is currently clunky in the U.S. and will frustrate some people.

Depth Of History — Lenders love big, long data sets. And they simply don’t have decades of performance reads on their CFU models, like they do with credit bureau models. This makes them nervous to go big.

Secondary Use — Alex drops a little bomb here. Apparently the CFPB’s draft rule on open banking prohibits using CF data for “secondary use.” This is a major blocker when you start thinking about how lenders bring products to market. It means it could be difficult or impossible to use CF data at the marketing stage. We’ll dig into this further.

Consumer Education — People understand how FICO works and are comfortable with banks using it. People don’t have a clue about CFU and we’re not sure how they’ll feel when they learn more about it.

Compliance — With CFU, a lender will know if you’re the type of person who frequents KFC or the local organic market. Whether you shop at Walmart or Saks Fifth Avenue. None of this stuff necessarily predicts risk, but they’ll have access to it. Now start thinking about how lenders will comply with Reg B/ECOA. These laws prohibit lenders from discriminating against protected classes, even if done unintentionally. And then consider machine learning which is prone to use data in unintended ways. Rabbit holes galore.

Securitization — Lenders like to sell loans in secondary markets. And secondary markets use FICO as a scorecard to price loans. Now remove FICO for these loans. How will these markets clear?

The Elephant In The Room

Earlier I said that I haven’t heard a single example of a cash flow based lender who’s killing it (growing rapidly) right now.

The reason?

Selling a CFU loan product is very high friction today. And that makes a performance marketer’s job hard as hell in the most common marketing channels.

Let’s illustrate the problem by thinking through how a lender would bring a CFU product to market in direct mail, paid search, and affiliates.

Direct Mail Will Be Expensive

Normally, lenders build audiences using a combination of credit and response models. The attributes they need sit at the credit bureau. Lenders send the bureau criteria, and they receive a list of names and addresses. These dialed-in audiences squeak out a good-enough cost of acquisition (CAC) to make the channel worthwhile.

CFU lenders will bump into a problem. The criteria they need to underwrite this audience (cash flow data), doesn’t sit at the credit bureaus.

To get this data, they have to get permission (usernames and passwords) from consumers. But they don’t know which consumers to ask. And if they ask everyone, their marketing budgets will blow up and their CACs will be sky high.

Now, recall the CFBP’s draft rule above on Secondary Use that could block marketers from using CF data in a prescreen (marketing stage) context.

Houston, we have a problem.

Paid Search Volume Will Be Limited

This is a little different. Here CFU lenders compete against the incumbents that use credit bureau data. They bid on terms like “credit card low FICO” and “personal loan no credit”.

The subprime lenders have been at it for years. They know what terms to bid on, and given competition, their marketing funnels are optimized to minimize friction.

You’ll often see ONE PAGE application forms after a consumer clicks on a search ad. Traditional lenders know that if they don’t convert the customer quickly, their paid click could vaporize into Google’s bank account.

A CFU lender could produce killer ad copy, beautiful landing pages, and offer a great product — an unsecured loan that serves customers with thin credit files.

So far so good.

But, what happens when the CFU lender pops the big question: “Please provide the username and password to your bank account.”

This is when consumers will balk.

Who wants to give a fintech lender they’ve never heard access to their checking account?

Low conversion rates will drive up CACs. A higher CAC means CFU lenders can afford to bid less on each keyword. Bidding less on each keyword means they’ll fight for the leftovers the traditional lenders leave behind.

Houston, we have another problem.

Affiliates Will Be Dominated By Traditional Lenders

Modern day affiliates like Credit Karma, Experian, Credit Sesame, NerdWallet, WalletHub and others have built products that help customers get approval certainty BEFORE they apply.

That means consumers compare products that they are likely to be approved for, creating a great shopping experience.

Enter the CFU lender.

They lend to customers the traditional lenders won’t consider. That’s attractive to the affiliate marketplaces, as it helps them serve more customers.

But, when the affiliate marketplaces ask the CFU lenders for targeting rules, they can only provide logic based on CF data. And, because many marketplaces don’t have access to cash flow data at the marketing stage, CFU lenders can’t deploy a targeting strategy that’s competitive with the traditional lenders.

The upshot? It’s challenging for affiliates to promote the CFU products with a high approval certainty.

That suggests CFU products will have lower click-through rates. Furthermore, many customers will drop off when the lender asks for the login to  their checking account.

I expect CFU product marketing funnels will be uncompetitive. That’s because a lower click-through rate and a lower application rate will compound to lower throughput for the affiliate channels.

This suggests affiliates will favor displaying the traditional products when they have a choice.

Houston, we still have a problem.

So Where Do We Go From Here?

Like I said at the top of the article, I’m rooting for CFU products to gain traction.

They help serve consumers who wouldn’t otherwise have access to credit. They open up opportunities for fintech lenders. They help affiliate marketplaces serve more customers with high-quality offers.

The big question is:

How do we get CFU products into customers’ hands at scale in an economically viable way?

So far, we don’t have a good answer to that question.

But, I think the answer will include 3 things:

1. Distribution channels that can use cash flow data at the marketing stage to identify what consumers qualify

2. Reducing the application friction in consumer-permissioned access to checking accounts

3. Educating consumers about the value and safety in sharing their cash flow information with lenders

The combination above can unlock consumer growth in the category.

Until we crack distribution, more risk-prediction and data processing innovation won’t help. Without low-cost, efficient distribution that competes with traditional lending products, cash flow underwriting will remain a niche offering that won’t live up to its full potential.

If you’re interested in solving this problem in affiliate channels, I’d love to chat.

P.S.: On October 7th, Plaid and MoneyLion announced Layer and Consumer Report, a solution that seems to address some of the distribution challenges raised in this article. I will contact Plaid and MoneyLion to see if they’ll share more about how it works.

About The Author

Carlos Caro is the founder of New Market Growth, a marketing agency that specializes in helping lenders generate explosive growth in affiliate channels. He’s also an editor and contributor at Ghostmode.