Credit’s new frontier: Cross-border records and the role of cash flow data

[00:00] Misha Esipov: Traditional credit bureau data, unfortunately, is just not enough anymore. And you can see that in the credit performance, and as some of these shifts that I talked about continue, that gap is only going to continue to widen.

[00:17] Narrator: Welcome to 22 Minutes in Lending, your go-to podcast for insights on all things lending. From lending practices, regulatory updates, how to enhance lending efforts, and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive in to the latest in lending.

[00:41] Vince Passione: Welcome, everyone, to 22 Minutes in Lending. I’m your host, Vince Passione. I’m excited to welcome Misha Esipov to our podcast today. As the CEO and co-founder of Nova Credit, Misha has been helping people deemed credit invisible, like immigrants and consumers with little or no credit history, leverage alternative data to prove their credit worthiness.

[00:58] Vince Passione: In addition, Nova has been building out a global infrastructure, enabling immigrants to transport their credit histories across borders and access financial services in their new countries. Misha, it’s a pleasure to see you, and welcome to the podcast.

[01:10] Misha Esipov: Great to see you. Thanks for having me on.

[01:13] Vince Passione: Awesome. Look, let’s jump right in. So, we know each other a long time. I’ve seen your mission, heard your mission. I’ll read it to our listeners, and I’d love to know why this mission, and why now? But the mission is, to power more fair and inclusive financial system for the world. So why that mission? And why now?

[01:30] Misha Esipov: We first started the business, recognizing that millions of people move to the US every year, and when they arrive here, they arrive invisible. And these are folks who are very credit worthy, have been credit worthy before, but the US system doesn’t understand who they are. And when you start to peel back the onion, you realize that the credit bureau system that exists has this inherent Catch-22, where you need to have had experience with credit to be approved for credit, right? Only when you have access to credit can you build history. Only when you have history can you get access to credit.

[02:05] Misha Esipov: And that Catch-22 is one of the core reasons for why we set out to build Nova Credit, is really to break through that, and to bring in new data sources to help people get access to credit at their point of greatest need.

[02:20] Vince Passione: Misha, how does it differ from what we consider to be the existing credit underwriting today, which is, go to the three bureaus, pull down a FICO store, pull down some of the other attributes, create a scorecard, and then decision someone?

[02:34] Misha Esipov: Yeah. So, if you look at our current credit system, there’s still about a hundred million Americans who aren’t appropriately served. We like to use the term, they’re misunderstood by the credit bureaus. And there’s folks who are just new to credit, thin file. And then there’s a bunch of folks whose scores aren’t really representative of their true credit risk.

[02:58] Misha Esipov: So we’ve talked a little bit in the past about these credit builder products that artificially inflate scores. But if anything, they’ve now been proven to be an early indicator of distress. BNPL and shadow loans aren’t really in the credit bureaus at all right now. Things like soft inquiry data has removed hard inquiry data. There’s government stimulus still floating through.

[03:21] Misha Esipov: And so the confluence of these factors and a few others have created a credit bureau environment that’s never been more difficult to understand. And it’s really in that backdrop that Nova Credit has emerged. Some have started to refer to us as the fourth credit bureau. I don’t like to be fourth at anything, but it’s a decent describer of who we are and what we do. And in our core capabilities, we really plug those gaps that exist in the credit bureaus, with new and alternative data, that is now being used by nearly half of the top 10 US banks.

[03:52] Vince Passione: Well, considering the fact the Bureau has been around since the 1800s, it’s not so bad being fourth, since you started, what, nine years ago? So you’re catching up. That’s not bad, Misha.

[04:01] Misha Esipov: We try to be both patient and persistent.

[04:03] Vince Passione: There you go. I like that. So Misha, what does adoption look like right now on cash flow underwriting?

[04:10] Misha Esipov: Yeah, I think we’re seeing the most success within credit cards, personal loans, and auto. And then from a customer type perspective, we’re now working with the majority of the top 10 US banks. And we work with a few of the credit unions, super interested in the credit union space, and we’re eager to spend more time there.

[04:35] Misha Esipov: One of the partners that’s worked with us now for seven, eight years is the United Nations Federal Credit Union, UNFCU. So they’ve been a long time partner of ours, and very excited about finding ways to not only continue to grow that relationship, but bring our capabilities to support many more credit unions here.

[04:56] Vince Passione: Yeah, I should have guessed that, right, given their demographic?

[05:00] Misha Esipov: That’s right.

[05:00] Vince Passione: They serve in Eric and Sarah’s team. Yeah, that makes an awful lot of sense. So how does it work? Does the consumer permission access to cash flow? Or does the lender turn around, decide to use it?

[05:13] Misha Esipov: Yeah, so we do a lot of different things at Nova Credit. I think what we’re best known for are three core products we do. One is called Cash Atlas, which is cash flow underwriting, and we can spend some more time on that. Two is called Income Navigator, which is verifying income and employment in real time on 99% of Americans. And then three is Credit Passport, which is our cross border business, so being able to access credit bureau data from all over the world and instantly bring that data in to allow lenders to better serve new to country applicants.

[05:46] Misha Esipov: The Cash Atlas product, the way it works is we work with a consumer to instantly get access with their approval into their bank account. And based on the information inside of that account, we can create a much more complete picture about someone’s financial health.

[06:02] Vince Passione: So are lenders that are using it today, Misha, are they using it in addition to the traditional FICO score and credit bureau? Or instead of? Or how does it work?

[06:13] Misha Esipov: Most lenders are starting with using cashflow data as a complement to traditional credit bureau data. And so the two use cases that we’re seeing the most success with right now, one is swap-ins. So taking a customer who you’re otherwise going to turn down, because they don’t have sufficient bureau information, and giving them the option to link their bank data. And should they choose, a large percentage of those customers can then actually be approved without compromising your credit risk appetite.

[06:51] Misha Esipov: The other major use case is credit line increases or pricing optimization. So even customers who you are choosing to approve, you can improve the economics of those products by being able to responsibly, let’s say, improve the size of the line you’re offering by looking at someone’s cash data.

[07:11] Vince Passione: So today, if I think about the way the bureau product works, we are also a subscriber to it, but we also furnish back information on the back of it. How does the data furnishing side work? Like adverse action notices, do we have similar notices? Do you need them right now? Are there standards for them?

[07:30] Misha Esipov: Yeah, that’s exactly right. So everything that Nova Credit does, we deliver decision-able attributes and scores, so they can be used for approve and decline. And everything comes with adverse action codes. So Nova Credit pioneered the creation of being a technology-backed, venture-backed bureau. So we became a CRA, credit reporting agency, seven, eight years ago, and really helped pioneer a lot of this stuff within the technology space, that’s allowed us to work with some of the largest banks, and even some of the major credit unions, over the last seven, eight years.

[08:10] Vince Passione: So FCRA was established to create some standards around how this information is furnished to the bureau. So you have now, standards at the bureaus on Metro 2, the format to send back things like adverse action notices and furnish information back?

[08:30] Misha Esipov: Yeah. Every time we deliver data to a partner, we have the data itself, the decision-able attributes and scores, and the accompanying adverse actions that can be referenced. And as part of our role in the ecosystem, to the extent that consumer chooses to dispute the information, we step into the shoes of being a CRA, and have a whole consumer operations team that does dispute management, and satisfies the requirements of the requirements of the FCRA.

[09:01] Vince Passione: So Misha, so I understand it, part of the product is to gain access to the data. The other part is the algorithm to parse through the data, and to calculate those cash flows. You’re doing both? Or does the lender do the latter? Can they customize that?

[09:14] Misha Esipov: Oh. We think about it as three core swim lanes. There’s the infrastructure side, which is like, how do I get my hands on the data? How do I maximize the coverage? How do I maximize the conversion, to be able to get our hands on this data? Two is the analytics, which is, how do we turn all these lemons into lemonade? How do we get the most insight from this data, compliantly? And then the third is the FCRA compliance, so making sure that you’re using this information compliantly, and that consumers have a place to go, to the extent that they have questions or want to dispute something that was reported.

[09:48] Vince Passione: Okay. Now, in the past when I’ve been out talking to some of my clients about cash flow underwriting, one of the comments is, and it might not be accurate, but I’d love to hear your comment is, “That’s already included in the Bureau.” So is that true? Is it not true?

[10:00] Misha Esipov: It’s not. There are some small exceptions, where the bureaus have a little bit of this data. But the core issue is that you can’t go and hit a database with all of this nation’s bank account data. That doesn’t exist. The bureaus don’t have it, the bank aggregators don’t have it. And so you have to build these unique real-time workflows to access bank account data.

[10:28] Misha Esipov: And only when you have the data can you figure out how to make sense of it. And so, to our knowledge, the bureaus and organizations like FICO, they don’t have all of this bank account data. You have to work with the consumer, get their consent to be able to go and capture this data in the middle of an application.

[10:46] Vince Passione: Okay, so when I think about this part of the business, and I look at bureaus, I always think about the bureaus as being a great way to understand your willingness to pay, right?

[10:56] Misha Esipov: Yep.

[10:57] Vince Passione: I’m looking at how you paid previous loans, your mortgage, your auto loan, and outstanding line of credit. Ability to pay seems like the whole domain of cash flow underwriting. Is that right?

[11:11] Misha Esipov: That’s right. The reason we’re so excited about cash flow data, and I’ll talk a little bit more about the here, and the why, and why now, but ultimately, the reason comes down to three core pillars. One is the coverage. 99% of Americans have a bank account, far fewer have a representative credit file. Two is cash flow data is much deeper than traditional credit bureau data.

[11:40] Misha Esipov: I can see your income, your direct deposit coming in. I can see your expense profile, how much you’re paying on your mortgage or on rent. I can see your assets, I can see whether you’ve over-drafted. And so it ultimately creates a much more complete picture about someone’s financial health than just looking at their credit bureau file, which may or may not exist, or may or may not be thick.

[12:00] Misha Esipov: And then the third factor is, ultimately, the real-time nature of this data. It’s a current, it’s a real-time snapshot of what’s happening in your financial health, as opposed to credit bureau data that is several weeks lagging in many cases.

[12:16] Misha Esipov: And so you have more coverage, it’s a deeper view, and it’s real-time. And so it’s really those three reasons that makes the story around cashflow underwriting so compelling. And then ultimately, as we’ve seen through many case studies at this point, the data is incredibly orthogonal to traditional credit bureau data. It’s value add, on top of traditional credit bureau data.

[12:39] Misha Esipov: And so as a result of that, lenders are able to take customers who they’re otherwise turning down, or sending down some happy path, and on a first principle basis, using good and reliable information, take them from a no to a yes.

[12:56] Ron Draper: This is Ron Draper, CEO of Somerville Credit Union. So in 2014, we were looking for a turnkey student lending solution, one that was simple and efficient for our members to access. And eventually, we chose LendKey, because it just integrated seamlessly, for quick member mobile access, and was easy to remotely review and approve from a loan officer point of view. And I should know, because I’m that loan officer. I still recommend LendKey to people whenever I get the chance, because after almost a decade, it continues to offer consistent product and service delivery, both to our membership and to our staff.

[13:35] Vince Passione: I just came back from an open lending conference, so probably about a hundred credit unions there, who are big players in the auto finance market. And one of the consistent conversations we had was about a vintage of loans back in 2022, that just aren’t performing well. And I think that goes across all asset classes. It’s not just auto, it’s mortgages, it’s pretty much any consumer asset class, where people saw a decline in performance there.

[14:03] Vince Passione: And the theory behind it, I think people are still trying to sort through it, is that this had to do with stimulus. That stimulus caused the consumer to turn around, COVID stimulus, to see that consumer’s credit scores were positively impacted by stimulus. I know you just had your big summit, your cash underwriting summit. A, did that come up? And B, is this a use case that says cashflow underwriting would’ve caught this?

[14:29] Misha Esipov: Oh yeah. Yeah, we had a whole session presented by McKinsey and Second Order on the state of the economy and the health of consumer credit. And we saw a similar trend in some of those 2021 and 2022 vintages, around credit performance. And I think it boils back down to some of those changes that I highlighted earlier, around how it’s never been harder to do the job of risk management.

[15:03] Misha Esipov: You’ve got this confluence of government stimulus flowing through, inflating scores. You’ve got credit builder products inflating scores. You have soft inquiry data that’s removing hard inquiry data. BNPL debt that’s not in it. And those factors, and a few others, have made this corpus of credit bureau data much more difficult to understand. As a lender, you now have to have the nuance to add and subtract what the bureaus are showing you, because not all trade lines are created equal, and not all inquiries are created equal.

[15:34] Misha Esipov: And that makes the job that much more complicated. And as a result of that, a lot of the traditional scores just aren’t performing as well and aren’t adopting to some of these underlying changes in the bureau. And cashflow data, in our view, and I think increasingly the industry’s view, is a new source of truth for what’s really happening with the customer’s financial health.

[15:58] Vince Passione: So you touched on BNPL, buy now pay later. When I go to conferences, credit unions constantly talk about this product. The ones that are in the credit card side of the business see it as a competitor or potentially a companion to the product, but there’s always this big concern about how it’s reported. So you’re in this all the time, what’s the state of reporting on BNPL with the bureaus? And how does cashflow underwriting help you?

[16:21] Misha Esipov: Yeah, so to my knowledge, none of the bureaus include BNPL trades in the core credit file, still. I think there have been headlines over the last few quarters, about them creating a new BNPL specific bureau, which will only include BNPL trades. I’m not up to speed on how real and how much scale those have, but I feel for the listeners, and having to figure out how to use multiple bureaus at the same time, and build credit policies on data that may or may not exist.

[17:02] Misha Esipov: It’s an increasingly complicated puzzle. And one of the beauties of cashflow data is, you can see BNPL trade line payments on someone’s file. You can see it in their cashflow data, on whether they’re making a recurring payment to someone like an Affirm, or a Klarna, or any of the major BNPL providers.

[17:27] Vince Passione: So we’ve been in conversation for a while now about this for our clients. Talk to me a little about what are the obstacles that you hear, or the pushback objections you hear from clients. And then tell you how to get over that. What’s the comeback when someone says, “No, I don’t want to use this because of regulatory concerns. I don’t want to use this piece of concern where it’s going to affect my FCRA.”

[17:48] Misha Esipov: Yeah. Well, maybe I’ll start with an overarching point before getting into the details. Change management is really hard, whether it’s at a bank, or at a credit union, or any institution. And deploying, and really benefiting from all of the power that cash flow and writing can bring across the customer lifecycle, from qualifying, to decisioning, to account management, requires real leadership and alignment of a specific of your team.

[18:23] Misha Esipov: And I think if I can offer one guiding principle, it’s to make sure you’re working with a partner who can really coach you through that process. Because there are going to be a number of valid questions, concerns, objections. And I’d say at this point, basically all of them have… There are responses for how to handle those kinds of questions and objections.

[18:48] Vince Passione: Misha, good answer. I guess, when I think about the way we build models with our clients, a lot of it’s based on historical data. So how do you create that historical perspective. If this is just the beginnings of use of this, for want of a better word, new attribute in the model, how do you get there? Is it just building it over time? Is there some way of looking back and back-testing it so you can demonstrate what would’ve happened?

[19:16] Misha Esipov: That’s a great question, and one we’ve spent a lot of time iterating on how best to address. I imagine for many of the credit unions here, as you think about your applicants, you may already have bank account information on them. You may have a primary direct deposit relationship with that applicant. And so you already have, in a way, for existing to credit union customers, their bank data.

[19:47] Misha Esipov: And so we have a whole process that we can go through to analyze that data, and tease out where you could improve your decisions using that information. For applicants that are new to your institution, or you don’t have a primary checking account relationship, there are a variety of strategies we have around helping with things like proxy retros.

[20:10] Misha Esipov: But at the end of the day, the important takeaway for anyone listening, is to not let perfection be the enemy of progress. You can take an analytical exercise, and take it to the extreme, and get stuck in a decision. And you end up missing the forest from the trees. And the important thing here is to start with something simple, a very simple credit policy. And to start with a more conservative buy box. And as you see the live performance coming through, you can become a lot more sophisticated in how you leverage this information to say yes more.

[20:51] Vince Passione: So when I asked, we don’t need to turn around and back-test it the same way and have all this history, because it’s in addition to, not instead of. And you’ll learn as you go. That a simpler way to think about it? And understand-

[21:05] Misha Esipov: Yes. And if you already have the data, then we can help you make sense of it.

[21:10] Vince Passione: So we touched on the cashflow underwriting summit. You had quite a turnout. We were talking before the calls, there were 200 people there. Everyone is very interested in understanding the state of the credit. But where the consumer is right now, we just saw the Fed drop 50 basis points. What are the big takeaways from that audience? And what are the big ones that you say are going to affect the way you position this product, as you think about 2025 and beyond?

[21:35] Misha Esipov (21:35): Yeah, I think first and foremost, there’s never been a greater need for this kind of information to be used in your credit processes. We talked a little bit about the shifting macro environment, we talked a little bit about the shifting data environment, and we talked a little bit about the regulatory environment, and how this information can now be readily accessed in real time.

[22:00] Misha Esipov: I think two is, to make sure you’re working with a specialist. There’s a lot of organizations who go very broad and they do a lot of different things. And there’s very few organizations who are super specialized in how to use this kind of information for credit risk purposes. And we happen to be one of those. And we’re very proud of the product that we’ve put together. We take a very consultative white glove approach in partnering with the various businesses that we support, and helping them go through this step change and inserting a very powerful source of data into how they make decisions.

[22:34] Misha Esipov: And then finally, it’s I think this broader point around change management and starting simple. Not trying to do too much at the same time, too many use cases at once. And just starting with getting that first flywheel to work, with something simpler, and not letting perfection be the enemy of progress.

[22:53] Vince Passione: Great. So you travel a great deal. You talk to plenty of lenders, large and small. What’s the prediction? What’s the advice you’d give our lenders as they think about 2025? Especially our credit unions? There’s liquidity issues, there’s concerns about loan performance, Cecil’s affecting their capital. What would be your advice to them as you think about 2025, and all the conversations that you’ve been having?

[23:16] Misha Esipov: You need to find the organizational capacity to upgrade the data you’re using, because only with new data do you have a chance of sifting through a very quickly shifting data environment that’s happening with the credit bureaus. Like traditional credit bureau data, unfortunately, is just not enough anymore. And you can see that in the credit performance, and as some of these shifts that I talked about continue, that gap is only going to continue to widen. And so the need for cash flow underwriting, and some of these other products that I talked about, we think is only going to continue to accelerate.

[23:58] Vince Passione: That’s excellent. Well, listen, Misha, thank you for joining us today. I really enjoyed the conversation, as always. Thanks to our listeners for tuning in, and don’t forget to subscribe so you can enjoy future episodes. And I’ll meet you back here at our next 22 Minutes In lending.

[24:10] Vince Passione: Misha, thanks again.

[24:11] Misha Esipov: Thanks for having me on.

[24:13] Narrator:  Thank you for listening to the 22 Minutes In Lending Podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five-star review.