Fintech

Plaid launches new product to make cash flow underwriting mainstream

Published

11 months ago

7 June, 2024

Plaid launches new product to make cash flow underwriting mainstream

Cash flow underwriting has been “the next big thing” in the lending industry for several years now. And while several lenders use it as part of their underwriting, it hasn’t become a mainstream tool. That may change with today’s announcement from Plaid.

While before Plaid announced a cash flow underwriting initiative a year ago, today they are taking it to the next level with the launch of Consumer Report,

Let’s step back for a minute. Plaid became a consumer reporting agency (CRA) last year and the agency is called Plaid Check. This had profound implications for its cash flow underwriting goals. When you are a CRA you can provide not only data but, more importantly, insights from that data that lenders can use for underwriting. If you are not a CRA, you cannot provide such insights.

This is an important point because most lenders don’t want to deal with cash flow data itself, as it is notoriously complex and convoluted. The value is in providing insights into that data.

As such, Plaid will now provide lenders with insights into up to 24 months of consumer-authorized bank account data. It will also provide Income Insights, which checks the consumer’s ability to pay. But what’s perhaps most interesting about today’s announcement is Plaid’s expanded partnership with Prism Data, which will provide a unique cash flow risk score.

Prism Data was born last year from credit card fintech Petal and has been powering credit products since 2018. They have also developed CashScore, a creditworthiness metric not unlike a credit score, but based solely on credit data cash flow. Plaid will use this score as part of the Consumer Report.

How cash flow underwriting is used today

Plaid has run Consumer Report beta tests with nearly a dozen lenders across personal loans, BNPL and proptech, including big names like Oportun and H&R Block.

Jonathan Gurwitz, Credit Lead at Plaid, discussed how lenders will use Consumer Report. The two main use cases involve taking a second look at borrowers who were initially rejected for credit and increasing acceptance rates by providing a better interest rate to borrowers who have already been approved.

“This is not a small population, a set of marginal declines by a lender,” Gurwitz said. “Even in certain situations, marginal approvals, where you feel like you don’t have a competitive rate to offer to that customer, giving them the ability to link their account and improve their offering. Overall this is a pretty large population and I think there can be a real impact here.

When I tried to get Gurwitz to share what kind of borrower pool growth lenders can expect, he was reluctant to provide concrete numbers.

“I hesitate here, because it’s so varied, but I think, overall, an estimated 5 to 15% growth in originations without adding risk… there’s not a lot of initiatives you can do like, you know, pretty developed credit space where you can get that kind of lift.

Lenders use Consumer Report in addition to compiling a traditional credit report to expand their customer base and provide better pricing for those customers who have been marginally approved.

This is a win-win solution. It’s a win for the borrower, who has now been approved or received a better interest rate. It’s a win for the lender, who now has a paying customer. And it’s a win for Plaid, which generates revenue from using its data.

Lenders implement the Plaid user experience for linking bank accounts, which is something most people are familiar with by now. So, it is a light switch for the borrower with a significant reward.

Insights into income from Plaid

We don’t want to gloss over the Income Insights tool because that’s a key part of the equation here and one that sets Cash Flow Underwriting apart from traditional credit reporting. Often, the credit side of a consumer’s bank account is complicated. Nowadays many people earn more than just W2 income. There’s often money from gig jobs, side hustles, and Venmo or PayPal payments flowing in and out.

“It’s not trivial to go from bank transaction data to the ability to actually develop a reliable estimate of someone’s gross income,” Gurwitz said.

Plaid includes over a dozen income streams categorized to provide your expected net and gross income, as well as an expected date for your next paycheck. This makes debt-to-income ratio calculations much more accurate.

Looking forward

The machine learning models powering Consumer Report will continue to improve, and Plaid is also looking to create new cash flow attributes to help lenders better predict short- and long-term credit risk.

The Plaid network is unique in that it includes 500 million connected accounts. Therefore, the company is currently examining account connection activity on the Plaid network as a risk predictor. This is in its infancy, but it contains a treasure trove of information, obviously used only with customer permission, that could further increase Consumer Report’s effectiveness.

There may come a day in the not-too-distant future when Plaid looks at all of a consumer’s linked accounts, including brokerage and money market accounts, and uses all of this information in real time to make an underwriting decision.

Regardless of where it ends up, the progress announced today by Plaid will have a dramatic impact on the future of lending in this country. It could be the starting point needed to bring cash flow underwriting into the mainstream.

Peter Renton is president and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and is the author and creator of the Individual fintech podcastthe first and longest running fintech interview series.

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

9 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

9 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

9 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

9 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”