Data aggregation’s new frontier: Lending decisions

Financial data aggregation, long used to power digital personal financial management tools, has found a more moneymaking role — speeding up underwriting decisions.

Rather than faxing in documents or submitting PDFs of data downloaded from multiple websites, consumers and small-business owners are granting online lenders permission to use aggregation technology to grab their financial transaction data.

“It’s what consumers have been doing for decades — just quicker,” said Nick Thomas, the executive vice president and co-founder of Finicity, a data aggregator in Murray, Utah, that Experian has invested in. “The credit-decisioning space is really the new frontier of data aggregation.”

So long as the technology is working as intended, lenders will gain something they may have not been privy to before — years’ worth of transaction data, such as cash flows that aggregators think lenders should crunch as part of their credit analysis in addition to credit history data. And sure, banks may already count some applicants as customers and have access to their financial transactions. However, most consumers have multiple bank accounts that lenders would also need to mine.

“You have to have a full picture of a person’s finances,” said John Bird, vice president of product marketing and alliances at Envestnet-Yodlee.

For now, the practice of using data aggregation for streamlining the application process is more typical of fintech companies like Quicken’s Rocket Mortgage and Kabbage. But aggregators like Finicity and Envestnet-Yodlee predict that traditional banks will increasingly follow suit to protect their lending operations.

“Banks are definitely awake to this,” Bird said. “Quickening lending decisions is going to be the No. 1 or No. 2 thing on the minds of large banks.”

But what sounds innocuous is anything but. The Consumer Financial Protection Bureau has been seeking information on data access and, more recently, on alternative data for underwriting purposes. And regardless of how the request for information shakes out, some industry observers are skeptical of the degree to which speed will serve as a competitive edge.

Lenders should not be overly hasty in underwriting a loan, warned Brian Riley, director of credit advisory services at Mercator Advisory Group. “It’s precision over speed when it comes to putting out credit,” Riley said.

However, some lenders paint aggregation as essential to their underwriting precision.

Kabbage is a small-business lender that uses aggregation technologies to underwrite loans in as little as a few minutes and has established partnerships with several banks, including Banco Santander’s U.K. operation, ScotiaBank in Canada and Celtic Bank in Utah.

Kabbage since its inception has required applicants to share their transaction, revenue, expense and other vital data, and that decision has been “monumental” to its survival, CEO Rob Frohwein said.

Many would-be borrowers, if they had been given the choice, would likely have submitted the data through slower, traditional methods, and the fintech company in such cases would have lost its competitive advantage — real-time data that saves borrowers the trouble of gathering documents or visiting loan officers, Frohwein said.

“Had we made the decision to give [a] manual option … I don’t even know if we’d be in business,” Frohwein said. “We’d be like everyone else on the street.”

Sure, some applicants bolt when Kabbage asks them to share so much access to their data, Frohwein said, but many borrowers are more comfortable with the idea of turning over the necessary log-in information to aggregators for simplicity’s sake.

It is similar, he said, to people’s willingness to use their Facebook credentials to ID themselves on other websites. To some, the convenience outweighs any potential risks.

“Now, it feels commonplace,” Frohwein said.

It’s because of offerings like Kabbage that traditional advisers need to refine their online lending experiences in order to compete on the quality of user experience, said Joel Pruis, senior director at Cornerstone Advisors.

“The pressure is on,” Pruis said.

As Pruis sees it, speed of decision is a critical competitive advantage. If lenders take too long, applicants will grow weary from the delay or wonder why the rates are not better by the time their offers arrive.

Lenders in other countries like Australia and Europe appear to be further along than U.S. banks — especially in building open application programming interfaces to simplify the flow of data among apps.

National Australia Bank, like Wells Fargo and Silicon Valley Bank in the U.S., has partnered with Xero, an accounting software provider, to share data via APIs. But NAB’s partnership with Xero goes one step further. Since June, customers of Xero and NAB can get unsecured loans of up to $50,000 based on 12 months of data they pull from Xero and in as little as 60 seconds.

“We are a firm believer in investing in aggregation of many data sources to transform our processes,” said Dan Carr, general manager of small-business lending and transformation at NAB.

Carr said the demand for the newer digital product has met expectations, though he did not provide details. Compliments from customers have increased, and the change is noticeable in a part of the business known mostly for drawing complaints, Carr said.

Moreover, NAB is happy enough with the progress that it will extend the product’s credit limits, Carr said.

But it’s just a small step on a massive industrywide journey to transform the lending experience for consumers and businesses alike.

Ian Benton, an analyst in Javelin Strategy & Research’s small-business practice, said the vision for many lenders is about crunching many sources of data to provide lending offers when customers need it most.

It would be a more proactive future, in which lenders do not wait for applications but on their own find borrowers and deem them creditworthy and then initiate offers.

“Eventually, we will see the death of the loan app,” Benton said.