Nova Credit CEO Misha Esipov argues that the credit industry doesn’t just need better data. He believes it needs a new standard that measures consumers’ financial lives in real time, not through the rearview mirror of traditional credit scores.
Transcript
This is Monday Conversation, a PYMNTS podcast. Karen Webster sits down with the visionaries behind the trends for the stories shaping what's next in payments and commerce. In this episode, Nova Credit CEO Misha Esipov argues that the credit industry doesn't just need better data. He believes it needs a new standard that measures consumers' financial lives in real time, not through the rearview mirror of traditional credit scores.
Karen Webster:Hey Misha, great to see you today. I have a number of things that I'd love to talk to you about, starting with uh you just wrapped your second annual cash flow underwriting summit, a very specific focus for those who attended. Uh, I'd love to get your thoughts on what was discussed and um and how that may have been different from what you've heard from prior interactions and engagements um with the summit that you just finished. So thanks for taking the time.
Misha Esipov:Of course, thanks thanks for having me. And um, yeah, I mean it was uh an amazing event. I mean, shout out to to our team for for pulling it off. Uh, we had 38 of the top 40 uh largest uh consumer lenders and banks uh in attendance, so basically our entire industry. Uh and I think the the overall headline is that um cash flow underwriting has gone from sort of a cool idea a year or two ago to you know in the steepest part of the inflection curve. Like we're seeing the most adoption of this uh capability uh that we've ever experienced as a company.
Karen Webster:It's been it's been around for longer than the last year or two. I mean, this is really how the Buy Now, Pay Later movement became more than just an opportunity to think about extending credit in a different way. I mean, that is the backbone for the Buy Now, Pay Later revolution. Um before we get into why this groundswell now of support from a cross-lending community, I'm curious to get your thoughts. So what was the most surprising thing you heard?
Misha Esipov:I think like the the consistency of uh the buy-in from the industry. I think like if I reflect on last year's summit, I think people were curious. I think they were curious to understand what this is, how it works. You know, they'd they'd heard rumblings of some of the you know smaller fintechs using these kinds of capabilities. And I think the big shift is you know, seeing, you know, uh the largest players in our space, you know, partners of ours like Chase and PayPal uh investing in cash flow underwriting as a core capability is moving the market.
Karen Webster:And why do you think there is this momentum now? Is it is it that there's been these proof points in the market from you know the all providers? Is it that the technology is better? Is is is regulation and sort of the financial infrastructure that supports it, like what Nova is doing, um, helping to feel the momentum? I mean, is there is there one thing or is it a multitude of things that have just all kind of come together to create the different perspective now that you're seeing?
Misha Esipov:I I think it's all of the above. I mean, I'll I'll even start one click higher, which is you know, our underlying credit bureau system is long overdue for an upgrade, right? There's still a hundred million Americans who struggle with getting basic access to credit. And so the industry wants to serve that segment of the US population. They want to find a way. And there's the only way to do that responsibly is with better data. Uh, unfortunately, the you know, technology providers and partners like us have you know built out the infrastructure that you need, the analytical capabilities that you need, as well as the compliance capabilities. And so it really takes that trifecta, the infrastructure, analytics, and compliance to be able to make cash flow underwriting plug and play. And that's what we spent the better part of uh of our history as a company bringing to life.
Karen Webster:What do the regulators say? Were were they in attendance at your at your meeting?
Misha Esipov:We actually had um all previous administration, CFPB administrations uh there, including uh former director uh Rich Cordre, um, you know, talking about uh you know what's happening in the administration and uh and what's happening to the CFPB. So it was very certainly a very lively uh conversation. But I mean I think the the through line on the regulatory side is um better, more reliable data can drive responsible growth and support the safety and soundness of a bank while approving more. And so the message we've heard consistently from um you know current and former regulators is uh you know leaning into the use of open banking for uh and you know bank transaction data to approve more.
Karen Webster:Let's talk about some of the things that regulators and financial institutions may still have pause um uh about with respect to cash flow underwriting. You know, the data does show whether consumers can pay, but they it doesn't necessarily suggest that they will. So there's you know, that's what the credit bureaus, the credit bureaus report the history, your history of being an on-time, responsible, you know, repayer of credit. Um how do you close that gap with just the underwriting data that you're collecting?
Misha Esipov:Yeah. I mean, there's there's you have to start by recognizing that you know just looking at somebody's liability statement is only a fraction of their financial health, right? You're you're missing you're missing income, you're missing expenses, you're missing assets, uh, you're missing uh whether someone has overdrafted. And so that information presents a much more complete picture than just looking at you know the recurrence of whether someone serviced a loan. Um and you can actually see whether someone has serviced a loan through their bank data, right? You can see that uh expense coming coming through. And so, you know, this information is uh readily available, uh, it's easy to use and it can be used compliantly, and that's what's gotten uh a large share of the market to start to invest and uh use it as a way to drive growth and expand the universe of customers they're able to better serve.
Karen Webster:Where do you see the most compelling examples of applying cash flow underwriting to expanding access to credit?
Misha Esipov:Yeah, I think the most obvious place where the industry is is starting is what we refer to as the swap-in use case. And so, you know, you have applicants who are applying for your financial product, whether that's a credit card or a loan or an auto loan, and you know, a large share of those are getting declined because they don't have enough bureau information or for a number of other reasons. And so rather than turning them down, let's see if they have more information in their account that they're willing to share that might change your mind. And if you see um high quality, consistent income, if you see reasonable expenses, if you see that this customer hasn't overdrafted and has you know a decent balance in their account, like that might change your mind. And so that's one of the many opportunities where um bank data and cash flow data uh is is being used to get started. And then from there, there's a large menu of use cases we're seeing uh take off sort of across the whole customer lifecycle.
Karen Webster:You know, there's there's obviously the the uh consumer who knits together side hustles to create paycheck. And you know, those incomes can be quite quite variable, but that is a phenomenon that we see and and we see we see growing. Um how does how does cash flow underwriting account for both the predictability and the unpredictability of those kinds of income streams?
Misha Esipov:Yeah, modeling income and understanding uh ability to pay is foundational to cash flow underwriting. I think one of the one of the biggest gaps in the US credit bureau system is its inability to understand income consistently. I mean, we we we study the bureau system around the globe. It's it's where we started our our business is by being the first company and first and only company to be able to aggregate bureau data from around the world. And so we have a good understanding of how bureau systems are different. And in other markets, income is consistently captured and available in those bureaus. In the US, we don't really have that um phenomenon here, and that is ultimately what makes uh cash flow data so powerful is the ability to understand income with far greater confidence than was possible before. And yes, there is complexity in and anomalies in understanding more difficult to understand consumers, right? Some somebody who's receiving a consistent paycheck every two weeks is much easier to understand than someone who's in uh earning in more irregular manners or who's earning through gig economy jobs. But ultimately you see those inflows coming into an account and you can make reasonable assumptions about uh how much confidence you have in the ongoing consistency of that income.
Karen Webster:There are a number of players who are introducing their own cash flow risk scoring based on similar models or similar sounding models. And when you look across the landscape, you talk about the standardization, the reporting, the ability to kind of consistently rely on these risk scores as a way to feel comfortable about extending credit. What makes these models different? And how does a lender decide which risk scoring cash flow underwriting model they should they should consider?
Misha Esipov:Yeah. I mean, models are only as good as the data on top of which they are built.
Narator:Right.
Misha Esipov:And um, you know, we think there are some um you know great partners and providers out there who have put a lot of work, like we have, into uh assembling the infrastructure, assembling the data, building the analytical suite, and building the uh the compliance capabilities. And you know, I think when you're when an industry is going through a step change, like the one we're we're going through, because this is not a game of you know basis points of improvement in approval rate. This is a step change of hundreds of basis points of improvement in approval rate. Um the differentiation is less so in the KS score of a model, and you know, we can go through that and win in those head-to-heads. It's I know we found it's actually more in um the quality of service and in being an expert in how you know the leaders in our industry are using this type of information to drive change. Uh and you know, we've just through focus built an expertise in this capability, and being a business that really pioneered nine and a half years ago the use of consumer permission data for improving risk decisions. Like we were, to my knowledge, the first, or certainly one of the first almost a decade ago, you know, working with consumers to get more information with their approval to improve outcomes and risk decision. And it's really that expertise and superpower that we've developed over the last decade that is helping us lead this industry forward.
Karen Webster:Do you think that in a model where consumers have input and can permission the kind of data that is necessary for a lender to make a decision, do you think that overall that in that improves the way they think about how to manage their finances day to day? It's sort of a psychological, if I know at some point this is going to become um very instrumental to getting additional credit, maybe I should start paying attention more to how I manage my my day-to-day.
Misha Esipov:I think on on the whole, um greater awareness of how credit works improves credit behavior. Um but I think unfortunately uh most Americans um aren't so focused on that, right? Like it's a there like there are certainly power users who are uh you know always checking their you know their their credit scores and their PFM apps. Um but I think that's our those are for the most part outliers. Uh and mainstream America is just trying to get to the outcome, is trying to get approved.
Karen Webster:Yeah. Do you see cash flow underwriting replacing the current Bureau reporting? I know that that it's just you know there's a lot of steps that that have to be checked or done in order to eliminate FICO, but do you see that as an as an outcome at some point, or do you see cash flow data becoming more of a of a decision driver with FICO sort of being second or third or even lower on the list?
Misha Esipov:I I think the nature of our industry is that it operates in very long cycles. Um because you know the adoption cycles of the largest financial institutions are measured in years, not months or quarters. Uh the credit performance cycles to actually prove that this data works is typically measured in quarters or years, depending on the financial product. And so the cycle times are long. Um, but I think that the end state um is one where uh the infrastructure is so good um that you can and and the consumer familiarity with these kinds of experiences is basically ubiquitous, uh, that risk officers will have the choice of do you use only bureau data or bureau and bank data? And when given that choice, uh any risk officer would choose more data. Uh and so I think where we'll ultimately land is bureau data and bank data will be used in concert together, uh, basically in every in every decision. Um and you know, I don't I don't really anticipate it fully replacing the bureau. Um, I just think that the core bureau model will have bank data in it. Uh, and you know, how quickly we get there is sort of one of the big open questions that we continue to iterate on. And one of the reasons for why we put on a summit like this and you know have 300 plus leaders in our industry there is to accelerate adoption in this space. We think this is a tremendous, uh tremendously powerful data capability that can create a win-win for the ecosystem. It gets more people approved for the products and services they need and deserve, and it helps businesses grow responsibly.
Karen Webster:But how do you standardize reporting and how do you make that accessible to all lenders?
Misha Esipov:By setting the standard for how bank data can be used compliantly. I think we've we've put a lot of effort into um working with many of the leaders across our industry to uh set the standard for how to take this very messy data that can come from all different places and all shapes and sizes and put it into a format that the industry knows and trusts.
Karen Webster:We've just raised some money, obviously, to continue to develop that and other things. How will you deploy the capital?
Misha Esipov:Keep doing what we're doing. I mean, this is a this is a game of of focus at the end of the day, which you know is the hardest part of my job when you see so much opportunity uh uh in our flanks and in the adjacent areas that we're in, and just staying laser focused on um the most compelling use cases and in serving uh serving this industry. And so our you know, our intent is to use the funds to continue to advance our infrastructure, our analytics, our compliance, our customer service, um, uh our operations uh in in in leading this industry through the steepest part of the inflection curve in cash flow andwriting.
Karen Webster:You obviously have a lot of data. You see a lot of people showing up asking for credit among a variety of different lenders. How would you characterize the health of the consumer today?
Misha Esipov:Pretty um reasonably stable right now from what from what we're we're seeing. I mean, we we track it in our own data, we track it in uh you know publicly available bureau data. Um I think there's similar to what you experience in the public markets, there's you know some anxiety around stability. We're certainly seeing some shifts in some of the cohorts. Um but on the whole, um things so far are holding up. But just like everyone else out there, we're you know, we're monitoring very closely.
Karen Webster:Misha, thanks so much for a great conversation about a very important topic and uh one that obviously will be a topic of conversation for many months and years to come, as you say. It's a takes a long time to drive change.
Misha Esipov:That it does. I wish someone had told me it would take you know take this long when I started the business a decade ago. But yeah, thanks for having me on.
Karen Webster:Thanks, Misha. We'll talk soon. Bye-bye now.
Narator:That's it for this episode of the PYMNTS Podcast: The Thinking Behind the Doing. Conversations with the leaders transforming payments, commerce, and the digital economy. Be sure to follow us on Spotify and Apple Podcasts. You can also catch every episode on pymnts.com/ podcasts. Thanks for listening.