Ryan Brinkhurst is the founder and CEO of Beautifi.
Recently, I bought my first home—a significant milestone in anyone’s life, including my own. And yet, despite having the economic means and having spent four months of stressful negotiations with the bank, I wasn’t able to lock down my mortgage until two days before closing.
I’m intimately aware of how lenders work; I have my CFA designation and am the founder of a consumer finance company. I knew I could afford the loan. But since I’m a relatively young entrepreneur with an income stream that doesn’t fit the model built in the 20th century, the bank needed a lot of convincing. Despite being armed with the means and knowledge, I was shocked at how rigid and difficult the process was.
And I’m not alone. A whole new generation faces a similar struggle: Banks and traditional lenders often do not understand our financial profiles.
In the last 20 years, the way we live and earn has rapidly evolved. Employment is precarious (subscription required), for starters. It’s also remote and constantly morphing. People with multiple jobs are often paid in a multitude of formats rather than a simple W2 form. The result? It can be harder for young earners to prove they’re qualified for a mortgage or line of credit. Banks may refuse them simply because their financial fingerprints don’t match borrowers from the 1900s.
That disenfranchisement (and the financial nihilism that follows) is bad news for all of us. Without access to credit, the next generation will struggle to invest and build equity. Meanwhile, it can be incredibly difficult for young strivers to reach for their larger goals. I believe the answer is to radically update the way lenders assess them.
Farewell To Old Lending Rules
The three-digit credit score system we depend on is a relic that’s been around in some form for centuries. When lenders use that score to decide whether to make a loan—and on what terms—they’re relying on the basic inputs that bureaus make use of (bill-paying track record, credit card status, etc.). Lenders then look at the borrower’s taxable income, too. But the analysis often stops there.
In reality, these snapshots offer only a limited perspective on the borrower’s financial life. It’s like looking at their world through a pinhole—you may miss the bigger picture. While these constraints plague our credit scoring system with unfair biases, many institutions believe we can’t do better.
I believe we can.
Behind every borrower lies a complex and dynamic story. And that can be doubly true for young borrowers whose financial lives don’t follow the familiar standard. Many young earners haven’t had a chance to build the traditional credit record that Baby Boomers enjoy, and their work lives can’t always be properly assessed via pre-internet models.
Real change is needed, and the tools to devise a better—and more equitable—system already exist. Here are two major shifts that can help make borrowing more accessible for the next generation.
1. Telling The Whole Story
New machine-learning tools enable cash flow underwriting, a more dynamic way to understand a borrower’s banking history. Lenders can get a 365-day view with meaningful trend analysis, not just the snapshot that traditional credit scores deliver.
Cash flow underwriting can pick up on features like a borrower’s minimum balance on a monthly basis, whether they’ve experienced job loss in the last 90 days, whether they’re receiving regular e-transfers, and so on. Even their social media activity can be used to help borrowers form a picture of their finances.
Building that holistic understanding of each borrower can allow lenders to be more thoughtful and humane. For example, should someone who experienced a major health crisis be penalized if their medical debt mars an otherwise flawless credit history? Considerations like this only become possible, though, when lenders are willing to reimagine the stories they look for. You don’t need to build your own AI tools to capture all this data, either, as there are already a number of tools readily available.
2. Encouraging FinTech To Share The Story
While fintech has the capacity to open doors for young borrowers, one sticking point is that new and alternative lenders don’t always report to national credit bureaus. If agencies like Equifax don’t log that activity, borrowers don’t earn important credit score bumps for paying off their loans, which can leave them back at square one when they ask traditional banks for mortgages.
Whether it’s a buy-now-pay-later loan for a flight ticket or a pair of sneakers, we need microlenders to capture and report that payment history so credit depth can be built and future lending decisions are fully informed. If traditional lenders and credit agencies want the most accurate possible picture of a borrower’s finances, I recommend working with fintech startups to gather data points from every possible source.
Everyone stands to benefit: Each time we fine-tune the underwriting process, we lower operational costs and increase efficiency. At the fintech company I founded, for example, we report data back to credit agencies to give our users a pathway to improving their long-term credit scores.
An Equitable Future
We shouldn’t be punishing borrowers just because their jobs and income streams look different. With a little creativity, we can build a future where alternative financial lives don’t stop borrowers from funding their dreams.
I know from first-hand experience that candidates who were previously dismissed by lenders often look very different once we glean their larger story. In the end, lenders can discover new customers and borrowers can access loans at the rates they truly deserve. That means more people—and younger people—have a real chance to take their next leap forward.
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