Business credit card underwriting is undergoing a significant shift. Traditionally, lenders relied heavily on credit scores and company financial statements to assess creditworthiness. This process works well for consumers but is less effective for startups and businesses with changing income streams. This has created a challenge for many small to medium-sized businesses (SMBs). One recent survey revealed that around 60% of SMBs could not get the funding they needed through traditional banks and lenders.
Corporate credit cards are generally the solution but often require personal credit sources and assets in underwriting. Today, technology is enabling more dynamic underwriting, based on cash flow and monitoring. Instead of fixed underwriting based on an analysis of a business's financial health at a point in time, ongoing monitoring can ensure continued financial health, reducing potential defaults.
Nontraditional Underwriting Methods
Nontraditional underwriting considers a broader set than just credit scores and may include:
- Cash flow: Assessing a business’s cash inflows and outflows using a live connection to their bank transaction data. Positive cash flow indicates stability and repayment capacity.
- Spending patterns: Analyzing card transaction data for insights into a company’s financial behavior.
- External public data: Using AI to scrape the web for due diligence such as public filings and negative news articles.
Fintech lenders, especially, are increasingly adopting these methods. They leverage technology to make assessments and underwrite loans for businesses that may not qualify with traditional lenders. This can provide a significant advantage in attracting a broader range of customers and driving them to FinTech providers rather than traditional financial institutions.
As traditional banks address FinTech's competitive challenge, dynamic underwriting can help level the playing field.
Dynamic Underwriting Adapts to Business Cycles
A key difference with dynamic underwriting is that it recognizes business income fluctuations, so it adapts credit limits based on cash flow and other data in nearly real-time.
A study by McKinsey & Company shows that this process significantly reduces credit-loss rates. By more precisely determining the potential for customers to default, companies adopting dynamic underwriting report a decrease in default rates between 20% and 40%.
While most business cards are unsecured, you may also use collateral or personal guarantees as part of your risk management strategy. Besides adjusting credit limits, you may also adjust collateral requirements dynamically.
Torpago’s Approach to Business Card Underwriting
For business card underwriting, Torpago incorporates FICO scores of controlling officers and business owners in credit decisions. However, Torpago goes a step further by monitoring FICO scores over time. If scores drop below acceptable thresholds, this triggers a re-evaluation.
In addition to consumer bureau data, Torpago leverages its proprietary business cash flow underwriting combined with internal spending behavior. Combining these different data types allows for a powerful risk engine.
As a white-label card provider for financial institutions, Torpago empowers card issuers to offer credit to larger groups of business customers while maintaining a responsible approach to credit. Some customers may qualify for a higher credit limit than they would qualify with a traditional corporate card. While underwriting is based on verified liquidity in the bank, spending patterns, and business history, credit limits can adapt over time.
A study from the Consumer Financial Protection Bureau (CFPB) validated how a holistic approach to underwriting improves risk management. According to the CFPB, those with positive cash flows outperform those with poor cash flow by 20%, even when the credit scores are similar.
Ongoing Monitoring
In business, things can change quickly. Someone who is a good credit risk one day can be a high-risk customer the next. By continuously monitoring the business’ cash flow and changes in FICO scores of controlling officers, card issuers can manage risk more effectively without missing out on opportunities.
Flexible company spending management platforms can also make it easier for new businesses to establish credit or for companies with less-than-stellar credit to get business credit. With negotiable terms, businesses may qualify for dynamic credit limits that increase as credit is used responsibly.
Managing Portfolio Risk
Dynamic underwriting allows card issuers to take a more comprehensive approach to managing portfolio risk. Businesses can be segmented based on risk profiles and underwriters can receive automatic alerts when conditions change. This helps issuers meet internal compliance requirements and regulatory lending practices.
Identifying Fraud
Tapping into nontraditional data can also help verify the identities of businesses and individuals upfront and periodically throughout the life of the relationship. Through the use of AI, the customer due diligence process can be done in a fraction of the time that it would take in a more legacy approach.
Dynamic underwriting can also help mitigate fraud by continuously analyzing a wide range of data points in real time, such as identifying suspicious activities that may indicate fraudulent behavior. Coupled with Torpago's Bank Admin Tool, financial institutions can access real-time data to help detect fraudulent activity. Generative AI can also assist with reporting on suspicious activity by leveraging the transaction data and standardizing the reporting through UARs or SARs.
AI and machine learning recognize fraud patterns as well as analyze financial data to look for fraud indicators during applications, enabling you to flag high-risk applications for further review. Every transaction is monitored against a set of AI-driven rules to scan for unusual behavior.
Expand Credit Customers and Reduce Risk
Dynamic underwriting with ongoing monitoring creates new opportunities for credit card issuers. By leveraging advanced technologies and data analytics, you can expand access to credit for SMBs while enhancing your risk management. Torpago's cutting-edge approach, including continuous monitoring of cash flow and FICO scores, empowers you to offer higher credit limits while reducing default rates and maintaining financial health.
New Opportunities with Torpago Include:
- Tailored, white-labeled credit card programs
- Continuous credit monitoring and dynamic limit adjustments
- Comprehensive support from program launch to ongoing management
Ready to elevate your credit card offerings? Schedule a demo with Torpago and discover how our game-changing solutions drive growth and deepen customer relationships. Experience the future of credit card programs where innovation and banking intersect.
