NEW YORK — Varo Bank is upgrading its underwriting systems to develop deeper customer relationships and grow. 

The $486 million digital bank was one of the first fintechs to gain a banking license in 2020 from regulators and has tried all forms of underwriting to grow while still maintaining high credit standards, Das Mohandas, chief lending officer and general manager at Varo, said at Nova Credit’s Cash Flow Underwriting Summit on Sept. 10. 

“We have been building a bank from scratch, and we are in the process of expanding our lending for the last several years, and especially the last several months,” Mohandas said.

In fact, 90% of the bank’s decisions are now made by evaluating cash flow underwriting, he said. 

While the San Francisco-based bank also uses traditional FICO scores, data on a consumer’s cash flow offers a much clearer picture of the borrower, Mohandas said.  

“FICO scores sometimes can be lagging indicators, like they cannot flag a person losing a job or getting a job, but cash flow can,” he said. 

The bank bases many of its consumer-facing lending processes on cash flow data, including “underwriting, client management, payments and collections — and we’re getting good at [loan] pre-qualification using cash flow,” Mohandas said, adding that the bank uses machine learning to analyze data. 

Internal versus external data 

While cash flow underwriting can provide a better picture of a consumer, FIs need to collaborate to create a common classification method to reduce friction and increase data sharing, Mohandas said.  

For example, Varo finds it easier to analyze data from its clients for cash flow based underwriting rather than using financial data from outside institutions, Mohandas said. 

With internal data, the bank can curate and classify income the way it wants, he said.  

“When you get the external party data, they define income differently, and you’re going to have … different outcomes,” he said. 

FIs need to build models from the get-go that can analyze external financial institution data to avoid discrepancies, he said.

In the coming quarters, Varo will focus on improving its loan pre-qualification offers based on cash flow underwriting to develop deeper relationships with its clients, he added. 

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