How to increase card spend through better credit card underwriting practices

5 considerations for neobanks to improve their underwriting practices and offer higher limits with examples from Brex, Parker, Ramp, and Rho.

Credit card underwriting is a delicate balancing act. Businesses want quick decisions and minimal friction. However, meeting these expectations means lenders collect less information and opt for conservative credit limits, ultimately restricting spend potential. This results in a lose-lose situation for both the card provider and the customer.

To increase limits, lenders require deeper insight into applicants’ financial performance and spending habits to make well-informed decisions. Yet, manually requesting this data creates delays, high dropoff rates, and wastes resources on low-impact tasks like chasing paperwork.

The problem with credit limit assessments

The credit limit assessment process usually involves applicants completing several forms and manually sourcing and sharing data from multiple sources. Since each application is reviewed in isolation, the customer will have to go through the same process each time they need an increase, or the provider will have to base their decision on outdated data.

Meanwhile, underwriters are tasked with meticulously analyzing vast amounts of data to make informed decisions. These tasks not only lower conversion rates but also limit the number of customers teams can handle effectively.

So, what’s the solution? In this article, we examined the market to understand how leading players tackle credit card underwriting challenges. Our research into publicly available resources revealed five effective methods you can employ to enhance your process. Keep reading to discover them!

5 ways to improve your credit underwriting process

1. Shift from one-time data collection to continuous monitoring

Conventional underwriting relies on a snapshot of your customers’ finances at the point of application. However, this can be unfavorable, especially for rapidly scaling or seasonal businesses. By continuously monitoring your customers’ performance, you’ll be able to: 

  • Better identify shifts in spending patterns and income
  • Build financial reports and forecasting models to track performance over time
  • Proactively extend credit increases/decreases based on performance
  • Improve operational efficiency 

For example, Rho, a business banking platform, uses real-time monitoring to ensure its lending decisions are based on accurate assessments of its customers’ financial position. 

“We have a unique monthly monitoring process that aims to answer a few important questions, including does historical data suggest a business has seasonal increases or decreases in activities? If you are a [consumer packaged goods] CPG company that regularly purchases significant inventory for the upcoming holiday season – an expected business flow – this would be considered part of our model.”

[Source: Rho]

2. Tailor your decision criteria to your target customers’ circumstances

Many providers still rely on cash balances to dictate a customer’s credit limit. But this doesn’t always paint an accurate picture of the business’s health. For example, it might be the right metric for a venture-backed SaaS start-up. But it wouldn’t be fair to assess a mid-size eCommerce business that invests heavily in inventory in the same way, since it might be low in cash but high in revenue. Conversely, a business might have a hefty cash balance, but if there are large existing loans to match, getting a limit increase could lead to default. 

It’s essential to understand how your customers operate so you can choose the best metrics for measuring their performance over time. This avoids a blanket ‘computer says no’ response to atypical applications.

For example, metrics such as operating profit margin can help assess office-based businesses, as it accounts for fixed costs like leases. On the other hand, you can gauge an eCommerce business’s immediate cash availability minus inventory by examining their liquidity ratio. For seasonal businesses like event management companies, analyzing annual trends is crucial due to fluctuating cash flows throughout the year.

Ramp goes one step further to offer a solution for businesses facing tight cash flow constraints due to inventory, marketing, and shipping costs. Leveraging integrations with major eCommerce platforms, web stores, and marketplaces such as Stripe, Shopify, and Amazon, they incorporate commerce sales data into their credit limit assessments [Source: Ramp].

3. Supplement your data with external bank data

Businesses today typically rely on various bank accounts to manage their money. In addition to a current account they may hold with you, they might also have a high-interest savings account elsewhere, along with several credit card accounts and supplementary payment and income checking accounts from different providers.

That means if you’re basing your decisions on a single bank account, you may not be getting a complete, accurate view of a business’s full financial activity. They may have additional loans, credit cards, or other liabilities they’re repaying out of a secondary account, or additional funds they forgot to report on their application—leading you to approve unsuitable businesses (and put your bottom line at risk) or reject promising ones (and miss out on opportunities to drive revenue).

However, thanks to Open Banking, it’s now possible (and easy) to integrate external bank accounts into the assessment process, allowing you to build a more complete picture of your customers’ incomings and outgoings. 

For example, Rho uses a range of external data points to ensure they get a holistic view of their customers. This includes: 

  • Financial statements: Balance sheet, income statement, and current access to additional capital 
  • Banking data: Company bank accounts with balance information.
  • Bureau data: Data pulled from Experian, SBFE, and other sources.

4. Offer higher limits with accounting data

Lenders should consider supplementing this information with accounting data to increase interest and transaction revenues without compromising on risk. 

In particular, access to a business’s financial statements directly from their accounting system can enable providers to extend higher credit limits and longer-term facilities to customers. More on that here.

For instance, Brex goes beyond cash balances in its underwriting process, considering liquidity, profitability, and other metrics to predict a business’s ability to meet its obligations in the long run [Source: Brex].

Accounting data can also play a crucial role in assessing larger, intricate businesses with multiple bank accounts and diverse assets and liabilities. Unlike banking data alone, accounting data lets you verify an SMB’s number of bank accounts, the total revenue held in each one, and any existing loans and liabilities in a single view.

5. Underline the benefits of sharing additional data

While the majority of SMBs in the market for credit are willing to share their data, some may have initial reservations. So, it’s worth taking the time to explain the potential benefits of doing so. 

According to our study, improved rates are the top motivator for SMBs to share data with credit providers (picked by 29% of respondents), followed by more transparency in the decision-making process (chosen by 22%).

Our advice: make it clear that the more information they share, the higher their credit limits can be. It’s also important to consider the timing of the request. For example, if the customer has just reached their credit limit, they may be more motivated to share information that will unlock an extended facility.

For instance, Brex clearly articulates that having access to financial data, such as revenue and funding rounds, allows its underwriting team to provide customers with card limits that better suit their needs. Likewise, Parker explains that this can lead to higher credit limits for customers:

“Integrate everything and get a clear picture of your entire business in one place. These integrations let us give you new kinds of analytics plus higher credit limits as you grow.”

[Source: Parker]

How Codat can help improve your credit underwriting process

We help credit card providers improve their underwriting by automating data collection and giving you easy access to your customers’ enriched financial data.

Borrowers can share data with you in just a few clicks, and we’ll seamlessly connect you to external banks, commerce platforms, and accounting systems. This allows you to build a complete picture of their financial performance over time so you can confidently extend more credit and ultimately increase your card spend.

Head here to explore our specialized product for business lending, or get in touch with one of our data experts by filling out the form below.