February 17th, 2013
The Economist reports on how some lenders are starting to take a long, hard look at your presence on social networks before deciding whether to lend you money:
Grabbing whatever data you can makes obvious sense in emerging markets where credit bureaus are underdeveloped. But it works in the rich world, too, where younger people and immigrants often have no credit histories. Bureaus themselves are now using everything from court records and rent payments to utility and phone bills. And a range of start-ups are also busily exploring alternative data.
Some firms piece together scores by analysing applicants' online social networks. Professional contacts on LinkedIn are especially revealing of an applicant's "character and capacity" to repay, says Navin Bathija, the founder of Neo, a start-up that assesses the creditworthiness of car-loan applicants. Neo's software helps determine if applicants' claimed jobs are real by looking, with permission, at the number and nature of LinkedIn connections to co-workers. It also estimates how quickly laid-off employees will land a new job by rating their contacts at other employers.
As statistics accumulate, algorithms get better at spotting correlations in the data. Applicants who type only in lower-case letters, or entirely in upper case, are less likely to repay loans, other factors being equal, says Douglas Merrill, founder of ZestFinance, an American online lender whose default rate is roughly 40% lower than that of a typical payday lender. Neo's efforts to improve accuracy include recording borrowers' Facebook data: Mr Bathija reckons that within a year there will be enough evidence to determine if making racist comments on Facebook is correlated with a lack of creditworthiness.
The article goes on to note that (for the time being) the established high street banks are watching these developments from the sidelines. Wary of the potential for bad publicity over invading customers' privacy, or just waiting to see evidence that this approach actually produces useful results for the various startups trialling this approach?
For once, this isn't a social media/invasion of privacy story in which the likes of Facebook are the bad guys: given that these startups are 'seeking permission' from the applicant, it's akin to those odd occasions where a potential employer wants to access an applicant's social networking activities in order to see if their life away from work includes anything that might embarrass the company. Reprehensible and dumb, but not something in which Facebook are complicit.
In other words, it probably won't take off on a large scale, but it'll as sure as hell prove rough for unlucky applicants who made the mistake of having Friended the odd acquaintance from school or college or a past job who has fallen on hard times.
[Via Rough Type]