Some lenders are starting to use social networking behaviour to assess who deserves a loan.
Can your Facebook friends influence a lender’s decision to approve your loan application? A growing number of new financiers are already assessing an applicant’s social networking behaviour as part of their standard credit risk assessment process.
Startup financier Lenddo’s CEO and co-founder Jeff Stewart says an applicant’s Facebook friends are an indicator of possible future delinquency. Mr Stewart says his company takes particular note if an applicant’s friends are delinquent themselves – and the applicant interacts with them frequently.
Lenddo’s approach is a curious combination of computing power – data mining – and fundamental psychology: the fact that birds of a feather flock together. If you interact often enough with those with bad credit track record, the balance of probabilities tips towards the notion that you might have difficulty repaying a loan as well.
Lenddo has around 250,000 clients, and operates only in the Phillipines, Columbia and Mexico.
Another relatively new financier, Germany-based Kreditech, evaluates a potential client’s eBay and Amazon accounts in its credit assessment process. It also considers other seemingly irrelevant factors: writing in ALL CAPITALS hurts your credit worthiness, but good grammar might help.
Kreditech says it receives an average of 1000 loan applications daily.
This begs an interesting question: How wisely do you choose your Facebook friends? In the future – the very near future – they could hurt your consumer credit rating. Is it even fair to be penalized for having the wrong ‘friends’? Is this nothing more than guilt by association, or do the data miners have a point?
On the flipside of this equation: Google tracks you to see what you want to find, iTunes tracks your behaviour to predict what you want to see and hear next – isn’t this just a logical extension of that tracking system?
In your parent’s day, a loan application might have comprised a form of a few pages plus supporting documentation: payslips, bank statements and identity documents. Today, companies like Kreditech will amass as many as 8000 different data points when assessing a loan application. Each one can be used to upgrade, downgrade or authenticate your credit worthiness. (Kreditech also evaluates the amount of time you’ve spent reading about the loan on the Kreditech website as part of its evaluation of your application.)
Shaun McGowan from Australia-based carloans.com.au says more data is not necessarily better, from the point of view of credit risk assessment. “We use a traditional credit application assessment approach. It’s straightforward, streamlined and simple – both for us and for our loan applicants. It’s also very effective – our track record with good credit demonstrates that you simply don’t need 8000 (or whatever) data points on potential customers to determine an accurate credit risk profile. As attractive as data mining sounds, from a technical perspective, it’s our experience that fundamentals like credit history, employment history, net asset backing and loan to income ratio are significantly more valuable in assessing potential clients than assessing the relative merits of their Facebook friends.”
Mr McGowan also cautions against the use of social media as a credit application tool. “Unlike other factors that make up a conventional credit score – such as employment and loan repayment history – the applicant can control their Facebook friends and the tweets they post. This means the applicants themselves can potentially manipulate the data.”
But another lender, Kabbage, gets small business clients to grant Kabbage access not just to the business’s Twitter and Facebook, but also its PayPal, eBay and other commercial online accounts. In this way, the borrower’s cash flows and transactions are disclosed to Kabbage in real time. Privacy questions aside, Kabbage says it can thus determine a business’s credit-worthiness and deposit funds into the business’s account in just seven minutes.
Kabbage – a specialist lender to small businesses selling online products, which expects to deliver 75,000 cash advances this year, ranging from $500 to $50,000 – claims that clients which open up their Facebook and Twitter to Kabbage are 20 per cent less likely to become delinquent in their loans. The theory behind this is that companies on top of Facebook and Twitter are also likely to be up-to-date with more conventional aspects of their businesses, too – like stock control and shipping.