With the increased speed of funds availability from alternative lenders that can approve credit in minutes, if not less, accurate risk assessment became a crucial part of conducting sustainable business. With traditional, usually time-consuming and cumbersome, underwriting techniques losing relevance, new credible data sources had to be discovered. Social media networks became one of the alternative data sources to gain importance and an indicator of creditworthiness.
Wharton recognized social media as an important data source for credit scoring back in 2014. However, the practice of judging a stranger based on their social environment is not new. One of the core ideas is that who you know matters. Companies like Lenddo, FriendlyScore, ModernLend use nontraditional data to provide credit scoring and verification along with basic financial services. Those companies are creating alternative ways to indicate creditworthiness. The information about a person in social networks can verify that the person exists at all and who that person is.
“If enough people are trying to game the system, and they do actively change their networks, the social network environment overall can still provide more accurate information compared to the data that would come from only the individual’s history.”
As Wharton professionals add, if you’re a good person, you must have some good connections with people around you, have a certain number of friends, and have had this account for a certain period. Technology companies focusing on alternative lending and credit scoring can gather so much more information about a person using social media than by looking at their financial data. Social media also gives lenders an insight into how an applicant spends their time.
Arun Ramamurthy, Co-founder of Credit Sudhaar, also believes alternative data sources, including social media, to be an essential part of creditworthiness assessment. “(About) 6%of the people who sign up for our advisory services are intentional defaulters and fraudsters,” Mr. Ramamurthy said. He also said to The Hindu that it is only through psychometric tests, social media data, and other unconventional sources of information that companies and banks can identify the intention of a potential borrower.
Indeed, social media can point out small but significant inconsistencies in the information provided. For example, a person’s Facebook profile indicating a different place of employment other than the one in the credit card application could be a red flag and require attention.
At the end of last year, FICO was reported to be looking for ways to use social media data to assess creditworthiness. “If you look at how many times a person says ‘wasted’ in their profile, it has some value in predicting whether they’re going to repay their debt,” FICO CEO Will Lansing told the Financial Times.
Increased accuracy of credit scoring is not the only goal with adding new ways to assess creditworthiness. As FICO said in the official news release, “Using the right alternatives to traditional credit bureau data, lenders can reliably identify millions (of) more consumers who qualify for credit.” Credit scoring based on alternative data sources is especially relevant for countries with a large part of the population excluded from the financial services system.
Among financial technology companies focusing on lending, one of the most successful players, Kreditech, also relies on social media networks in assessing the ‘underlying personality’ of a potential borrower. As Rene Griemens, Chief Financial Officer of Kreditech, recently said in the Financial Times, “Social media tells you a lot about the person. What type of friends do you have? We may be able to see whether he has friends who have already repaid a loan to us—that usually is a good indicator.”
However beneficial the use of alternative data may seem, there are always hidden rocks to consider. Some professionals believe that such assessments may lead to system gaming practices in the form of segregation. Once it has been figured out that certain connections on social media may negatively affect creditworthiness, people may start deleting negatively-affecting connections.
As Wharton researchers suggest, “What we are finding is that yes, indeed, individuals [could game the system], if they could know somehow that you are a financially responsible person and I am financially responsible, and we all need to show that we are good individuals to the company on social media so that we can be considered worthy of a loan. We find that individuals will have some incentives to drop their friends or at least make the information, the connection of having a friendship with [certain people] less visible.”
“What that could do over time is [cause] some sort of fragmentation in social networks. Good types, people who are more financially responsible, have incentives to drop the bad types. That’s also true for the bad types as well. They have an incentive to be connected to a higher number of [financially responsible people]. And they have an incentive to be connected to a smaller number of bad types. That’s going to result in, over time, a segmentation or fragmentation of the markets.”
Another interesting view on the matter was expressed by Rob Frohwein, Chief Executive of online lender Kabbage. According to Frohwein, while a business’s social media presence can indicate its future income, it hasn’t proven true for individuals.
“Who your social circle is, or whether you play ‘Mafia Wars’—we haven’t seen that as very valuable,” he commented to the WSJ, referring to the famous Facebook game.
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