Editorial Policy

Seeking credit? Social media may help — or hurt you

Tom O'Connell

February 4, 2016

To quickly determine potential borrowers' creditworthiness, credit-industry startups now check what consumers voluntarily offer up about themselves on social media.

The startups, a mix of lenders and data suppliers to lenders, don't stop there. They also look at your online shopping habits, how you purchase and interact with smartphone apps, the people you associate with in cyberspace, the content of your emails, your browser search history, even the way you fill out forms online.

All this information paints a more complete picture of the would-be borrower who may not have much of a credit history, the companies pioneering this say.

Sifting through your personal information
Algorithms — which search for specific data structures in all that information — turn up some surprising findings. For example, gamblers are a better credit risk than non-gamblers, according to Branch.co, which bills itself as “a bank in your pocket” and makes small loans, primarily in Africa, after assessing smartphone use.

But the social-media credit industry hinges on whether consumers are willing to opt into a system that sifts through some of their most personal information.

Millennials and those who don't have as much access to traditional lending are the biggest target demographic of these new creditors.

“We're able to offer financial services to populations that don't normally have credit history,” says Florentin Lenoir of Lenddo, an international financial services group specializing in the digital footprint of potential borrowers. “We can really offer a new way of doing lending.”

Lenddo started out as a direct lender, but shifted its business model to link lending institutions and borrowers. A consumer who downloads the Lenddo app grants the company access to 12,000 data points, including the consumer's phone and accounts for Twitter, Gmail, Yahoo, LinkedIn and Facebook. It combines these nontraditional data sources with traditional credit data like the FICO score (if the borrower has a credit history at all) to assess one's credit risk.

Lenoir admits assessing one's online profile and phone use is rather intrusive: “We do have access to content of emails, what they write, how they write it, who they are writing to, who is responding.” This helps Lenddo's algorithms arrive at a “direct correlation” regarding an individual's ability to pay back a loan, he says.

Smartphone use leaves a digital footprint
This shift in lending also includes how consumers fill out online credit applications, Lenoir says. Lenddo's algorithms look at how you approach the application: Did you have to correct the field for your salary? Did you provide an accurate or round number for salary? How long did it take you to fill out certain fields? Did you fill it out in all caps? No caps at all?

“The financial services industry is on the brink of a new era, where harnessing the power of digital information to serve new segments is becoming the new normal,”

Mike Kubzansky, partner at Omidyar Network

So why even take part in such an intrusive process?

There are benefits to both borrowers and lenders, Lenoir says. The proliferation of smartphones in developing nations provides Lenddo with a good image of borrowers' digital footprint, so even consumers in areas underserved by traditional financial institutions can now access banking products. A borrower can also receive a lending decision in as little as five minutes, he says, while lenders can dramatically decrease their operational costs by relying on the startup's assessment of creditworthiness.

Big data being used to extend small credit
Social media-based lending is a game changer, say its proponents.

“The financial services industry is on the brink of a new era, where harnessing the power of digital information to serve new segments is becoming the new normal,” said Mike Kubzansky, a partner at Omidyar Network, which describes itself as a “philanthropic investment firm.” It was launched in 2004 by eBay founder Pierre Omidyar.

“Companies in the ‘big data, small credit' space are an example of how this paradigm shift can unlock an entire new pool of customers for formal lenders, while helping consumers in emerging markets get the services they need to improve their lives.”

Kubzansky was referencing Omidyar Network's 2015 report, “Big Data, Small Credit: The Digital Revolution and Its Impact on Emerging Market Consumers,” which found that up to 580 million people in previously underserved areas around the world will have access to credit for the first time in their lives because of this shift in lending.

Although this route toward loans represents a huge privacy trade-off, Omidyar partner Arjuna Costa says consumers around the world are willing to take the plunge: “Our survey shows that consumers in emerging markets have a clear understanding of the privacy trade-offs this type of solution entails, and seven out of 10 are willing to share information they consider private in order to get a loan.”

Assessing personal info raises privacy concerns
A lawyer at the digital rights nonprofit Electronic Frontier Foundation cautions that consumers have very little recourse after being turned down for a loan that's based on social-media factors. Those mysterious algorithms are impossible for the public to decipher, so consumers are unable to refute negative credit decisions.

“If companies can keep their data sets and algorithms secret, how could anyone challenge a credit denial that uses social media credit scoring, or argue that it was unfair?” asks EFF attorney Lee Tien.

“If you don't want your boss to see photos from your wild Miami weekend, you probably don't want your potential mortgage lender to see it either.”

Claire Tak, Credit Sesame

When asked whether he thought this shift would have a chilling effect on privacy and free speech, Tien says it's a tough question because it's so new, and no one really knows exactly how their behavior is being scrutinized. He does, however, add: “Maybe gun owners will worry that visiting [a Second Amendment website] will make them look less creditworthy. Or that engaging in political action against the ‘1 percent' will make it harder to get credit.”

“Social media should only be a piece of the puzzle”
So how can consumers modify their digital behavior in case they ever decide to open themselves to the credit algorithms?

“Borrowers should always be careful about what they are posting on their social media accounts,” says Claire Tak of Credit Sesame, a service that helps consumers track and maintain their credit health. “Posting something that's overly personal should be avoided, and people should learn how to use privacy settings on accounts like Facebook. If you don't want your boss to see photos from your wild Miami weekend, you probably don't want your potential mortgage lender to see it either.”

But Tak doesn't think your digital footprint alone can provide the most reliable picture of your creditworthiness.

“A borrower could look like the most upstanding citizen, but end up being a complete deadbeat, and vice versa,” she says. “Using social media should only be a piece of the puzzle.”

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