A handful of growing companies are turning to social media sites like Facebook to assess the risk of lending to potential customers.
Instead of heavily relying on one’s FICO credit score, as is
standard in the lending business, newer companies turn to a host
of online behaviors in offering loans.
Creditworthiness of customers is judged on a guilt-by-association basis for lending company Lenddo, which takes into account one’s Facebook friends, especially those with frequent interactions.
Have friends late in paying a loan? Your credit takes a hit also, according to Lenddo’s standards. Lenddo offers loans in emerging markets like Philippines, Colombia and Mexico, but has hopes to expand.
Neo uses social networks, especially job and coworker information associated with one’s LinkedIn profile, to determine a borrower’s ability to repay a car loan. Neo owner Navin Bathija told The Economist there will soon be enough evidence to determine that making racist comments on Facebook indicates a lower ability to repay a loan.
Douglas Merrill, founder of American online lender ZestFinance, said his company has used advanced algorithms that have found applicants who type in only lower case or only upper case letters are less likely to repay loans, other factors being equal. The company’s default rate as of February was around 40 percent lower than the average lender.
Kreditech, which gives out 10 million loans per year, analyzes social media information and data voluntarily given by potential borrowers from their eBay and Amazon accounts, for example, to assess worthiness. The company will also take into consideration a host of other factors gleaned from one’s computer location and how one fills out their application form, among 8,000 other data points it gathers.
A small business owner’s connectivity and attention to social media encourages small-loan company Kabbage to approve certain would be borrowers.
"Someone who's paying attention to Facebook and Twitter channels to deal with customer service is more likely to be on top of other parts of their business, too, like inventory and shipments," Marc Gorlin, Kabbage's chairman and co-founder, told CNN.
Kabbage also asks customers to offer up their PayPal and eBay information, among other online payment accounts, for scrutiny. The owner said these factors, including a FICO score, are just pieces of a larger set of assessments as Kabbage selects what businesses are worthy of loans.
Kabbage expects to dish out 75,000 advances in 2013 ranging between $500 and $50,000, three times as many loans that the US Small Business Administration gave in 2012.
Critics of these approaches say online-behavior assessments -- especially social media given the ease of gaming it invites -- can be highly inconsistent and unreliable in predicting risk.
Using social media data to assess loan applicants is “a dangerous game” that larger banks aren’t embracing, Frank Eliason, head of social media for Citibank, told The Economist.