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.