Social media has revolutionized the way people share their lives, mobilized communities for a common cause and changed the way companies market to consumers.
Next, it may be used to determine your creditworthiness.
A small number of lenders have begun evaluating whether a person will repay a loan by examining their online reputation and the quality of their professional connections on Facebook, LinkedIn and Twitter.
Aside from using social media, the concept is nothing new.
“If you go back 200 years, your ability to access credit was based on your reputation, your standing in the community and whom you were connected to,” said Jeff Stewart, chief executive of Lenddo, a Hong Kong organization that lends money to individuals and small businesses in emerging markets, such as the Philippines, Colombia and Mexico.
What’s new today is that the process is technologically based.
“It’s the same principle, but it’s now automated,” said Eric Bradlow, co-director of the Wharton Customer Analytics Initiative at the University of Pennsylvania. “By knowing who your friends are, by potentially knowing what their credit risks are, by knowing what the products they purchase are, by knowing their default rates – all of that is informative about what you do.”
Bradlow has studied commercial applications for social media.
Lenddo isn’t like your typical neighborhood bank. It describes itself as a “community” that lends money to individuals needing life-improving loans for education, health care, home improvement or, in some cases, to build a small business.
It doesn’t facilitate lending between members but lends its own capital and the capital of investors and partners.
“We’re operating in parts of the world where people are very hard-working,” Stewart said. “They’re part of the global economy, but they don’t have access to credit, so what we empower them to do is essentially to prove that they’re trustworthy through Facebook and LinkedIn by having their friends put their own reputation on the line. We call that a ‘trusted connection.’ ”
When someone applies for a loan from Lenddo, they share their “social graph,” a map of your personal and business connections on social media.
“We look at how those people are connected to you, how they’re part of the community, the friends you have in common, the nature of that connection and who they are,” Stewart said. “Have they borrowed from us in the past? Did they repay? Are they connected to people who repay? From that, we’re able to successfully administer credit.”
Experts said it’s too early to tell whether social media data can actually predict whether a person will default on a loan. For that reason, U.S. commercial banks may be slow to adopt the practice.
“The jury’s still out,” said Robert Stine, a Wharton statistics professor who studies credit scoring. “It’s very new. It takes a long time to figure out what’s going to be predictive in credit scoring.”
Stine and others said borrowers could game the system by collecting connections on LinkedIn, followers on Twitter and friends on Facebook.
Until the three major credit bureaus get on board with the use of social media connections, the potential is questionable, said Chris Kraft, chief executive of Splash Media, an Addison social media marketing firm.
“I remain very curious but not convinced this is a viable concept,” he said.
Two of the bureaus, Experian and TransUnion, aren’t using social media in their methods.
But Clifton O’Neal, spokesman for TransUnion, said the bureau is “constantly looking for new, alternative data sources that can add value in determining credit risk.”
But he added, “At this time, TransUnion believes that there are many other data sources/elements that might provide a clearer picture of a consumer’s risk level, e.g. utility information, mobile phone and rental payment information.”
Given the way social media have changed the world, I wouldn’t be surprised if the method was eventually adopted.