It’s all about the algorithms.
To quickly determine potential borrowers’ creditworthiness, credit-industry startups now take advantage of the fact that consumers voluntarily offer up everything about who they are on social media. But the startups 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. The picture of you is pretty clear to the roving algorithms of the new credit paradigm, according to the companies pioneering it.
Gambling With Your Privacy
Those algorithms reveal some surprising facts. Gamblers are a better credit risk than non-gamblers, for example (gamblers have been found to be more likely to repay loans). But the entire social-media credit industry hinges on whether or not 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 this new paradigm. “We’re able to offer financial services to populations that don’t normally have credit history,” said Florentin Lenoir of Lenddo, an international financial services group specializing in potential borrowers’ digital footprint. “We saw a direct positive impact with what we are doing. That’s the motivation behind Lenddo. We can really offer a new way of doing lending.”
Lenddo started out as a direct lender, but shifted its business model to become a conduit between lending institutions and borrowers. To opt in, a prospective borrower downloads the Lenddo app, granting the company access to 12,000 data points from phone and online accounts, including Twitter, Gmail, Yahoo, LinkedIn and Facebook. The app combines these nontraditional data sources with traditional data like a FICO score (if the borrower has a credit history at all) to come up with a predictive rating.
Although Lenoir said Lenddo’s “sole purpose” is to give borrowers access to better financial services, he admits the process 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, said Lenoir.
This shift in lending means consumers will likely become more careful in their online activities. That includes how they fill out online credit applications. Lenoir said Lenddo’s algorithms look at how you approach the lending form: 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?
Privacy is an issue with this style of lending since Lenddo asks potential borrowers to invite friends and family to become part of their “trusted network.” That means the algorithm isn’t looking at all of a user’s contacts. This network must include three people with a minimum Lenddo score of 300, and all members of the network receive updates on borrowers’ success at repaying a loan.
So why even take part in such an intrusive process? There are benefits to both borrowers and lenders, insisted Lenoir. The proliferation of smartphones in developing nations provides Lenddo’s algorithms 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, said Lenoir, while lenders can dramatically decrease their operational costs using a service like Lenddo.
“A New Era”
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, in a press release about the company’s 2015 research report on emerging credit industry trends. “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.” Omidyar, which describes itself as a “philanthropic investment firm,” was launched in 2004 by eBay founder Pierre Omidyar.
Omidyar’s 2015 report, “Big Data, Small Credit: The Digital Revolution and Its Impact on Emerging Market Consumers,” 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 paradigm shift.
Although this route toward loans represents a huge privacy tradeoff, Omidyar partner Arjuna Costa said consumers around the world are overwhelmingly willing to take the plunge: “Our survey shows that consumers in emerging markets have a clear understanding of the privacy tradeoffs this type of solution entails,” he said in a press release, “and seven out of ten are willing to share information they consider private in order to get a loan.”
That explanation doesn’t quite justify the intrusion. Because opting in to such a system might be the only way for underserved and poorer borrowers to get loans, can you really call it freely opting in?
A lawyer at the Electronic Freedom 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?” wonders EFF attorney Lee Tien.
When asked whether he thought this shift would have a chilling effect on privacy and free speech, Tien said 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, offer this speculation: “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 ‘one percent’ will make it harder to get credit.”
“Borrowers should always be careful about what they are posting on their social media accounts,” said 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.”
Self-monitoring our online behavior has traditionally been aimed at not upsetting Mom. But with this model, it’s about not upsetting a faceless corporate algorithm sifting and digging relentlessly through your online portrait. Is that a tradeoff many of us are willing to make?
Another major issue is that this could become a market trend affecting potential borrowers who refuse to give up their privacy. Could these people be left out of the credit market entirely? Will we all eventually give in to the demands of the new social-media-lending paradigm? Will all borrowers have to “opt in” to the private surveillance state to get the banking products they need?
Maybe it’s time for a counter-paradigm, where startups are less interested in abusing your private data and more concerned with your basic human potential.