The Rise of Social Scoring
As people’s behaviours change, so should the way we measure credit worthiness? We have previously explored how financial institutions use traditional scoring systems, and the challenges that might come with the current model.
This time we delve into Social Scores – how it is currently being used and its impacts.
Social Network Scoring in Developing Nations
Lenders in developing nations have been using data from social networks to determine the creditworthiness of their prospective borrowers. Most of these countries don’t have enough infrastructure that contains data on individual borrowers. As a result, credit history is more of a mirage.
You will notice that in most of these countries, the internet revolution is yet to take place, or where it’s already happening, it’s at a very slow pace. Therefore, banks don’t have the resources needed to collect relevant and sufficient information on the borrowers.
The underbanked and unbanked in developing countries have access to social media, an important tool that can be used for credit scoring. There are special smartphone packages that are provided by companies like Facebook, for example, who have a unique mobile data plan in Thailand where users can access the social network.
Another example is our partner Lenddo, that offers credit assessment services in the Philippines, Colombia, and Mexico. Lenddo’s system is heavily leveraged on the information that the borrowers have on their social networks.
Lenddo states “since our early days we have seen the development of an entire category of alternative data credit scoring companies who are using non-credit bureau data sources like social media, psychometrics, telco and mobile phone data to inform lending decisions. That’s a huge shift in how credit scoring is approached and an acknowledgement that someone’s character, abilities and personality can predict risk.”
A peek into the kind of success that microfinance institutions have enjoyed in such countries makes a strong case for an attempt to do the same with social networks. What companies need to do is to learn more about the social dynamics of the community, and then use this knowledge confidently to come up with feasible solutions. According to one of the local retired bankers, the concept of social network scoring is similar to systems that have been in place hundreds of years before credit bureaus came into being.
Impact of Social Fragmentation on Credit Scores
Once consumers’ information is in the hands of the credit company, it can be analyzed from different angles. For example, people in your network that you barely communicate with will hold less weight than those you communicate frequently with, and the lenders will, therefore, make predictions based on this.
If most of your friends have better credit scores than you do, your risk exposure to lenders might be fairly lower. When users fragment their networks and relationships online in this way, the accuracy of such credit scores becomes ambiguous.
Other than that, these scores can provide an accurate reflection of the borrower’s risk exposure because of the ego network they belong to. The problem with this is that as the ego networks increase, they become smaller in size, which means they hold less information on every member. This makes predictions from the networks inaccurate.
Experts do say however that network manipulation, adding or removing people depending on their credit scores, might not always work for you. This is because the emphasis is not on who your friends are but on the nature of your shared connections. The fact that you are friends with someone on social media might not hold much value when determining your social credit score.
The Rise of Social Scoring
Social scoring is increasingly providing the underbanked and unbanked population with the opportunity to access capital that they would otherwise not have enjoyed earlier on.
Owing to the lack of reliable infrastructure, lenders in such communities might have a difficult time determining the credit risk that borrowers expose them to. However, social scoring might prove to be quite an asset and a practical alternative.
The best course of action, is to use any available social data to support and compliment traditional credit score models in assessing your creditworthiness.
So as the proverb noscitur ex sociis goes, you are the company you keep and we should be looking at a much more holistic approach.
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