An emerging crop of companies believe that our online identities – and our social data in particular – are valuable sources for evaluating and even managing credit risk. This week, Lenddo, a New York-based startup that helps the middle class in emerging markets use their online social connections to build credit, announced that it had raised $8 million in new funding.
Almost like a Grameen bank for the digital era, Lenddo provides an online microlending platform that uses social dynamics and positive peer pressure to keep people creditworthy and provide capital they might not otherwise be able to access. Members receive loans as individuals, but their trustworthiness — expressed as a FICO- or Klout-like “Lenddo score” — is evaluated in the context of their community.
“Character, for hundreds of years, was really the foundation of lending… [lenders] would talk to people in the community,” said Jeffrey Stewart, Lenddo’s CEO, who launched the company in 2011. “What we figured out how to do algorithmically is quantify and understand someone’s trustworthiness.”
When someone joins the network looking for a loan (which tend to be between $400 or $800 depending on the location), the company doesn’t ask for collateral, a co-signer or financial history. Instead, it takes a deep dive into the member’s online social history, looking at the number of social media accounts he links to Lenddo, the history of those social accounts, the number of friends and followers he has in each network and each of those contacts’ Lenddo scores. The Lenddo “trust graph” gets bigger as more people join the site and add contacts from their social networks to their “Lenddo trusted network,” with the underlying idea being that a person’s social reputation is the best incentive for repaying a loan on time.
As a member repays his loan
he not only raises his own Lenddo score but the scores of his contacts. If he starts falling back on payments, it reflects on him and his entire network. Lenddo algorithms also use social networks to verify identity – an important function in developing economies that don’t have same identity infrastructure we have in the U.S., Stewart said.
Startups tie social connections to credit process
But the practice of tying social connections to the administration of credit isn’t confined to the developing world. Neo, a startup that won the Founder Institute’s Showcase in November, evaluates credit risk for car loans by looking at a combination of social and financial data. Movenbank, a New York startup targeting a launch later this year, says
that it is developing a score that measures a person’s “credibility as a friend, colleague and customer” in the context of financial decisions. And peer-lending startup Lending Club doesn’t use social data to determine credit worthiness, but can use it to help with identity verification. In countries where the capital infrastructure we have in the U.S. doesn’t exist or is limited, connecting online reputation to credit is a compelling and potentially very powerful idea. Emerging markets are opportunities for companies like Lenddo, for example, where it won’t have to overcome an established order. But in developed countries, companies blurring the lines between social networks and financial profiles will need to tread carefully.
“Birds of a feather flock together,” some might say. But creditworthy individuals might not exclusively keep company with similarly reliable consumers. And, even if they do, online social networks aren’t yet at a point where they accurately reflect our offline networks. Privacy questions, already a major digital concern, will loom even larger in a space with financial consequences.
Stewart said that Lenddo is focused on the 1.2 billion middle class people in emerging markets. But, pointing to the rise of collaborative consumption services like Airbnb and Zipcar,
as well as the globalization of commerce, he projected that social networks will play an increasingly prominent role in finance.
“There’s clearly a need for a better understanding of trust on the Internet,” he said. “Having a global reputation system becomes very valuable.”