Companies and colleges regularly look to social media activity when deciding whether to hire or accept an applicant. Now, another sector is using the same tactic: financial service firms are reviewing what people and companies do on sites like Facebook to see if them deserve a loan.
The use of social media as a credit metric, described in this Wall Street Journal feature, is especially prevalent among start-ups like Kabbage that lend money to small businesses and others that are often ineligible for credit from traditional banks.
A potential borrower”s activity on Twitter and Facebook can offer a number of important insights for lenders. Tweets and posts on Facebook or LinkedIn can be used, for instance, to learn new facts about a borrower or to reveal contradictions between what someone states on a loan application and what they tell others. And a social network itself can be used to gauge credit-worthiness; someone with a small, tight network and many genuine interactions may be a better loan candidate than someone with many “friends” but few deep connections.
In the bigger picture, the social media information is just one more data point that this new breed of lenders are using to remake the credit business. As the CEO’s of Kabbage and Zest Finance explained at Gigaom’s Structure Data last year, their companies rely on algorithms to parse thousands of data signals when evaluating loans.
This approach comes at a time when the FICO score — a tool developed in the mid 20th century and used by big banks to evaluate borrowers ever since – looks increasingly crude and out of date in the era of big data. FICO, however, is finally giving the new data tools a look; an executive from the service told the Journal that “There could come a time where certain social media could be predictive and we’re looking at that, but it isn’t yet.”
The use of social media accounts to inform credit decisions also raises the specter of what Om calls “data Darwinism,” and has led to criticism from consumer advocates. Critics, however, will also have to recognize that many of the potential borrowers who could be subject to social media scrutiny would not even be considered for a loan in the first place in the FICO era.