At a congressional hearing in 1912, an attorney asked John Pierpont “J.P.” Morgan if a man’s money and property was the most important factor in lending money. Mr. Morgan responded, “No, sir; the first thing is character.”
That story was the lede in a recent Wall Street Journal article on the increasing interest in the financial industry in using data from social networks to help make better lending decisions. The idea behind this trend seems to be that data from consumers’ social media accounts provides an excellent way to assess the character of potential borrowers.
This trending report will examine the recent industry coverage on this topic, with an eye towards the feasibility of using social media data in the near future.
Replacing Traditional Credit Scores?
Jeff Stewart, co-founder of online lending startup Lenddo, loves to tell the aforementioned story about J.P. Morgan. In the same Wall Street Journal article, Mr. Stewart points out the gap in assessing consumers’ character and reputation between traditional credit scores and social media data.
FICO allowed finance to scale but it is inferior to lending based on reputation and your standing in the community,” said Mr. Stewart. “Facebook, Twitter, and LinkedIn allow finance to go back to the basics.”
The Predictive Power of Social Media Data
Based on Mr. Stewart’s enthusiasm, it’s reasonable to wonder what specific insights lenders might be able to glean from social media data. According to a recent article in The Economist, there are all kinds of possibilities.
Professional contacts on LinkedIn are especially revealing of an applicant’s “character and capacity” to repay, says Navin Bathija, the founder of Neo, a start-up that assesses the creditworthiness of car-loan applicants.
Neo’s efforts to improve accuracy include recording borrowers’ Facebook data: Mr. Bathija reckons that within a year there will be enough evidence to determine if making racist comments on Facebook is correlated with a lack of creditworthiness.
As statistics accumulate, algorithms get better at spotting correlations in the data. Applicants who type only in lower-case letters, or entirely in upper case, are less likely to repay loans, other factors being equal, says Douglas Merrill, founder of ZestFinance, an American online lender.
Will Big Banks Jump on Board?
Given that all of the quotes on the value of social media data seem to be coming from alternative providers and startups, it’s logical to ask what large, traditional banks think about the idea. According to that same Economist article, big banks’ enthusiasm on the topic is still pretty tempered.
Big banks will tread carefully, nonetheless. Although they monitor social media for marketing, using the data to assess loan applicants is “a dangerous game” that big banks are ducking for now, says Frank Eliason, head of social media for Citibank.
Is There Any Value in Social Media for Big Banks?
That’s not to say that there are no valuable uses of social media for big banks. John Adams over on Bank Technology News lays out a couple of the more effective ways that large financial institutions can utilize social media.
1. Build a community and glean product ideas from it. Many banks, notably Citi and ING Direct, engage with customers via Twitter and Facebook. Sentiment analysis, content tracking and crowdsourcing can turn these interactions into actionable science.
2. Monitor customers’ posts to learn about product needs and preferences.With Facebook, for example, the bank is able to see demographics and interests: favorite shows, movies, “wives of the Air Force,” relationship status, alumni associations etc.
And Ken Rees, CEO of alternative lender Think Finance, points out that while social media data might not be that indicative of credit risk, it can be very useful in detecting fraud.
One simple check is finding out if a borrower actually has a social media footprint. Facebook and Twitter have become so ubiquitous that not having accounts can set off a red flag. “It’s better to have an online ID. Not having one is like walking into a brick and mortar store without a driver’s license,” he says.
There seems to be little doubt, in any corner of the financial industry, that social media is going to play an increasingly important role. There are a number of potentially valuable use cases for utilizing social media data in banks’ processes, but there are also some big obstacles preventing those use cases from becoming best practices. It is these obstacles that are causing big banks to hang back and leave the social media experimentation (for now) in the hands of alternative providers.
What role do you think social media data is going to play? Leave a comment and let us know.