In a report released on September 2nd by CCA Analyst Habib Jamal (@habibjamaljd), Jamal discusses the movement away from tradition credit scoring to one based on the social network. The opportunity is that we have new tools and technologies that can help gauge a person’s credit worthiness more so than one’s payment history. Namely these tools come down to how large one’s social network is, how engaged they are with that social network (eg: Facebook, Twitter, Linkedin) online and offline (mobile phone). The risks are that that actions of your social network (and hence the people you affiliate yourself with) could have a negative impact on your credit score. Jamal creates a scenario where by a potential home buyer is denied a loan because these future credit monitoring agencies calculate that the average ‘online/offline credit score’ of his or her peers is below a certain average and hence might make the borrower a greater risk for default. Guilty by association?
Jamal cites a recent patent filed by Facebook that outlines a scenario similar to the one above and sparks the debate “just because some of one’s friends have bad credit scores should I?” The report takes us back to the creation of the Fair Credit Reporting Act and Equal Credit Opportunity Act (circa 1970) that aimed to block outright discrimination. The outcomes of those Acts and companies like Equifax, Experian and Transunion is a game of credit whereby one must maintain credit to be in it (oddly enough staying out of debt is a bad thing in this game) and balance the realities of life with the debt you’ve amassed. Empirical evidence will show that many people don’t feel this is a fair game when you throw in the realities of the world we live in today (as opposed to the offline world of 1970), nor an accurate gauge of them as individuals or their ability to be credit worthy.
This brings us to the future of credit reporting and how Jamal shows that new entrants into the marketplace (like Cignifi, M-Pesa, Lenddo, Lendup, Wonga and Zest Financial) aim to upset the traditional players, reduce credit defaults, and create a more transparent and reliable score by using new data points such as:
- Time of day/night and duration of phone calls
- Time of day/night visiting a lender’s website
- Payment history of cell phone bills, utility bills
- Purchases of prepaid minutes
- Location data
- Social media contacts and presence
- Behavioral analytics (mouse and scrolling movement, duration on a webpage etc.)
- People’s e-commerce shopping behavior and device data (apps installed, operating systems)
It is a great report and a quick read. It will leave you wondering ‘can online data really drive transparency in credit scoring and what may be the negative implications?’ If these new credit agencies aim to get it right it just might be the new normal for credit reporting.
ps – If you are creating one of these crowd scoring technologies, we’d love to see it! Contact us!