Social media has revolutionised the way we communicate. These platforms provide convenience – we get to see news and relevant content at the push of a button and faster than ever before. However, this privilege sometimes comes at the expense of privacy, with our social media ‘footprints’ leaving impressions of personal data across the internet.
Despite some obvious disadvantages to the security of data accessible via open social media platforms, it could be beneficial when it comes to accessing credit. Social media platforms could ultimately transform the way banks and building societies approach alternative lending. Similarly, mobile phone usage and data could also impact the credit market in this same progressive fashion.
Lenders are currently facing the ‘thin file’ riddle – where people don’t have enough personal information and data to pass any form of lending risk test – which makes granting credit more difficult. Millions of people worldwide, including around 25 million in the USA and a few million in the UK, are refused credit because they have ‘thin files’. As there’s no data that verifies their income or shows they have paid off credit, lenders cannot work out the probability of repayment and therefore won’t lend to them.
This may be a particular problem for young people, especially with the rise of the ‘gig economy’. Many of these workers are unable to present a stable, consistent or predictable income to potential lenders. In this instance, social media technology could present a unique opportunity to explore alternative ways of assessing a person’s credit eligibility. One repercussion of sharing your details on social platforms means there is, with the individual’s permission, easily accessible information which could be used in a positive way to gain credit. By using private variables from social media in place of traditional data, such as employment and financial history, lenders are able to somewhat combat the problem of ‘thin files’ which might be blocking an organisation’s or individual’s access to credit.
When nerves start creeping in
It’s early days for the UK with regards to adopting this approach, and the country is lagging behind some others when it comes to embracing use of alternative data to credit lending. Used predominantly in countries such as the Philippines, Columbia, Indonesia, India, Mexico and Poland, credit risk modelling techniques that use these methods – mobile and social media data – are being trialled and employed to ascertain risk.
Whilst the details that form this type of credit modelling are highly proprietary to particular lenders, it is likely that information including frequency of mobile phone calls, sentiment in social media posts, browser data and even the profiles of those you are connected to within social media networks could impact lending decisions. Despite this approach being in its infancy, 68 per cent of the world’s credit experts at the recent University of Edinburgh Business School’s biennial Credit Risk and Credit Scoring Conference felt social media data will be a significant factor in consumers accessing credit in the next five years
One barrier for western countries is the stricter data protection laws and concerns over privacy. However, with more countries adopting these processes, this technology could be something UK lenders consider. The use of social media will create an even more competitive market and it’s essential for UK lenders to stay ahead of the curve. We could see this becoming a trend if consumers with ‘thin files’ are willing to allow access to mobile and social media data in order to secure credit where they may have previously been rejected. With millions of consumers currently in this position, this could be the direction of travel in years to come.
Yet, at a time when data protection regulations are set to become even stricter (in May 2018 the Data Protection Act is set to be replaced with the EU’s General Data Protection Regulation), and the public will have more control as to how and where their data is used, some may be nervous. However, this approach to credit risk modelling may provide a positive reason for them to allow more access to their personal data – something millennials are predicted to be more open to.
Social media technology can also extend past personal finance to be used to assist companies seeking extra capital and support. Our team at The University of Edinburgh Business School is currently working on research to explore how company information on Twitter might predict a company’s financial performance, meaning social media data could, in the next few years, be an integral part of business financing plans.
It’s clear that social media presents an interesting opportunity for banks to find innovative ways of credit modelling. Technology is undoubtedly beginning to enhance competition in the credit market which could see consumers benefiting from everyday actions such as mobile phone calls, tweets and internet searches. Despite the time it will take for lenders to implement and for consumers to feel comfortable with this new environment, the majority of those surveyed in a meeting of the world’s credit professionals (77 per cent) believe these alternative lending models will increase access to finance in the next five years.
Jonathan Crook, Professor of Business Economics and Director of the Credit Research Centre, University of Edinburgh Business School
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