Using social media in credit scoring

Social media could provide valuable information to supplement traditional sources credit scoring companies use to predict a borrower’s ability to repay a loan and meet credit terms.

To date, factual and historical information has been used – payment and credit history; current level of debt and so on. Add to this information derived from an applicant’s social media presence and a more fully rounded picture of the would-be borrower can emerge that could help lenders make responsible lending decisions.

Borrowers are now more aware than ever that they have a credit score and that it affects their likelihood of success when applying for a loan. The thought that their social media presence could form part of the analysis into their creditworthiness may take a bit of getting used to. Information-sharing social media platforms are inherently public but passions run high that the data they contain is owned by individuals and that they’re in control of it.

People might not like the idea of credit scoring companies using it, but there are benefits to lenders and borrowers alike of bolstering information with social media data.

Footprint

Consumers don’t tend to conform to a lifecycle anymore that could previously have been considered ‘standard’ – mortgage, car loan, pension investment and so forth. They buy homes later – if at all – they may use car pools rather than own a car that depreciates; they may invest in property for their pension. All of which adds up to a lack of credit history – a smaller credit footprint in the financial data sources lenders are used to tapping into. This can result in would-be borrowers being shut out of the financial eco-system.

They are though a generation that exists increasingly online. While they are just beginning to create their credit footprint, social media may be the most sensible source of data on them. These are the channels today’s borrowers engage with most readily; increasingly to the exclusion of others.

Small businesses

The use of social media data also has the potential to benefit small business loan applicants.

Fledgling businesses can often hit a system black spot applying for loans or credit. Their application isn’t treated as coming from an individual, yet the start-up business has no financial history to plead its case.

Lenders stand to lose out if they can’t resolve this as a loan to a start-up business is likely to lead to a current account, a credit card and a banking relationship that could be potentially lucrative and long-term.

If lenders were to use the same tools to assess an application from a small business as they use for a consumer, they could stand to make a more accurate, faster decision. As part of this, social media data can provide a genuine demonstration of borrower behaviour that could point to capability and likelihood of meeting repayment terms.

In the two-way lending relationship, this data also offers a way for financial institutions to know their customers better. This is especially important at this time when the spotlight is on responsible lending. Lenders are sensitive to their part in offering the right product to suit customer needs and want tools to help them reach a decision to lend an appropriate amount with appropriate repayment terms.

Technology is playing an ever more central role in supplying these tools. Sophisticated analytics are part of the kit-bag helping to make the vast and unstructured data generated by social media usable.

Integration

For those agencies offering social media data analytics, simple integration with existing systems used by financial institutions is important. Changing legacy systems is expensive and time consuming. And social media channels exist in a fast-moving industry – online platforms evolve and change their algorithms regularly. Credit scoring technology incorporating data from these sources is challenged to keep up.

Tools used today for the assessment of creditworthiness are well established and heavily relied upon. Social media is comparatively new on the scene, but data is king so it has the potential to firmly establish its place.

For lenders, social media can provide valuable data where traditional sources yield little. Recourse to a predictive credit score generated from analysis of social media data could mean an application that would have been rejected, is approved. This is a significant benefit. Lenders want to reduce the time it takes to grind through the decision mill to reach an outcome. Applications sitting in the pipeline are of no benefit to lenders – they are a drain on resources – or frustrated borrowers.  

Time will tell. Predictions underpinned by social media data will be assessed against borrowers’ subsequent proven ability to pay, and this will help lenders understand if this new data source does in fact help them make the right decisions, quickly.
 

By Paul Thomas, Managing Director of risk life cycle, Provenir

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