A handful of tech startups are using social data to determine the risk of lending to people who have a difficult time accessing credit. Traditional lenders rely heavily on credit scores like FICO, which look at payments history. They typically steer clear of the millions of people who don’t have credit scores.
But some financial lending companies have found that social connections can be a good indicator of a person’s creditworthiness.
One such company, Lenddo, determines if you’re friends on Facebook with someone who was late paying back a loan to Lenddo. If so, that’s bad news for you. It’s even worse news if the delinquent friend is someone you frequently interact with.
"It turns out humans are really good at knowing who is trustworthy and reliable in their community," said Jeff Stewart, a co-founder and CEO of Lenddo. "What’s new is that we’re now able to measure through massive computing power."
This sounds really sinister but it also sounds like another case of companies buying lots of expensive data and not really having a good idea how to use it? Like, let’s assume you don’t have FICO or some similar measure of credit score. I don’t see how Facebook friend interactions are going to a better measure of your disposable income than, say, the part of town you live in, your most recent pay stub, and your ability to put down some cash as collateral. Certainly it’s a whole lot easier to game social media (share lots of pictures of cute dogs with your wealthy buddy who loves dogs!) than disposable income.
This seems like a really underhanded way to use someone’s socioeconomic status against them, and this method of background checking will probably not catch on.
EDIT: Ben Popken offers some good feedback on this post.