November 27, 2017
Special to Gulf News
By Zaid Kamhawi, CEO, Qarar
When I first moved to the Middle East, it took me months to receive a credit card or cell phone contract due to my lack of credit history. Even with a university degree, a job at a multinational, and a clean credit slate in two other countries, it was a time-consuming process.
Today, loan applications and credit card inquiries essentially hinge on one thing: a credit score. Traditionally, institutions have asserted that an individual’s financial history — primarily their payment history, current debt profile and length of credit history — informs future behaviour and should therefore dictate the decision of whether or not to offer credit to potential borrowers and at what rate.However, credit scoring as a tool for assessing an individual’s creditworthiness has been largely unchanged over time despite the shift in credit appetites, local credit behaviours, mobility, and customer expectations.
The traditional credit scoring method uses demographic and past performance information to determine future risk. These methods remain at the core of credit scoring and have shown strong separation performance in situations where the required information is available to be scored. At the same time, lenders have been constantly seeking other methods to enhance their ability to assess creditworthiness.And with the rise of social media platforms, they now have the potential to harness the value of large volumes of non-traditional data to analyse an individual’s likelihood and willingness to repay debt.Lenders need a way to verify creditworthy individuals even when they do not have access to localised credit histories, as well as new methods that can provide more accurate risk scoring and better decision accuracy. This is particularly true in GCC countries, where vast portions of the population are highly transient or expats, and would otherwise never be able to access financial services due to limited credit histories.
In this situation, alternative data — driven largely by the rise of social media platforms — provides access to unprecedented amounts of information that can enhance credit and character assessment, leading to a shift in the way lenders assess creditworthiness. A number of innovative lenders are already exploring the use of social media scoring in their credit underwriting process.And mainly to assess thinner-file borrowers such as students, foreign nationals, and populations of under-banked individuals who are not likely to have amassed significant wealth and have less established credit histories, but who a large purchasing power and are super users of social media.This includes data from social media platforms, bank transactions, cell phone and mobile data, bank and lender data if available, as well as third-party data hubs of personalised verifiable data that can be easily packaged for lenders.
The analysis of this data can bring tangible benefits to lenders, helping them to increase approval and conversion rates; expand their customer base to encompass the underbanked; provide a differentiated customer experience through a deeper understanding of customer profiles; and prevent fraud by flagging potential fraudulent activity.The most predictive social media scores come from countries with high social media penetration, as consumers in these markets tend to be active on multiple social platforms. The problem this approach solves is largest in countries with limited credit bureau data. In such places, vast portions of the population can only be assessed using alternative methods.
So if such a country also has high internet penetration, online and social data is an effective way to assess borrowers. Lenders that take advantage of the data generated by social media can differentiate themselves with enhanced services and faster decision-making.A good example is FriendlyScore, which has emerged from London incubator StartupBootcamp. The company conducts in-depth analyses of people’s social networking patterns to provide an additional layer of data for lenders trying to analyse the credit-worthiness of a borrower.
It has created an algorithm that can work out the trustworthiness when it comes to lending based on the way they use Facebook, LinkedIn and Twitter, and their habits on other social media sites. FriendlyScore is dedicated to alternative credit scoring using big data.While traditional credit scores work well, they exclude a high proportion of the creditworthy population who lack historical data. But as people and their devices become more interconnected, new streams of granular, real-time data are emerging, and with them innovators who use that data to support financial decision-making.
Your social media profile speaks volumes about your lifestyle and creditworthiness. In this age of big data and digital transformation, you might expect a credit check firm to be stalking you quite comprehensively. We publish an enormous amount of information out there and a whole host of apps will merrily download photos from your phone and demand access to your entire email inbox.
But while our social media posts can be a guide to our spending preferences, tomorrow they will be a reliable gauge of our creditworthiness.Anyone can use the public-facing data available on Facebook and other social media channels to create whatever credit score calculations they want. So think twice before sharing a selfie at dinner and updating your social media profile. With that latest update, you could be giving away more than you think.