Digital banking: Credit scoring goes social

Helen Avery
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Those in need of credit are turning to emerging online platforms rather than their traditional banks. It’s faster, easier and more transparent. And emerging market business is leading the way.

Rene Griemens
Rene Griemens, CFO at Kreditech, says 'there is a tremendous opportunity to reach the unbanked customers in the emerging middle-class in the emerging markets'

Will banks be disintermediated from lending? It’s not unthinkable. An increasing number of independent lenders are gaining traction in the loans industry, thanks to the use of technology to analyse credit risk. They lend where banks will not.

Lenddo was set up in 2011 and uses data from LinkedIn, Twitter, Google, Yahoo, Live and Facebook among other sites to form a profile of the borrower. Over 100,000 credit decisions have already been made through Lenddo.

"It’s much like JPMorgan himself looked at banking - where lending was based on the 'character of the man’. We discovered that how you connected to others and who you are connected to will determine how you behave as a borrower," says Jeff Stewart, co-founder of Lenddo.

Kabbage, headquartered in Atlanta, Georgia, makes loans to small businesses in the US and the UK. Since 2010 it has lent $300 million to 30,000 customers. Like Lenddo it uses some social-network data to complement third party credit scores, and it also improves the scoring by using data provided by the sales platforms its lenders use – such as UPS, eBay, Amazon, Etsy.

Says co-founder and COO, Kathryn Petralia: "Banks have always found it hard to profitably provide loans of less than $100,000 due to the highly manual nature of their lending process. They often require personal guarantees, and business owners are afraid to put their house on the line. Most banks can’t lend to business owners with a FICO score less than 700, but these borrowers are just as creditworthy - many of them are simply using personal credit to run their business, which artificially deflates their score. We supplement that data with our own collection of data to make credit decisions."

Kabbage uses buyer feedback ratings, selling history, turnover, accounting data, bank account information and other metrics to approve cash advances.

Kabbage also focuses on providing loans within minutes, adding funds to borrowers’ PayPal and checking accounts. Petralia says: "Our automated platform enables us to offer funds immediately, which is difficult for banks and other financial institutions to do with a manual process."

Local partners

The use of social networks in providing insight into a borrower’s credit risk is particularly useful in emerging markets. There the middle class is growing at a fast pace and often requires loans, but individuals lack a credit history. Lenddo provides banks with approved borrowers in Mexico, the Philippines and Colombia. Stewart says Lenddo hopes to reach 1 billion people in emerging markets within the next 10 years. "The plan is to find local partners and to keep adding more countries," he says.

Indeed emerging markets have been a key focus for the new lenders. Kreditech, which launched last year is already in seven markets. In September it will open in the Dominican Republic, towards the end of the year in Romania, and it is looking at Brazil as well as others for 2015.

Jeff Stewart-large
  We discovered that how you connected to others and who you are connected to will determine how you behave as a borrower

Jeff Stewart

"Eighty percent of our markets are between G8 and developing countries," says Rene Griemens, CFO at Kreditech. "There is a tremendous opportunity to reach the unbanked customers in the emerging middle class in the emerging markets. We are also looking at African markets, which is really an economy-building function. It is very difficult for a high street bank to deliver what we offer, as loan amounts are so small. We are in discussion with one of the world development organizations around funding for expansion into emerging markets."

Stewart says these lending services are having a social impact in emerging markets. "Often individuals with good references and a good profile are borrowing for their family’s education, or to help those less fortunate, as well as growing their own businesses."

Lenddo also provides advice on financial health to its customers such as how to save or how to budget. Says Stewart: "We offer tips in Twitter-sized digestible chunks; interestingly how individuals engage with that information is also predictive of whether they will pay back the loans."

In April Lenddo launched a Visa credit card with ScotiaBank’s Colombian subsidiary Banco Colpatria that is dependent on a consumer’s reputation on social networks. "We received 2,000 applications within the first month of launch of the co-branded credit card," says Dan Gertsacov, chief executive for the Americas at Lenddo, "more than doubling Lenddo and the bank’s estimate and demonstrating the value of social networks to provide access to credit to a segment that had previously been ignored by traditional data analysis."

Santiago Perdomo Maldonado, CEO of Banco Colpatria, says the use of social network data for banks in his country offers real value. "We’re facing a very important challenge helping people to access financial services, and this is an opportunity to really help Colombians to improve their life quality through financial services."