It was recently reported that Facebook has been granted a patent on a method that could be used by lenders to decide if a loan application can progress. The credit ratings of friends in a loan applicant’s social network through Facebook could be taken into account in the loan assessment process.
It’s an emotive topic. Not surprisingly, many squirm uncomfortably at the thought of the social connections they choose to make in their personal life impacting their financial situation.
The thought of data from social media being interrogated at all is a strange enough concept for many. Information-sharing social media platforms are inherently public but passions run high that the data they contain is owned by individuals.
It should be made clear that risk decisioning as part of credit and lending processes isn’t the only use of the technology covered by Facebook’s patent – it isn’t even the primary one. The main parameters of the technology deal with authentication and content filtering. Notwithstanding that, the potential for lenders to make use of this data source highlights the changing face of lending.
The latest generation of finance seekers are undeniably a generation that exists online. Today’s borrowers engage most readily with online channels – increasingly to the exclusion of others.
They don’t tend to conform so much to a lifecycle that could previously have been considered ‘standard’ – mortgage, car loan, pension investment and so forth. They buy homes later – if at all – and they may use car pools rather than own a car that depreciates. All of which adds up to a lack of credit history; a smaller credit footprint in the financial data sources lenders use to assess the relative payback risk of a loan applicant. The result? Would-be borrowers are being shut out of the financial eco-system.
For the online generation just beginning to create a credit footprint, their activity on social media can build up to a rich source of data.
For lenders, social media can provide valuable insights for risk assessments where traditional sources yield little. Recourse to a predictive credit score generated from analysis of social media data could mean a credit or loan 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.
Evolution in credit and lending processes
With huge amounts of data now generated on and by individuals all the time, we are seeing an evolution in credit and lending processes. There may come a day when individuals don’t need to gather historical data to support a loan application.
The information that assessors need may already be out there – it’s just a case of knowing which bits to tap into, and how to do that.
‘New’ data entering risk decisioning processes has an interesting characteristic. It points to a future that relies less on credit history and current financial position and more on customer behaviour as an indication of creditworthiness.
Does this suggest that how we behave in our everyday lives speaks for itself as an indicator of our financial reliability, and is that a more powerful guarantee than financial data?
Back in the day, local branch bank managers assessed loan applications based on their knowledge of applicants and what people prepared to vouch for them said.
Recent developments in credit and lending risk assessments don’t point the way to a return to those days, but behavioural indicators can play a part with a modern-day twist.
Now, our behaviour is turned into bits and bytes and algorithms and data analytics do the assessing. It isn’t exactly the personal touch but rather, character-based assessment, technology-style.
Smart technology is providing new and efficient ways to automatically access real-time data, analyse it and generate insights that lenders can use to make faster, informed decisions.
The use of social media data is only one part of ongoing changes in the way loans are decided and progressed. Lending systems and processes are also getting a shake-up.
Despite living in a digital world, many lending assessments still rely on paper-based, manual processes. The re-keying of information as applications move from one department to another in a financial institution is still not unusual. But it is a situation that is becoming increasingly unsustainable.
Lenders are beginning to look for solutions to automate much of their risk decisioning process and to replace manual processes with digital. Back-office processes need to stand up to customer expectations set by their experience of the front-end channel, which is increasingly online and designed to be quick and simple.
Whether or not the type of information indicated in the Facebook patent will be used for loan assessments in the way it is suggested it could be, remains to be seen.
Either way, the progression of data use and automated analytics to speed up risk decisioning in credit and lending will continue.
Paul Thomas, managing director, Provenir