Financial institutions typically rely on a few time-tested credit scores from experienced credit bureaus to make lending decisions. These scores are relatively good predictors of repayment behavior, but they may not adequately address consumers who have limited borrowing experience.
Several startups are using alternative data sources to make credit accessible to consumers and small business with limited credit histories. Some such companies believe that analyzing massive amounts of data from social networks could yield insights into a consumer’s creditworthiness.
From CNN Money:
“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.”
While the topic is certainly interesting, usage of social media data to make lending decisions is still considered highly experimental. Lenders in established credit markets have reason to be cautious about the accuracy of these services, although there is potentially a greater need in emerging markets where credit is generally inaccessible.
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