There was a time when banks used a handful of information to assess the creditworthiness of the borrower. With the introduction of credit score, the lending industry saw a huge revolution. Banks and other financial systems relied on credit reports to reduce the risk of credit defaults. However, there is a paradigm shift in the way money is perceived and used in the financial system.
The lending industry is poised to see a huge change in its practices. Soon, determining individuals’ credit worthiness based only on their credit score will be a thing of the past. The futuristic fintech (financial technology) lending companies are now analysing a huge number of data to determine the credit worthiness of a person.
The advent of internet was a revolutionary change that transformed the way we live. Four decades later, it has sneaked in our daily lives. What we do, where we go, what we like, where we shop, where we live – everything is there on the internet. The new lending start-ups are continuously mining, collecting and organising these data points to make their lending decisions. These companies have found an alternate way of determining the creditworthiness of even those individuals who do not have credit scores. While traditional lenders are still heavily dependent on the credit scores, a new wave of start-ups is now combing through social networking sites, Amazon and the likes, GPS location, online shopping behavior and so on.
These companies collect thousands of seemingly meaningless data about the individual, which are then incorporated in a complex algorithm to determine the behaviour pattern of the individual when assessing his/her loan application. Using the ‘big data’ to make lending decision is set to become a norm rather than exception, sooner or later.
Here are some of the thousands of ways in which a lending company may weigh up your creditworthiness:
Location of your computer
The location of your computer is used to determine the place where you live or work. If the ratio of credit defaulters is higher in your neighbourhood, this could be bad news for you. You may deny a loan based on where your computer is located.
Your social media friends
If you are friends on any social networking site with someone who has defaulted on his/her loan, there is a high chance of your loan application getting rejected. They also analyse who you are interacting with most. Your social media friends will soon play a large role in determining your creditworthiness.
Your smartphone is like a bag full of goodies for these revolutionary lending start-ups. It contains huge amounts of data – both obvious and subtle – that can help them make a decision regarding your creditworthiness. It is a quarry of data like your social media posts, your text messages, GPS location and emails, among thousands of other data points. They will scan your call history, who you contact most often, your online shopping receipts and even how many times you have charged your mobile.
Your online payment accounts
If you are a business, these lending companies will ask your permission to access your PayPal, eBay or any other payment account to analyse your sales information.
These are just minute pieces of a much bigger pie. Credit scores are just not enough. Lending companies are on a lookout to find more reliable and predictable ways to minimise the risk of delinquency. Big data mining can help them collect thousands of pieces of information from search engines, social media sites, etc. to make accurate predictions regarding the behaviour of the borrower and make better lending decisions.