At a congressional hearing in 1912, appointed for the purpose of investigating an alleged money trust, J P Morgan made some interesting statements regarding credit.
Q: Is not commercial credit based primarily upon money or property?
J P Morgan: No, sir; the first thing is character.
Q: Before money or property?
J P Morgan: Before money or anything else. Money cannot buy it.
Q: If that is the rule of business, why do the banks demand a statement of what the man has got, before they extend him credit?
J P Morgan: That is what they go into; but the first thing they ask is “I want to see your record”.
A century later, it is interesting to note that a few lenders in the U.S. believe that online reputations can reveal more about a person's trustworthiness than the traditional credit score. They use personal data available on social networking sites such as Facebook, LinkedIn and Twitter to assess a consumer’s credit risk. Why? Because they believe that a person’s social standing, online reputation and professional connections are factors that should be considered when extending credit.
It does not seem that incredulous when you realise that employers too look at social media accounts of potential employees to get an idea of the type of person they might be hiring. Lending companies such as Neo, Lenddo and Affirm are also hopping onto that bandwagon.
According to Rajiv Raj, Director and Co-Founder of CreditVidya, though it may sound a bit far fetched for Indians at this point of time, these methods of alternative scoring may be a reality for us sooner than we can imagine. Notwithstanding your CIBIL score, some lenders may assess your creditworthiness based on your social media footprint in the not so very distant future.
In technical parlance, Raj says that this kind of scoring method is reffered to as “big data scoring”. Below Rajiv Raj he explains why it may soon catch on in India.
Moving beyond the traditional
Assessing the creditworthiness of an individual is a difficult task. So far, a traditional three-digit credit score has been used as a metric for judging how much risk there would be in lending to person.
In the Indian context, the CIBIL score made available by India’s premeire Indian credit bureau of the same name is widely accessed by lenders. It is easily available and inexpensive. In fact, the Reserve Bank of India has made it mandatory for banks to base their initial judgement on this score. (Read:How to get a good credit score)
In order to maintain a good CIBIL score, one must maintain good financial habits such as re-paying credit card outstanding amounts, keeping overall credit utilisation under 30% and re-paying loan installments on time. While there is no undermining the importance of maintaining these good financial habits, the fact remains that the current credit scoring system may “punish the guilty” with a “sentence that may be larger than one’s crime”. In other words, there may be untoward circumstances in one’s life like a job loss, an accident or a death in the family that may throw one’s finances in a complete state of disarray. This in turn may lead to poor credit score because of the inability to service or repay the debt on time. On the other hand, these may be the very times when he is likely to be in most need of credit. However, he will be unable to access any due to an unflattering CIBIL score.
What if the lender considers an alternative scoring method, in addition to the CIBIL score, to asset an individual’s credit risk? A person’s reputation online, his contacts (professional and social) and the value of his opinions can be a metric of his social standing and thus can be used to asses his credit risk.
Betting big on big data
In today’s world of increasing digital footprint, this does seem like a viable option, given the fact that big data assessment systems are sophisticated and have a large positive impact across industries.
In fact, this method of “open scoring” as it is now being termed, has already commenced in the west. U.S.-based Fair Issac Corporation, or FICO, publishes a score based on the consumer credit files which depend on the data available with three credit bureaus (Exeperian, Equifax and Transunion). FICO is in the process of unveiling a new “alternate scoring model” for proving the creditworthiness of those whose FICO scores are not upto the mark because of bad or non-existent credit. This will give a chance to a number of consumers to improve their FICO score.
This new scoring model is likely to use data such as utility bill repayment history, cell phone bills and cable bills and may later extend to social media data as well. As a result, American lenders will get access to a huge untapped market (approximately 15 million people) whose FICO scores are not too flattering at the moment. These are the people who have bad credit because of the impact of a major financial event or those who do not have a credit history because they have not used credit in the past.
Once these methods of alternate scoring become a norm in the developed markets, it is only a matter of time before India adopts such practices. There is sufficient reason to believe that this may happen soon, given the historical evidence. In the late 90’s when credit bureaus became big in the U.S., India understood its merits and the retail banking system began using credit scoring models by mid 2000.
The number of internet users in the country is rising rapidly. According to the Internet and Mobile Association of India there are approximately 300 million internet users in India and this number is projected to go up to approximately 600 million by 2018. Out of these, approximately 225 million are projected to be users of social networking sites. (Source)
Needless to say, the scope is huge especially in the Indian context and the aspirations of Indians are also increasing. Indians traditionally have been wary of credit and thus do not have a good credit score for the lack of credit history. Besides, alternative scoring models may prove to be a disruptive when it comes to financial inclusion in India as well.
Long story short, be active on social media. However, it is not an alternative to bad financial habits or not making an attempt to maintain a good CIBIL score. At the moment, one still has to maintain a score of 750 and above if one aspires to get a loan product or a credit card in India. And this norm will not change right away.