Social scoring – a new era in the assessment of creditworthiness?
Banks were once associated with ossified structures that did not keep up with new trends. We cannot say that for a long time about these financial institutions. Banks are still developing their offer, they want to be more accessible to clients, flexible and functional. It is enough to recall even modern payments by BLIK phone or Android Pay. Now we don’t have to have a wallet with us when going to a restaurant or shopping. What is the loan issue like? Have facilities been made in this field?
Social scoring and banking socoring
Before proceeding to social scoring, let’s remind what banking scoring is. Knowing this term will allow us to better understand the new products introduced by the bank that relate to loans. Banking scoring is an internal system for assessing the financial credibility of a potential borrower. Each bank, before granting us a loan, thoroughly checks our credit standing according to presented in the form of a credit score. Credit scoring involves comparing the profile of the applicant for a loan with similar profiles of clients who have already received loans. Typically, the bank takes into account the following factors:
- housing status
- the borrower’s place of residence
- period of residence at the current address
- amount of monthly income
- owning a telephone
- the number of dependents of the borrower
- age and marital status
- bank accounts held
- bank references
- having savings programs
- owning a car
- having life insurance
- owned payment cards
- period of employment in the same enterprise
- employment period in the current position
- employment period with previous employer
The bank analyzes the above-mentioned features of the borrower and calculates the so-called cut off score. This calculation is the lower credit threshold. Persons applying for a loan will receive a refusal from the bank if they get a lower score. On the other hand, those who in the final score of the scoring approached the cut-off point – if they are still interested in obtaining a loan, they must provide better loan security or simply apply for a lower loan amount.
Disadvantages of credit scoring
A disadvantage of credit scoring from the bank’s client’s point of view will be some of the features to be assessed. Banks are studying our credit history. If we have never bought even the smallest thing in installments, i.e. we did not take out a loan, we may be poorly assessed, because the bank simply qualifies us as financially unreliable borrowers. The bank does not know if we are trustworthy payers. If we have recently changed our job to a very well-paid one, the bank may not include our great salary because it checks the data backwards. Similarly, when starting your own business. Even if we have high revenues from the beginning, we are still unstable for the bank. We have to reckon with the fact that as new entrepreneurs we will not get a loan so easily – we are talking about a personal loan.
What is social scoring? This new concept has appeared recently. Social scoring is a service that allows you to connect Social Media online accounts belonging to the borrower with the appropriate system. Thanks to such a procedure, information is downloaded from social networking websites that allows it to reliably assess its creditworthiness. For now, social scoring mainly uses Lokos, which is the largest social loan platform in Poland. According to the website, about 85 percent of the data used in social scoring are the same information that banks use and try to acquire from other sources. I am talking mainly about the data used when the customer completes the loan application. As in the above-mentioned data, these are primarily issues of private life, professional experience, level of income.
Social Scoring in practice
How does social scoring look in practice? To start with, it needs to be clarified that a financial institution using social scoring does not receive a report on one person. After analyzing our content, behaviors, the devices we use, how often we log in to Facebook, a profile of similar people is created and based on them, scoring is calculated showing whether such a group of people has a problem with loan repayment, etc.
Next, our family relationships, shopping habits, who we keep in touch with, and the behaviors of people who are our friends are examined. So, as you can see, the complicated social scoring algorithm will take into account very different data from our social media behavior and compare it with prepared profiles, as well as with BIK scoring. If we use financial institutions that grant loans through social scoring, we must bear in mind our behavior in Social Media. So far, social scoring in traditional banks is not used, but looking at the development of internet technologies, it is only a matter of time.