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Credit Risk

Social Media Minefield

There are plenty of reasons to call MovenBank Corp. Ltd. a bank of the future. It hasn't opened its doors yet, for one. And it plans to be a mobile bank for the smartphone age when it launches later this year.

Perhaps more intriguing still, it will use social media information to inform its credit decisions and to determine aspects of its relationship with customers, including pricing.

"We look at a bunch of elements, and one is your ability to act as a referrer, or influencer, who can drive acquisition as a basis for connections," says Brett King, founder and chairman of MovenBank, and the author of Bank 2.0.

So far, banks have limited their social media exploits to marketing and customer service experiments on Twitter and Facebook. But financial institutions and their product vendors are aware their own customers' data has potential implications for credit decisions, relationship pricing, even collections.

Some are tinkering now, others think the information could be important in the near future. And most wonder how it can be used given the way the regulations limit data collection and sharing, such as the Fair Credit Reporting Act.

"Banks have infrastructures that allow [them] to provide treatment that is as equal as possible to all customers," says Cindy Balser, senior vice president of consumer product management at KeyCorp of Cleveland.

"When you are using social media for credit decisions, I just don't think you can get the kind of information to be able to treat everyone equally," Balser says.

But King disagrees. MovenBank plans to use information from Twitter, Facebook and other social networking sites not just for underwriting, but to price the entire relationship. It has developed a scoring product it calls CRED, which is a combination of traditional scoring elements and a consumer's social media "street credibility."

Among the things the score will examine are a customer's timeliness in paying bills and tendency to have negative balances, as well as standing in social networks, and the ability to sign up friends for the bank.

"If you introduced 20 friends, we might add 25 basis points to a saving account, or offer free p-to-p transfers," King says.

While MovenBank is certainly in the vanguard, the credit bureau and scoring agencies have used alternative data for years, and it's safe to say social media data is at least on their radar screens.

It has to be.

Since the beginning of the financial crisis in 2006, the creditworthiness of the U.S. population has suffered and the population of those with no credit files, or thin files, has swelled to 65 million by most estimates.

"Credit access is more constrained than it was," says Rachel Schneider, vice president of innovation and research for the Center for Financial Services Innovation of New York.

Certainly the credit reporting agencies already use their own alternative data sets to help lenders make decisions.

Experian Information Solutions Inc. of Costa Mesa, Calif., offers information on renters' propensity to make timely rent payments through its RentBureau product.

For consumers with minimal lending history, Fair Isaac Corp. of Minneapolis offers something it calls the Expansion score in partnership with MicroBilt Corp. of Kenneshaw, Ga.

It factors in such information as purchase plan payments, property ownership records, and demand deposit information, which could include the propensity to overdraw accounts. It also looks at the timeliness of utility bill payments and even more obscure items such as payment of gym membership and phone bills.

"Our approach is also very pragmatic, and we let data speak for itself," says Bradley Graham, senior director of product management for Fair Isaac, adding that social media information is something FICO might consider using in the future following a rigorous examination.

Social media data is already being used to inform credit decisions on many peer-to-peer lending sites, such as Weemba Inc. and the newly launched SoMoLend LLC.

In some respects that's not entirely new territory, either. When Prosper Marketplace Inc. launched five and a half years ago, it fashioned itself as the eBay Inc. of lending, allowing lenders to rank borrowers much the way customers rank sellers on eBay.

Though that approach ultimately went by the wayside for Prosper, the language still prevails today for the lending start-ups.

"We believe when active lenders are willing to be like eBay and make a recommendation or speak of the strengths of someone as a borrower, the borrower will benefit," says Candace Klein, founder and chief executive of SoMoLend LLC.

Key has a lead generating relationship with SoMoLend. The lending platform is in line with Key's focus on the small-business market, where it has plans to lend $5 billion through 2015.

"Certainly things like rent payments and utility payments will point to a person's ability to meet their obligations, and with SoMoLend, they are using their own experience with borrowers," Maria Coyne, executive vice president and business banking segment head for Key, said in an earlier interview.

For a variety of reasons, it's much easier to start using social media information when scoring businesses for loans, says Christine Pratt, a senior analyst for Aite Group LLC.




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