Financial statements and income verification are the backbone of loan decisions. But there are other, more subtle clues that can also inform a decision.
"If you're in a face-to-face situation with a customer in your office, for example, you can see how that customer is interacting with you. Are their eyes looking back and forth? Are they looking at the door over your shoulder? Are they asking questions about your products, or do they want to immediately apply?" says Ken Rees, CEO of Think Finance, an alternative lender that uses its database and underwriting engine in an attempt to offer rates that are about half of payday lenders.
Rees says that much like observing behavior during an in-person interview, social networking offers an opportunity to spot behavior that can inform a broad picture of credit risk. While it's rare for people to use Twitter or Facebook to post or tweet about how they need an installment loan or how they're having a tough time paying bills, there are still tendencies that can be gleaned by viewing their social media interactions.
Think Finance, which has made about $3 billion in loans to 1.5 million customers over the past decade and doubled from $250 million in 2011 to $500 million in volume in 2012, is increasingly using social networking to supplement the more traditional financial and payment history information that it feeds into its underwriting system. The lender's goal is to find borrowers that are safe enough to offer a rate that's lower than payday loans for its mix of installment loans, pay advances and rent-to-own loans that let people purchase electronic equipment and pay in installments.
Financial institutions are broadening their sourcing of data to include analysis of social networking as part of the broader move toward what's called "big data," or the leveraging of information outside the transaction histories that are stored in a bank's database.
Rees says that while analysis of customers' social networking activity is more useful for fraud detection, there are uses for credit risk. One simple check is finding out if a borrower actually has a social media footprint. Facebook and Twitter have become so ubiquitous that not having accounts can set off a red flag. "It's better to have an online ID. Not having one is like walking into a brick and mortar store without a driver's license," he says.
He also says that the timing and usage of a social media account can provide insight. "If you recently set it up and there's a lot of usage, that may be an indication that there is something going on with that customer," Rees says. A sudden spike in activity, or someone signing up to social media right before applying for an installment loan, is suggestive of someone who may be looking for counsel of some sort from peers.
Rees also says the information that consumers give when disclosing the length of financial, digital or other professional relationships, either in social networking sites or in person, can be revealing. A precise answer, such as "4.3 years," can be viewed as similar to fidgety or evasive behavior, compared to a more general response, such as four or five year. The reason is someone who is trying really hard to look like a good, creditworthy customer is going to try to fill out the form as prefectly as possible. Most people who have been with a bank for a longe time can't remember exactly how long and aren't worried about looking evasive.
In an interview for an upcoming Bank Technology News feature on the future of social networking in banking, First Mariner Bank director of digital marketing Erica Barry told BTN that people post a lot of information about themselves on social networks — everything from favorite television shows to trips they are planning to general information about life events. While that can be used as information for targeted marketing, there's also a risk management component — these seemingly mundane posts can be used to determine if a person is likely to commit loan fraud or if they are having financial difficulty.
"Not many people talk about paying bills online, but they do tweet about a car breaking down. That can be an opportunity to reach out to a customer for a loan, or to be aware that they may have a need," Rees says.
Rees also stresses that social networking is an additional factor that aids traditional underwriting, rather than a replacement. "You have to balance that with true credit underwriting," he says.