How A PayPal Brain Wants to Beat Big Banks
No cash? No credit? No problem. All that time spent on Twitter, Facebook and LinkedIn could finally start to pay off.
There are now banking startups than can search through your social media data to determine a new kind of credit score that can be used to make loans. If the idea sounds scary, you’re not alone. It’s one the Wall Street Journal explored earlier this year, highlighting regulatory concerns of lenders using such data.
You’re also probably not a millennial.
At least, that’s what one of the founders of PayPal, Max Levchin, suggested to CNBC when he was interviewed about his startup, Affirm, which uses social media data to make small loans to consumers in an instant. Millennials, with their little credit history but who “are very excited about putting themselves out there online,” said Levchin, “are misrepresented by FICO score and the credit bureau data.” This, he said, makes them his prime customer.
FICO, after all, is all about the money.
Scores are determined by a combination of payment history, the amount owed, length of credit history, new credit and the types of credit used, and more than 90% of lending decisions are made using FICO scores, according to Fair Isaac Corporation. Levchin, however, believes Affirm’s “propriety underwriting technology” can do better. “We look at everything – everything we can honestly and legally get our hands on,” he said, including FICO scores.
For its part, FICO has expressed interest in the use of social media data. A senior specialist there told the Wall Street Journal that such data “could be predictive and we’re looking into it, but it isn’t yet.”
It’s also perhaps a boon for Levchin’s startup that millennials seem less interested in getting credit cards. A recent Bankrate survey found that more than half of them (those between 18 and 29 years old) don’t even have one. One of the reasons for this, according to the survey, is that they may “fear” falling into debt and finding themselves unable to pay their bills. Levchin agrees. Not only are millennials “not excited” in carrying a balance on credit cards, he said, but a revolving credit account is “yesteryear’s problem.”
Enter Affirm.
The lending startup, which prompts users for four pieces of information to confirm identity and underwrite the loan, allows consumers to repay over 3, 6 or twelve months, with a rate that Levchin describes is “a little bit better – sometimes a lot better – than what their credit card would be if they had one.”
Levchin would not say exactly which of your activities on Facebook or Twitter would be considered or how they would impact your credit score, but a German startup called Kreditch said it looks at, among other things, whether a borrower’s “network on Facebook [is] just drinking buddies from a bar,” as well as which smartphone the borrower uses, according to the same Wall Street Journal story.
Critics of lenders mining for social media data to measure credit risk have pointed to one obvious point: people can lie. This, one credit expert wrote, can “game the system."
Levchin, on the other hand, indicated no such qualms, instead emphasized his faith in data to create a better system for consumers.
“This is not about trying to under-price or scare anybody in the big bank world,” the PayPal co-founder said, “but rather beat them by being honest with the customer."
And to do just that, he added, “there’s plenty of data.”