For prospective borrowers who have no credit history, a common problem for immigrants whose credit starts anew when they move to the U.S., economists and startups are using metadata from smartphones to see how reliable a borrower is in other areas of their lives to help determine their likelihood of paying back a loan.
A recent article in the New Scientist cites research conducted by Brown University economist Daniel Björkegren and the Entrepreneurial Finance Lab which involved combing through cellphone data of 3,000 borrowers from a Haitian bank to identify such trends as how often they pay their cellphone bills, how quickly they return important phone calls, and travel behavior based on location data.
The researchers used an algorithm to process this data and its relation to the user's credit, finding that the bank examined in the study could have reduced loan defaults by 43%, according to the New Scientist report.
This use of metadata is apparently catching on – the article mentioned three startups that use mobile and web data in similar ways, including one that guesses a user's approximate credit based on the credit scores of their connections on Facebook and Twitter. And since this data could theoretically be used to both identify more reliable borrowers and reduce the number of risky loans, it's probably not long before larger banks embrace this approach. This data could very well provide additional context for those with long, established credit histories.
One important concern raised briefly in the New Scientists report is this practice's potential impact on privacy, which seems quite substantial. Yanhao Wei from the University of Pennsylvania told the publication, "you may give people the choice to give data or deny data, but in those cases, denying itself is a bad sign." Even the increasingly rare privacy-conscious web user will have difficulty withholding their data if it will make it more difficult for them to buy a home, start a business, or send their children to college.
Also interesting is the broader impact this use of data could have on the economy. If smartphone users are aware that the banks are taking into account their location data, maybe they'll think twice before making an impromptu trip to a casino. Even when people use cash to spend their money in reckless ways, banks could be able to figure what they were doing with it.