Lenddo, a Hong Kong-based microlending startup incubated in New York’s FinTech Innovation Lab, calls itself “the first credit scoring service that uses your online social network to assess credit.” The first thing Lenddo asks for is a Facebook account; then it wants access to Gmail, Twitter, Yahoo, and Windows Live. The Observer was given a respectable score of 470. But when we tried to apply for a loan, we were told “you need at least 3 connections with scores above 400 in your Lenddo trusted network.” (We wouldn’t have been able to get a loan anyway: Lenddo is only available in the Philippines, although it recently hired an ex-Googler to head up the Americas.)
The company’s algorithm is proprietary and secret, said CEO Jeff Stewart, but the primary metric is what Lenddo knows about the people you’re friends with. “We think that in the age of the internet you should be able to establish your reputation and your identity through your social graph, through your on- and offline community, and use that to get access to financial products and information,” he said.
If Lenddo sees one of your best Facebook buddies took out a loan and paid it back, there’s a good chance you will too. “Our backgrounds are in machine learning and pattern recognition,” Mr. Stewart said. “It’s some serious math.
“There’s no reason there shouldn’t be thousands of engineers working to assess creditworthiness.”
In another nifty but nefarious innovation, Lenddo reserves the right to broadcast your loan status if you fall into default. As the site warns: “Failure to repay will negatively impact your Lenddo score, as well as the score of your Lenddo friends. Lenddo MAINTAINS THE RIGHT TO NOTIFY YOUR FRIENDS, FAMILY AND COMMUNITY if the borrower fails to repay, however, this is only done after several notifications to the borrower and an attempt to work out a payment plan.”
“I think Mark Zuckerberg said it best,” Mr. Stewart said. “Every industry will be in fact impacted by social.”
Banks have been curious about using social media to gauge risk for at least a year, said Matt Thomson, VP of platform at Klout, which calculates “influence” based on a user’s social media activity. Determining creditworthiness is not a core product of Klout’s, he said, but banks have approached the startup to ask about it. He wouldn’t name names. “It’s really like the who’s who of banking,” he said.
(Mr. Stewart of Lenddo also said his startup is approached “regularly” by major banks curious about the algorithm.)
Klout, arguably the leader in developing a metric for social media power users, has taken a beating from bloggers for being spammy and potentially insecure. The New York Times wrote about shocked parents who discovered Klout had autogenerated skeleton profiles for their children, based on what it had gathered from their connections to others; the science fiction writer Charles Stross called the service “the internet equivalent of herpes.” R. Ethan Smith, who blogs as The Startupist, recently wrote a critique of Movenbank’s projected partnership with Klout. “Klout claims that I am influential about New Jersey, coffee, and iPads,” he wrote, noting that he has no real expertise in any of the three and doesn’t even own an iPad. “Now, let’s assume that King is completely serious about using online social profile data to determine a Movenbank user’s influences, which will essentially determine their ability access a line of credit… To stake tangible dollars on what seems to be a relatively easily manipulable algorithm is not something I would characterize as ‘good business sense.’”
Media theorist Douglas Rushkoff dismissed the idea that social media credit scoring is a serious erosion of privacy, mostly because there’s nothing left to hide. “We’re already in the nightmare scenario,” he wrote in an email. “They already know everything about you—more than most of us realize. If anything, the addition of social networking information to this data mining will help us come to some understanding of how much more these companies know about us than we know about ourselves.”
The precise formula for FICO, the most widely used credit score, is secret and proprietary to the Fair Isaac Corporation, a publicly traded company. Experian and TransUnion, two of the three national credit bureaus, did not respond to requests for comment on this story; Equifax, the third, did respond. “Our corporate development professionals are very aware of the opportunities to enhance our proprietary data and partner with companies who add value to the accuracy of our reporting, which helps our customers make better decisions prior to lending,” a company rep said in an email, adding that Equifax can’t comment on future strategies because it’s a public company.
This new use for social media data could turn out to be empowering, Mr. Rushkoff pointed out, if it leads to people lending to one another. A reputation score based on the social graph could lower the barrier to entry for peer-to-peer lending startups. “Instead of everyone outsourcing their savings, investments, and borrowing to truly evil institutions who use what information they about us simply as an excuse to drain more money from us,” Mr. Rushkoff said, “we would invest in one another.”
Snow is falling lightly outside as Mr. Bailey logs off of PotterBank.com. Suddenly, a bell rings. It’s his iPhone: a text message from Lending Club, a peer-to-peer lending startup based in San Francisco. His friends saw his Tumblr post with photos of the coveted apartment, and forwarded it to friends of friends. Collectively, they’ve pledged to invest over and above the needed deposit. He looks up, smiles; looks back at his phone, and taps out a tweet: “No man is a failure who has friends!”
CORRECTION: The original post incorrectly said Lenddo is based in New York. The company is officially headquartered in Hong Kong.