[Edit: The article says the ultimate nightmare is the banks using this to access data that they can't ask you for on forms. That is unlikely. What they'll do instead is do exactly what credit scoring does: develop an algorithm which a) improves assessment of risk and b) is totally, verifiably blind to all protected classes which c) happens, as a side effect, to correlate very strongly with membership in certain protected classes.]
The problem with trolling my FB account for understanding my behavior is that people fall into roughly 3 categories:
- Old work associates
- School friends
- Family and close friends
If I have a deadbeat cousin who also happens to be the black sheep of the family, they may penalize me unfairly for his behavior. Or if I used to be in school with someone who is now doing poorly financially, I get whacked. Now consider that this person might have been my close friend in 6th grade, but we grew in different directions. Where is the relevance here? Where's the logic in that?
Pulling this info from social graphs as augmentation is a whole lot different than simply creating a full profile from your graph in the absence of real financial data.
Lagging or not, how I paid my credit cards over the past 5 years is going to tell you a lot about how I treat money. Not so much about what I'm tweeting tomorrow.
Social grading gives them free reign near-uniformly depress credit scores to make everyone appear less credit-worthy.
This allows them to increase average rates and maintain low lending volume, under the cover of credit scores that appear low in historical context. When it behooves them to begin lending again, their lending to people with low(-in-historical-context) credit scores will be paraded about as virtue.
There is simply no-one who is that far removed from a black sheep or friend/family member who's fallen on hard times. Not even during good economic times. Certainly not given the way people friend one another on these sites.
Any grading of people based on social connections will drag nearly everyone down, potentially in a self-reinforcing cycle.(higher rates push more people into worse economic situations, lowering their credit score, reflecting negatively on their friends who now pay higher rates, etc)
If a bank wanted to raise rates, the bank could just raise rates. They don't do that because, if they raise them excessively, competing banks will undercut them. This same reason prevents them from using Snidely Whiplash Credit Scores ("Everyone gets a 20! BWA HA HA!"): if SWCS predicts defaults worse than FICO does, then competing banks will use FICO and steal the borrowers for whom FICO is more predictive than SWCS, letting EvilBank attempt to raise rates on the dregs of the barrel.
Yes, it's only an issue inasmuch as it's (nearly) uniformly applied. i.e. the risk is mostly of FICO scores being weighted by 'social' factors.
And my optimism that new more-accurate ratings agencies will appear to compete with profitably-wrong ratings agencies went out the window with the CDO mess.
Let them use whatever the hell they want. Either they'll be right (and have a useful credit rating score) or they'll be wrong, and lose custom to other banks. That's how a market works.
You have no God-given right to credit. You have access to as much credit as someone wants to offer you, and they compete each other such that the rates you get offered reflect the market-thinking of normal profit (as compared to super-normal profits) + default costs.
Of course you have no god-given anything, that's ridiculous. And so is the concept of rights.
But you do have a reasonable expectation as a citizen of a country that your common tax/output funded currency will be available to you on the same terms it is to others. Otherwise, why would you contribute to/use it?
This is already not the case in most places as all lending is done through predatory monopolies with privileged access to the central bank, and a central bank financed via government subsidy but outside of government (the people's) control.
Already we've got a toxic system that's not of much use to the people who pay for it.
9.5% is pretty damn good in Europe, I haven't really seen low APRs here.
Plus, grace periods are a rarity(more exactly I do not know of any Nordic nor Eastern European banks which would offer them). You use the credit card and you pay the interest from the moment you put something on the card.
I think US has the most competitive credit card enviroment.
I think you'd have to compare the various fees and fine print as well. The US has a great credit card environment for people who don't actually ever need credit.
It becomes considerably less great for people who use those cards as anything other than a lower-risk debit card.
What you are describing is just a fundamental quality of these types of risk assessment algorithms. For example, males pay more for car insurance than females, because there is a demonstratable correlation between being a male and the insurance company paying out more money to you.
This is true even for an individual that has been in absolutely no accidents. Statistically it is true that a male that has had no accidents still has a higher expected value for insurance payouts in the future than a female that has been in no accidents.
You as an individual is an unknown quantity that they cannot absolutely determine. There may have been completely legitimacy reasons why you failed to pay credit cards that cannot possibly occur again in your life, you should equally complain about that not being taken into account.
No one can perfectly predict the future (if they could, insurance would be pointless). They can only use information that they have to imperfectly model the future; both who you tweet and previous credit card payments are imperfect signals for what will happen in your future. It is true that how you paid your credit cards in the past is a much stronger singal; it is absolutely impossible that any credit evaluation is taking who your cousin is and your personal history as equals. Their models take into account that who you tweet is a much lesser indicator.
>You as an individual is an unknown quantity that they cannot absolutely determine.
well, we can imagine that given more info and better algorithms they would narrow the "unknown quantity" into the range much more narrow and thus less populated than "male, 22 years old, 00000 zip code". From a hundreds thousands peers to just a hundred of peers in the same risk level pool - it would be very different "unknown quantity" then.
The better they differentiate the higher profits they will get by offering lower quotes to no-risk ones while more intensely screwing ones with the risk. This is wet dream of the retail, insurance, etc... business - custom targetted offerings. Lower prices when it is really neccessary to make the sale and screw the customer by jacking up the price when it is possible. To do this they need to _know_ the customer. Thanks Facebook.
Excellent points, I could see a big benifit of these types of algorithms for people that don't have established credit scores. If as a bank seeing that a high school graduate knows many of my good customers, this would make me more willing to loan him money.
Social graphs can show these things. For example you deadbeat cousin who is a black sheep in the family probably has a very different circle of friends outside of your family than you or most of your family does. As such he could be identified as an out-lier. In fact I would not consider these algorithms worth while if they didn't do that.
I doubt this would replace a credit score but it may argument it. Or it might lead to a lender making further inquires. For example if you've been tweeting about how you "hope to blow tens of thousands of dollars in Vegas" it seams reasonable that would make a lender worry about lending you.
In the end I don't see these algorithms are very different from a bank in a small town where the manager personally knows everyone in the town.
If the algorithm is good, it will have a leniency for having a black sheep in your family- seemingly everybody does, and numerous demonstrably low-risk individuals I am sure have their black sheep as well.
"""If I have a deadbeat cousin who also happens to be the black sheep of the family, they may penalize me unfairly for his behavior."""
Yeah, like you're so much better than Matt "Glue Sniffer" Jameson, now that you made it in the big city. Really, is Des Moines as nice as you're making it out to be?
Anyway, when are you coming back to Idaho, Jim? We miss you!
P.S Matt is in jail again, if you can chip in for the bail, send me a message in FB.
"Fear" wouldn't be the word I would use, and I wouldn't say they're mirroring discriminatory results so much as approximating reality with some level of error. Reality is not egalitarian. Good approximations of reality will probably not be egalitarian, either. A nakedly discriminatory heuristic might be a better approximation of reality than "everyone is equal." A non-discriminatory heuristic might be a better approximation than that and also have the side effect of falling very unequally across arbitrary groupings of people.
For example, according to actual data I've seen, poor people really are disproportionately likely to a) have missed payments before, b) not repay your loan, and c) belong to certain ethnic groups. Some people may fit into one of these categories and not the others, but the correlation exists, so you can't clamp down on one without also measurably reducing the others unless you go out of your way to do so.
(Don't know who's downvoting, but I'm just stating pretty well-known facts. Don't take this to indicate approval — I'm just saying that, statistically, some groups do get the short end of the stick. What you do with this information is a different question entirely.)
However, the study also concludes that for a sample of black people statistically identical to whites, the approval rate is only 82% (compared to 90% for whites).
Why is more accurately assessing credit risk without discriminating by race the "ultimate nightmare"?
One example - down payment size for home mortgages. A low loan/value ratio strongly affects risk (a), it's verifiably blind to all protected classes (b) and is also correlated with certain protected classes (c).
Is it the "ultimate nightmare" for banks to use the loan/value ratio while evaluating creditworthiness of mortgage applicants?
It's very hard to argue against this. Either your social network is a good signal, or it's not. If it's not a good signal, the people who use this information are going to lose money--they will quite literally pay for being wrong.
But if it does work, then overall mortgage rates will marginally decline. Better information will lead to better choices, so mortgages will become less risky overall. Some people will suffer, but keep in mind that when those people oppose this, they are saying "I want to hide material information from the people with whom I do business; if they knew the truth about me, I would get a worse deal." That's fraud.
Yes, there will be false positives. And it's easier to visualize being the victim of one of those than it is to visualize the tiny collective improvement in human welfare that tends to result from better decisions.
I would be interested in an argument that applies in this specific case, but doesn't apply to the general class of rough but useful heuristics, like "Kids with bad grades who drive recklessly are probably less responsible than 40-year-old moms who drive minivans, even though there is some C-student with a red car who is safer than some particular 40-year-old minivan-driving mom."
It is easy, but it gets political. The sketch of the argument is "Banks should not be allowed to make judgments which negatively affect certain groups of people disproportionately even if those judgments are accurate, because it is contrary to social justice. It would be better if substantially everyone paid more and/or if banks were less profitable if it meant that access to homes/credit/etc was improved for protected groups at the margins. We have a special obligation to do this because of our collective responsibility for historical and continuing inequities which directly result in the fact pattern which tends to cut against the interests of protected groups."
n.b. Not me talking there, just summarizing a view which is very popular.
If that's exactly what happened, the market would have already adjusted; no loan officer is going to say "I know poor people's social networks will indicate that they're even less responsible than they look on paper. I can't wait for them to click the 'login with Facebook' so I can finally act on that knowledge."
The actual effect will be more nuanced. This would be better at differentiating between, e.g. "People who can afford to regularly drink Johnny Walker Blue Label" (good credits), and "People who actually do" (less responsible).
Overall, it seems better to create rules that efficiently allocate resources, and then correct for inequality after the fact. That's better than creating defective resource-allocation rules as a way to keep things equal.
And please note that if you're right, you're arguing that right now, the rich subsidize the poor in this way. (I know, I know, that sounds extreme. But "Poor people only get these interest rates because it's hard to tell that they're deadbeats given current information" has to be true for your statement to work, here. You pretty much have to pick one: either this is factually wrong, and the banks that do this will lose money; or it's morally wrong, but actually does work, and we should prevent people from acting on useful information in order to let poorer people gently defraud them. This is analogous to plenty of previously or presently disastrous situations, in e.g. mortgage lending, health insurance, and student loans.)
But if it does work, then overall mortgage rates will marginally decline.
Or the banks will just raise the profit margins.
Some people will suffer, but keep in mind that when those people oppose this, they are saying "I want to hide material information from the people with whom I do business; if they knew the truth about me, I would get a worse deal." That's fraud.
What about "my bank has no business spying on who my friends are or what I do on my free time"?
This raises the cost (possibly prohibitively, if the number of people who refuse to give out an account is so small that banks can outright refuse credit to them) to anyone who isn't willing to sell out their privacy, and more importantly, their friends'.
And of course, people like me who just don't have an account are outright fucked.
Banks are in a competitive industry; if their costs go down, they'll cut rates to increase sales, unless there's some implicit or explicit cartel behavior that keeps them in line. But if that were the case, you'd expect banks in general to be more profitable.
Your bank is in the business of figuring out how likely you are to repay loans. They'll probably ask you these questions, since answering them makes you a better customer. But refusing to answer puts you in a low credit-rating bucket.
Banks already use your transactions to figure out how creditworthy you are. If you want to avoid that, you can do all your business in cash, but you will pay for it if you ever want a mortgage. All they're doing is offering you the option: if your privacy is worth, say, 2% per year on a $100K mortgage, then go ahead. But for lots of people, privacy has value, but not an infinitely high value.
You can argue that it's unfair for your desire for privacy to imply that you have something to hide. But if you do, better blame the people who do have something to hide and claim that they just believe in privacy: if such people didn't exist, you would be able to maintain your privacy at a much lower cost.
Maybe you could use a real-world example. Let's say you're hiring an employee, and your employee casually mentions that he changed his name last year. "What was your original name?" "Not telling." "Did you do anything that would give you a good reason to change your name?" "Not telling." "Can you tell me who you used to work for under your previous name, and why you're no longer there?" "Ugh. Stop trying to violate my privacy. Just assume that I have good reasons not to tell you information that you would use to make a reasonable decision; it's totally unfair to lump me in with people who would do that to cover up something terrible they've done, or some unsavory associations they have. I'm not one of those people. Trust me."
A bank doesn't operate alone in a vacuum. As the number of people who have prime credit shrinks the competition to lend to those people will go up. They can't simply raise profit margins because there is always another lender out there who will be happy to take on a prime credit borrower.
I don't think that's practical. In an industry with very few players, it could work, but there are tons of small banks, credit unions, and online banks. Do you really think the big banks could convince every single one of them to just accept their share of the pie and stop trying to compete?
There's many small banks like you say, but the impression I get (I have not done the research to back this up) is that the few really major banks (i.e. Bank of America) have a huge market share. Again, I have not researched this, but just from day-to-day experience, it sure seems that way.
Edit: http://www.cardhub.com/edu/bank-market-share-by-deposits/
According to this site, the market share of the top 10 banks is about 45%. Those statistics are not highly precise but it illustrates the point I am trying to make.
I don't see how would they distinguish "doesn't have an account" from "doesn't want to give it because his friends are deadbeats", so I find it hard to believe that group will be more creditworthy.
A couple notes: lower credit scores mean higher rates. If a loan applicant is just as low a real risk as they were last month, but now has a social-signal-adjusted credit score that is lower and thus demands a higher interest rate, the bank will make more money.
Bad signals applied uniformly across the industry can be massively profitable.
Second, lowered risk hasn't had much impact on rates. Increased risk, as we saw banks take on during the bubble, led to very low mortgage rates. Whereas, absent federal programs to encourage refinancing, current rates are often higher than five years ago, for people of the same credit risk.
Another example of this would be the bankruptcy "reform" laws that made it very hard to discharge credit card debts. These have dramatically lowered real risk for US banks, but no corresponding drop in credit card rates has been seen. Again, contrary to what simple economics would predict, rates are often higher than they were before the reform for the same people.
My first reaction: "Why would I volunteer that information?"
Followed quickly by: "I don't have to; my less-savvy friends would. And I'm in their graph."
At which point, it's in my interest to disclose my own social graph, so that the bank sees that I'm actually connected to responsible people, too. Which means betraying those individuals' presence in my graph. Gah!
"Followed quickly by: 'I don't have to; my less-savvy friends would. And I'm in their graph.'"
That's actually a very good point. I'm not too worried about the stuff I write about on my own Facebook wall -- I know it's set to private, I don't rant, put offensive material, etc. What scares me is what other people write about me on their own walls with God-know-what-kind of privacy setting, the pictures that they tag of me, etc. Even if everything is set "Fort Knox" mode, you're still just one Facebook bug/vulnerability away from it all being revealed.
There was a BlackHat talk this summer called "Faces of Facebook" by Dr. Alessandro Acquisti [1] where he extracts a person's SSN just from an image of their face (by cross referencing Facebook and other things). Scary stuff.
After so many privacy setting changes, I see no reason why the guideline would now be anything but: don't put anything on Facebook you wouldn't want being made public anymore.
I mean, I have stuff on my Facebook that I'd rather keep to my group of friends, but nothing on there that absolutely has to remain within that group anymore.
After so many privacy setting changes, I see no reason why the guideline would now be anything but: don't put anything on Facebook you wouldn't want being made public anymore.
The previous two commenters' point is that this doesn't help you. You have to worry about what other people post about you.
And cut yourself off from the people you interact with there. Social networks have very high value. You can't expect people to throw them out -- they love them. This is why people talk seriously about regulating privacy handling, to prevent this sort of abuse.
They only have value that is voluntarily put into them. There are certainly young-ish people that for them, Facebook is their social world. On the flip side, there are certainly people who rarely visit it, and deleting their account is no more problematic than abandoning a random forum account.
Personally, I'm falling into the second bucket as I get older. I like seeing updates for the people around me, but if I deleted my account I wouldn't miss it.
>For people you do care about, you can always meet offline, or call.
This is an incredibly myopic worldview especially nowadays. I don't know about you, but online is where I do 99% of my socialization outside of the office. Why? Because phone calls are distracting and rude (when IM is right there and won't interrupt everyone), and meeting up in real life is something that requires a sometimes herculean effort of schedule juggling.
>> Because phone calls are distracting and rude (when IM is right there and won't interrupt everyone)
Why? If the other person is busy, they don't have to pick it up. Or you send them a text to make sure they are free (it's what I do). For close friends, I already have a pretty good idea when they'll be busy or free.
"""This is an incredibly myopic worldview especially nowadays. I don't know about you, but online is where I do 99% of my socialization outside of the office."""
Then I'm sorry to inform you, you are not doing much socialization at all.
If phone calls from you are taken as "distracting and rude" or if you see phone calls from others as "distracting and rude", then a) they don't like you and b) you are not a social person anyway.
And if a real life meeting "requires a sometimes herculean effort of schedule juggling", maybe you have your priorities wrong.
>Then I'm sorry to inform you, you are not doing much socialization at all.
And you know anything about my socialization how? Where did this backwards (and utterly ludicrous) idea that one can only socialize in person or via voice come from?
>if you see phone calls from others as "distracting and rude", then a) they don't like you
Are you trying to be as offensive and acerbic as humanly possible? Your bad attempt at snark aside, I'd expect a commenter to a site named "Hacker News" to have a more hacker-esque mind set. Having the phone ring is much, much more distracting to someone who is occupied on a mostly mental task such as coding than an instant message or even a SMS. My particular group and I tend to shun the phone unless it's either 1) super important, something that would justify the loss of mental state or 2) downtime on a weekend when we know the other person isn't likely to be occupied or even 3) asked ahead of time so the other person can clear whatever they're doing.
It's a no brainer. There is quite literally no reason to call someone when an equivalent electronic form of communication is less distracting and just as effective. Knowing someone is working and choosing to impose yourself over whatever they are doing for the purposes of small talk is very rude.
>And if a real life meeting "requires a sometimes herculean effort of schedule juggling", maybe you have your priorities wrong.
I'm happy you have all the time in the world to organize as you see fit. I am not so lucky.
"""And you know anything about my socialization how?"""
Well, duh, from YOU, when you stated: "online is where I do 99% of my socialization outside of the office."
"""Where did this backwards (and utterly ludicrous) idea that one can only socialize in person or via voice come from?"""
I don't know, never heard of that idea. Mine was: if you're doing "99% of your socializing online" there you're not doing much at all --especially if people you could contact think phone calls from you are "distracting and rude".
"""I'd expect a commenter to a site named "Hacker News" to have a more hacker-esque mind set."""
No, I don't go for sheep mentality. Try ESR's blog for a truly hacker-esque mind set.
"""Having the phone ring is much, much more distracting to someone who is occupied on a mostly mental task such as coding than an instant message or even a SMS."""
I'm a programmer myself and have lots of programming friends, from work, for old workplaces, from uni, you name it. No one has a problem answering their phone --as long as you don't call them every other hour.
There are tons more distractions in a day than a friend calling you (meetings, for one) --and you wouldn't call them at work time, anyway. OTOH, if all their/your time is work time, i.e if 9pm you're at work coding, then, they/you're not really socializing anyway, you're just commenting on other people walls --other people you will almost never see in person or interact with.
"""I'm happy you have all the time in the world to organize as you see fit. I am not so lucky."""
I sure don't, but if a meeting in real life took herculean effort, I'd consider my working schedule a failure, and would try to find ways to amend it.
How does "doing most socializing online" equate to "there you're not doing much at all" in your mind? Again. Very wrongheaded.
>No one has a problem answering their phone --as long as you don't call them every other hour.
It's not that there is a problem answering their phone, it's that it's much more polite to either carry on your conversation via IM if it doesn't require voice (and I have a hard time thinking up things that do), or at least ping them first before you start burning up their phone.
>...you're just commenting on other people walls
Did you forget about the entire IM framework that facebook holds? Also, wall comments are immediately flashed to the other person if they are online. Carrying on public conversations is a common occurence.
I think khafra's point was that not-disclosing your Facebook info will become in the future, what not-allowing a credit check is now.
That is, today, only people who are big credit risks would try to avoid a credit check when applying for a loan -- because a credit check is an expected thing.
In the future, linking your facebook account will be an expected thing in applying for a loan. So banks will assume anyone not allowing it is likewise a credit risk and thus ineligible for a loan, except possibly at usurious rates.
To me it seems a lot more likely that not sharing Facebook info would result in slightly higher interest rates, not zero credit.
My thinking is that the Facebook info will not actually be more useful than things in a traditional credit score, so it will only be used in addition to those things. That leaves people with no payment history, but historically banks have been plenty willing to take a try it and see approach with those people.
Another great way to "improve your credit" is to save.
If you show up to buy a house with a 50% down payment, which you saved in your interest-bearing money market fund, I bet that payment will more than make up for a lack of credit history.
My social graph doesn't tell you anything useful about me.
What it tells you about is people who like the books I write.
Someone sends me a friend request? I auto-friend them unless they're an obvious spambot. It doesn't mean they're my "friend" or someone I know IRL; probably 80% of my FB "friends" live in parts of foreign countries I haven't visited. I don't use FB for social purposes, I use it for marketing communications.
(EDIT: Paradoxically, it turns out that many of my real friends aren't hooked up to me via FB. And none of my relatives -- except one nephew -- even have FB accounts.)
This wouldn't be a problem except for Zuckerberg's sociopathic insistence that we all have just one unitary identity. Groan.
The wonderful, terrible thing about this is it literally doesn't matter whether the social graph says anything useful about you. It only matters that it says something which, when added to existing data sources, is a tiny sliver more accurate than the bank's internal risk scoring when aggregated over 100,000 people who happen to include you in them. If you happen to be misjudged by the algorithm, that isn't in itself a problem.
If I were writing a social network layer to a creditworthiness algorithm, the first thing I'd do is create some kind of taxonomy of friend networks. Got 500+ friends? See if the Google results for your name indicate fame (i.e. you show up in title tags on Amazon, IMDB, or the NYT). And bam, reduce the social networks' weighting.
Although I would be willing to bet that a) your fans will have above-average credit scores adjusted for age, and that b) authors whose fans have crappy credit are themselves more likely to have crappy credit.
In the extreme case, if you're a law professor and your FB friends are all attorneys who loved your book, you're probably a good credit. If you wrote a guide to how to fool your parole officer and your FB friends were all fans of your book, your odds of default might be pretty good.
No heuristic is perfect, but the question is whether this situation is common enough to swamp the general informational effects. So, three possibilities:
1. Adam Sandler will pay a fractionally higher interest rate.
2. The heuristic will route around this situation.
3. Banks that blindly apply this heuristic will lose money on Sandler because they make a comparatively unattractive offer; the bank that lends to him will get higher market share by being less cautious or more careful in this instance.
Keep in mind that we're talking about an edge case among edge cases. Authors are a tiny minority of social networking users. And authors whose fandom is a contrarian indicator of their creditworthiness are even rarer. Actually, it would more likely work in the other direction: I bet poets published in the New Yorker have very creditworthy friends and still have trouble paying the rent.
So in a scenario where social credit becomes a part of your economic health as an individual, what happens to friends and family that declare bankruptcy? They become some sort of pariah, avoided on Facebook and Twitter?
Or helping someone becomes a dangerous proposition, because they'll likely add you to their social graph, dragging you down. It'll be just like those social clubs that determine what you're allowed to do in your private life and who you're allowed to hang around if you wish to remain a member.
Stratification would occur automatically out of fear, as each clings desperately to their social position and tries to keep their social graph pure now that it has real-world consequences.
This right here is my single greatest fear of banks knowing/using this information. If I befriend an undesirable (because I see past society's assumptions/the rough times this person has had in their life/whatever), or I care for an undesirable, I am punished. Of course, I would have to weigh if it's worth it (it probably is), but the fact that things like this may have to be considered is just depressing and wrong.
Heaven help the preacher that friends his congregation. Not everyone comes from a rosey past.
Back in the days of Old Man Potter, the bank solved this problem by being local and the banker actually was your friend, so he already knew your social graph.
Yes, but that banker used heuristics like "Tom is a good white Christian who goes to church every Sunday, of course he is good for the money" and this algorithm can be proven not to, even if it comes to very similar credit decisions as Bill the Biased Banker.
This is part of the reason why credit scores took over the world in the first place: they're demonstrably blind to protected classifications. (They're also more accurate than Bill the Biased Banker and orders of magnitude cheaper to run and execute virtually instantly at 3 AM in the morning, but if their only feature was "As effective as traditional underwriting but immune to anti-redlining legislation" they'd still have taken over the world.)
Disparate Impact is not a real explanation, because it's equivalently useful at any stage of the argument. For example, "Disparate Impact" might explain why banks don't lend so much to group X. So if we find some good underlying variable that explains why banks would be disproportionately unlikely to lend to group X, "Disparate Impact" now explains that factor. And when that factor gets explained, it explains the next factor.
Disparate Impact is just "God of the Gaps" for discrimination.
The point was that in a small town the banker knows who you are and can evaluate your risk just by being acquainted with you. If he trusts you, he might just be your friend, if he doesn't then he is probably not your banker.
(Yes the word "friend" is a bit hyperbolic in this case)
It also tweets and updates to Facebook -- 'I'm using Lenddo!' -- on your behalf when you register without asking first. When I asked them why, they said that was a cultural difference -- that people in the Philippines 'appreciate' that feature.
"What happens if you cannot find a bank that gives you a loan without insisting that you give them access to your accounts?"
Then you either go to another bank, or maybe you don't get the loan from any bank. If you don't get the loan, you change your plans to save up cash, or you change your goals.
Either most people will go along with this (likely), or banks will have to decide if a smaller loan pie is good business.
The implicit assumption here is that judging your credit score using your social graph will give the wrong answer: as in either claim you are a deadbeat when you're not, or claim you are trustworthy when you're not.
But, judging from other stories here and elsewhere, your social graph does seem to yield mostly accurate information about you. So, most likely, you are likely to be tagged as a deadbeat or not correctly.
More meaningful, I suppose, is for those of us that are very careful about social media. I have a Facebook account, but use it very little. However, it has come in very useful in that long lost friends have been able to get in touch with me through it. I must admit, I have never really initiated that myself (ie. go search for someone). So, am I likely to be judged incorrectly solely on the basis of being a social media avoider; that is, are the banks going to say hey ignore social media stuff for this guy, or are they going to say, loners avoid social media and loners are likely to be bad credit risks?
I am definitely a member of the group that almost instinctively react negatively to the use of social media for data mining like this. I am also aware that I'm old enough that I might just be an old fuddy-duddy. I wonder how many articles were written about the loss of privacy when telephones started becoming popular and when the white pages were introduced.
I'm probably going to go to downvote hell for this, but I need to say it; I'm massively disappointed startups are still using their energy and talents to service the loan industry. It's 2011 - have we learnt nothing from the past 3 years? Build value, don't destroy it.
Selecting qualified people for loans is a valid industry that promotes growth. The goal is to loan the right amount and that the person will pay it back. If you can do that accurately and loan to people who would fail normal tests then you've created significant value.
What if the person in receipt of the loan was selected with perfect accuracy but then his/her circumstances changed due to no fault of their own?
No loan is a "good" loan. Loans facilitate the reallocation of money. No net value is created and for the majority "value" decreases in fact.
I'd challenge the "leads to growth" assumption too but I'm on iPhone and I don't wish to hijack the thread. Essentially, it does not lead to sustainable growth for the majority (or the economy for that matter)
A loan is a transfer of risk, and a way to engage in growth faster than otherwise possible. Without loans (or investments, which are similar but involve a greater transfer of risk), any new venture would need to first save enough money to a) carry out the venture and b) survive if the venture fails. With a loan, the bank gives the capital right away, and assumes some of the risk - but takes a percentage if the venture succeeds.
Now, this does create value if done properly. Because the new venture (whether it be a new business, expansion of an existing one, or whatever) happens _right now_ instead of 10 years later, there's significant savings in opportunity cost. The bank simply pockets part of this savings in exchange for its assuming the risk of losing some or all of the money it lent.
It's only when the process screws up, and the bank misjudges the risk - or when the borrower misjudges how much they can repay without undue hardship, that problems occur. These are not failings in the idealized form of the moneylending system, but rather imperfect information (the former) or human shortsightedness (the latter).
Producing value is an activated process[1]. Without money, the investment needed to produce value can't be made, and the value that would have been produced over the lifetime of the product or service is lost to society.
The entire point of a loan is to reallocate money to people who need it temporarily. Without loans, only the rich could start businesses. This is especially relevant outside of the software sector, where the costs of things like factory tooling cost significant amounts of money.
There are lots of loans that shouldn't be issued due to no fault on the person being invested in.
For instance, I've been working on opening an icecream shop for weeks and need a loan to finish the preparations and a bigger better icecream shop opens next door. Through no fault of my own, I am no longer a good investment.
It is your fault if the bigger better icecream shop opens next door and you still persevere with your original plan. That suggests that you personally are a bad investment (not just your original business plan.)
I would be more likely to give you the money if you needed five times as much, because you had decided to sell pies or pizzas instead.
I Agree with dan. another way to look at loans is like funding for your startup. Just like the credit score, vcs give you a score on how likely it is that you will yield a return. There is not anything wrong with that. This is a fundamental part of any economy. Investment for people who can use it to create value.
2008n just showed what happens if you don't access the score correctly.
The economy isn't controlled by one or two startups who luck out - its controlled by the spending power of the average person on the street. If they can spend, everyone benefits. Loans help them spend, but the consequences of taking on loans they cannot long-term (due to ignorance, bad loan selling or change of circumstances) afford to service means they stop spending. And where they stop spending, us entrepreneurs run out of money. Loans are the antithesis of value creation, as I added in my other comment.
Same applies to small businesses and even tech startups. Just think what'd happen to our industry if angels started exercising the "debt" part of "convertible debt". Lucky angels are so nice ;)
I'm going to have to disagree. When depositors decide to save and defer consumption, entrepreneurs notice this (due to interest rate decreases) and can invest it to increase production. In general when the savings rate goes up, interest rates go down, and we see a shift from consumer goods to capital goods.
Taking out loans to go on vacation, etc is not a good use of the money and will hurt someone.
Taking a loan to invest in a business, fix a leak, etc will create value either by creating new opportunities or preventing catastrophic failure (e.g. a stitch in time saves nine). This is why pay day loans aren't evil, if for some reason you had an unexpected cost and won't be able to make a mortgage payment or truck payment the penalties could be quite severe, and thus a small loan to get over that bump is a fiscally rational choice - unfortunately many people borrow too much or too often and don't have a plan to live within their means.
But now the data available to the credit bureau consists of you being friends with others, then unfriending them just prior to applying for credit. Which sounds like an intent to deceive, which is worth -200 points on your credit score. You didn't think unfriending people erased your historical association with them, did you? "Deleting" data is so 1995. Facebook has never deleted anything, and they're not going to start. Google may be partially anonymizing some old data, but my guess is it isn't really anonymous - probably Google can reconstruct everything you have ever searched for, ever.
Why are we all assuming people would naturally have a large social media presence in the first place?
If I have a 790 credit score and no Facebook account, do I get a higher rate? Now you're looking at discriminatory practices based on the fact I don't engage in social media.
This is a VERY slippery slope these industries are going down.
Articles critical of the loss of privacy that comes along with social media often come up with this type of scaremongering. 'If you know someone that has bad credit, then you won't be able to get credit either'. Well, if your relationships do actually effect your ability to repay your debts, then banks would be right to be at least a little more wary of giving you credit - amd you should not be trying to overextend your credit.
I would have said that the undesirable practices that are mentioned - such as redlining - are the result of using crude, discriminatory heuristics rather than the result of having too much data about customers. This isn't necessarily a bad development - it could enable banks to lend to more marginal borrowers if they could see they had a strong support network. Clearly, if you have a good conventional credit record, then your social credit will hardly matter. Banks that use this new source of data stupidly won't do well.
I think half of my facebook friends are people whom I don't know in real life. On twitter it's probably 80%. Many of my replies and retweets are for people whom I've never met. So they won't find out a lot unless they get clever, which could be time consuming.
I'd like to see actual evidence that a few bad friends are a good indication of your own credit rating. Frequency of posts, number of new friends/contacts in the last month, grammar/spelling -- all might be better correlations to your paying debts.
The article is alarmist for sure. I highly doubt these startups centered around this activity will outlast the inevitable death of the platforms they're attached to.
Isn't this saying you are guilty by association? I see this as an infringement on my civil liberties.
This fails to take into account the element of CHANGE. Change that is as much a function of time as it is of a person's choice and circumstance.
The idea may succeed; hell, it WILL succeed given the nature of financial institutions and the online social infrastructure that exists today but it will be an aberration in the name of progress.
Car insurance applies to the skill of driving. And the part mandatory by law is third party insurance. So essentially, car insurance is not for your protection, its for the person you hit. The concept of owner's insurance is so you can also pay for your own car after running into a pole - this is optional.
Withholding financial goods from a person based on their social interaction is different from suspending their driver's licence because money is a need and is directly related to the very survival of a person. Money, in our society, is a very fundamental requirement; driving licence is not. So this idea imposes a very real threat on my very existence. And thats why its an infringement on my civil liberty.
Judging a person's financial aptitude based on their social actions is dangerous. Not to mention the fact that social interaction isn't currently scientifically quantifiable and so all the conclusions you draw from the data are essentially opinions of the experimenter, nothing more.
I love how we're all being reduced automatons thanks to statistics and I especially love how programmers seem to have a data mining fetish that will only help governments, corporations and banks, the same groups that repeatedly screw things up.
Also, won't some of this count as discrimination based on age, race, gender, religion, political beliefs? At least in some tangential sense?
This goes both ways. If it becomes commonplace, there will be a business in SEO'ing your social media profile. I wouldn't be surprised if a large portion of facebook will consist of networks with good credit scores all friending eachother and blogging about savings tips.
How about the TV shows you watch, the books you read, and whether you call things "Grape Juice" or "Grape Drink". The problem with bad Fico is that it in itself can create self-fulfilling prophesies. Just look at Italy.
If this were to get big, the industry to game it will be even bigger. Pay $500 to friend some high-credit-rated people on Facebook to get a few points off your loan. Then un-friend them after the loan is established.
Its an amazing opportunity for brokers and ilk geared for risk to join cracker circles privy to lenddo et.al algo exploits, creating a credit-metric marketplace. Game on.
The good news is that you don't actually need credit. Rent from someone you meet on Craigslist, spend only what you earn, ride your bike or use public transportation (to avoid mandatory insurance).
To an extent this is true. There are still likely to be events in which your credit score is queried: renting from someone who's not a friend (or getting your own place), unexpected medical expenses, especially when uninsured, applying for a job, security-related background checks being implemented (say, at client request) at the job you've already got ....
It's possible to live with very little exposure to Facebook and non-anonymized social media, the consumer credit system, and the like, but it's difficult to eliminate this entirely.
At the same time, this trend speaks to a larger problem: credit scores aren't as useful as they used to be, and/or creditors are increasingly risk averse.
It occurred to me after the 2000 crash that credit scores had limited predictability when the real factor was whether or not someone had an income stream. Credit scores mattered a lot in an age of easy credit, which had a lot to do with getting us into our present mess. Both may be much less prevalent in the future. Or not.
I had a harsh experience while on vacation recently.
In Miami, I was utterly and completely refused a rental car because I didn't have credit history. Never mind that I could buy one of their cars, cash. They didn't want to hear it.
I don't normally rise to your mocking/trolling/whatever, jrockway. I am glad you are content with your life and transport choices.
In the past, I have never had problems renting cars. I rented one in Mexico the month previous, no problem. But now there is another requirement for car rental in the US, which is hard to acquire.
It was massively inconvenient to find this out in the middle of a trip to Miami, which has virtually no public transportation or taxis, and spread out over nearly 80km.
You have a point. Without credit, much small business would simply not be able to exist, or have ever existed in the first place. It's one of our fundamental paths for economic mobility.
Strictly speaking with a restaurant your largest expense, rent, is ongoing rather than upfront. Your point in general is valid, though I would argue that for someone truly motivated to make a point, it's not impossible to start with smaller businesses (incl. non-software businesses) or a bunch of savings and progressively work your way up to kick-starting larger business.
They may find this useful at first, but if they weigh social media heavily wouldn't it be too easy to game to be useful in the long run? It isn't that hard to have 2 Facebook or twitter accounts.
"I would like to be able to run an antivirus style application on FB that identifies relationships that are a threat to my credit profile, career prospects, and caste. I want to know who to ditch."
Who wants to buy an invite to my high-roller social network? We promise to weed out those "untouchables" who are losing their jobs and homes!
Honestly, it would only be a matter of time before we saw entirely fabricated social groups. Unless social networks start requiring photo ID/SSN to join.
Not to mention the potential this would have to further skew wealth distribution in favor of the rich while strengthening the barriers that already prevent upward economic mobility.
Reminds me of long-forgotten blog post I read where someone claimed they were able to raise their credit score by subscribing to affluent lifestyle magazines, luxury catalogs, charging small purchases from Neiman Marcus and Sacs Fifth ... just creating a trail of data that would give the appearance of being in a higher income bracket produced a lot of interesting side effects.
The thing most people don't realize is that your credit score is mostly an indication of how much the bank can make off of you, and your income. High income basically always gets you a high credit score, and making minimum payments also gets you a high credit score. Lets say two people who both have the same income, the person who pays their debts off fastest will have the lower credit score.
It's pretty easy to get a high credit score by maintaining a balance on a high interest credit card.
People that use facebook don't care. They would rather use facebook than have privacy, thats the bottom line. To them the benefits on facebook outway the problems.
For most people if you told them they would die in 10 years if they continued to use facebook, they would still use facebook. For a lot of websites today and apps, you can't even login or do anything without a facebook profile.
Find me one person that is outraged and dropping their facebook account in light of this information.
On top of all that banks aren't lending money nowadays anyways.
That's pretty obviously not true because "what they care about" can change a lot.
"Facebook is using face recognition!" = OK, no huge deal.
"Banks are using your info for credit scores!" = a big deal.
If someone has those responses they aren't being inconsistent. "Privacy" has a variable definition, so "Facebook users don't care about privacy" makes no sense.
Valid point, but still accepting to disclose some private info is still somewhat different to accepting to die in 10 years time for using a service. If that were the case, FB would be gone in no time and G+ would finally rise ;)
http://news.ycombinator.com/item?id=954276
[Edit: The article says the ultimate nightmare is the banks using this to access data that they can't ask you for on forms. That is unlikely. What they'll do instead is do exactly what credit scoring does: develop an algorithm which a) improves assessment of risk and b) is totally, verifiably blind to all protected classes which c) happens, as a side effect, to correlate very strongly with membership in certain protected classes.]