“Financial services is about to have its Napster moment," says an entrepreneur quoted in the October issue of The Banker, meaning that it is about to go through the same kind of disruption as the music business did with the advent of online music downloads.
But he is not referring to the usual suspects: disrupters such as Apple, Google and PayPal whose presence or anticipated presence in the payments space threatens to undermine the banks and will no doubt be a source of debate at next week’s Sibos 2014 meeting in Boston.
He is referring instead to another banking building block: credit scoring.
The old model of credit scoring is creaking, according to this new breed of lender, and is ready to be replaced by a contemporary system based on a person’s social media data. Facebook and LinkedIn profiles, Twitter activity, Facebook friends – these will all count towards a person’s credit score in the new world.
And while some may have privacy concerns, advocates point out that this latest approach is enfranchising entire sections of the world’s population who never had access to credit previously.
These are people without a formal credit history such as the growing middle classes in emerging markets, the younger generation in developed countries and even the poor in emerging markets who are earmarked for 'financial inclusion' initiatives. That’s a lot of people and a huge business opportunity if the players in the market and, eventually, the banks themselves can get it right.
As one commentator points out in The Banker article, credit bureaus cover less than 25% of the world population. Of this number about 60% to 70% of people are covered with outdated information.
But the social media credit scorers still have to perfect their product. One wrinkle is that certain data points which count as a positive for credit under the old method – such as being married – count as a negative in the new system, and no-one seems to understand why. Eventually the data crunchers will work this out and produce a system based on sense as much as data analytics. Then we really will have a Napster moment.
