Credit scoring using alternative data has been lauded as a way to end financial exclusion. But tougher data protection rules could bring everything to a halt, writes Brian Caplen.

Section 3.15 of Facebook’s platform policy states that data from the site should not be used to “make decisions about eligibility, including whether to approve or reject an application or how much interest to charge on a loan”.

In November 2016, Facebook cited this policy when it stopped UK insurer Admiral using Facebook profiles to calculate car insurance premiums. As the scheme required users to opt in and was likely to lead to discounts, some have suggested Facebook was more concerned in keeping the data for itself than it was about privacy. 

But the trend is starting to run in Facebook’s direction. EU data protection agencies recently issued guidelines stating that employers require a legal basis in order to check the social media profiles of job applicants. These guidelines are likely to influence how the EU’s General Data Protection Regulation due in May 2019 is implemented. 

If this is the rule for employee profiling, then why not apply the same measure to banks assessing borrowers? As banks are increasingly using social media and other online data sources as a way of providing the instant loan decisions that the market demands, this could prove a serious obstacle. 

In fact, many have hailed this as a breakthrough in getting credit out to those without credit histories living often, but by no means always, in developing countries. According to a MasterCard paper on Enabling Financial Inclusion through ‘Alternative Data’: “Globally, almost 50% of adults are financially excluded… Promising potential substitutes to traditional data are emerging that can make financial inclusion possible.”

These include pre-pay and usage history from mobile phones, payment and e-commerce transactions in the case of small businesses, and social data as pioneered by firms such as Lenddo, Kreditech and DemystData. 

What the privacy campaigners seem to be missing is that credit scoring in this way is no different in essence from old-fashioned credit scoring, whereby your details are kept on record at a credit bureau or where the bank asks for employer and other references. As so often with the internet, the channel is the innovation not the task. 

Of course, there needs to be controls and no one should be forced to reveal their Facebook profile, for example, to get either a job or a loan. But the danger is that privacy campaigners manage to stall a process that has the potential to improve the economic prospects of the disenfranchised.

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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