One of the themes of from last week’s Underbanked Financial Services Forum in San Francisco was the emerging relationship between social media and consumer finance.
More than a few startups are trying to use the social networks of consumers to help make better underwriting decisions or to ease the process of collecting debts.
I will not attempt to predict how well these ideas will lead to lasting profits but I do think it is worth acknowledging that these companies are broaching uncharted territory with regard to consumer protections. In some cases, the business plans proposed would violate the law if they were done through traditional media – in person, on the phone, or through the mail. No one knows how social media will create an opportunity for regulatory arbitrage.
I spoke briefly with an upper level executive at a small-dollar credit company about this practice. I don’t have the exact quote, but his general response was something like this: “Well, I don’t know how they are going to do that in the United States. Maybe in other countries where the same laws do not apply.”
Sociogramics (“returning character and community to financial institutions”) is one example among many. Sociogramics uses information that it gleans from the LinkedIn and Facebook identities of their loan applicants. Here is what Arjan Schutte, a partner with Core Innovation Capital, says about Sociogramics:
“Why has no one figured out a way not just to do leadgen with social (my mom can do that!), but to actually use our online social media lives to bring back what the community banker of yore did: really understand his customers? Sociogramics, led by the god-father of online dating, Match.com founder Gary Kremen, does just that”
The logic of Sociogramics is that a LinkedIn account reveals information that can bridge the gap on many of the loan applications of the underbanked. If your LinkedIn profile gives a direct connection to your supervisor, then the company can learn more about your future financial security. Sociogramics invites those references to act as sponsors of an application.
“Rev gen” from Sociogramics may come from third parties (banks, debt collectors, retailers) that want to use social media data to enhance their efforts to understand their customers.
Lenddo uses data offered by consumers to make loans in the Phillipines and Columbia. Lenddo is attempting to take micro-finance to scale. Those familiar to microfinance will remember that it uses the leverage of community trust to encourage repayment. Community leverage has proven to be very powerful in getting people to repay their debts. Most reports indicate that more than 90 percent of all loans are paid back on time and in full.
Lenddo’s underwriting rewards applicants that provide the company with an extensive set of personal references. Lenddo calls this a “trusted network.” Linking an application to social media accounts is one of the most powerful methods to build a Lenddo score. Lenddo does not require capital.
“We believe your reputation with your family and friends is the best incentive for on-time repayment…You authorize that your Trusted Network can be made aware of the details of your loan application – when you applied for the loan, how much you applied for and your payment history.”
Lenddo does not take passwords for the social media accounts of their clients.
The only problem is regulatory uncertainty. It is very possible that regulators will see the use of social media in debt collection as a violation of the Fair Debt Collection Practices Act. Traditional debt collectors have run into problems with the FTC when they do things like call an employer about the debts of a staff person or when they knock on the doors of a debtor’s neighbor. Social media is one step removed from those kind of actions.
There may be one saving grace for social media debt collectors. Section 805 of the Fair Debt Collection Protection Act says that debt collectors may not contact any third parties to discuss the payment record of a consumer, “without the prior consent of the consumer given directly to the debt collector.”
“Imagine if your Mom comments on your Facebook wall,” writes WSJ reporter Lora Kolodny, “or sends you a loving direct message on Twitter, when it’s time to pay your credit card?”