There's a new credit score in town, and it's all based on how big your social network is. Lenddo, which reached $8 million in funding last month, uses information sourced from your online profiles to measure your creditworthiness.
In a world where risk is typically measured by past financial habits, this start-up hopes to disrupt the loan industry in the developing world, starting with the Philippines and Colombia. There, members of the emerging middle class don't have the accounts and payment history required to gain access to credit. What they do have is an online reputation, and that's what Lenddo uses to assess creditworthiness.
Here's how it works: First, you create a profile and upload a photo. Then, you connect your social networks and invite your friends and family to create what Lenddo calls your "Trusted Network." From there, there are a few other requirements you have to meet in order to qualify for a loan, like being a salaried employee with your own bank account.
If you qualify, Lenddo shares some of its $8 million in funding with you in the form of a loan, provided you use it for a life-improving purpose, such as education, a medical emergency or home improvement. These loans are distributed using local lending companies.
The Good
Lenddo's goal is to give the same opportunities to the emerging middle class that those with good credit have. It does this by using complicated algorithms to analyze a potential borrower's social and email networks. Its algorithms are meant to measure truthfulness, behavioral and demographic clues and a sort of "PageRank for people" (a la Google).
These loans could be the perfect fit for an individual who wants to take a career-development class, but doesn't have the cash and can't qualify for a traditional loan due to a lack of credit history. He'll be able to leverage what he does have -- a connected network of online friends and colleagues. According to Lenddo, that's all you need to prove you're a trustworthy and honest person.
This could be the dawning of a new insightful way to evaluate a consumer with no credit history. If Lenddo makes it to the U.S., it could benefit the nearly 50 million Americans who currently have "thin files" -- little or no established credit history. Globally, there's a huge potential market; Facebook alone currently has nearly 700 million members worldwide, according to stats tracker SocialBakers.
The Bad
For those who take out Lenddo loans, there are certainly risks. Since your Trusted Network of at least three people is leveraged to secure you a loan, those people also receive Lenddo scores. If you fail to pay back your loan, not only will your Lenddo score suffer, but your Trusted Network member's scores will also be affected, which will reduce their chances of getting approved for a Lenddo loan if they ever apply for one.
Maybe that's a good thing, as it encourages your friends and family to help keep you accountable. Your Trusted Network on Lenddo will be able to see the details of your loan: when you applied for it, how much you received and your payment history. If you fall behind on your payments, whoever is in your network will know and can nag you about it.
The (Potentially) Ugly
Risk of embarrassment aside, there are other potential impacts of this new style of credit scoring. For now, borrowers have to give Lenddo permission to access their social sites, including Facebook, Gmail, Twitter, LinkedIn and Yahoo. That's a good thing. But with the changing landscape of the web and lending, this could over time convince banks and lenders to use social media data as a business tool themselves.
"Banks want to focus on bringing in the most qualified customers," CreditKarma.com CEO Ken Lin observed in Mashable. "Social media presents this opportunity."
If Lenddo's business model proves successful and it moves on to larger markets, banks will take notice because it could help them tap into a previously credit-less -- but salaried -- market. Could the future bring banks developing their own type of "social reputation credit score"? Perhaps, but only if it's proven to be a profitable method. That's where Lenddo could serve as a market test, free of charge to the banks.
The future of Lenddo and its crowd-sourced credit scores is uncertain. One thing's for sure, $8 million worth of investment funds says Lenddo is a company to watch.
Bethy Hardeman writes on credit, personal finance and the economy for CreditKarma.com, a free credit management website that helps more than 6 million people access their credit score for free.