With more services than ever collecting your data, it’s easy to wonder why anyone should care the most. This is why. Because people are starting to get ideas like this.
In a new blog post for the International Monetary Fund, four researchers presented their findings from one working paper that explores the current relationship between finance and technology, as well as its potential future. The researchers stare into their crystal ball and see the opportunity to use the data from your browsing, search, and purchase history to create a more accurate mechanism for determining the creditworthiness of an individual or company. They believe that this approach could result in more lending to borrowers that could potentially be refused by traditional financial institutions.
Essentially, the paper is trying to grapple with the emerging idea that the institutional banking system is facing a serious threat from tech companies such as Google, Facebook and Apple. The researchers identify two key areas where this is true: technology companies have better access to soft information, and messaging platforms can take the place of the physical locations that banks rely on to meet customers.
The concept of using your web history to provide credit assessments is framed around the notion that lenders rely on hard data that can obscure a borrower’s dignity or paint an unnecessarily bleak picture in troubled times. Citing soft data points such as ‘the type of browser and hardware used to access the Internet, the history of online searches and purchases’ that can be used in assessing a borrower, the researchers believe that when a lender has a more intimate relationship with the history of potential customers, they may be more willing to give them some leeway.
“Banks tend to soften credit conditions for their long-term customers during recessions,” the authors write. This is because they have a history and relationship with the customer. Now imagine the kind of intimate history Facebook could have with a borrower and suddenly it does digital money initiative is starting to make more sense.
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But how would all of this data be processed in credit ratings? Machine learning of course. It’s black boxes all the way down.
The researchers acknowledge that there will be privacy and policy concerns regarding the inclusion of this type of soft data in credit analysis. And they don’t explain how this could work in practice. The paper is not long, And his worth reading just to dwell on some ideas about the future of fintech and why everyone seems to want to get in on the payment game.
As it stands, getting the really fine soft data points would likely require companies like Facebook and Apple to relax their standards for associating unencrypted information with individual accounts. How they could share information, other institutions could be its own worm. And while the researchers sound optimistic about the advantages technology companies have over banks, they cite business-to-business lending as a game that traditional institutions continue to dominate. “However, this may change with the rise of cloud computing, which may allow large technology companies to create B2B ecosystems with large enterprise customers,” they write.
Yes, the idea of every move you make online to enter your credit score is spooky. It may not even be possible in the near future. The IMF researchers emphasize that “governments must monitor and carefully support the technological transition in the financial world. It is important to adjust policy accordingly and to stay ahead. “When was the last time a government did that?