Social Credit

Let’s look at another example and talk a little bit about credit, a pillar of the modern financial system. For many people in the world, credit is part of everyday life, ranging from credit cards to borrowing money from a bank to buy a home. 

For many, the ability to access and use credit is largely defined by a credit score, which ultimately gauges how likely a particular person is to repay the money that they have borrowed. Conceptually, the better the score, the lower the risk. 

So, in the United States, we have something called a FICO score, named after its creators, Bill Fair and Earl Isaac, who created the Fair Isaac Corporation, which initially produced these scores. To calculate the FICO score, different financial data, such as bank account information, existing debt levels, payment history, and other related information are used together to calculate a credit score. Many other countries now also have their own version of these scores. 

In theory, the use of these scores is important because individuals can more freely access capital and other financial products since banks and financial institutions are more willing to lend money and likely at lower interest rates because they have this credit information. So, a mature credit system makes accessing capital easier.

For many in Hong Kong, the UK, or other countries with developed financial systems, the notion and use of credit is quite mature, given, really, almost an afterthought. 

But, what if there was no credit score for a financial institution or bank to assess your risk when you needed to borrow money? How might that impact you? 

Well, that bank may require you to pay a really high-interest rate or pledge a lot of collateral, even for a really small loan. Or, they might even require both. It was due to such challenges that microfinancing organisations, like the Grameen Bank, founded by Muhammad Yunus, were formed. 

Now, the issue of credit really becomes apparent when you consider that there are approximately two billion people in the world who are unbanked. So, this basically means that roughly 25% of the world’s population doesn’t have a bank account. Without access to the financial system, which, for most people in the world is through a bank, then, of course, it’s extremely difficult to develop a credit history and a credit score. The lack of this information makes it difficult for the unbanked to access credit, which means borrowing money, leaving many mired in the same financial situation. 

So, the exciting thing is that FinTech, paired with mobile technology, can help solve this conundrum. With the rise of mobile phones, and particularly smartphones, and the shift in digital banking, there are a lot of opportunities. So, for many of today’s unbanked, most of them may never, or at least rarely, access a traditional brick-and-mortar bank. But increasingly, many will patron digital banks, even online-only banks, and other digital financial services via their mobile device. 

This is, and will be, incredibly empowering for many of the world’s neediest populations, and one of the great potential democratising aspects for FinTech, giving people more opportunities. 

For people who may be using mobile devices, but still not yet fully integrated into the financial system or with only minimal financial data, there is still the problem of trying to determine their credit.

So, one alternative to traditional forms of credit analysis is the rise of social credit. In its simplest form, social credit basically means that any kind of data, not just financial, can possibly use to determine some level of credit. 

For example, your Facebook network and your relationships there, the type of people you most frequently message on your phone or the amount of time that you spend watching Taylor Swift videos on your phone, and a whole host of other behavioural and relationship knowledge, that is not necessarily financial, can be utilised by AI-backed algorithms to compile a profile on you. A social credit profile, that may have an impact on your financial and social life. 

Sounds fascinating, but is this okay? And what are the benefits, and what are the risks? 

Aspects of social credit are being rolled out in various ways already. At a national level, China is implementing its own indigenous social credit system. A reputational score system that applies to individuals and companies, with the intention for it to eventually score all the citizens when the system is fully developed. The early stages of this social credit system have already garnered attention, as almost 10 million people have been banned from domestic air travel in China alone. And this is all based on their social credit score. Other potential impacts include limiting access to certain educational opportunities or employment, and social credit scores could even impact one’s internet speed. 

It’s not even just nation states, but really private sector actors are leading the charge. Ant Financial, one of the world’s largest FinTech companies, and related to Chinese technology giant Alibaba, has also started developing its own form of alternative credit, dubbed ‘Sesame Credit’. In addition to traditional financial information, something like a FICO score might include, Sesame Credit also incorporates other information like the online behaviour of a person, especially in the context of their activity within the Alibaba ecosystem. A high Sesame Credit score improves the user’s trust level within the system and facilitates access to Ant Financial products. 

But China’s not the only place where social credit analysis is growing. Even in Silicon Valley, you can observe aspects of social credit. Dealing with mirrored issues relating to fake news claims, Facebook has developed its own rating system to gauge the reliability and trust of its users. And one criticism, however, of this is, that even if such a tool might be necessary, it’s not transparent. 

The use of social credit will continue to expand, either as a direct proxy or, at the very least, a supplement to traditional financial credit. Maybe nowhere is this more apparent than in the peer-to-peer, also known as the P2P lending market, which is another important part of the FinTech landscape. Many P2P platforms incorporate some aspect of social credit in their models. 

For example, one of the larger P2P platforms, Lending Club, which is listed on the New York Stock Exchange was originally an application on Facebook that spun off. Prior to its IPO in 2014, Lending Club frequently mentioned that social relationships were an important part of its model and that social affinity and other non-financial factors, helped lower the risk of non-payment. 

As P2P platforms grow, more data becomes available, and AI capability is enhanced, it’ll be interesting and important to consider how social credit will be used in the future to influence our lives.