A startup uses social networks to gauge whether it’s wise to loan to borrowers in emerging markets.

http://www.technologyreview.com/news/428122/can-a-credit-score-be-crowdsourced/?ref=rss

Nader Nazemi

In the days of community banks, a person’s upstanding reputation around town gave him access to a reasonable loan. But global financial institutions can’t trust strangers, so the credit rating was born.

A startup called Lenddo hopes to return lending to that community bank era, but with a modern twist. The company gauges a person’s creditworthiness using his or her online reputation, as assessed through sites such as Facebook, Twitter, and LinkedIn, to grant loans. To secure repayment, it forgoes collateral and instead relies on peer pressure through the same social networks.

The target market is a demographic often ignored by banks today: the 1.2 billion people, largely in developing countries, who are part of the world’s emerging middle class but who still struggle to access credit because they lack a documented financial history and strong identity records. “Our theory is, we could duplicate the social dynamics of microfinance, but instead do it online,” says CEO Jeff Stewart, referring to the practice of making small cash loans to the world’s poorest people and relying on peer accountability to ensure low default rates.

 

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