Discrimination and Credit Underwriting in the Age of Social Media

Social media has gradually infiltrated every aspect of the majority of the population’s lives. It has evolved greatly since its early days when it was primarily used for interpersonal reasons like connecting with friends. Nowadays, business marketing, financial transactions, consumer engagement, etc., are also heavily dependent on social media presence. From posting ad copies to developing a brand image for possible customers, everything is done digitally. 

Apart from the apparent benefits of using social media platforms, the statistical data from social media usage is also infallible in predicting customer behavior. However, the question arises of whether it is safe or ethical to utilize personal data in making commercial judgments.

Finances and Technology

Finances and Technology

The increase in social media usage is aided by the increasing development in technology. The effect of technological advancement is also evident in the finance industry. It is used to impart banking services, make digital transactions in lieu of cash or even with cryptocurrency, and furnish professional advice on investment management. This popularity of digital transactions has allowed even the unbanked population to participate in the financial community. 

Similarly, major technological components that aid in improving financial services are Artificial Intelligence (AI), Machine Learning, and Big Data. These technologies have completely revolutionized the way we handle monetary transactions. Their usage has become prominent in predicting market changes, determining customer inclination, generating investment advice, etc., backed by statistical data. This advice is the crux of decision-making in regard to credit distribution. 

As a result, banks, money lenders, financial institutions, and other credit underwriters refer to this information to determine how likely the borrowing individual or business is to return the loaned amount. Before this, the risk of investing was judged solely based on the lendee’s credit background. With personal data available easily on social media, every aspect of an individual’s life comes under the microscope. 

Prevalence of Technology in Our Lives

Prevalence of Technology in Our Lives

Although social media is one aspect of technology invading our lives, technology has also proven useful in completely changing how we make our daily transactions and even how we manage our investments.

Mobile Banking

As a consequence of incorporating technological advancements, the popularity of mobile banking services among consumers is increasing. A perfect example of this is observed in Africa as money-mobile sprinters adapt to local conditions in Somaliland. Telecom ZAAD, the most successful of the 14 GSMA Mobile Money Sprinters, introduced mobile banking in Somaliland. 

In fact, they offered free services to their customers to increase customer loyalty and lower-income-group inclusion. The efforts of Telesom ZAAD have met with resounding success as their services continued to be used by 70% of their consumers, even after the lapse of one year.

Using Blockchain to Increase Services

Banks are pairing with fintech companies to increase their reach and authenticity. As fintech companies utilize blockchains to render services securely and easily, banks are capitalizing on this to provide greater services to a segment of the population that was inaccessible earlier. 

For instance, ICICI and Stellar using blockchain, have started marketing to a larger demographic to support both domestic and international transactions. Stellar receives a fee from ICICI for every new account created after the establishment of 300,000 accounts. This allows ICICI to offer free wallets to customers and reach a low-income demographic deprived of traditional banking services. 

Judging Credibility Using AI

With the emergence of new customer demographics, creditors and money lenders need to upgrade their assessment process to inculcate a larger body of data and make accurate evaluations about customers to mitigate personal risk. This is where AI comes in handy. AI, machine learning, and big data are proficient in handling large quantities of data and accounting for different factors reliably. Unfortunately, certain factors should not be included in making such distinctions, as they may lead to discrimination. 

The Pros and Cons of Using Social Media Credit Scoring

Social media, although a proven tool to judge the reliability of borrowers to return a loaned amount, can be potentially biased against minority and vulnerable communities, increasing discrimination within the financial world. The pros associated with this system of credit scoring are that it reduces the risk for financial investments using a large body of data to accurately judge creditworthiness. However, considering factors unrelated to financial decision-making, which are abundant in an individual’s social media presence, may lead to discrimination and, ultimately, redlining.

State of the Microfinance Industry

State of the Microfinance Industry

As a matter of fact, Microfinance Banana Skins publishes reports on the risks faced by the microfinance market in a regular series. This report is published by CSFI and based on its analysis, they provide a measure of the level of anxiety in the banking sector known as the CSFI’s Banana Skins Index. In the latest report in 2021, this index is estimated to be at an all-time high, compiling data of more than 20 years. The Banana Skins Reports reveal overindebtedness as the biggest concern in the microfinance industry and to be the major cause of this anxiety. It is the major concern among shareholders that the overindebtedness of clients will adversely affect the market.  

But, evidence illustrates that the introduction of Fintech companies has greatly improved the market standards by being more inclusive. It shows great promise in improving the financial ecosystem. The credibility of Fintech companies would improve by building trust and growing digital financial services which in turn, will ensure its continuing success. Trust is built between provider and consumer by guaranteeing the client a personalized, responsible, and seamless experience with constant reassurance of quality service. They also need to ensure that a client’s personal information is not used to discriminate against them. 

Hence, there are regulations in place to control the growth of fintech companies. Some of it is used to keep discriminatory practices in check, but it also poses a threat to the development of fintech companies. There are raging debates on whether these regulations will ultimately result in the decline of Fintech companies. Africa Board Fellows deliberate on the matter, and they suspect these regulations to be only a temporary hiccup. 

Alleviating Indebtedness

According to the authors of Scarcity Why Having Too Little Means So Much book, the feeling of scarcity has an important role to play in alleviating poverty. They suggest a more conscious control over an individual’s time and expenditure to improve their status. 

FAQs

Q1. What is underwriting discrimination?

Underwriting discrimination is when money lenders base their assessment of the credit-worthiness of clients based on arbitrarily-chosen parameters, such as race, gender, nationality, etc., deeming people meeting these criteria riskier and either not worthy of lending or charged exorbitant rates and fraudulent charges for small loans. 

Q2. Can you discriminate based on credit score?

Although credit scores of marginal communities tend to be lower, the Equal Credit Opportunity Act prohibits discrimination by creditors in any aspect of a credit transaction based on race, gender, nationality, and certain other characteristics.

Q3. Are mortgage lenders prohibited from discriminating in giving credit?

Historically, in the USA, the mortgage was denied to groups living in certain districts which were deemed riskier. However, the Fair Housing Act prohibits discriminatory practices in home financing.

Bottomline

Therefore, it is not all doom and gloom. Social media analytics have proven extremely helpful in providing personalized products and services to consumers. Websites using personal information should be strict and exclusive in letting creditors access that information. 

Additionally, there should be laws that explicitly eliminate certain factors from being parameters to evaluate risk and therefore removed from the cycle of credit distribution to ensure the fair dispersion of wealth and resources.

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