Banks May Soon Use Our Facebook Friends to Assess Our Creditworthiness. Should We Worry?

Last year, Facebook secured a patent on technology that enables social-media data to influence lending decisions. The move could one day allow banks to use information about the creditworthiness of an applicant’s Facebook friends to determine his or her own risk profile.

As an expert on social networks and new media, I find this development fascinating. My interest is not so much in the specific technology Facebook is developing—we can only speculate on the details right now—but in what the news represents for business growth.

Is it inherently good or bad for companies to use social media data to drive business decisions and profits? I argue that is neither; it is just complicated. For anyone wrestling with this issue—whether a business leader, regulator, consumer, or observer—I offer five points to keep in mind:

Harnessing social-media data can expand the economy—possibly dramatically. This is the major upside of technological developments like Facebook’s recent patent. Creditworthiness, for example, is critical decision-related information—not just for banks, but for everyone, including individuals. One of the most monumental implications is that every one of us could soon have access to the creditworthiness of strangers. Think of the impact this would have in an economy with an unprecedented volume of peer-to-peer transactions. Crowdfunding, for instance, is projected to be a $1 trillion market, and it is easy to see how individual lenders would benefit from better information about whom they’re trusting with their money. Social media data, used effectively, could provide a value-maximizing crystal ball.

Big data needn’t be so big. One doesn’t need to know everything about a consumer to know something about them. That is, companies may not need to collect and analyze terabytes of social-media data; data from a small but critical mass of people in a “network neighborhood” could be sufficient to provide decent estimates about the characteristics or preferences of others in the same virtual neighborhood. For example, Facebook may be able to offer up fairly accurate information about a user’s creditworthiness based on the recent purchasing behavior of a relatively small sample of his or her friends.

Only time will tell. Remember when people thought online shopping would make bricks and mortar a thing of the past? Just as that prediction proved hyperbolic (in fact, multiple online retailers are now opening physical stores), so too is it hazardous to assume that social media and predictive analytics will entirely dismantle everything from credit-rating to healthcare. A better way to think about these developments is that businesses—led by the Googles and Facebooks of the world—are still trying to figure this space out. The opportunities and barriers—whether technological, regulatory, or behavioral—will become clearer over time.

Individual privacy may become obsolete. Our knee-jerk reaction to any kind of online privacy issue tends to be, “I don’t want Company X using my data.” The deeper issue, I believe, is that it’s not just my data anymore; it is the data of everyone I affiliate myself with online. For example, I may be selective with my own privacy settings on social media, but a technologically savvy company can come to know a lot about me from the less selective members of my network—even from just a small number of them, as mentioned earlier. The relevant topic seems to be shifting from individual privacy to collective privacy, which can be much harder to protect. That shift is uncomfortable for most of us, meaning businesses in this space need to tread carefully.

Disruptions can have unintended consequences. Despite potential privacy concerns, social-media users do have some power over their own data. For example, if I know Facebook is using my network to influence my credit rating, I might decide to unfriend the most egregious spenders on my friend list before applying for a car loan. This would potentially diminish the value of Facebook’s new technology—the disruption may disrupt itself! Similarly, if I have access to credit-related information based on social media, I might use it for personal means, such as pestering my friend who boasts a high credit score but still hasn’t paid me back the $100 I lent her a month ago in Vegas.

I’m confident that businesses will learn to harness social-media data for profit and for positive progress. I am excited to see how exactly they’ll do it, how disruptive it will be, and how it will impact everyone involved.

Brian Uzzi is a professor at the Kellogg School of Management at Northwestern University and a globally recognized scientist and speaker on leadership, social networks, and new media. He codirects NICO, the Northwestern Institute on Complex Systems, is the faculty director of the Kellogg Architectures of Collaboration Initiative (KACI), and holds additional professorships at Weinberg College of Arts of Sciences and the McCormick School of Engineering. Professor Uzzi is a co-lead for Kellogg’s second annual International Conference on Computational Social Science, June 22–26, 2016.

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