Wednesday, January 26, 2022
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The Future of Credit Scoring

Could your Instagram account determine whether you are eligible for a mortgage? In this video, Futurist Chris Crespo discusses the changes in the way financial institutions assess your credit worthiness and how, as companies capture more and more data, your online and offline behaviour is being used to score far more than your ability to repay your loans.

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The following is a transcript of the media above.

Generally speaking, a credit score is a three digit number that rates you on the basis of how likely you are to pay back your loans.

As the name indicates, this number is mostly used by bankers and lenders to decide whether they should lend you money, although more and more often, credit scores are also being used by companies to decide if you are employment worthy.

Credit scores typically look at five areas of your financial activity:  

  1. How long you have had a history of credit
  2. How much new credit you have through credit cards or other financial products
  3. What different types of credit you own, for example personal loans, car loans or mortgages
  4. How you’ve met your payment obligations in the past
  5. How you have used credit available to you in the past

The idea behind the credit scoring system is that your past financial behaviour is the best predictor of how you will behave in the future— and this helps banks determine how much risk you represent as a customer looking for a loan, a credit card and other financial products. So basically the better your credit score, the more likely lenders are to lend you money.

However, since our credit score only reveals a small part of who we are, credit score companies are relying on more sources of data to build a more comprehensive picture of us as borrowers.

We don’t have to think long to imagine what the future of credit scoring will be like. The future is already happening, although perhaps it is not evenly distributed.  So as with all things Fintech, if we want to get a glimpse of the future, we need to look at China, and today we are going to look specifically at China’s Social Scoring System.  

Back in 2014 the Chinese government laid out a legal framework that would allow it to aggregate citizen information from various sources. Its purpose was to incentivise trustworthy conduct and punish untrustworthy behaviour among its citizens. 

The system has been developed in close cooperation with private firms like Tencent, Didi Chuxing, and Sesame Credit among others. These are all technology companies that operate services like ride-sharing, dating, banking and online shopping in mainland China.  China’s social scoring system is very different  from credit scoring systems used in other countries, as it is not only a mechanism for assessing credit worthiness, but it is also a way to assess your social standing. The system uses data from a broad list of sources including social media, to punish behaviours considered undesirable. The list includes things like:

  • Spreading false information or information not approved by the state
  • Financial wrongdoings
  • Smoking in banned places
  • Causing trouble on public transport
  • Jaywalking

If you don’t find that level of intrusion objectionable, consider that the system is closely related to Skynet, China’s mass surveillance system which relies on facial recognition, artificial intelligence and big data technologies to monitor people’s behaviour in public.

In a way the Social Scoring System works as a gamified life experience. Citizens often begin with an initial score, to which points are added or deducted depending on their actions. A person’s score is determined then determined by their actions on four areas: administrative affairs, social behaviour, commercial activities, and judicial matters. The specific number of points for actions under each category are then listed in publicly available catalogues for everyone to see.

The Chinese government argues that these systems are meant to reward and incentivise good citizen behaviour, but most importantly, it is meant to discourage antisocial behaviour by penalising untrustworthy citizens.

And in fact people have already been penalised for violating social protocols. According to the Independent, a British newspaper, as of June 2019, the system has blocked the purchase of over 26 million domestic flight tickets from people who the system labelled as “dishonest.” 

The system has also been used to controversially ban “untrustworthy” people and their children from certain private schools, prevent people with low social scores from renting hotels, and it even to blacklist individuals from the job market.

I often use China as a standard for innovation in Fintech and over the years, I have heard that there is no point comparing China to our western democracies, as the political and economic systems are radically different. But, let’s take a look at some initiatives that have been rolled out in Europe and the US with little opposition in the past 18 months. 

Let’s start with the UK. In July 2021, Boris Johnson, the UK’s prime minister, announced his plans to introduce a version of the social credit system, with the noble goal of combating obesity.  The program will monitor family supermarket spending, rewarding those who reduce their calorie intake and buy more fruits and vegetables.  A new app will be used to reward people who participate in organised fitness evens or who choose to walk to work. Points will be captured through the app and then later redeemed for cash, discounts and other incentives.

It is worth noting that similar systems have been in operation in the UK for at least 10 years in the hands of private health insurance firms like Vitality Health, which rewards its customers with discounted movie tickets and cheap Eurostar trips for eating healthy, attending the gym and racking steps on their pedometers.

Critics believe the argument in favour of systems like this fails, as your body and your health are just about the most private concerns to you as a person. If you allow the government to “interfere” in matters as personal as your body-fat percentage you are pretty much conceding that the state has no boundaries, even when it comes to your own body.    

In several other European countries, authorities are experimenting with systems for citizen scoring in relation to welfare fraud.  

According to Algorithm Watch, in the Netherlands for example the Systeem Risico Inventarisatie, merges data from the tax office, immigration authorities and others to detect welfare fraud. Similarly in Sweden, an algorithm fetches data from several public databases, and decides whether or not applicants are entitled to receive social benefits. Denmark, designed the Gladsaxe model, a point system to detect children in vulnerable circumstances. Although the system was never deployed, it was built to profile families suitability to look after their children by gathering data related to mental health, unemployment, and even attendance to doctors appointments.

So far, these state initiatives have been kept mostly bound to matters related to the state. However a more alarming trend is that more and more private companies now  use social credit systems to assign people scores based on personal profiles that dictate everything from which apps they are allowed to use, to whether they can enter a bar.

For example in early 2021 the New York State  Department of Financial Services started to allow life insurance companies to base insurance policy rates on people’s social media posts. 

Other platforms like Airbnb and Uber have customer rating systems that can have drastic impact on whether people can use their service. Airbnb is even allowed to impose life bans based on private information provided by people who list their properties on the platform. Uber has reportedly also started banning customers whose ratings fall significantly below the average.

According to the Daily Mail in the UK, a system by company PatronScan is being used by bars in the US, the UK, and Australia to assess whether someone is likely to get in a fight, commit sexual assault, and more. If a person is banned by a bar on PatronScan, they could be forbidden from entering any bar that uses the system.

Facebook who is increasingly censoring content that goes against official government narratives has recently introduced messages that ask users to snitch on their potentially “extremist” friends, which considering the platform’s political bias seems to target mainly the political right. 

Regardless of where we stand on freedom of speech and data privacy, we could probably see the benefit of having more accurate and less biased ways of making decisions.

However, the mammoth in the room that must be addressed is that if there is a line to be drawn between what is acceptable or unacceptable, truth or false, right or wrong, who draws it and on who’s authority?

The potential scope of the soft social credit system under construction is enormous. The very same companies whose systems can reward your “good behaviour” could also utilize their tracking capabilities to limit your activities, block your transactions and even restrict your use of certain products or services.

We need to ask ourselves at what point does your debit card get canceled over old tweets, or your Amazon account invalidated because a friend flagged you for questioning vaccine mandates?

As we have discussed in previous videos,  concerns are compounded when the potential use of Social Scoring Systems is combined with Central Bank Digital Currencies like the Digital Euro, the Digital Dollar or Britcoin which are already in the works. In time, decentralised forms of money, such as cryptocurrencies like Bitcoin, may become the main means for dissidents to operate, provided of course, Central Governments don’t move to ban them altogether as it’s been the case of Nigeria. 

While we often point fingers at China for being an authoritarian state, the west continues to develop its own flavour of technototalitarianism.

China may use a technological stick to punish what it regards as bad behaviour whith bans and blacklists. Western democracies are using technology carrots to  reward good behaviours with discounts and access to pubs, museums and concerts. China may use the power of the state to “influence” its citizens, while the west is increasingly using the power of corporations.

At the end of the day, both attempts seek to separate the good from the bad and the obedient from the non-compliant, who gets to set the standard, is perhaps a topic for another video.

Chris Crespo
Chris Crespo
Chris is the Co-founder of Nordic Fintech Magazine and Fast Forward Banking; Financial Media companies that seek to bust the jargon out of banking. As a behavioural economist he enjoys exploring questions that go against the grain of conventional thinking. Chris is also a guest lecturer at Stanford University and Singularity University where he speaks regularly on the Future of Financial Services, the Future of Money Disruption and Entrepreneurship.