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Banks of the future may not care what you owe as much as whom you know. The FICO score has allowed banks and businesses to determine a customer’s creditworthiness, but it is a historic reference that reflects a past situation from 60 days ago. Banks, in particular, do not want to make loans solely on a FICO score if a person is currently undergoing financial stresses that might lead them to default on a loan. To understand the whole picture, a few banks are turning to social networking when a new client comes in the door seeking a loan.

Birds of a Feather

It may sound unfair, but some banks believe that if you are in a circle of friends that are deadbeats, you’re also likely to be a deadbeat when it comes to paying your own bills. Startups like CreditKarma.com are inventing new social metrics that will allow banks to check your friend’s list and find out whether you have “profitable” friends or not. They can then make a value judgment on your character, also.

Status Updates

The status update boxes in Twitter and Facebook may provide your friends the ability to see what is going on currently in your life, but that might not be a good thing if your creditor or bank is friending you. Banks who hope to leverage social networking or collections and to determine creditworthiness are going to demand access to your Twitter or Facebook accounts. They may at first say that it is to provide better customer support or to publish account alerts quickly; however it will soon be apparent it is more beneficial to banks for determining creditworthiness. If you end up posting a suicidal status update, odds are you’ll be denied a loan. Once a bank friends you or follows you on Twitter, it won’t be long before they’ll use your accounts to embarrass you if you don’t pay your bills on time or default on a loan. This could provide a nightmare scenario for people who end up with everyone knowing their financial difficulties and being badgered for payment online.

Movenbank

While experts believe the technology for creating a reliable credit profile based on social networking is three to five years away, some banks like Movenbank are trying to get into the game early. This startup is creating business policies to be rolled out to use social networking to help determine a person’s CRED score. This score will determine what products and services are available to a borrower or buyer based on their social networking behavior and other proprietary data.

Lenddo

Another promising startup called Lenddo are creating algorithms that determine a credit score via social networking clout that can be used to obtain loans. The company requires borrowers to give information on their Facebook account, but ultimately it will want information on many other accounts as well, including private email. The company believes that individuals should have profiles that establish their online credibility. A strong Facebook or Twitter reputation will actually increase the borrower’s credit score, in that instance. A poor Internet presence, however, will hurt their chances to obtain funds. The more people you connect with pay back their loans responsibly, the better your odds of getting a loan. However, if they do make a loan and you fail to pay it back, Lenddo reserves the right to notify everyone in your social networking circles of that since they say it impact’s their Lenddo credit scores as well.

Boost for Peer-to-Peer Lending

Other consequences of using social networking informational metrics to determine creditworthiness is the impact it will have on peer-to-peer lending. These alternative lending arenas rely on FICO scores and individual stories to determine who is a good risk. This can lead to high default rates when the information is outdated. If a new credit score were available, that included social networking data, it would lead to more confidence in peer-to-peer lending and a boost for this industry. It might make sense for people within their own networks to lend to each other, rather than to go through a bank. It would not only be a way to boost your own social credit worthiness, but you wouldn’t have to deal with an impersonal bank at all. In this way, you could use social networking credit scores to boost the financial power of your network when you are doing well, and use that same network when your fortunes turn for needed resources. It still is unclear, though, how collections practices will be affected and whether the quality of human social interaction will be harmed if everyone ends up being spammed by companies or individuals eager to get payment on an account. This technology may not be around for years, but it will end up creating new styles of interaction. It needs to be carefully thought out before people agree to allow the financial services industry to destroy a warm and inviting online network into an efficient and cold place to do business.