Lending institutions around the globe are embracing algorithm based credit scoring. Allot of people have never heard about the practice and the only major country utilizing it at the moment is China. The Chinese version referred to as The Social Credit Score has more to do with the communist government controlling its massive population than providing a base of where to allocate capital.
Like most things once in the hands of an all-powerful government tech becomes liberty crushing powerful weapon that is used to tame and track a populace. On the other side these tools in the hands of the free market will see capital flood into sectors of the economy that lending institutions could only dream of.
What exactly is algorithm based credit scoring? To understand what this type of credit scoring is it's important to know how modern credit scoring works. The current system in America is a highly regulated system monitored primarily by companies like Equifax, TransUnion, and Experian. The companies look at a few metrics like past payment history, income, credit burden, and debt to income. These indicators, of course, don't tell the complete story of creditworthiness and other methods are also utilized, and the industry is tightly regulated.
How this new credit scoring system works is instead of just looking at those financial data points they seek to use thousands of data points to determine what kind of loanee you will be. They look at things like social media postings, type of phone you have, the type of motor oil you buy and almost anything else you can think of. This and thousands of other data is gathered, and the applicant is given a score.
Naturally, in western society, there are some concerns with this type of system but where this is most promising is developing nations and underserved communities. For decades those with capital have wanted to wade into these type of higher risk markets, but the lack of traditional credit monitoring systems made it an incredibly high-risk venture. Now lenders can build a profile of individuals utilizing a person's digital identity.
There are some very troubling aspects to this new system that need to be addressed. If this can be done in the free market, I think these tools can be used to bring millions more out of poverty by giving them access to capital.
China Social Credit Score Explained