Last month, Kiva.org, an online lending and crowdfunding platform, announced that it surpassed $1 billion in loans supporting 2.4 million borrowers around the world. The loans on the platform have a 97% repayment rate.
That’s lower than at commercial banks by a percentage point or two, but it’s much better than anybody might have guessed a decade ago, when making loans to micro-entrepreneurs and people with no credit histories was a laughable endeavor.
One of the hidden keys that makes platforms like Kiva work is social media. Kiva, which handles loans in increments of $25, and others have figured out that social media is a decent stand-in for a measurement of character. Kiva uses Facebook, Twitter and Yelp profiles as inputs in its risk-assessment algorithm.
“There are things like reliability, consistency, things your friends would know about you,” said Kiva co-founder Premal Shah. “It’s kind of how banking was done 100 years ago.”
It’s important here to draw a distinction between the group of tech companies known as P2P lenders – which typically package loans and turn them into asset classes – and companies like Kiva, which create a foundation out of personal connections.
“There is a massive, fundamental difference,” said Jonny Price, senior director, Kiva U.S.
“With these "P2P" sites there are no human connections.”
On one hand, there’s an obvious benefit to social media on the borrowers’ side: The more people or potential lenders a small business is connected to, the more likely he or she will find lenders among those connections.
There’s a less obvious – and in some ways more interesting -- connection as well: Borrowers are more likely to repay their loans if they are on social media, specifically, in Kiva’s case, if they have a Facebook page.
Kiva borrowers with business Facebook pages have a significantly higher repayment rate than borrowers without business Facebook pages. The 120-day cohort performance of borrowers with business Facebook pages is 96%, compared to 91% for borrowers without business Facebook pages, according to Kiva.
“The more connected borrowers are to their lenders (e.g. through Facebook), the more "social collateral" there is between borrowers and lenders. If lenders have Liked a borrower's Facebook page, or written them a nice Yelp review, or connected with them on LinkedIn, or become their customers on their eBay page, then that borrower is more likely to repay their loan -- because they feel "connected" to their lenders, in a way that they are rarely connected to their banks,” wrote a Kiva spokeswoman in an email.
It’s no coincidence that banks including Capital One have invested in Kiva. The algorithms that enable it to factor in character as a lending criteria are valuable, Shah said.
Among the other factors that correlate with higher repayment rates, according to Price:
- Whether a small business owner has a vibrant Yelp profile
- Whether or not they have made at least one Kiva loan themselves in the past
- How many lenders the borrower personally invites to lend to their loan
- Whether the borrower is "endorsed" by one of our nationwide network of Trustees (mostly non-profit technical assistance providers supporting entrepreneurs in their community)
There is an obvious question, though: On one hand, something of people’s character does come through on social media. On the other hand, most people make themselves look better on social media than they actually are in life.
“It's a small concern that some people 'lie' on social media.’ But we can also try to detect those 'lies,'" Price said. "It's like an arms race here. There will always be a small number of people that slip through the net, but I think there are many things we can do to position ourselves to catch the vast majority of fraudulent or nefarious social media activity over the coming years.”
