In the not so distant past, the lack of good and reliable data about applicants with no credit history left banks little choice but to lump them together as high-risk bets. As a result, they either were offered loans at prohibitively high rates or had their applications rejected.
Thanks to the proliferation of social media and smart devices, Silicon Valley is awash with data. While much of it has no obvious connection to finance, some of it can still be used to make accurate predictions about the user’s lifestyle and sociability. As a result, a new generation of companies is beginning to deploy algorithms that sieve through these data to separate trustworthy borrowers from those likely to default and to price their loans accordingly.