Living by the Numbers Big Data Knows What Your Future Holds
Part 6: The Database
The brick building in Hamburg's Winterhude neighborhood doesn't look like a bank branch, and yet loans are made there. A plastic banner identifies the company as "Kreditech," and the atmosphere inside the building is a mixture of garage startup and shared apartment. Signs are posted on the walls exhorting employees to "Take off your shoes."
Sebastian Diemer and Alexander Graubner-Müller bear no resemblance to typical German lenders, whose business model they consider to be outdated. "At least the classic branch bank model is on its way out," says the young and dynamic Diemer, dressed in the classic start-up look: jeans and a hoodie.
The self-confident founders of Kreditech lend money through the Internet: short-term mini-loans of up to 500, with the average customer receiving 109. Instead of requiring credit information from their customers, they determine the probability of default on their own, using a social scoring method that consists of high-speed data analysis. "Ideally, the money should be in customers' accounts within 15 minutes of approval. This is already working in Poland," says Diemer. In return, Kreditech wants as much data as possible from its users. The more information the company gets, the more precise are its predictions and the higher a customer's potential credit line.
The evaluation profiles of EBay accounts are already publicly accessible. Kreditech also requires access to Facebook profiles, so that it can verify whether a user's photo and location match information on other social networking sites, like Xing and LinkedIn -- and whether his or her friends include many with similar education levels or many colleagues working in the same company.
All of this increases the likelihood that Kreditech is dealing with a real person. Even the question of whether the loan request was submitted from an expensive iPad or a cheap Aldi computer goes into the evaluation. The applicants' behavior also plays a role, such as how much time it takes them to fill out the questionnaire. Kreditech also records the frequency of errors and use of the delete key.
Loans on Faith
In this manner, the Kreditech algorithm can process up to 8,000 different pieces of information, say its creators, who founded the company in March 2012 and are expanding rapidly. Kreditech is currently online in Poland, Spain and the Czech Republic, and the Hamburg-based lender also plans to launch its business in Russia in the coming days.
The lending operation had only been available in Germany for three weeks when Kreditech terminated its service here, "for preventive reasons," as Diemer says. In fact, the Federal Financial Supervisory Authority (BaFin) had contacted the company and announced its intention to examine its business model. That's because Kreditech doesn't just charge high interest rates, but also requires its customers to pay up to 49 for a "certificate of creditworthiness."
The mandatory purchase of certificates has since been eliminated in its other markets, say Kreditech's creators. The amount of interest they charge ranges from 5 to 28 percent a month, depending on the loan amount, a customer's score and the terms of the loan.
Kreditech's founders don't just expect to generate substantial revenues with microcredit requests and interest income. Their real goal is to develop an international, self-updating creditworthiness database for other companies, such as online retailers. Current scoring methods are based on fewer parameters, which also only reflect a person's credit past, says Diemer. Even that doesn't exist in many countries. A credit bureau with market penetration similar to the German system exists only in a few markets. "For almost three-quarters of the global population, there is still no reliable information on creditworthiness," says Graubner-Müller.
In addition to Kreditech, lenders like Zestfinance and Britain's Wonga are pursuing similar goals as they dabble in this precarious market, raising both legal and moral issues. Wonga was maligned in the British press when it tried to lure students away from government-backed student loans into its own, vastly more expensive loans.
The Kreditech founders, who have known each other since adolescence in the western city of Wiesbaden, insist that they are above reproach when it comes to privacy issues and the amount of interest they charge. "SCHUFA (the German credit agency) keeps data in storage, while we only use data for a specific request." Besides, they explain, almost all of the data relating to rejected applicants is deleted after 90 days. The company only retains the information it needs to recognize applicants who were previously turned down.
Despite the limitations, investors find social scoring to be extremely attractive. Kreditech secured $4 million in capital in December, and in April a German fund invested at a similar level. Wonga, for its part, has already raised $141 million in investor capital.