Social networks help perfect personal credit evaluation
Social networks and connections can be better studied to perfect individual credit reports. Photo: FILE
Social networks are a system of interpersonal relationships from which individuals can obtain emotional and financial support and information. In credit evaluation, social networks play the role of information transmission, supervision and restriction and a risk guarantee. As of today, the transformation of Chinese society from traditional to modern has been accompanied by the growth of social networks and also their role in credit evaluation. Therefore, it is of great practical significance to perfect individual credit reporting via examination of social networks and connections, so as to construct a credit evaluation system with Chinese characteristics.
Credit relations
A society is a complex network, characterized by patterns of social relations among individuals who share a distinctive culture and institutions, such as kinship, geography, friendship and career. However, due to the differences in ownership of means of production, social status and wealth, each individual occupies various scarce resources in different ways, such that they can share and trade with each other, thus forming a stable complementary relationship. Credit is a kind of trust relationship among social members based on social networks. From this perspective, the credit function of social networks is mainly reflected in the following aspects.
Information plays an important role in trading, because the party with the information advantage can take the initiative in trading activities. As social members interact and form a stable relationship in daily life and production, they have some knowledge of each other and establish basic trust, thus effectively alleviating information asymmetry. In lending activities, such trust determines whether a loan transaction can be completed successfully. Thus, if the lender can get hold of the borrower’s credit via the latter’s social networks, it can save the cost of credit review and reduce the possibility of loan denial due to information asymmetry.
In addition, there are “rules” within social networks that help regulate the behavior of members and reduce trading risks. If borrowers default, they face great credit losses, where in some cases, they may even be removed from the network, which fires up the cost of defaults. Members of the social network place higher value on their own social status and image, and also are more likely to abide by the designated contract. In this way, we can say social networks can effectively reduce supervision cost.
In credit transactions, social networks can be regarded as a type of implicit mortgage or guarantee, but it is worth noting that the role of risk protection is associated with the level of openness of social networks. That said, the sustainability of social networks is an important prerequisite for risk protection. When an individual is a member of a social network, the social network will play an insurance role through mutual assistance in case of loss caused by failed investment. Social networks provide implicit mortgage and guarantee for credit transactions, which not only improves borrowers’ chances to receive loans, but also reduces credit risks to some extent.
Change in social networks
Traditional Chinese society is a typical “acquaintance society,” where social connections weigh in a range of human activities, including borrowing loans. Informal financial markets have existed for a long time in China, especially in rural areas whose daily operations center around social networks. The important role of social networks in informal financial markets provides a new approach for us to strengthen credit construction and optimize the credit environment.
However, social networks are not static. The expansion of individual activity radius, the change of social environment, and the impact of external factors have altered the landscape of social networks. Therefore, when conducting credit investigation on social networks, we must also take into account the change of connections between the surveyed individual and network members.
On the whole, the transformation of Chinese society from traditional to modern has a profound impact on people’s social life and relations. Social networks are undergoing a transition from the traditional strong relationship bound by blood ties to the weak relationship supported by friendship and career.
In this light, the credit function of social networks is no longer the same. Information sources tend to be more reliable in a strong social network, whereas in a weak social network, they are often multi-faceted, fragmented and unsystematic. As for social networks as a supervision mechanism, constraint and punishment are more severe in strong ties than in weak ties. As a risk guarantee, the social network with strong relationships emphasizes the mutual help of members, and shoulders the risk and other implicit guarantees. In contrast, in the social network featuring weak relationships, the role of the social network as a “cushion” against risk is quite limited.
At present, credit investigation based on big data is the digital evaluation of individual social networks. In practice, an individual’s credit status is examined through the modeling analysis of customer-related data. However, big data credit investigation is more on the technical level. It mainly aims at the social network with weak relationships by collecting and modeling relevant data in various social interactions or in the transactions of individuals.
Credit investigation based on social networks needs the technical support of big data, but it is not all about a big data credit investigation. In other words, the concept can be defined in a narrow sense and a broad sense. In a narrow sense, credit investigation based on social networks emphasizes the portrait of a social network with strong relationships. In a broad sense, social network credit investigation covers the credit evaluation of weak relationships as well, and only in this sense can it be regarded as a big data credit investigation.
Though big data technology has supported the current credit evaluation related to weak relationships and is developing rapidly, its application in understanding and studying the credit investigation of strong ties is still insufficient, and there is room for improvement.
It is evident that the strong and weak relationships in social networks are also in transition. By riding on the strong ties to extend the weak ties, and then strengthening social contacts to enhance weak ties, the stability and trust of the latter will be gradually improved, and a new strong relationship will be formed. In this way, the individual’s social network will go beyond its normal reach.
In fact, the social ties woven by employment and friendship have become the new strong relationships. In the social media era, around the new strong ties, weak ties are a more tenuous relationship with acquaintances on the edges of the circle of influence. However, these weak ties are crucial in binding groups of strong ties together, by bringing circles of networks into contact with each other, strengthening relationships and forming new bonds between existing relationship circles. This new trend shall be taken into account when conducting credit investigation based on social networks.
Going forward
In order to better utilize the credit function of social networks, make the networks more valuable and build a credit evaluation system with Chinese characteristics, several suggestions are proposed as below.
To begin with, we should establish a correct view of social networks. Social networks are not only traditional interpersonal relationships, but also an important resource. Individuals should objectively evaluate their existing social networks, position, credit and reputation, so as to predict their social capital status. In the process of urbanization, while maintaining their original social networks, individuals should actively expand and interact with new social networks, to accumulate trust and credit and achieve long-term personal development.
Next, we should fully understand and utilize social networks as a resource to improve the credit evaluation system. A database related to credit investigation on social networks could be set up to match and verify social network indices with other credit data. If the subject of credit investigation is also a credit institution, financial products based on the social network can also be designed to help the social network play out its credit function. At the same time, credit officers can gain more comprehensive information about borrowers by accessing their comprehensive social networks.
As for regulatory bodies, the importance of the credit function of social networks shall be highlighted in the construction of the credit evaluation system, to popularize credit investigation on social networks, and also make social networks an important channel for spreading and practicing credit. The regulatory authorities should also encourage the development of professional credit checking agencies, support industry-university-research based credit investigation grounded in social networks, and encourage them to provide professional social network credit products.
Du Chaoyun is a professor at the School of Economics at Xiamen University.
edited by NIU XIAOQIAN