How digital footprints are changing the mortgage market

A person's digital footprint can be used for nefarious reasons, including identity theft and fraud, but it's not all bad, says University of Auckland researcher Dr Dulani Jayasuriya.

In fact, a recent study by Jayasuriya and two co-authors found that the use of digital footprints, which are a record of online activity, may help to reduce discrimination in the US mortgage market.

"Borrowers from a certain race, gender, income range or geographic location can be marginalised because of preconceived biases, and in our study we found that a borrower's digital footprint can aid in correcting such biases," she says.

"This research can improve the screening process for good quality borrowers and help to ensure lenders are not inhibited by biases."

The researchers' analysis of 50 banks, many of which collect customers' digital footprints, found that the use of such information can benefit both the company and the customer by significantly reducing the lender's overall risk as well as discriminatory traits.

Overall, says Jayasuriya, she and her fellow researchers found that the informational advantage associated with using a borrower's digital footprint far outweighs that of existing lending methods.

"Just because you are a certain race, or a woman, or you live in a not-so-nice neighbourhood, you might be considered a risky borrower by traditional lenders, but those banks who utilise digital footprints have more granular information and can identify the true creditworthiness of a borrower and disregard biases.

"We also found that banks who use this digital information reduce the overall riskiness of their portfolios by lending to these borrowers."

At a time when interest rates are rising and putting considerable pressure on mortgage borrowers and home buyers, Jayasuriya says the findings have unique implications not only in the US but globally.

"The research is applicable here - many banks in Aotearoa New Zealand and Australia are collecting their customers' digital information."

Jayasuriya and her co-authors explored the substantial rise of digital footprint users in the US residential mortgage market, the kind of data collected, and subsequent lending outcomes.

In attaining their findings, the trio investigated 50 US banks and lenders including JP Morgan Chase, Wells Fargo and the Bank of America.

The researcher and lecturer says the team's findings, detailed in a paper titled The use of digital footprints in the US mortgage market, come with huge implications relating to data privacy, usage, efficient markets, and decision-making processes for both borrowers and lenders.

"Although this is one example of how our online activity can be used for good, it also raises many questions about big data, data privacy and consumer behaviour as a result of data collection.

"For example, if borrowers know that banks collect their digital data and use it to identify their creditworthiness, they can change their behaviours."

Jayasuriya says her research highlights the need for regulation and oversight and says there should be more open and transparent discussions about data privacy and collection. She says the long-winded, very detailed privacy agreements used by many banks and other organisations need to be constructed in a way that people can, and will, digest.

"There are positives when it comes to collecting a user's digital footprint, as we have shown, but there can be negatives too, so there has to be monitoring, transparency and laws regarding data privacy, collection and usage.

"When we click yes to these very in-depth data privacy agreements, many of us fail to read or understand the statement in its entirety. Instead customers could be made aware of what they're signing if the key points were summarised detailing what data is collected, and for what scenarios it may be used, including whether it can be sold to third parties."

The Business School researcher says another alternative could see providers incorporate short explainer videos to make customers aware of how their digital information will be used.

"This may result in a more transparent and open process where users and companies both benefit from such data collection and usage."