Alternativa data: how bank can take advantage of them

Alternativa data (non-standard data or online data, referred to ‘alternative insights’) are one of the most recent innovations referring to banking activities. Credit and financial institutions especially require data on popularity and digital reputation related to a business activity (e.g. reviews, comments, conversations on social media, posts, photos and videos) and on geolocation.

Alternative data represent an added value, integrating traditional financial data on legal and natural persons, opening new paths for credit institutions’ clients acquisition and loyalty management.

Before going in depth on the four methods applicable by credit institutions to use these data to increase loans, mortgages and current accounts, the concept of online data should be analysed more in detail.

What are online data?

Alternative or online data consist of information extracted and collected with artificial intelligence technologies from non-traditional sources, e.g. social media, blogs, reviews, forums, vertical websites, comments, geolocation with mobile devices. Their amount is huge and they are becoming more and more crucial to inform investments and manage corporate risks. According to a study by Grand View Research, the cost related to the collection of alternative data could reach the amount of $ 17,4 billions (€ 16,4 millions) by 2027.

They represent the so-called ‘big data’ and can be structured, semi-structured or non-structured. Big data consist in set of computer data so wide in terms of volume, speed and range, that specific analytical methods and technologies are needed to extract value or knowledge.

Why are they so important?

Considering that alternative data vary from one sector to another and given that ‘alternative data’ is a general term which includes an evolving set of data, not comprised in the traditional set of data typically used by banks and FinTech, during the last few years monitoring the sentiment of a brand on social media and on the Internet has become essential. The sentiment has become a market indicator able to condition purchase and investment decision.

Are you looking for a proof? There are many studies dealing with the relation between online reputation and performance of companies. The most famous one was carried out in 2014 by US Cornell University focusing on tourism.

Alternative data, banks and advantages

Currently, banks still rely on balance sheet and Chamber data, but it should be considered that they date back to months ago and are based on historical trends, i.e. on the past. Online data, despite their non-standard nature, provide an overview of the present, so that online reputation could condition a company’s selling and turnover. Since they are almost real-time data, they can inform future decisions.

Generally speaking, banks and financial institutions use online data as an instrument for risk mitigation related to mortgages, loans and investments. More in detail, in the banking field, alternative data could be useful to set, for example, credit scoring, market analysis, investments, reputation and sustainability-related initiatives. This is why they are more and more used and required in the context of banking activities. The collection of these huge amount of quantitative and qualitative data, which are analysed, normalised and transformed into actual indicators, is essential to support the decisional processes of credit institution and financial institutions.

Banks challenging data

Over the time, the amount and the sources of the data have exponentially increased, making more difficult the extraction of useful information. Moreover, the challenge becomes even harder when dealing with regulations constantly updated and rules on cookies and policies to protect privacy.

However, banks and financial institutions are looking for different systems to collect, organise and obtain information on their clients. In this context, alternative data play a fundamental role in the promotion of the growth and performance of a credit institution, as well as in risk management, since they provide critical information on natural and legal persons involved in their business relationship.

Below are four methods applicable to alternative data to help banks in the strengthening of their strategies, to increase and consolidate their clients and to protect against potential risks.

1. Develop relation with clients

Clients are a valuable source of data, but these data should not be out of date. They should be as up to date as possible, since they reflect the changing needs of clients, their lifestyles, their passions and interests, their family and professional changes. For this purpose, alternative data offer a ‘multidimensional’ vision of clients, providing a range of additional information not conveyed by traditional data.

Analysing the lifestyle of savers, we can find out useful information not only related to money management and bill payments. For example, maybe the income of a certain person is increasing, maybe s/he recently got married, maybe s/he goes often to the seaside or to the mountains during weekends.

This set of alternative data offers a wider context, more dynamic and multifaceted, for a deeper insight on savers and provides a range of elements necessary to draft the best product offer to the right client, at the right moment.

2. Identify ideal targets

For banks, as well as for any other company, a marketing campaign addressed to potential clients who cannot or do not want to purchase any products/services represents a waste of time and money, and also a potential damage for the brand of the bank itself. For this reason, especially in the banking sector, a precise targeting is fundamental.

From this point of view, when integrated by traditional data, alternative data can offer a wider view of potential clients, with a potential remarkable increase of the quality of the information available to the marketing area.

These data provide detailed information about a person’s family, occupation, education, economic development and much more. With this additional information, marketing professionals can create better offers and messages to meet clients’ needs, in order to increase answer rates.

3. Credit to small and medium enterprises

SMEs in Italy are 206 thousand and produce 41% of the total Italian turnover. SMEs represent a huge market opportunity for banks, but at the same time a challenge too; this is mainly due to the fact that small enterprises, often family-managed, are self-financing and thus their credit history is very limited, where any. Considering that, it could be difficult for banks to evaluate creditworthiness and the related risks, where a SME requires a loan.

Alternative sources can help to overcome the lack of data on small enterprises that could be unavailable through traditional sources and can convey additional information to create a more detailed and sound overview of SMEs requiring a loan.

4. Improve pre-screening efforts

Banks already know that some clients have a very limited credit history, where any; for examples, millennials and immigrants, that together constitute an extensive client base. In this case, non-traditional data could represent a valid alternative, since they go beyond conventional credit data.

When alternative data are combined with advance analytical models, they result in a highly forward-looking assessment, meaning that a bank can rely on new information and produce more detailed and targeted assessments. These assessment can contribute to a complete depiction of a client’s creditworthiness, especially identifying marginal or invisible candidates, with a good creditworthiness, that otherwise would remain outside the banking market.

Relying on alternative data, banks can analyse potential new clients from a different perspective and, more important, maintain the ones already included in the existing portfolio.