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Alternative Data: The Ascent to Better Risk Management & Financial Inclusion

The financially excluded are those without access to traditional financial services at usury prices, and lacking in financial education. This population is not limited to those in developing countries, but also counts people in the developed world, including the 88 million in the United States (see consumer profiles in American Express’s Documentary “Spent: Looking for Change”).

One might ask how so many lack access to basic financial services, given the increasing pace and reach of technological growth?

In reality, the reliance on insufficient and outdated data by traditional financial institutions remains a key barrier towards increasing financial access and developing more resilient means to measure consumer risk.

 

 

Stories like Jorge’s represent the market failures of the traditional data banks use to develop a consumer profile. The need for “Alternative Data” has emerged to prevent this type of failure.

Over the last year, I volunteered as a consultant for the Ashoka Globalizer program and leading alternative data provider, PERC – FIRM (Financial Identity Risk Management). Our goal was to scale alternative data to multiple markets. Through this work, I learned about the potential to make far-reaching strides towards financial inclusion by applying alternative data.

Alternative data or “non-traditional” data, aims to increase financial inclusion by combining different forms of non-financial payment data to develop risk profiles of potential consumers. Examples of alternative data include:

  • Electronic payments (remittances, withdrawals and transfers, whether through banks or telcos etc.)
  • Payment history with telecommunications and utility bills
  • Rental payments
  • Supply chain data (for businesses)

FIRM has partnered with Experian MicroAnalytics to develop a hub-and-spoke cloud model. Hubs act as data sharing and risk modeling platforms, while spokes act as servers with data furnishers.  FIRM is able to comply with privacy standards, as the data is stored with the original custodian who collected the data (e.g. utilities company).

In order to effectively use alternative data, companies that collect electronic, utility and rental payments as well as supply chain data, must be incentivized to make the data available and usable, without compromising consumer trust.

FIRM solves the problem of alternative data access by harmonizing incentives among data furnishers, lenders and borrowers. Lenders and borrowers would pay FIRM a fee to access a customer’s risk profile, and FIRM would pass a portion of that fee to the original data collectors (e.g., utilities companies, suppliers, telcos, etc.).

 

By using FIRM, the bank has been able to acquire a new customer from an untapped market segment who is within its risk tolerance. This not only improves the bank’s profits, but helps extend access to financial services to a previously excluded consumer.

This is just one example of how alternative data can be leveraged to access new market segments in one industry. Other industries in which alternative data can be applied include underwriting for the mortgage market, as well as insurance. Alternative data has been used successfully to generate many consumer reports around the world, including in the United Kingdom, Mexico and Colombia.

It is time we critically assess alternative data and its positive potential on our clients’ bottom lines. Not only can alternative data help them smartly manage risk for their traditional customers, it can also provide a means to fairly assess the otherwise financially excluded and bring them into the fold.

 
 
 
 
 
 

About the Author

francesca lopez

Francesca is a Consultant in the Banking practice at Capco North America. She has over six years’ experience of conducting financial inclusion research and has published a variety of content from white papers to articles in publications like Forbes Magazine and the World Economic Forum. She holds an MS in International Business and Management from Manchester Business School, UK.

 
 
 

The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.