The finance industry has long used data as part of its operations. Investments can be a risky business after all, and data can be used to limit the risks. Many financial institutions have gotten used to employing data from more traditional sources as part of their analysis and assessment. Some of these traditional sources can include SEC filings, customer credit scores, press releases, and more.
As the world has become inundated with more and more data, the traditional data sources, while adequate, only give a portion of useful information. The finance industry can do so much more if they have more data. That’s where alternative data comes in. According to a 2018 survey from Dataminr, around 79% of institutional investors say they use some type of alternative data. It’s clear that many within the finance industry are turning to alternative data and seeing the results they want.
What is Alternative Data?
Put simply, alternative data is data that has been collected from anywhere outside traditional data sources. That can be different for pretty much any industry. In the case of the financial industry, if data comes from a source outside traditional areas like SEC filings and credit sources, it can safely be considered as alternative data.
When institutions collect alternative data, it will sometimes come in a highly unstructured form. There’s also usually a lot of it. Many organizations will refer to alternative data as big data, but big data is mainly a reference to the amount, whereas alternative data refers to where it comes from.
Why Use Alternative Data?
With so many traditional data sources at their disposal, why would financial institutions and investors want to use alternative data? Traditional data sources have certainly served them well for many years, but there’s so much more data for them to use out there. Alternative data helps provide additional insights that these institutions wouldn’t normally have. This data gives them a bigger and clearer picture of the financial situation surrounding an individual, organization, industry, or even an entire economy. For example, some investment firms have recently taken to analyzing satellite imagery to assess the health of a local economy. This is done by taking satellite photos of shopping center parking lots and counting the number of cars there at any given time. From that information, they can determine how many people are shopping, which can indicate the current economic state.
Types of Alternative Data Used in the Finance Industry
With financial organizations turning to alternative data more, it’s helpful to know what kinds they’re using. The very definition of alternative data makes the list of types long, so let’s look at some of the most common ones.
Besides satellite imagery, which was mentioned above, common alternative data sources include social media, web browsing behavior, cell phone geolocation, email receipts, credit card transactions, bill payments, and product reviews.
Social media is one of the biggest alternative data sources. In the game of risk assessment, financial companies want to know who they are doing business with. The more details the better. In the past, credit score was used for this purpose, but social media analysis has proven to be another helpful source. Based on how someone uses social media, who they interact with, what they say, who they know, and different pages they visit, many financial institutions can predict the likelihood of someone paying back a loan.
The same goes with regular bill payments. For example, if a customer has shown that they will always pay their cable TV bill on time, that’s a good indicator that they will make their loan payments on time as well.
Web Data is the most important source of alternative data. The scale and diversity of the data on the web means that you can know anything you want about your industry, your competition and your customers and you can know it right now. Using web data it is possible to create a dataset that is unique and highly relevant to your business, meaning that you can answer questions that simply could not be answered previously.
All of these alternative data sources are used to gather more information about someone. This is information that the finance industry simply didn’t have access to before, in part because the technology wasn’t there to collect it.
Using Web Data Integration & Alternative Data in the Financial Industry
Import.io offers advanced web data integration that companies can collect alternative data and have it available for analysis. Import.io streamlines the effort associated with parsing through financial reports, separating associated text and descriptions, and converting the data into a usable format—so analysts can focus on analysis.
With Import.io, your organization can leverage a comprehensive Web Data Integration solution that makes it fast, easy, and affordable to maximize the strategic value of web data. The capabilities of the solution are limitless, however the internal resources you have available to leverage the solution are far from infinite. All initiatives require web data, but lack the time, expertise, or resources to see these efforts through to completion make them hard to execute. No web data project is too difficult or ambitious for Import.io. We can do the heavy lifting, so you can focus on what’s important: driving your business forward.
The Uses of Alternative Data
Alternative data is used for more than just risk assessment, although that is a major benefit. The finance industry also uses these different data sources to extend financial access to populations that might otherwise be overlooked. There are many people out there who simply don’t have experience working with financial institutions. As such, they have no real credit history, which makes it difficult to get loans approved for them. However, if alternative data is used, financial organizations can determine credit trustworthiness and give financial access to them when they likely wouldn’t have received it.
Alternative data can also be used by financial institutions as a way to improve their own services. Many financial transactions are done online these days, and based off of data collected from those transactions, organizations can figure out where they are lacking and need to improve.
Alternative Data is the Future
The use of alternative data is the clear future of the financial industry. It’s more extensive, more up to date, and a better indicator than many of the traditional sources that have been around for years. The ironic thing is that once an alternative data source is used for long enough, it may no longer be considered alternative; it will simply become a part of the traditional data framework of the finance industry. No matter what happens, alternative data will likely be part of financial organizations for the foreseeable future.