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The digital revolution over the last decade has intensified the incidence of interconnected devices. With the ease and cost-effectiveness of digital tools, the amount of data that is generated globally has been rising exponentially.
The digital revolution over the last decade has intensified the incidence of interconnected devices. With the ease and cost-effectiveness of digital tools, the amount of data that is generated globally has been rising exponentially. With this increase in data generation, the capacity to structure, collect, and analyze data continually in real-time has also been growing.
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With nearly 1.7 billion people who do not currently have access to formal financial services, the need for a data-based economy has been on the rise.
Moving to a financial system that considers alternative data rather than traditional data such as credit reports can foster greater financial inclusion. There are plenty of new forms of alternative data that are considered to expand financial services to the lower-income customer segments. In this article, we will gain a deeper understanding of how alternative data can impact consumers and lead to the ultimate goal of financial inclusion.
All About Alternative Data
Typically, during the lending process, banks and financial institutes profile customers by considering traditional data such as repayment history, credit dues, outstanding debts, credit reports, and others. Such a system of customer profiling and determination of creditworthiness only holds good with the availability as well as the quality of past credit history data. However, not all customers or applicants have a reliable set of data across these aspects. This is where alternative data such as utility payments history, financial etiquette, consumption patterns and others can come in handy.
In a world with a flood of data available, it can be challenging to determine which data points have to be captured and how the said data can be put to good use to provide a favourable outcome. With both traditional and alternative data, the practical challenges of first obtaining and further converting raw data are immense. This scarcity is pointing towards the lack of APIs across the fintech and banking sectors. Despite the plethora of data that is available, it can be challenging for financial service providers to use more than a certain amount of data independently. Combating this issue can be possible by collaborating with third-party providers such as mobile network operators, e-wallets, utility companies, and other stakeholders.
Perks of Using Alternative Data
One of the key benefits of using alternative data that shed light on the consumer’s ability of financial management is a predictive factor of the credit risk of the consumer. On the whole, alternative data brings about better outcomes for both lenders and consumers. Lenders receive a more comprehensive and predictive picture of the consumer’s credit risk helping them confidently grant credit to verified candidates.
This lender confidence can be extremely instrumental in scenarios where consumers have sparse credit and minimal credit activity. Consumers can expand what the lender can view regarding their credit habits and financial behaviour, which is especially beneficial for new-to-credit candidates. This holistic view helps lenders understand the consumer’s ability and willingness to uphold credit commitments.
While alternative data holds great promise, there is one challenge with respect to fragmentation. The numerous sources of data lead to an increased variation in the available data with respect to access, structure, and sharing methodologies. So, maintaining a standardized format to store and share data can eliminate challenges with respect to fragmentation.
Improving Financial Inclusion Through Alternative Data
The gap between eligible customers and other customers is driven by the insufficiency in data regarding past credit habits. This gap can be bridged by using alternative data. Over the past few years, many financial institutions have adopted this method in addition to traditional data. To accelerate this adoption and simplify its process, it is important to consider the avenue of partnerships. To leverage data and drive financial inclusion, partnering between fintech companies and banks can offer great opportunities. These partnerships can be beneficial from the faces of risk tolerance, specialization, and agility.
The path towards financial inclusion is driven by using alternative data in addition to traditional data. With plenty of data generated on a daily basis owing to digital technology, choosing the right data and generating meaningful insights with the help of partnerships can aid fintech establishments and banks to make informed decisions about a customer’s credit risk.
The author, Amit Das, is CEO and Co-founder at Think360. The views expressed are personal
(Edited by : Anshul)