Lack of credit data is a major reason for financial exclusion, especially in developing regions. However, individuals and businesses leave multiple digital footprints and generate large volumes of data daily using mobile phones. Activities such as online payments and trading, social media, web surfing, record keeping, etc., form alternative credit data sources.
Financial services providers (FSPs), especially fintech, began to extract digitized alternative data to inform their decisions and credit risk management process. As a result, lack of data became only an obsolete obstacle to extending financial services to the underserved.
Today, both traditional and non-traditional lenders leverage alternative data (behavioral, transactional, social media data, etc.) to enhance their operations. With the data gap bridged, the underserved can access financial services and products and get included in the formal economy. Nonetheless, the innovation continues to open the door and hold it open for financial inclusion across the globe.
Why Is Alternative Data the Key?
The noise about alternative data raises different questions. The major queries include why experts think it paves the way to financial inclusion. Alternative data possesses many features which combine into a key that opens the door for underserved individuals and businesses to access quality financial services.
Real-Time Information
Alternative data provides up-to-date information that provides FSPs with predictive and descriptive insights to feed into their models. Real-time data helps banks and other financial institutions readily and accurately assess old and new.
As a result, they deliver personalized services and products based on consumers' current realities rather than history. The combination of historical and real-time data gives a complete picture of customers' financial situation and behavior.
Dynamism and Depth of Datasets
The compilation of data from multiple sources makes alternative datasets deep and dynamic with numerous unique insights to offer.
The availability of large amounts of information made available to FSPs, especially banks, helps them serve unbanked and thin-file customers. More so, the dynamism of the datasets gives multiple perspectives and well-rounded views on customer behavior and realities.
Accuracy of Modern Technology
In the past, major concerns would center on the difficulty of processing such vast amounts of data. Traditional financial institutions like banks require enough processing time for less ambiguous conventional data.
However, modern technology also birthed a vast array of infrastructure and methods which enable the transformation of large datasets. Using AI and machine learning with advanced big data analytics curtails human bias and inefficiency, aiding the accurate translation of relevant information.
Security of Cloud-Based Infrastructure
Alternative data used cloud-based computing to gather and store data from different sources. Its use eliminates the risk of data loss and damage and secures customer information.
More so, alternative data remains accessible and easily updated with quick navigation. It makes it easier and less expensive to maintain compared to traditional paper-based data.
Ease of Obtaining Data
Many platforms aggregate, extract, and verify alternative data from different sources, making it easy to acquire for generating insights. Additionally, the platforms go beyond ordinarily sourcing for data to facilitate onboarding, refining, analysis, and real-time tracking of data. Alternative data-leveraging innovations such as FiDaaS take steps further to provide verified data to FSPs on customers' behalf.
How Alternative Data Paves the Way to Financial Inclusion
Financial inclusion means the same thing to every nation in the world– economic development. It signifies access to financial services like savings, credit, and insurance to underserved individuals and the opportunity to expand for MSMEs.
For banks, other financial institutions, and fintech companies, it means a larger market and more customers. The regulator takes it to denote extensive, quality, affordable, and secure financial services and products. The United Nations accepts it as an enabler of eight out of seventeen Sustainable Development Goals.
Ultimately, Financial inclusion is essential for global economic and socioeconomic development. Nonetheless, experts identify alternative data as the key to paving the way and ushering the world into an inclusive era. Fortunately, the results generated from its adoption across various industries, sectors, and nations speak for themselves in the last few years.
Particularly, it has actively promoted the extension of financial services and products to the underserved. Since the absence of adequate data is a major reason for exclusion, the presence of alternative data counters it. Several inclusive innovations leverage the technology to facilitate financial access for all. The following discusses the ways through which alternative data drive financial inclusion.
Credit Risk Assessment
Alternative data enhance credit risk assessment to promote financial inclusion. Before individuals or businesses obtain credit, banks and non-bank lending institutions determine the risk involved in making a decision. Credit analysis involves assessing customer information to measure their creditworthiness and ability/ probability of fulfilling their debt obligations.
The diversity of data available daily from alternative sources presents a potential catalyst for credit risk management. When extracted, alternative datasets provide valuable insights for credit assessment and empower lending services providers to give accurate credit scores. Both lenders and customers gain an advantage from the arrangement.
Therefore, underserved individuals and businesses who lack credit access due to inadequate information or credit history receive an opportunity. As a result, more previously excluded people get included in the mainstream financial system.
Providing Consumer Information to FSPs
Customer data is critical to FSPs for quality service, smooth operation, innovation, and growth. Alternative data improves their ability to obtain, aggregate, and use customer data. Combining machine learning (ML) and artificial intelligence (AI) technologies allows companies to collect and process larger customer data.
Moreover, authorized alternative data platforms to provide data to FSPs on customers' behalf. The enhanced ability to store, manage, and transfer data and gain consumer insights help FSPs serve the underserved.
Supporting Digital Finance and Strengthening FinTech
Financial Technology facilitates productivity and promotes economic growth through innovations that serve many concerns of traditional finance, including financial inclusion. Fintech embraced alternative day ways before traditional financial institutions realized that they needed to jump on the fast train.
As a result, they are more aware of the untapped potential of alternative data sources. They exploit its predictive capabilities to strengthen their operations and, essentially, provide financial services and products in emerging, untapped markets. Many fintech companies target underserved populations because they possess a key to unlock and identify the jewel in the rubble— alternative data.
Consequently, more low-income, less-educated, underserved individuals and communities gain access to financial services and products. In addition, the underserved are embracing digital finance and getting included in the formal financial system.
Ultimately, alternative data kills two birds with a stone by promoting both digital and financial inclusion. In a bid to maintain relevance, banks and other traditional financial institutions turned to digital banking and other digital finance options.
Creating Financial Identity
Alternative data expand financial access to unbanked and underbanked customers by creating financial identities without traditional credit histories and documentation. Banks and other traditional FSPs often require formally-issued identity documents and identification proofs to verify customer identity.
However, many customers lack the ability to provide them due to several other reasons. Particularly, the unbanked are mostly institutionally invisible and thus, require a different means of establishing their identity.
Moreover, alternative data allows the verification of personal without documents such as birth certificates and proof of receipts. Several platforms leverage the technology to create financial identity and credit scores for so-called invisible or thin-file customers.
Moreover, the alternative data-aided design enables traditional financial institutions like banks to explore opportunities such as remote account opening. It gives them access to customer information and the ability to compute form fields and remotely verify signatures. This increases financial access for the underserved and enables banks to reach regions with no physical branches at lower operational costs.
Driving Financial Inclusion Strategies
Fundamentally, financial inclusion strategies derive direction and stability from data. Alternative data intensify the push for financial inclusion. Consequently, as part of their national inclusion strategy, some countries approved the integration of new alternative datasets.
Additionally, it helps policymakers aggregate high-quality financial inclusion data to inform their deliberations and strategic planning. In fact, FINDEX included alternative data in compiling demand-side data on financial services relations in nearly 150 countries to support national inclusion policies and strategies.
Final Note
Financial exclusion results from having little to no financial identity or credit history. The lack of conventional data renders a large number of individuals and businesses unqualified to receive financial services and products. Adopting alternative data provides solutions to the challenges presented by the information gap between customers and FSPs.
As a result, the financially excluded get enrolled and established in the mainstream financial system. They participate more in the formal economy with access to affordable, high-quality services and products. Although regulators and data security proponents raise concerns, alternative data continues to open the door to inclusion.
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