August 26, 2021 | Jennifer Clarke

Estimated reading time: 6 minutes

The life-changing magic of alternative data

Data may not be considered particularly rock and roll. In fact, utter the phrase “financial services data” and you may quickly lose your audience. But stay with me…

While data may traditionally have conjured images of Excel spreadsheets, filing cabinets, and endless form filling – it has now taken on a new, digital role. Far from these traditional associations, new and alternative data uses are evolving at pace, and their applications are bold, innovative, and spearheading a new movement of equality and accessibility within financial services. In many ways, alternative data is changing lives.

Following our recent report, we sat down with Santander’s Head of Digital, Jonathan Holman, as well as Financial Services and Compliance Expert, Sylvia Yarbough, to get their take on the evolving landscape of alternative data.

Alternative data isn’t that alternative

As well as being Santander’s Head of Digital in the UK, Jonathan Holman is also a visiting scholar at the London Institute for Banking & Finance. In this role, he has helped to develop their module on alternative data. We started off by discussing the meaning of ‘alternative data’. He was quick to set the record straight on the term.

“Alternative data isn’t actually that alternative. What it’s doing is it’s taking the same view of a business but sampling it at further points upstream. So that could be CRM data about pipeline and sales. It could be their payments data, where they’re collecting payments, and ultimately generating revenue. It could be their bank account, one step upstream of their financial accounts, where those transactions hit that bank account.”

So alternative data isn’t actually alternative data. Instead, it is better defined as “financial and non-financial data that is secured from non-traditional sources.” In essence, raw data is scraped from various different and far-reaching avenues to enable financial organisations to make faster, more accurate decisions.

How is alternative data being used in financial services?

I asked Sylvia Yarbough, ex-Citizen’s Bank Compliance Head, whether she has seen an uptake in the use of alternative data within financial services over her years in financial services. While she noted it’s not yet “mainstream”, she is seeing a lot of organisations using it in different ways. This is especially true of banks looking to provide access to services to customers that don’t have what is considered “standard data information”. This is especially true in the credit space.

“Historically, we’ve relied on credit bureaus and credit reporting agencies. However, in order to access the new market – millennials and Gen Z’s that don’t really use standardised banking services, for instance – we want to provide them access to credit. This is pretty much where you’re seeing that alternative data come into play.

It’s looking at things like utility bills and anything that would give you a sense of how they act from a credit perspective; rent payments, smaller types of access, loans that they’ve got extensions on and were able to pay over time. This is a means by which we can advance the younger generation (who may not have credit scores) and give them access in that credit line, or access to credit without that standard credit information.

So that’s where you really see the focus right now. And that’s really where the banks have to learn how to compete with the fintechs in leveraging that alternative data.”

Alternative data is changing lives

The ability for alternative data to open up banking to new markets is a point that Jonathan similarly highlighted in his interview. Alternative data, it seems, is a vessel for change and openness within banking. It is a means through which customers without traditional credit or reference data can gain access to financial services, therefore opening up financial services to the masses and offering equal opportunity, of sorts. As Jonathan noted:

“For individuals, where there isn’t a traditional credit profile, people’s transactions with e-wallets where they’ve perhaps been outside the banking system has given them a credit profile, where previously there hadn’t been the sorts of records that we might be used to having access to in the UK.

And obviously that is an incredibly rich profile of data that those companies have access to, and then they can use it to build a profile of a person which doesn’t require a bank account or a traditional credit profile, because you’ve got all the information that you want about an individual.”

Jonathan adds that this is where innovation is key, and highlights that the old ways might not be the best ways – or indeed might hamper innovation.

“Like everything, if you have a convention of how you do something – for example the means to do credit assessment and understand a person or a business – it can prevent you from innovating in that space. Where you’ve got nothing to start with and you’re building an infrastructure from scratch however, new technology can come in and do something more sophisticated more quickly.

It’s a very difficult area to navigate, and while I don’t And so we are seeing that trend globally that alternative data can be a really useful tool to supplement or to replace traditional sources.”

Your transactions are telling

The benefits of alternative data, as Jonathan points out, are not simply limited to credit decisions. It can be used across the breadth of financial services and, in some cases, could be used to provide intelligent, tailored products without the lengthy lead-in time and paperwork.

“I’ve long since said, bank account transactions could tell you if someone wears glasses or not. They can tell you their favourite type of cuisine. You could probably have a good guess at someone’s weight. You could probably have a good guess at someone’s age if you didn’t know it – all from their bank transactions. You could probably guess their sense of humour or the types of music that they like, because you could match expenditure at concert venues on certain days. It’s quite easy to profile a person in some detail from their bank account transactions.

Now, some of that adds value, some of it doesn’t. But the point is, you could determine almost anything just from bank transactions. You could work out the size of their mortgage payment, the size of their insurance payment, you could work out roughly what their house is worth and roughly the amount of debt they’ve got outstanding against that, and therefore, you can roughly work out their LTV.”

This is, Jonathan adds, something that would be particularly useful in mortgage applications and transactions, whereby you could determine affordability – to a very high degree of accuracy – based solely on bank transactions.  

This is a point that does not go unnoticed by Sylvia who, in her closing remarks, considers how the rise of technology and alternative data has now given banks almost unbridled access to customers’ data, purely by understanding the transactions that customers make using their products. This enables financial institutions to become better, more intelligent financial advisors and offer products that are both suitable and needed. She adds:

“It’s our ability to take that data and add it alongside things like social media information, their purchases online and so forth, and really harness the power of artificial intelligence on top of the data we already collect. Using AI, we can then really expand our ability to be good financial advisors and provide the right financial services to customers, when they need it.”

Sylvia and Jonathan’s interviews were recorded as part of our Data: Poison or Cure? report. You can watch the videos in full here.