Can Alternative Data Find Alternative Revenue for Your Business?

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Read more about author Gergo Varga.

As international business moves inevitably toward a recession, many companies already entrenched in a bear market attitude are looking to expand the returns in their existing customer base. For some, this process may be akin to searching around the basement, rearranging precarious stacks of boxes while searching for that one forgotten shoebox labeled “rainy day ROI.” A more efficient method that’s less prone to falling boxes? Leveraging alternative data to discover new market segments and unlock previously untapped revenue.

What Is Alternative Data?

When assessing the lifetime value of a potential customer, or even ascertaining their viability as a customer, businesses tended to rely on traditional assessment data from legacy financial institutions. This data – credit scores and real estate, for example – are a consistent indicator of a customer’s spending power, but also limited to those individuals who have a history with the greater brick-and-mortar financial landscape.

Alternative data comes from non-traditional sources like mentions in news media, social media and other web-based platforms, or even publicly listed government contracts. The nature of these data points is potentially as wide-ranging as the nature of services that are being offered, and who have their data openly accessible. Consider services like AirBnB, Disney+, or Facebook, and the potential for individual customer information they may contain.

For example, being able to analyze a customer’s data that is associated with AirBnB can result in data like:

  • The number of reviews left by the customer, implying that they travel frequently, which could be an indicator of strong lifetime customer value
  • A full bio including family members and their approximate age
  • Whether or not that customer completed AirBnB’s IDV processes

Meanwhile, alt-data providers like Thinknum can aggregate data across entire user databases, providing things like the number of likes and check-ins a company has on Facebook – a great indicator of public sentiment and a potential signal to invest, or not.

Depending on your vertical, points like these may or may not be useful. Alternative data, however, is a concept that is constantly redefining itself to include new, untapped data pools.

What Advantages Does Alternative Data Offer?

Some of the intrinsic qualities of alternative data sources offer distinct advantages over legacy financial data streams. Broadly, these advantages come in the form of efficiency, dynamism, and security. Consider that alternative data:

  • Exists in real-time, so is always up to date in terms of reflecting whatever information exists on the queried database at that very moment.
  • Offers a very deep pool of data for any given individual. Naturally, it is limited to whatever digital footprint of that user exists online, but these are increasingly numerous for any one person. There are always new applications for resultant data, with potentially valuable insights being generated all the time as analysts find new angles to look at the discovered information.
  • Is less susceptible to human error. Where legacy financial providers often rely on manual registration and data collection, often still with physical paperwork somewhere in the process, modern data is collected with the accuracy of automated digital means, with machine learning tools to help sort it.
  • Is stored in the cloud and offers that level of data security and organization.
  • Is easily accessible, to the point that there are hundreds of services that do it for you, collating and extracting insights. Alt-data sources like social media websites want to keep their user data open-source to facilitate connections between users, among other things.

These huge pools of data are also constantly being analyzed with new perspectives, applying new metrics in different ways. This kind of dynamism – potentially limitless – make alternative data a well that companies can return to continually, especially if they bring a different bucket every time.

What Tools Can Alternative Data Power?

Building new revenue streams, or building upon existing ones, requires tools. Tools to find the customers, tools build the pipeline, tools to catch the new output. Think of alternative data as the power point that these power tools get plugged into, or at least the extension cord to make them reach farther.

Here are some emergent examples of alternative data being used to boost ROI by opening up previously shuttered windows – or in some cases, just chainsawing a new window in a wall.

Financial Inclusion

Many neobanks and challenger banks are wisely defining their marketspace against legacy banks, as opposed to trying to challenge them directly. A huge portion of that potential customer base includes the underbanked, or people who are traditionally excluded from opening accounts at brick-and-mortar banks for lacking credentials or financial solvency. The push for financial inclusion refers to those emerging money services that are seeking these individuals explicitly. Lacking the usual accountability of a lifelong credit report, alternative data is often used to assess how trustworthy an underbanked person is. 

While the goal is to onboard new customers safely, companies wading into these waters are aware of how thin the line is between a lifelong underserved person and an instance of application fraud. Some examples of how resourceful, careful companies are leveraging alternative data to include the underserved:

  • Esusu in America helps underbanked people build credit, assessing their rental payment history to ascertain their creditworthiness.
  • South Africa’s Paycode is targeted at the underbanked in rural areas and uses alternative data sources like biometric markers to perform IDV and authentication at both sign up and transaction. 
  • ZigWay in Myanmar leverages a proprietary machine learning algorithm that measures alternative data such as social media accounts, and indeed the movement of the phone-holder. This data aggregation results in information like whether a person is going to work regularly, and this allows ZigWay to offer micro-loans for lifestyle staples like cooking oil and rice. 

In regions like Myanmar where only 10% of the population has a traditional bank account, but nearly 90% have phones, this kind of alt-data leveraging represents a huge untapped market. 

Market Segmentation

Beyond onboarding and alternative credit scoring, alternative data can also be used to segment your existing customer base. Marketers and machine learning have been developing a closer relationship since ideas like this have been introduced. Alternative data is another step in that direction, serving ROIs by creating segments between customers’ respective lifetime values, or to create a more bespoke buying experience.

Some particular data points that can inform internal marketing decisions, and are from open-source pools include:

  • Lifestyle indicators like restaurant reviews and vacationing services. An active AirBnB or account, for example, with international reviews and check-ins, could be used to sort customers by their overall spending power.
  • Professional indicators like an account that has registrations with Linkedin, Github, and Atlassian, for example, is probably a strong indicator that the individual works in a particular industry that likely commands a certain salary.
  • Registrations to language-specific and localized apps, such as weibo or Qzone, might trigger an internal push to present country-bespoke user experiences, the convenience of which will likely lead to a higher shopping volume.

Cybersecurity and Fraud Prevention

Risk-based fraud solutions can reference alternative data to form an idea of a user’s intent, particularly during the onboarding process where some amount of user data gets submitted. While these use cases don’t necessarily bolster your returns – outside of fostering a reputation of being a safe marketplace to both buy and sell – they certainly impact your bottom line by mitigating your losses to fraudsters, and potentially reduce the risk of KYC noncompliance fines.

Sometimes this alt-data investigation can be as simple as yes or no. Do they have a significant social media footprint that is easily scrutinized? Or do they have few registrations, and all of the registrations are recent?

Many new registrations, particularly in emerging markets, might fall somewhere in between yes or no. The respective risk appetites of different companies might make them fall on one side or the other for each new customer. That being said, alternative data can only ameliorate the friction introduced by best-practice risk mitigation, and the most secure companies will deploy it in their software stacks in tandem with more hardened KYC processes, or else risk massive penalties.

Can Alternative Data Drive You Down a New Road to Profit?

Most companies are already inspecting their data to derive insights about how to improve their processes, and indeed straighten out the kinks in their revenue pipelines. That said, most companies are also not aware of how much potential kink-straightening they are still sitting on, within their proprietary databases.

If it’s any indication of the potential of a well-analyzed alternative data pool, precedence research reports that 71% of the returns for alternative data providers came from hedge funds and investment banks. Naturally, these entities are looking at alternative data to predict market movements and make smart investments off the back of those insights.The same report also indicates the alternative data market to reach almost $150 billion worldwide in the next 10 years. Without fueling their engines with alternative data, companies hoping to compete on the global stage may find their investments looking less smart, their pipelines developing knots and leaks, and only they are left with their competitors’ dust to analyze as they speed down the ROI superhighway.