5 Benefits of Alternative Data for Banks and Financial Institutions from Enriched Credit Scoring to Lead Qualification

alternative data for finance

A recent survey conducted by Oxylabs, a top UK-based proxy market agency, reveals that out of 252 financial firm managers with decision-making power, an impressive 63% of them are using “non-traditional” data sources that have never previously been analyzed.

We’re talking about the infamous Alternative Data: an immense pool of information that includes datasets ranging from downloads and application usage metrics to the sentiment expressed by users online, social media behaviors, website traffic and much more.

By enriching traditional financial information and datasets (bank statements, tax returns, credit reports, etc.) with new sets of data related to customer’s behavior and their perception of products and services, the combination can bring numerous advantages.

Now more than ever, as a response to the economic crisis brought on by the Covid-19 pandemic, banks and financial institutions are on the search for innovative solutions that leverage Alternative Data and are linked to social sentiment and UGC (user-generated content).

alternative data for finance - mckinsey

Alternative Data for Finance: 5 major applications

But in practice, how are banks and financial institutions taking advantage of alternative data to mitigate risk and lend strategically? 

We’ve identified 5 major applications of Alternative Data that are gaining ground across the financial sector:

  1. Data Enrichment to enhance underwriting, smart lending & credit scoring
  2. Historic data for forecasting and predictive algorithms
  3. Identify and qualify new business partners
  4. Improve the customer experience and launch innovative solutions 
  5. VAT (Tax ID) Matching

1 – Data Enrichment to enhance underwriting, smart lending & credit scoring

When it comes to underwriting and granting commercial loans or mortgages, banks carry out a financial evaluation that’s limited to the most recent financial statements, a series of tax returns and bank statements relating solely to the economic evaluation of a business. 

Alternative Data allows lenders to take their evaluation one step further, by analyzing the reputation of both the business requesting the loan and the products and/or services they sell.

The perception and level of appreciation expressed by customers is a very accurate predictive parameter for the future performance of a company.

As Industria Italiana (Italian Industry) magazine revealed, “Financial statements and reports can be artfully constructed to lower the level of risk and act as a bridge to attempt fraud. Online reputation analysis is a litmus test, the stamp of quality of financial data.”

 
Let’s explore a practical example:

A small business that produces leather bags is asking the bank for funding to open new stores. If, in addition to information on the company’s financial performance, the bank also has access to the analysis of the brand’s online reputation, the bank will have a more complete picture of the business. 

Who is the company’s target audience? What are customers saying about the quality of their products and service on social media and review channels? Are their products appreciated more or less than their competitors?

Data Appeal has provided this type of service to Unicredit and is continuing to do so for other major international banks. 

2 – Historic data for forecasting and predictive algorithms 

Alternative data not only provides an accurate and comprehensive overview of the current business scenario, but by leveraging the historical data of an organization, banks and financial institutions can evaluate past performance to predict future potential with a high level of accuracy. 

In addition, historical data is a very powerful and early predictor of potential upcoming problems and critical issues. When combined with real-time information, Alternative Data provides key insights on decreasing performance trends that might be warning signs of potential financial issues in the upcoming future.

 
Let’s explore a practical example:

A small hotel group that owns three properties is requesting a loan from a local bank. Over the course of 2020 and the first half of 2021, both financial statements and popularity and reputation data reveal a bleak story. One without many guests, online feedback, income and revenues. However, by analyzing historical data up to 4 years in the past, the bank was able to detect a strong performance with thousands of consistently positive reviews and online feedback as well as little-to-no seasonality impact throughout 2017, 2018 and 2019. 

3 – Identify and qualify new business partners 

Alternative Data proves to be a precious resource for enriching any corporate CRM. By drawing on new information and datasets, users can optimize the profiling of potential B2B customers and partners.

By taking advantage of these new datasets, seamlessly identify the points of interest in any selected territory where services or products are unavailable, or conversely, where competitors are located.

Moreover, by leveraging alternative data, enrich the profile of each company in your database with detailed, qualitative insights, such as the company’s Sentiment score (perceived level of satisfaction in the eyes of customers) and popularity.  

 
Let’s explore a practical example:

Data Appeal supports Poste Italiane, the National Italian Postal Service, in a data enrichment project that’s based on artificial intelligence technology. To create a more complete and reliable profile of operators and potential customers, Data Appeal analyzes and catalogs reputation and feedback data across online channels and social networks.  

The result? An enriched CRM complete with exclusive insights and performance KPIs to strategically evaluate new business opportunities. 

4 – Improve the customer experience and launch innovative solutions

In addition to their corporate customers, banks, insurance firms and financial institutions each have their own reputation and analyzing the perception of an individual bank branch or the overall brand is invaluable. 

Monitoring your reputation helps exceed customer expectations, increase your clientbase, win market share, compete more strategically against competitors and adapt your products and services to better suit the unexpressed needs of the market. 

Collecting and analyzing online reviews and content posted by users relating to your products, services, points of sale and brand is the most effective way to uncover the true needs and expectations of customers. Better understand their experience to leverage what’s most appreciative and efficiently solve critical issues. 

 
Let’s explore a practical example:

An Italian bank collects and monitors – in real time – all conversations and user reviews on its branches in Milan as well as those for a major competitor in the same territory. 

The semantic analysis reveals that the majority of negative comments about the competitor are related to the lack of assistance of telephone operators in the individual branches. Clients are never able to talk to the staff and, in their online reviews, they have expressed that it’s extremely frustrating.

The bank conducting this analysis, which provides excellent telephone support, decides to focus on their strength, highlight it more throughout their marketing and communication and inform their employees to keep up the good work. 

5 – VAT (Tax ID) Matching

Among the most modern applications of Alternative Data for the financial industry, VAT Matching is gaining popularity around the world. Simply put, VAT Matching is the validation of correspondence between a company and VAT (tax ID) numbers.

This tiny datapoint is quite powerful and can be used to reveal a complete picture of the financial situation of any company applying for a commercial loan or mortgage. 

Through a special algorithm developed by Data Appeal, financial managers can search for commercial activities and businesses linked to the VAT number of a company under review. 

 
Let’s explore a practical example:

A bank needs to validate the correspondence between select VAT numbers applying for bank funding and the companies corresponding with the VAT numbers to effectively the true and accurate solvency.

It’s possible that these VAT numbers are also registered in other companies of which the bank has no correspondence. It’s critical to keep the financial situation of all companies related to a business in mind when underwriting and granting a loan. 

This is one type of service Data Appeal provides to major national banks. Through a unique dataset, our customers can access all VAT numbers and their matches to enrich their internal underwriting and lending progress. 

Interested in learning more about our solutions for banks and financial institutions? 

Download Our Financial Deck

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