by Niels Turboer, Spotcap
Fintech is playing a key role in shaping the future financial landscape. At the centre of this is data. There has been a huge change in both the supply and demand of financial data in recent years. We have more data than ever, it’s cheaper to access than ever, and we have more types than ever. It ranges from traditional sources – public filings, tax returns and bank statements, to new alternate data such as payment behaviour, geographic and online footprint as well as product reviews.
These developments are viewed as positives because supply isn’t the only thing that has grown. Demand has as well. Businesses from the whole financial services spectrum are using the abundance of available data to drive operational efficiencies, personalisation and cost reduction.
Too good to be true?
Perhaps. While the alternative data and technologies that go hand in hand with them – AI and machine learning – allows for faster decisions and lower cost, they could also be a risk.
It’s important not to lose sight of the fact that since the use of alternate data exploded we have not yet been through a full credit cycle and therefore we cannot be sure how some of the models that rely on alternate data will hold up when exposed to change in credit conditions and systematic risks.
Can these risks be managed?
Yes, absolutely – to an extent. As another industry member put it “as humans you and I are able to take into account context and general knowledge to put data-driven conclusions into perspective.” We are part of a necessary check and balance system as the use of alternative data grows. A credit decision making process that makes use of alternate data can be balanced with an experienced underwriter who is able to review a credit decision before a loan is approved, for example.
Alongside the human factor, regulators will play a key role in setting up auditability standards and governance to ensure that risks are properly managed.
But there are also limits to their reach. A recent paper by Financial Stability Board discusses how network effects may give rise to third-party dependencies. This could, in turn, lead to players that fall outside of the “safe” perimeters that regulators have set up to monitor and manage risk.
We all realise that the role of alternate data will increase dramatically in the future. It has tremendous potential to drive innovation and evolution of the financial service sector. To ensure a smooth ride it’s best to start by using it to enrich tried and tested data sets and analytical models. If these prove robust in the long-term, use can be stepped up. In the end, we’ll all get further that way.
Spotcap operates as a direct lender to SMEs in the United Kingdom, the Netherlands, Spain, Australia and New Zealand where they offer promising businesses access to flexible finance. Spotcap’s online application is straightforward and can be completed in as little as five minutes, either online or in collaboration with a financial advisor, broker or accountant.