With the explosive growth of data and the breakneck pace of digitization, mainstream financial service providers (FSPs) are increasingly turning to new and alternative data sources and analytics tools to more efficiently reach emerging markets and help bring the world’s 1.7 billion underserved people into the formal financial system. This “new data,” largely separate from traditional credit bureau data, represents a tremendous opportunity for commercial banks to identity new customers, many of whom were previously “credit invisible,” and to better understand and serve the needs of their existing client base. However, the path to greater data utilization is not always clear, as FSPs must weigh the benefits of embracing a data-centric approach with significant operational challenges, including changing a risk-adverse banking culture, recruiting top technical talent, upgrading legacy IT infrastructure and navigating a complex regulatory environment. Building upon in-depth interviews with banks, fintechs and other actors, Accelerating Financial Inclusion with New Data—the newest joint report from the Center for Financial Inclusion at Accion (CFI) and the Institute of International Finance (IIF), supported by MetLife Foundation—examines the data landscape and evaluates the progress FSPs have made in innovating around data and areas where they have faced obstacles.
The path to greater data utilization is not always clear, as providers must weigh the benefits of embracing a data-centric approach with significant operational challenges.
The sheer volume of data now available to mainstream FSPs is truly immense, with some estimates projecting the size of the digital universe to increase five-fold between 2015 and 2020.
Emerging technologies such as artificial intelligence and blockchain will only enhance providers’ ability to analyze both traditional and non-traditional data. For providers looking to break into emerging markets, leveraging alternative data—which includes, but is not limited to data derived from social media, email, utility payments history, mobile phone and e-commerce activity, and psychometric test results—is a necessity.
It is difficult, in practice, to collect alternative data, convert it into a format which can be readily analyzed, and extract actionable insights without collaborating extensively with external partners or building up internal capacity.
But as our interviews with banks and fintechs revealed, it is difficult, in practice, to collect this data, convert it into a format which can be readily analyzed, and extract actionable insights without collaborating extensively with external partners or building up internal capacity. Banks and fintechs commonly source non-traditional data from third party providers (such as utility companies, social media companies, and mobile network operators), frequently a time-consuming process which is further complicated by data privacy, protection and ownership regulations, KYC requirements, anti-money laundering statutes and the like. FSPs sometimes end up deploying multiple solutions for various jurisdictions/countries to comply with these rules. For example, Artoo—a customer relationship management (CRM) solutions company working with microfinance and other lending institutions in India—had to switch from using Amazon Web Services to another local cloud service provider to satisfy Indian data localization laws that mandate the retention of customer data within the country’s borders.
Ultimately, FSPs might find that only some alternative data types are useful, as their utility is contextual and depends heavily upon the particular product or use case in question. There is no “one-size-fits-all” solution for tapping into underserved markets.
Despite the constraints, our research also shows that many FSPs have found success utilizing new data sources and analytics tools. Our report details four snapshots highlighting different products and approaches to data-driven innovation:
- As China’s first private online-only bank, WeBank has capitalized on its connections to tech giant Tencent and utilizes an iterative approach to incorporating social media data into its loan decisioning processes.
- In Mexico, BBVA Bancomer has pursued partnerships with fintechs to test new alternative credit scoring and customer engagement strategies in combination with internal efforts to change customers’ use of transactional products, such as checking and savings accounts.
- Following in the footsteps of Bangladesh’s Grameen Bank, Grameen America has taken a high-touch approach by collecting data directly from customers, instead of using credit scores and other external data sources for its lending decisions.
- SCB Abacus has spun off entirely from Siam Commercial Bank to achieve greater flexibility and autonomy needed to pursue digital innovation.
These examples, and others featured throughout the report, underscore the benefits for banks and fintechs of data-centric innovation and proactive engagement with the broader ecosystem of players in this space, including financial regulators and other policymakers.
Accelerating Financial Inclusion with New Data represents a concerted effort to evaluate the impact and potential of new data and analytics techniques for financial inclusion, and illuminate how mainstream financial institutions and fintechs have adapted their strategies to reach underserved customers in this increasingly data-centric world.