The Rise of Alternative Data: CEO Strategies for Extracting Insights in Financial Services

By Anurag Sinha, Co-Founder & Managing Director, Wissen Technology

Financial services firms have long relied on data to make critical business decisions. But traditional sources of data are slowly becoming extremely stagnant. This has given rise to alternative data that is gathered from non-traditional sources. Let’s examine the popularity of alternative data and how financial services CEOs can extract exceptional insights from it.

What Is Alternative Data?
Alternative data refers to non-traditional data sets that banks and other financial institutions use to drive their decisions. Unlike traditional sources of data that deliver limited information, alternative sources of data help banks paint a 360-degree picture of their operating environment — right from the latest banking innovations to emerging customer preferences and more.

Given the quality and depth of insights alternative data can provide, the market is set to skyrocket in the next few years. According to a recent report, the global alternative data market is valued at $7.2 billion in 2023 and is expected to exceed $135 billion by 2030.

What Are the Most Common Sources of Alternative Data?
Banks and other financial institutions are constantly looking for new, untapped sources of data that enable them to stay ahead of the competition. Listed below are the most common sources of alternative data:

Transaction Data
Banking customers are increasingly using various digital channels to carry out transactions. From digital wallets to banking apps, they are making several transactions online. Transaction data acts as a great source of alternative data, offering deep visibility into the payment environment. Banks can use this data to evaluate customer banking experiences, identify performance issues, and fix anomalies. Banking organizations can also use transaction data to strengthen operations and avoid service disruptions in digital payments.

Mobile Device Data
With mobile devices becoming the primary medium of access to banking services, the data collected by them acts as a treasure trove for financial services organizations. Mobile device data offers deep insight into customer behavior and preferences. Banking firms can use this data to understand how and when customers use banking apps, what actions they carry out the most, and the issues they face along the way.

IoT Sensor Data
As banks increase their reliance on IoT sensors to improve their operating models, IoT sensor data is quickly emerging as a popular source of alternative data. Banks can use this data to segment customers based on their profiles, track spending patterns, and even monitor and measure their banking experiences. IoT sensor data also aids in detecting fraud and enhancing the security of banking operations.

Social Media Data
Social media is another popular source of alternative data increasingly used by banks. Tracking customers’ social media behavior can shed much-needed light on customer sentiment, allowing banks to stay ahead of the curve. By tracking posts, hashtags, keywords, and mentions, banks and other financial institutions can improve product features, enhance customer support, and maintain their business reputation.

Online Product Reviews
The reviews that customers leave on online channels are a great way for banks to improve the quality of banking services. While positive reviews can uncover what customers like about a particular product or service, negative reviews act as a great starting point for improvement. Financial services firms can assess customer sentiment through these negative reviews and make necessary modifications to improve the customer experience and their competitive position.

Location Data
Location data is also increasingly becoming an excellent source of alternative data. Assessing location data can enable financial services organisations to come up with better-targeted marketing and advertising campaigns. They can pinpoint opportunities based on the shopping habits of customers, enable local convenience, and minimise fraud via timely authentication and/or alerts.

How Can Financial Services CEOs Leverage Alternative Data?
Financial services CEOs constantly face the burden of operating efficiently in a volatile market. Basing their decisions on alternative data is a great way to optimize products, streamline risks, and improve customer satisfaction. Here’s how financial services CEOs can leverage alternative data:

Identify New Prospects
Limited budgets and rising competition have made it difficult for banks to identify new prospects. Alternative data can help in identifying customers who are most likely to opt for a banking service – thus improving the chances of conversion. Instead of wasting time and money marketing to people who have no interest in a service, banks can enable precision targeting and boost response rates.

Strengthen Customer Relationships
Alternative data can be used to unearth critical information about customers and take steps to strengthen customer relationships. For instance, as a customer stands in a queue at the POS counter in a shopping mall, the bank can send an alert for quick online payment – thus reducing the purchasing time and improving the customer experience.

Minimize Fraud
Continuous access to alternative data allows banking CEOs to minimize the instances and impact of fraud. Closely monitoring transaction data can enable them to gauge customer behavior and quickly detect anomalies – before any damage is done. By identifying unusual patterns that indicate fraudulent activity, banks can flag suspicious transactions and investigate them for quick workarounds.

Streamline Investment Management
Alternative data empowers financial services CEOs with valuable insight for investment management. By assessing non-financial and unstructured data from alternative data sources, CEOs can enjoy active returns on investment. They can also drive better organic growth by enhancing operational efficiency, improving product distribution, and managing risk.

Boost Financial Inclusion
Banking CEOs that go beyond traditional data sources can also boost financial inclusion. With millions of people around the world falling into the unbanked or underbanked category, alternative data can help banks reach previously untapped markets at reduced costs. It can also aid in creating credit profiles for citizens and in offering basic banking services.

In a Nutshell
Traditional sources of data, such as financial statements, customer service interactions, and website visits, will always be critical to banking and financial services companies. But as they look to keep up with the latest trends and outdo the competition, they are increasingly relying on alternative data.