How Fintechs Can Use Alternative Data for Improved Predictive Modeling

By Maria Kingston.
Updated Jul 7, 2021

SAN FRANCISCO (PRWEB) July 07, 2021 - The emergence of fintechs in recent years can largely be attributed to their increased flexibility, agility, and speed when compared to their traditional banking counterparts. However, fintechs must balance contrasting goals. They must continue to provide customer-centric solutions while safeguarding their organization from risk. They have to attract a constant stream of high-quality, low-risk leads, which is difficult to do while working with limited data.

Fintechs are beginning to realize the power of alternative data sources. The right types of alternative data can significantly improve predictive models, including risk modeling, fraud detection, and lead scoring. Alternative data provides a more comprehensive, well-rounded picture of who prospects and potential borrowers arewhich in turn, helps fintechs make better decisions about who to target, extend credit to, and strive to retain over the long run.

What types of data should fintechs acquire?

With 2.5 quintillion bytes of data created every day, the issue isnt a lack of dataits finding the right data. Alternative data in fintech might include geospatial data, person data, company data, or time-based data.

It is also important to consider how to combine these data sources to extract derivative signals for a complete picture of prospects.

For example, some unique attributes that fintechs can leverage using alternative data include:

Alternative data in fintech Fintechs can leverage alternative data in several ways. However, weve typically seen it used for three primary use cases: risk modeling for B2B lending, fraud detection, and lead scoring.

Risk modeling for B2B lending Fintechs are quickly becoming the go-to loan providers for SMBs, due to quicker approvals, less stringent background checks, and no upfront collateral required.

This can attract risky applicantswhich means that accurate risk modeling is essential.

Relying on limited data such as banking or accounting statements, does not accurately predict a borrowers creditworthiness, or the likelihood of them repaying their loans on time. Small business lenders are therefore struggling to cope with increased defaults on loans they have extended.

Alternative data can help enrich a fintech providers data, providing a more accurate analysis of the risk levels of loan applicants. Fintechs can use the following types of data to increase loan default risk model accuracy:

As a result, fintechs can more easily identify and exclude high-risk businesses, expand the data indicators of risk among SMB borrowers, identify businesses with low risk for immediate automatic loan pre-approval, and create alternative credit scoring models.

Fraud Detection According to PwCs Global Crime and Fraud Survey 2020 , nearly half of all businesses have experienced fraud in the past two yearswith online lenders experiencing roughly twice as much fraud as banks.

Online lenders are targets for fraud by borrowers who claim to be legitimate businesses. Compared to banks, which generally make loans to known customers, the online application process is remote and decisions are made quickly. Several online lenders dont do thorough enough background checks, and rely on basic information such as business and owner name, address, business IP address, and business creation date to make lending decisions. Fintechs need more relevant, alternative data to better assess if a business is real. By enriching their data, lenders can generate more accurate fraud scoring models which can dynamically identify fraud by expanding the number of relevant data points used at the pre-qualification stage.

A few examples of the types of alternative data that can help to improve loan application fraud models are:

Lead Scoring All companies, regardless of their sector, want to target high-quality leads. However, internal data (e.g. form fills, website engagement, and pages visited) reveals little about prospects. For financial institutions and lenders to SMBs, the results of poor lead qualification can have a severe negative impact. Fintechs need to target the leads that are lower risk, and more likely to pay back the loans on time. If not, money could be wasted on recovering defaulted loans.

Enhancing existing datasets with real-time, relevant information enables the creation of new lead scoring models that will more accurately qualify leads and identify those with low-risk profiles. We see our customers create lead scoring models with new signal categories by incorporating third-party financial data such as credit ratings, previous history with bankruptcy, revenue trends, loan repayment history, and assets owned. The result is better targeting, improved conversions, streamlined operations, less time wasted pursuing bad leads, and less money spent on recovering defaulted loans that were extended to incorrectly qualified leads.

A few examples of the types of alternative data that can help improve lead scoring models are:

The results are wide-ranging: better targeting, improved conversions, streamlined operations, less time wasted pursuing bad leads, and less money spent on recovering defaulted loans that were extended to leads that were incorrectly qualified.

Its time to unlock datas true value

Today, fintechs continue to struggle to build accurate predictive models trained with only internal data.

To derive the full value that can be gained from data analytics, they must enrich internal data with alternative data sources. This will power improved business outcomesenabling them to make more accurate strategic decisions.

Explorium offers a first of its kind data science platform powered by augmented data discovery and feature engineering. By automatically connecting to thousands of external data sources and leveraging machine learning to distill the most impactful signals, the Explorium external data platform empowers data scientists and business leaders to drive decision-making by eliminating the barrier to acquire the right data through data discovery and enabling superior predictive power.