Data and Financial Services: Four Lessons Learned
By Kathleen Yaworsky
A new report from Accion highlights how data-driven innovation can help financial service providers access new customers and address the needs of the underserved.
In the ten minutes it takes to read this article, mobile phones, the internet, and smart appliances will create a staggering volume of information; collectively, these devices will produce roughly the equivalent of a third of all the written works in human history by the time you finish.
This vast new resource can transform nearly every walk of life, and it holds particular significance for those of us working to promote financial inclusion. Data – specifically big data – can help financial service providers verify who their clients are, tailor services to their needs, and assess their creditworthiness.
In time, big data can facilitate the automation of many processes, making it cheaper, faster, safer, and more appealing for businesses to work with the communities and entrepreneurs that typically can’t get the high-quality financial services they need. But even ”small data” – data that’s not as abundant or formalized as big data – can do a great deal to help financial service providers expand down-market and catalyze financial inclusion.
Despite its potential, data is only as useful as our ability to interpret it. We at Accion spoke with more than 30 experts to understand what steps organizations must take to use the data they already have at their disposal to inform and improve operations, as well as the additional ways that they can use data to inform and improve operations. Building a data-driven culture takes time, but as our new big data research paper explains, it’s a worthwhile investment, one that can help people left out of the formal financial sector obtain the services they need.
Here are some of the paper’s highlights:
#1 Data can enable companies to reach new customers
It can be daunting for large financial service providers to work with the underserved. In many instances, the people and businesses without access to financial services take more time and cost more money to evaluate as borrowers, they have smaller ticket sizes (that generate smaller profits), and – as a result, serving them does not seem economically viable.
But data-driven innovation makes it easier to treat typically-overlooked customers and businesses. We’ve seen large, legacy financial service providers use data to segment populations and create more targeted products, A/B test services, and replace or support human decision-making. All of these improvements make it safer, cheaper, and easier to perform high-volume transactions – and ultimately provide financial services to those who are currently left out.
Doing so represents essential social progress. It’s also just good business. By investing in emerging markets, companies gain a foothold with new customers. And technology makes it easier – and more cost-effective – than ever to reach those customers.
#2 Every little byte counts
Yes, big data is particularly transformative. But size isn’t everything – smaller datasets are still valuable. One partner we worked with gave tests to assess clients’ progress on financial literacy. Those tests scores were never meant to have any other application, but once loan officers digitized and evaluated the results they found that the scores were highly predictive of loan default rates.
#3 Do it better with data
Throughout the course of our research and interviews, we cataloged nearly 60 providers around the world harnessing data to improve insurance, credit ratings, fraud prevention, student loans, financial record keeping, and at least half a dozen other financial services.
Sure, some of them have more potential than others – one interviewee relayed a story of another provider trying to develop an algorithm based on a user’s astrological sign to predict their ability to repay. We’re a little skeptical that Leos make better borrowers then Capricorns (though I may be biased, since I’m a Leo myself!), but we do believe that data can improve – or at least inform – just about any financial service, product, or back-office operation.
#4 Take your time
Financial service providers looking to harness data-driven innovation should prepare for a long and involved process. That’s true from the start: teams need time to “play” with the data, if only to look for interesting patterns. Asking questions about those patterns can direct data projects to solve pressing business questions.
Apart from taking the time to look at data, financial service providers also need to work through a series of issues before implementing data-driven innovation. These projects have operational consequences that cut across an organization: senior leadership needs to address or consider staffing, legal compliance, IT infrastructure, vendor contracts, and training for any data-driven innovation to be successful.
You can start small, but think big!
Kathleen Yaworsky is the digital solutions global manager at Accion.
Featured photo: A books vendor uses her cell phone while waiting for customers in Jakarta on September 23, 2016. (Credit: Bay Ismoyo/AFP/Getty Images)