Data is king for many reasons, and the amount of data we produce every day grows exponentially. According to some estimates, 90% of the data in existence today was created within the last two years. IBM estimates that we create 2.5 quintillion bytes of data every day, or enough to fill 10 million Blu-Ray discs.
The sheer amount of data we generate, along with the improved accessibility of this data, has enabled companies to become more efficient in their business decisions, whether in terms of developing new products and services or serving their customers better. Data has enabled companies to make better business decisions and receive a better return on equity (ROE).
In the financial services industry, data enables companies to do things that were not possible just a few years ago. For example, when it comes to underwriting, Mike Cagney, CEO, chairman and co-founder of SoFi, an organization that offers lending, wealth management, and insurance products, said the company can perform comprehensive underwriting assessments with just five pieces of data: your name, your address, your date of birth, the school you attended, and the amount of money you earn. With those data elements alone, the company can assess hundreds of thousands (sometimes millions) of data points and make instantaneous credit decisions. The decision process is so fast that as soon as you click the button, you already know whether you have been approved for a loan.
In fact, at first, applicants did not believe the company was even reviewing their applications. They thought it was simply capturing their personal information. To make their underwriting process more believable, SoFi created a fake timer that spins for 15 seconds if a potential client will be rejected. It turns out that people did not want to be rejected so quickly.
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While those five data elements enable SoFi to successfully evaluate applicants, the company says cell phone data could foster even better underwriting decisions, offering more value than what current credit systems provide. Non-traditional data sources also have good predictive characteristics from a credit standpoint. Even Facebook and LinkedIn profile data has some predictive value with respect to one’s ability to repay debt, similar to cell phone and utility bill data.
With basic analytics, logic, machine learning, and productive modeling, SoFi says its methodology is 40% better than what FICO offers. Mr. Cagney said that while FICO is an acceptable method, it is not a deterministic driver. Nonetheless, he believes we are still in the very beginning stages of leveraging all the data we have available for use, partially due to regulations.
It is fair to say that most financial institutions agree with the notion that introducing new solutions is a challenge because of regulations. As an example, the Consumer Financial Protection Bureau (CFPB) is exploring the impact of alternative data on credit access for consumers who are credit-invisible. While the CFPB is looking into the use of unconventional sources for determining credit worthiness, companies that are willing to take chances and risks related to the creative use of data can benefit tremendously. SoFi is a good example of a company that has benefitted from taking risks, whereas traditional rating agencies are simply too slow to look at alternative methods for underwriting.
Another good example of a company that, through the unique use of data, is turning traditional consumer financial strategy on its head is PayJoy, a company that provides smartphones to customers who typically could not obtain them (e.g., no credit history). Unlike most financial services companies, PayJoy requires only that the customer have a Facebook account, a government ID, and a phone number. If a customer fails to pay, the company will immediately lock the phone, an experience no consumer wants to face. PayJoy has even garnered support from firms like Santander. In September 2017, Santander InnoVentures, a FinTech venture capital fund formed by the Santander Group, announced it had invested in PayJoy.
In a September 2017 interview, the former CEO of Citigroup, Vikram Pandit, said the biggest disruption in banking is coming from competitors in the FinTech area. These companies are using efficient, low-cost, and interesting services to go after the customer. He said banks have to battle to keep the customer.
Using anecdotes and commentary from company executives, we wrote a guide that explores the state of the financial services industry as it pertains to the impact that data and technology have on innovation, regulatory and compliance, customer service, and human labor. From these very examples and our active work in the industry, we highlight several trends that we expect to continue to transpire in 2018.