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Harnessing alternative data intelligence to make better decisions: a golden opportunity for banks and financial institutions

By Hamza Khan, Founder and CEO, Suburbia

In the analytics world, the HiPPO (or Highest Paid Person’s Opinion) is an all too common presence at the head of our organizations.  We bring the best data to the table in the hope that executives want to make rational and evidence-based decisions, but then, as research from the University of London showed, the executives so often ignore that and go with their gut instinct.

Hamza Khan
Hamza Khan

This is even the case when it comes to making investment decisions, with a German study published in the Journal of Finance showing that CEOs are even favouring gut instinct when making hard, cold financial decisions.

The gut instinct approach is severely limiting the company performance, with a report by the McKinsey Global Institute showing that data-driven organizations were 23 times more likely to acquire customers, and 19 times more likely to be profitable.  The strange thing is, most executives are aware of this.  Indeed, data from EY showed that 81% of executives agreed that data should be the driver for everything they do.

So what’s holding companies back?  Sure, there is a well recognised shortage in data science talent across industry, with data from Crowdflower suggesting nearly 4 in 5 companies are struggling to attract and retain the talent they need to fulfil their data-driven ambitions.

Poor quality data 

Perhaps more pertinent is the quality of data organisations have at their disposal.  This is where alternative data can take financial decision-making to a whole new level.

Investors no longer have to rely on quarterly earnings reports and rumours heard on the grapevine to gauge how companies are doing, as a plethora of alternative data sources offer to give detailed and timely insights into company performance.  For instance, it was common for investors to perform physical headcounts of shoppers to gauge the vitality of a retailer, but now with satellite images, it’s possible to simply count the number of cars in the parking lot instead. Anonymized and aggregated transaction-level data is also available now, offering the most reliable indicator of performance by far.

It’s an approach that is gaining heavyweight backing, with titans such as Goldman Sachs and J.P. Morgan Chase making big investments in alternative data. It’s created a world in which there are several hundred alternative data providers on the market, and yet there remains a strong sense that we are barely scratching the surface of what is truly possible.

The new oil 

After all, we’re living in an age where data is the new oil, and vast fortunes have been amassed by technology companies that have managed to accumulate incredibly rich and detailed datasets on their users. The major difference with alternative data, is that it provides a new way of leveraging data which doesn’t include personal information. It is both highly valuable to the investor and, at the same time, protects the privacy of individuals.

Alternative data provides the context that is so important to successful financial decision-making.  For instance, news of the gas explosion in Baumgarten, Austria that sent crude oil prices soaring first emerged on Twitter, where eyewitnesses shared their stories long before the news made the media headlines, thus giving those with their fingers on the pulse an early informational advantage.

The value of data has also been acknowledged by the UK government, with the UK Treasury issuing a paper last year highlighting the potential for data to fundamentally transform not only the finance sector, but the entire British economy.

Indeed, data released in 2017 by Deloitte and Transport for London (TfL) put the value of TfL’s open data set at around £130 million in terms of the impact it’s made on the London economy, and so it’s perhaps no surprise that a recent report from EY found that 78% of hedge funds are currently using, or expect to use, alternative data in their businesses.

Data-driven success 

The volume, velocity and variety of data from an ever-growing number of sources has coincided with the onward march of computing power that enables organisations to process the data at scale.  It’s a world in which practically every action is being recorded, allowing organisations to connect the dots and draw inferences that guide smarter decisions.

What’s more, the rise of cloud computing has placed this computational power in the hands of even the smallest companies, as they no longer have to build and maintain a hugely expensive IT infrastructure themselves.

The competitive advantage alternative data is providing to banks and financial institutions is clear and should be at the forefront of their business strategies. However, the fact that data literacy remains so varied, underlines the real opportunity for those who do master data-driven decision making to run laps around their rivals.