By Sarah Parker, Financial Health Network
Blog originally published on February 2, 2016
The better a financial services provider understands its customers, the better it can serve them. With Big Data, providers can increase customer loyalty and gain market share by better serving its customers. Big Data here is defined as the collection and use of large data sets that can be broadly combined and distributed to identify patterns and create new data based on these insights to increase the effectiveness and efficiency of consumer finance products. In this sense, Big Data can be a tool to help providers better understand their customers and work with them to improve their financial health.
But not without controversy. Few days go by without a new report, a new op-ed, or a new blog either singing Big Data’s praises or warning about the risks and pitfalls that will undoubtedly ensue as Big Data is increasingly used in a vacuum of appropriate oversight and regulation. The Federal Trade Commission released a report last week on the benefits and risks of Big Data, discussing potential laws and policy considerations. The White House has put out several reports on the topic over the last year. My own organization, the Center for Financial Services Innovation, released the report Big Data, Big Potential last February examining four trends and highlighting how many companies are leveraging Big Data in financial services to improve the financial health of their customers.
As the Big Data debate continues, here are 5 things to help you keep a balanced view of the issues.
1. Remember that the current standard of loan decisioning, the credit score, is selective by nature.
The main argument cautioning against the prolific use of Big Data is the risk of disparate impact, a disproportionate adverse impact on persons in a protected class. Indeed, this is a legitimate concern. Should someone’s education level and marital status be used to price auto insurance, as is often the case in Maryland? Maybe yes, maybe no. But it is important to keep in mind that the current FICO standard of loan decisioning is not without its own form of selection, albeit legal selection. The credit score is used to automate predictions of the future based on what has happened in the past. While this could be positive selection for one person, it is very likely negative for another. Think about someone who recently went through, but emerged from, a difficult financial situation. Their past financial behaviors, reflected in their credit score, would show them to be a big credit risk. Their current financial situation may in fact make them a very low credit risk, but they will be discriminated against because of their past troubles, impacting their ability to seize future opportunities.
2. Remember that one of the most basic principles of banking is Know Your Customer.
At the end of the day, a financial services provider’s main goal is to know who their customers truly are. Much was made at the time of Facebook’s approval on a patent last fall that could help lenders determine credit risk based on potential customers’ social network connections. It is unclear if Facebook intends to use the patent in this way. But remember that determining one’s creditworthiness used to be completely socially determined. Today, banking has become much more digital and much more detached, bringing huge advantages. But banking has also lost touch with the intangible social elements of someone’s life that help a bank really know its customers well. Big Data provides the opportunity to get granular by getting huge and avoid what has been called “data deserts”. Numerous studies have shown the predictive power of alternative data. Even the latest Nobel laureate for economics, Angus Deaton, has argued that macroeconomics questions are best addressed by using microeconomic data. Indeed, Big Data tools showing the individual savings, spending, and investment decisions of people are feeding into important macroeconomic work today.
3. Remember that the perceived risk may often be greater than the actual risk.
There seems to be an assumption that the use of Big Data will necessarily do more harm than good. But not all of us need to be the worrying mother thinking about all the bad things that may undoubtedly happen, most of which never does. A very useful CGAP study on doing digital finance right acknowledges that the perception of fraud perpetrated on customers in a handful of developing countries was high while actual experiences of fraud were low. The worrying mother needs to have a voice at the table, but she should not drown out the other voices that see the opportunities as well as the risks.
4. Remember that the underserved are extremely tolerant and that should not be exploited.
In the context of financial services, people will go along with what they think they have to do to get what they think they need. Providers have a responsibility to be transparent with their customers and potential customers about how their data is going to be used. The credit score system’s black box should not simply get bigger as Big Data is increasingly used. One White House report warns that Big Data capabilities may create an “asymmetry of power between those who hold the data and those who intentionally or inadvertently supply it.” As we demonstrate in our Financial Health Network paper, there are plenty of providers that are communicating data elements clearly to consumers and are giving consumers the option to trade private information for better value. More of this needs to happen.
5. Remember that Big Data is simply a tool.
Big Data is nothing more than a set of tools that can be applied to creating, refining, and scaling financial solutions for consumers. As a financial technology tool, it is neither inherently good nor bad because its value to providers and consumers depend on the quality of its application. More data is not necessarily the answer unless the right questions are articulated clearly. A responsible, sophisticated, and transparent use of the increasing amounts of digital data that is now at providers’ fingertips is one of many tools that should be leveraged to improve consumer financial health.
By Financial Health Network on March 10, 2017.