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WHY AN AMBIGUOUS ECONOMIC FUTURE IS POINTING FINANCE TOWARDS ALTERNATIVE SOURCES OF DATA

Omri Orgad, Managing Director, Luminati Networks

 

Every market, every investor, and every business owner in the current climate is looking for signs: signs of recovery, or signs of what is to come next. In a market that frequently resembles quicksand, every economist, banker, or investor is looking for that one insight on which they can base their future strategy. In the search for certainty and a clear direction, organisations in finance are now exploring a plethora of high-frequency alternative data sources to figure out where we are and where we are going.

This lack of near-term visibility is accompanied by an abundance of contradictory signals from governments worldwide. The almost impossible to foresee series of events since March has made it much harder to make accurate valuations and is complicating risk-reward calculations. This ambiguity is driving the financial world to consume significant amounts of alternative data.

In the world of finance, the way we manage, and access money has changed unrecognizably over the past decade. Disruptive technological advances have drastically shifted our approach to borrowing and saving, managing investments, interacting with financial advisors, and more. Could the way we approach data sources undergo the same radical level of change?

 

Omri Orgad

So, what is Alternative Data?

Having access to data sets that reflect a minute-by-minute snapshot of the true state of the economy is all important in today’s financial markets. In a rapidly changing business environment, alternative data, also known as external data, is undergoing a rapid escalation in popularity. Alternative data is defined as data derived from non-traditional data sources, such as social media networks. It gives financial market players such as bankers and investors information and unique insights to help them evaluate loans, investment opportunities, or business decisions, which are necessary in the current uncertain business climate, as traditional data sources such as government or analyst reports simply cannot match the current pace of markets changing.

As a result of this, the alternative data market is already huge and growing. It is expected to become a $1.7 billion industry in 2020 and double year-over-year. It encompasses a plethora of varied sources, these include natively digital information, such as web traffic, online buying habits, pricing strategy, social media activity, and government publications. Other examples include pharmaceutical approvals as well as more granular indicators of financial performance, such as ocean cargo and automobile registration information.

 

Not your usual financial forecasts

Credit and debit-card spending can demonstrate the value of alternative data in the current times. The latest figures compiled by Opportunity Insights at Harvard University looked at spending patterns in Georgia and Florida, two of the first states to reopen. The spending patterns in these states look very similar to those in New York and Massachusetts, which have only recently begun to reopen. This suggests that being allowed to go out and spend is less important than consumers feeling confident about doing so. And that’s where the usual/traditional reports and numbers fail us. Instead, the key to forecasting the future of economy in a time of unprecedented crisis appears to lie in figuring out when people will feel confident enough to spend “normally” again – and that kind of assessment can only be delivered by Alternative Data.

Whether it is online reviews, or posts on social media platforms like Twitter – these can act as indicators for how people feel at a given moment and their willingness to spend, something that is true for any market globally. Personal spending is generally considered to be a sign of a healthy economy and represents a clear indicator of economic recovery.

Alternative financial models also consider “unstructured data,” or data which is not organised in a pre-defined manner, which can be leveraged to be understand consumer behaviour and experiences. For example, data on mobile payments and/or generated by mobile devices creates enormous amounts of information that can be used garner financial insights.

 

How alternative data can benefit consumer lending

The fintech sector has been a frequent user of alternative data models for credit scoring. This can ultimately provide a better approach for consumers, especially considering the immense level of financial strain much of the population is currently under.

Traditional banks are beginning to understand this as well. The current situation makes it difficult to predict what the future brings, inhibiting their ability to accurately estimate credit via conventional means. In the US, 840 companies in total (with more added daily) have stopped providing annual credit reports. Since banks and other creditors use credit reports to make lending decisions, when debts do not appear on a report, a creditor cannot accurately judge the borrower’s capacity to repay. If debts are not reported to the consumer credit reporting agencies, lenders cannot make informed underwriting decisions.

Potentially, this means a person could take out a large loan at one bank and then take out an equally large loan at another institution, even when this borrower lacks any realistic capacity to repay both. This type of losses can add up quickly, and history tells us economic consequences can result from the excessively easy provision of credit.

The way to protect the credit of consumers adversely affected by the Covid-19 pandemic is not a cessation of credit scoring. Rather, it’s by revamping the credit scoring models and adding other alternative data models. This means having a scoring system that factors in human behaviour, which is easily monitored via alternative data, allowing those harder hits to have access to credit which they desperately need.

 

A helping hand for businesses and consumers alike

Novel problems require novels solutions. As data is the core of almost all modern business decision making, dealing with Covid-19 and the associated economic issues it presents means that businesses may be best served taking new approach to data. This will allow them to be able to tackle the difficult financial decisions that 2020 is forcing them to make in the most agile and informed manner possible.

But it won’t just be one party that enjoys the fruits of embracing a non-traditional approach to data, everyone from struggling families looking to make it until payday, to wealthy institutional investors, to your run of the mill high street bank has something to gain from this new paradigm for collecting data.

 

Finance

2020: THE YEAR OPERATIONAL RESILIENCE AND CYBER-RISK TAKE CENTRE STAGE IN FINANCIAL SERVICES

Miles Tappin, VP of EMEA for ThreatConnect, explores how financial providers can build a cyber security strategy that enables operational resilience

 

Financial institutions are operating in a new digital landscape. New disruptive technologies – from Artificial intelligence (AI) to crypto-currencies and big data – have driven change and innovation. In retail banking, new fintech providers have seized the opportunity to offer personalised services and challenge existing providers. For example, Klarna, has successfully disrupted the payments sector and is now established as Europe’s biggest fintech firm. It has quickly emerged as an alternative to credit cards since bursting onto scene, allowing consumers to shop now and pay later with retailers, such as H&M, Ikea and Zara.

To compete with the rising number of fintech providers and fulfil growing consumer expectations, traditional financial institutions are developing robust digital ecosystems that can deliver omnichannel service models. However, it’s becoming clear that the pace of technological change is a double-edged sword. It enables innovation and change but it is also one of the most destructive forces in the financial services ecosystem today.

 

Financial services emerge as a hotbed for cybercriminals

2020 has emerged as a defining year for cybersecurity in the financial services industry. It started with an unprecedented attack against Travelex where hackers successfully took some of the currency providers offline for nearly a month. Then came Coronavirus which sparked a new wave of malware and phishing threats. Research from VMware Carbon Black Cloud revealed that threats against financial institutions have surged by 238% since the start of the pandemic.

The renewed interest from cyber criminals comes at a time when regulators are paying close attention to the resilience of the sector. After a string of IT failures and breaches, financial organisations in the UK have been given a mandate from regulators to improve operational resilience. This means ensuring business models can withstand disruptive events from hackers or adversaries and quickly recover to protect the stability of financial systems.

In December 2019, the UK’s financial regulators published a series of consultation papers outlining their proposed approach to achieving greater operational resilience. The proposals suggested that financial institutions will be required to map out the systems and processes that support business services in order to identify any potential vulnerabilities that would pose a risk to the stability of the UK financial system or the firm’s standing.

 

A mandate for change

Where cybersecurity used to be a classic back-office concern, it’s now a central part of digital strategies and a key pillar of both reputation and customer retention – financial legislation leaves no room for failure. All financial institutions need to ensure they have full visibility of their systems and can detect any potential threats.

The challenge for financial institutions is making the security tools they have purchased separately work together in tandem. Security teams buy a firewall, an email filter, threat intelligence feeds, antivirus software or enhanced endpoint protection, and whatever else they need individually. Each of them does a good job but they don’t talk to each other and valuable time is lost tending to individual systems that become a burden to run. At the same time, running multiple security systems is expensive. The more systems you have, the more highly skilled staff you need to manage them, and they’re few and far between.

 

Improving intelligence sharing across borders and communities

To reduce complexity and simplify decision making, financial organisations need to unify processes and technology to harness the security intelligence that comes from across their own security programmes and external sources to drive down risk. However, no financial institution can tackle the problem alone. Experienced threat actors using advanced techniques are constantly targeting the financial sector. The industry needs to come together as a whole to foster a sense of collaboration and data sharing.

In the same way that financial institutions have introduced open banking to deliver a fairer service to customers, the same needs to apply to security – all parts of the financial ecosystem need to unite and share information to learn from one another and succeed in the fight against adversaries that operate across borders.

By sharing alerts on cyber hazards and risk across financial institutions and with law enforcement, government agencies and other relevant authorities, it’s possible to build industry specific insights into cyber security threats and quickly pivot to gain more information on those specific threats and threat actors. By working together, a picture can be painted on threats coming from all manner of malicious activity, from malware to ransomware, to phishing and software vulnerabilities.

 

Breaking down barriers

Having the right intelligence is not enough to ensure that intelligence is turned into action. Breaking down information and process silos across security teams allows financial organisation to analyse and act on the most pertinent information. Everyone has access to the risk and threats that matter most, and orchestration and automation of response helps overwhelmed security teams prioritise response plans and improve efficiencies in their security programme.

Integrating internal security tools and technologies, while also connecting to external sources of intelligence, creates a single source of intelligence that feeds operations and enables organisations to direct action against the threats that matter most. The outcomes of those actions further feed intelligence, providing the ability to further refine the efficacy of the entire security lifecycle.

This approach provides a continuous feedback loop for the people, processes and technologies that make up the security programme. It allows financial institutions to keep up with threat actors that have consistently adapted their methods to profit at the expense of the financial industry. Something that won’t stop anytime soon.

 

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Finance

GROWTH OF FINANCIAL MARKETS AND TECHNOLOGY

Ashish Jain,CEO, Future FX

 

The economic development of any nation completely depends on its financial structure both in long term and short term. The financial system and its efficiency determines the success of the nation in terms of economic growth.

As most of the sectors are taking advantages of the technology evolved since 1980, financial sector has also transformed immensely.

The Bombay Stock Exchange (BSE), dating back to 1875, started as a broker’s forum under a tree on Dalal Street, and is Asia’s oldest stock exchange. For over a century, registered brokers have made trades happen.

The National Stock Exchange (NSE) came up in 1994 to provide screen-based electronic trading. It gave fibre-optic access to brokers in other cities who could join the trading in the centralized exchange located in Mumbai.

Dematerialization of shares started in the late 1990s and online trading began at the turn of the millennium where investors could buy and sell shares through electronic brokers such as ICICI Direct and Sharekhan.

As more and more elements of the stock market get digitized, it increases its potential to attract a new generation of investors.

Online financial services company Zerodha brought “discount broking” to India in 2010, applying a flat fee of ₹20 on a trade whatever its size. This attracted young investors who could do a trade in less commission. Now, we have all the marketing and trading apps on our phones and we can easily make trades.

The insurance sector has eliminates the role of broker and now anyone can buy insurance through mobile phones. Some such apps are HDFC ERGO insurance, Insure, Caringly Yours, etc.

Trade has always been shaped by technology but the rapid development of digital technologies in recent times has the potential to transform international trade profoundly in the years to come.

From the moment we wake up to check how the markets performed overnight until the time we go back to bed before doing another check of how the market is set to open on the other side of the globe, technology now plays a critical role in everything we do and the way we do things.

For the financial markets, the coming of advanced technology has been the key factor behind the transformation in the way things are done. Technology is also at the core of how companies operate and maintain their competitive edge in this vicious environment.

While forex trading and trading in general used to be the domain of institutional and corporate players, today even retail and private investors consider forex an essential component of their overall portfolio. And this is no doubt due to the ease of access and price transparency offered on the electronic platform.

Nowadays, providers need to have the latest technology all the time. They need to add new and build more features to their platform to attract and retain clients.

Traders are now able to monitor their trades from anywhere as long as there is an internet connection. This gives traders more freedom, mobility and flexibility.

The trading in global markets has thus become easy and convenient like never before.

 

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