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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

OPTIMISING YOUR FINANCE THROUGH TECHNOLOGY

Covid-19 restrictions and ongoing uncertainty have prompted a fundamental switch in mindset across a multitude of different sectors. Many organisations have begun to recognise that outsourcing their finance can make them more agile and give them the competitive edge they need to compete and scale effectively in today’s market.

Mark Pullen, CEO at Xledger  explains to what extent outsourcing can boost resilience for a lockdown recovery.

 

Solving the pain points

Inefficient processes are prone to causing delays and errors which can have a huge impact on the bottom line when viewed at scale. They can also negatively impact the client experience, causing frustration with missed deadlines and mounting uncompleted tasks.

New finance technology is automating many of the daily, monotonous back office functions such as bank reconciliation and invoice entry, meaning that the nature of the work that a finance professional provides will change. This presents a huge opportunity as it gives these employees the opportunity to be involved in higher-level work. Technology can also provide a resource that gives real time insight, allowing for better strategic decision making, which is so key in the current climate.

 

Optimising your finance function

Outsourcing high-value services within the finance function can improve workflow by implementing a defined and transparent process which streamlines operations. For a finance department, this can speed up areas that require internal controls such as expense reporting and cash release, but it can also speed up the full lifecycle of a project; from time tracking and resource to accounting and billing.

There is also a cost efficiency benefit when outsourcing, as management bandwidth is effectively increased by eliminating the need to be involved in many of the day to day processes. Instead this time can be focused on other business priorities and planning for future growth.

Outsourcing accounting functions to bespoke and standardised technologies means using data led processes that can be measured, optimised and benchmarked against in-house requirements. These processes can also be undertaken remotely, boosting the resilience of your business in these uncertain times.

 

Case study box-out: RPC Tyche

RPC Tyche is a global insurance software supplier with offices in London, Paris, and the USA. Initially a division of award-winning law firm RPC, but now a stand-alone entity, RPC Tyche’s main software offerings support capital modelling, and pricing commercial insurance and reinsurance.

 

The challenge

As part of a restructuring process following the de-coupling with the law firm RPC, RPC Tyche had to separate its back-office processes. They remained under the umbrella of the law firm while the changes were taking place, so initially had some flexibility with the shared finance system, but time was running out to separate the two entities cleanly. As a stand-alone company, RPC Tyche now needed its own financial system; one that could align with its new business processes and that could be implemented quickly to deliver the organisation’s business objectives. Furthermore, they needed a new finance solution that could help them grow exponentially, facilitate a globally diverse group structure, and still maintain efficiency when operating as a small team.

Gavin Dilley, Chief Finance Officer for RPC Tyche commented, “Following an initial discussion with a third-party advisor regarding Xero and Quickbooks, we were recommended Xledger because we required a swift and scalable solution. After contacting Xledger, their tried and tested implementation methodology ultimately assured us that we would achieve the fast-paced implementation needed for our go-live objective. We also really liked that Xledger was a multi-tenanted, true cloud solution with its scalability setting it apart from the competitors.”

 

Implementation and training

Following conversations with Xledger, RPC Tyche created a project management team to keep everything on track on their side, an arrangement that Gavin emphasised “worked really well.” He said that “as a small project team, the flexibility to undergo substantial configuration during the training sessions with the Xledger consultants brought focus and enabled us to dedicate sufficient time to the system without distractions.”

Although the implementation was expected to take three months, RPC Tyche experienced hold-ups owing to the separating of back-office processes, so they were pleased when it was mutually agreed to facilitate a one-month delay.

 

Post-implementation results

“The implementation process was highly effective, and we’re very happy with the results,” said Gavin. “Since implementing the Xledger solution, we’ve been so pleased we haven’t had to dip back into the old system as the transfer of historic data has been particularly successful.” RPC Tyche had a large volume of historic data and transactions, including timesheets and work in progress reports that were all successfully migrated to Xledger during implementation. “We’re particularly happy with how easy it has been to onboard our new Finance Controller, due to flexible training and the system being so intuitive.”

Gavin added, “Since implementing Xledger, we have far greater reporting flexibility, better distribution of skills within the finance team and are naturally more self-sufficient because we can make amendments to the system without relying on the software provider.

The system is easy to use, and the purchase order functionalities, integrated workflows and automation of processes have enabled us to be highly efficient, even as a small finance team. Not to mention that the Xledger support team are incredibly responsive, so we can continually maintain productivity.”

 

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Finance

THE FUTURE OF FINANCE LIES IN THE CLOUD

Author: Chris Tredwell, Enterprise Business Development Manager,Aqilla

 

At the beginning of 2020, 87% of public sector organisations surveyed by UKCloud expressed a desire to move traditional IT environments into the cloud. But, as a result of the Covid-19 pandemic, the rate of cloud adoption in the UK has grown significantly, as many companies not already in the cloud were compelled to make the switch due to enforced remote work.

This is certainly indicative of many other industries, finance included. Pre-lockdown, the majority of finance and accounting teams still relied on on-premises software, but the move to remote-working meant many organisations had to quickly reconsider their technology needs and move some or all of their IT requirements to cloud-based platforms.

But, in a recent survey by GrowCFO – an independent portal for finance leaders to network, learn and collaborate – it was found that there is confusion around what actually equates to a true cloud finance platform. This was apparent given some respondents replied with ‘cloud’ to known on-premises solutions, suggesting the difference between cloud-based and ‘on-premises with remote access’ is not fully understood.

This is an important point because it has the potential to influence the technology choices made by organisations across the sector. In short, traditional on-premises financial software resides on IT systems owned by the user organisation, typically on hardware hosted within their building. After purchasing and installing the software, they maintain, secure, and manage it themselves (or with the help of a specialist third party IT support business). Many of these systems also offer the option of connecting remotely, with users accessing software and data via a connection to their office-based network.

Conversely, cloud software is almost entirely outsourced and delivered via a web browser or app as a service to each user, hence the description ‘Software-as-a-Service’ (SaaS). The software resides with the service provider who is also responsible for reliability, performance, the availability of enhancements and updates, as well as the security of their service or application. The location of the user is largely irrelevant – as long as they have a good, secure internet connection, a suitable laptop or tablet and a browser, they can access the service in exactly the same way as if they were in the office.

Chris Tredwell

One of the most immediate changes organisations notice when moving from on-premises technology to the cloud is it removes the need for in-house IT personnel or external specialists to manage and maintain the technology. For many smaller organisations, it liberates the individual who has been given the task of ‘looking after’ the on-premises tech, even though it usually isn’t their specialism or even in their job description.

But that’s just the start. The massive success of the cloud-based, ‘-as-a-Service’ technology industry is predicated on a range of key developments over traditional on-premises, or ‘legacy’ software.

 

A Formula for Finance

Often of particular interest to finance and accounting professionals are pricing and payment terms that accompany today’s cloud SaaS options. Cloud-based software typically offers the convenience of a monthly pay-as-you-go model, instead of investing significant up front sums in one-off software purchases. This also saves money on the server hardware that has previously sat in the office, which may no longer be needed at all. Also included in cloud pricing arrangements should be details which clearly set out the type of service and support included in the cost. Done well, cloud-based customer support and service can deliver an exceptional experience where the provider effectively works as an extension of their in-house team.

The best cloud software providers place huge emphasis on security, focusing on data protection, backup services and their ability to deal with common security issues, such as ransomware. This also extends to compliance, and in the finance context, specialised compliance capabilities offered by many cloud software providers can be of particular benefit. Even for the most niche requirements, there is often a software provider out there whose technology has been written to meet compliance rules, often saving users considerable time and effort.

And then there’s the key issue of functionality and performance. Today’s cloud-based finance software market offers a wide range of options from simple entry-level tools to powerful applications designed to meet the needs of even the biggest and most complex finance departments. For organisations considering cloud, it’s important to assess the options available and choose a provider that most closely matches their individual needs.

For many finance and accounting organisations and their teams, the requirements of lockdown and transition to home working were made possible by cloud-based software solutions. In doing so, they have gained valuable insight into the range of services available, their potential benefits and how technology can become much more than just a labour-saving tool, but also a means to enhance their all round business capabilities.

 

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