Finance

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

Published

3 years ago

June 26, 2020

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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.

Banking

A bank’s ESG record depends on how its technology is built

Published

2 days ago

July 29, 2023

editorial

By Tony Coleman, CTO, Temenos

ESG (environmental, social, and corporate governance) has become mission-critical for banks, from meeting regulatory obligations to aligning with customer values to win market share.

Many banks have turned to technology to manage their ESG position. But technology is not a panacea. It also presents a risk that banks fall short of their ESG targets.

Technology that greens

Let’s look at the environmental pillar. Run on-premises or in a private datacentre, technology can be a big consumer of carbon. But deployed with the right infrastructure partners, it can enable banks to reduce their carbon footprint. Cloud is the best example of this. Banks that outsource their computing infrastructure to the public cloud hyperscalers can benefit from their economies of scale and energy efficient build principles.

The geographical spread and scale of these datacentres allows for carbon-aware computing, which involves shifting compute to times and places where the carbon intensity of the grid results in lower carbon emissions. One study of Microsoft’s cloud infrastructure concluded its datacentres emit 98% less carbon than traditional enterprise IT sites. These hyperscalers have a focussed mindset and the deep pockets to match. The new Graviton3 processors that AWS is now installing in its public datacentres, which claims to use 60% less energy than the standard X86 models that have been in wide circulation, is an example of the progress that only a hyperscaler can achieve.

The green benefits ‘of the cloud’ are enhanced by software purposefully built to run ‘in the cloud’. Software vendors that are committed to decarbonising their solutions in the build phase pass those wins down the supply chain to banks. For example, the latest version of the Temenos Banking Cloud was built with a 12% improvement in carbon efficiency. How the software operates can have an even more profound benefit for banks. For example, banking software that runs ‘scale-to-zero’ protocols will automatically shut down or scale down availability according to demand for its service. This is one factor that has contributed to a 32% carbon efficiency improvement in the run time of the latest Temenos Banking Cloud release.

Collecting this evidence is not simply an internal tracking exercise. Regulations are reaching a point where publishing data against ESG targets will be legally mandated. In Europe the ECB and the Bank of England have launched climate risk stress tests to assess how prepared banks are for dealing with the shocks from climate risk. Meanwhile, initiatives like the UN-convened Net-Zero Banking Alliance (representing over 40% of global banking assets), the Glasgow Financial Alliance for Net Zero and the Principles for Responsible Banking add to the clamour for banks to evidence their progress. Tracking ‘Scope 3 emissions’, which includes all indirect emissions that are not owned or controlled by the bank, is the next phase. Recognising this, Temenos has developed a carbon emissions calculator, which gives our customers deeper insight into carbon emissions data associated with their consumption of Temenos Banking Cloud services.

The same concept can be extended to a bank’s customers, with carbon calculators and automated offsetting schemes that help people build towards their personal environmental goals. Doing so brings a bank’s green credentials into the public sphere, turning environmental initiatives into commercial opportunity.

(Box-out)

Flowe, a cloud-enabled digital bank built on green principles, launched in June 2020. It is the first bank in Italy to be certified as a B-Corp and has been able to maintain its overall carbon footprint close to zero, saving 90.81% – 96.06% in MTCO2e emissions compared to the on-premise alternative. Within six months of launch, 600,000 mainly young Italians had become customers, at one point onboarding 19 new customers per second. This rapid launch and growth was only possible with the agility and scalability of cloud. Read more about this story.

Technology that reaches

Cloud also enables financial inclusion, a key tenet of ESG ambitions. Today, anyone with a mobile phone and internet connection can access banking services. With elastic scalability and software automation, banks have an almost limitless capacity to serve more customers. And they might not be where you think; 4.5% of US households (approximately 5.9 million) were “unbanked” in 2021. In the past, banks would have seen them as unprofitable targets. But as cloud and the associated automations cut go-to-market and operational costs, the commercial case for inclusion becomes stronger.

Embedded finance gives banks another avenue of reach. Via simple APIs, banks can provide their solutions to non-financial businesses. This ready-made audience might otherwise take years to reach through a bank’s own marketing and sale channels. The embedded finance market is set to be worth $183 billion globally in 2027. That can be seen as a proxy of greater financial inclusion.

AI offers another opportunity to improve financial inclusion. Armed with AI, banks can deliver highly personalised products and experiences for customers. People can be directed to the most appropriate investments, including funds that promote sustainability and loans made with a better understanding of the applicant’s ability to pay it back. ZestAI (previously Zest Finance), a leading provider of AI-powered credit underwriting, claims that banks using its software see a 20%- 30% increase in credit approval rates and a 30-40% reduction in defaults.

But mismanaged, AI can have a dark side. If the data used to train them has bias, systems will perpetuate these discriminations. This can lead to unequal access to financial services and unjust or irresponsible credit decisions. In a study conducted by UC Berkeley, Latin and African-American borrowers were found to pay 7.9 and 3.6 basis points more in interest for home-purchase and refinance mortgages respectively, representing $765 million in extra interest per year. What’s more, AI algorithms are often complex and difficult to understand, so it is hard for customers to challenge decisions and for regulators to enforce compliance.

ESG by design

So how do banks reconcile the ESG benefits of technology with the risks? The answer is in how the technology is built; or more specifically, in the principle of ESG by design.

ESG by design is the concept of incorporating environmental, social, and governance factors into new technology and software features from the outset. The desired outcome is that the solution’s architecture, functions and UX enable ESG optimisation. But it is enabled with a commitment that all decisions taken through the design and build phase are judged through the lens of ESG criteria and targets.

At Temenos, ESG by design is a core principle to how we build technology. Let’s unpick what that means in practice, with some examples.

Shift-left is how we systematically embed ESG into our banking software services. It means estimating the potential carbon footprint of a new project from the start, and then working back to mitigate it at every stage. The same goes for usability, compliance, and other factors that impact ESG. Detecting and addressing issues earlier in the development process is more effective than taking remedial actions after the event, which risks both compromising the efficacy of the solution and increasing the cost and time of the development lifecycle.

If there’s a choice to be made, banks should make it. Though ESG goals align with most bank’s commercial aspirations (i.e less carbon equals less cost, more choice and better experiences equals more customers) it is not binary. Banks will have varying appetites of commitment to ESG. Take scale-to-zero, which I referred to earlier. Limiting service availability and adding latency impacts the customer experience and regulatory SLAs, such as payment processing speeds.

The optimum balance is not a call for us, as the technology vendor, to make. Instead we give banks the parameters and configurabilities to make the choice themself. This higher degree of control encourages banks to (a) use carbon-aware computing solutions, and (b) engage with the technology with more purpose.

Use technology to improve technology. Humans are fallible. AI is only as good as the people that program it. Their biases become the system’s biases. But the black box nature of many AI systems means that these biases go unnoticed. At Temenos we embed an explainable component to our AI tools (XAI). It allows us and our banking clients to understand how AI decisions have been made, and in doing so surfaces flaws that can be fixed. We extend this capability to a bank’s customers, allowing them to interrogate and challenge decisions.
The complex supply chains in technology makes ESG a collaborative effort. The work we do at Temenos to support banks with their ESG goals would be undermined if our partners didn’t share our same commitment. That means working with hyperscalers and partners in our ecosystem, and opening ourself up to third party validation. We did just that, using an independent carbon calculation platform (GoCodeGreen) to assess our carbon efficiency. I shared the evidence earlier; a 32% carbon efficiency improvement in the run time of the latest Temenos Cloud release, and a 12% improvement in build time. These are the sort of independently verified data points that banks should be asking their technological providers to submit.

Collaboration also means being honest about what others can do better, and enabling their innovations. The Temenos Exchange has almost 120 vendors that are continually extending and improving our core solutions. These include Bud, an AI capability that drives highly personalised experiences for lending and money management; and Greenomy, that makes it easier for banks to capture sustainability data and report on it.

Conclusion

ESG by design is an holistic approach to all tenets of ESG: energy efficiency, financial inclusion, transparency and accountable governance. By working with technology partners that elevate ESG to a core design principle, banks can recognise a wide range of commercial opportunities and ensure compliance with evolving regulations. That should make ESG a core selection criteria of software vendors. Banks will want to find the evidence that their technology partners are as serious about ESG as they are; and that they have the design and build practices that bring these to life.

Finance

Why financial advice isn’t just for the wealthy: demystifying financial planning for all

Published

3 days ago

July 28, 2023

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— Emma Danby Harris, PFP Wealth

A common misconception about financial advice is that it is only necessary for the wealthy, but this is simply not true. Regardless of income, savings, and ambitions, everyone can benefit from professional planning to help them achieve their personal financial goals and secure their future objectives. Whilst those with a higher net worth may be more likely to have more complex financial situations and financial needs. Everyone can benefit from receiving sound financial advice to help them make informed decisions about their money.

From budgeting to bills, and defining long-term life goals, Emma Danby-Harris, Director at PFP Wealth, believes that no matter what stage of life someone is at, they should be able to access the advice they need to make progress towards saving for retirement, investing for the future, and achieving other financial goals.

Here, Emma gives insight into why it is important for people to consider working with a Financial Adviser and how people can make informed decisions about their financial future.

Your wealth is your wealth

Money is of equal importance to everyone. A misconception of financial advice is that it’s there for those who earn a lot of money or have a large amount of funds in the bank, but this is incorrect. Your wealth is your wealth, whether that’s a little bit or a lot. Whether you’re a seasoned investor or have one savings account, everyone would benefit from visiting a financial adviser.

Whilst finances — and money worries in particular — are still seen as taboo conversations, it’s important to remember that everyone has the experience of worrying about money at some point in their life. If this is the case, why shouldn’t everyone have the opportunity to make their money work in the best way it can for their circumstances?

Of course, someone with a complex financial situation may need help with Inheritance tax planning or corporate financial planning — but it’s important to remember that financial advice is for everybody. Whether you’re looking to buy your first home, start a business or fund your child’s education, a Financial Adviser can help to provide objective guidance and strategies to help you reach your goals.

Financial education is key

Historically, the way in which everyday people accessed financial products was via ‘the man from the Pru’ who would call round weekly to collect savings and insurance premiums. There was very little, if any, planning involved. However, things have changed and there has never been a greater need for financial advice.

Today, clients want to plan and have certainty over their financial future in an increasingly uncertain world. Financial planning and investments love time; the more time they have, the better the outcome will be. We observe a multi-generational approach aimed at enjoying, growing, and preserving wealth for the whole family.

Clients that act upon the future ahead of when they need it are the ones that gain the advantage and, with it, a huge sense of peace of mind by simply removing future financial uncertainty.

The importance of financial planning

Every stage of life is different, but the importance of sound financial planning remains the same.

For the younger generation, looking at ways to save as much money as possible for a house deposit is usually of the utmost importance. However, a couple looking to start a family may be more focused on how their careers will take shape and what this means for future childcare expenses.

Financial advice doesn’t just mean having someone to tell you how to manage your money. It can also give you structure for the future, too. Structure is important in all aspects of life, and sound financial advice can make a real difference to people’s futures by enabling them to make better long-term financial decisions.

From investments to pensions and overall savings, financial advice should be given on an individual basis, and you may not be ready to talk about each of these areas yet. Whatever is on your agenda should become the priority for your adviser — there is no such thing as a silly question when it comes to money.

A Financial adviser provides expert guidance tailored to you. Just like you’d see a trained professional for a health problem, why not speak to a qualified adviser to help you achieve your goals and minimise financial risk? Ultimately, everyone wants greater financial security and peace of mind when planning for life’s milestones — financial advice can help make this happen.