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Alternative Data: Who has it? Who wants it?

Sep 21, 2016 Lauren Twardy

In a recent article, LendingTimes.com looked at differences between alternative data and traditional credit reports in regards to online lending. Now, we intend to further explore the uses of alternative data by examining two sectors of the alternative data source industry: companies that cultivate Big Data and companies that use Big Data as a source for risk assessment in marketplace lending.

Big Data’s Worth is Growing Big (Like $48.6 Billion-Big):

First and foremost it’s important to note that Big Data is a business all on its own. Companies, such as Microbilt, have been collecting alternative data for their clients for over 35 years. Alternative data companies are profitable and growing. IDC predicts “big data technology and services market growing at a CAGR of 23.1% over the 2014-2019 forecast period with annual spending reaching $48.6 billion in 2019.”

With the surge of marketplace lending over the past few years, the alternative data business has been booming. Companies are looking for the fastest and easiest way to get reliant information about potential employees, clients, and borrowers; Big Data companies, like Microbilt or LexisNexis, are providing banks, marketplace lenders, and other companies with essential (and speedy) information.

Putting These New Data Sources to Work in More Way Than One:

In our previous article on alternative data sources, we discussed a few of the many types of information that are usually excluded from traditional credit reports but included in alternative data reports, such as utility bills, bank account records, and even social media account information. While all of this information has proven to be useful in risk management for lenders, it is also being utilized by government agencies, nonprofit organizations and commercial businesses. Often times, Big Data is being used for the sole purpose of identity verification to prevent fraud, but it also helps form a complete picture of individuals and businesses.

Microbilt not only caters to lenders but also many other types of organizations. They offer services such as bank verification, background screening, and business credentialing. Using several hundred variables of data such as criminal records, DMV records, government filings and phone records, Microbilt can help confirm identification and assess risk.

With access to what seems to be an infinite amount of information, it’s is easy to understand why online lenders are choosing to utilize alternative data. Big Data allows them to make very informed decisions about potential borrowers in just a few minutes. The ease and speed of decision-making have made online lending a much more attractive option for borrowers as well.

How Alternative Lenders are Using Alternative Data:

With marketplace lending on the rise (123% CAGR since 2010 and reported $36billion industry in 2015), online lenders are in need of data that can keep up with their pace. Unlike traditional lenders that use standard credit reports to assess potential risk, more and more marketplace lenders are turning to alternative data in order to find and weed through loan applications in a very timely manner. The connection between online lending and alternative data is so strong and obvious that it is no wonder that several companies founded in recent years have combined the two businesses.

Kabbage, for example, is a marketplace lender that collects and uses Big Data in their lending platform. They were co-founded in 2008 by Marc Gorlin, Rob Frohwein, and Kathryn Petralia and were named #63 on Forbes’ America’s Most Promising Companies list in 2015. They have been utilizing alternative data from the start in order to make greater informed decisions about small business lending.

One of the most prominent forms of alternative data that Kabbage uses is social media. When a potential customer creates an account with Kabbage to apply for a small business loan, they are given the option to connect one or all of their business’ social media accounts to their Kabbage account. This simple connection can have a huge impact. Co-founder Gorlin explained in a 2013 interview that they’ve “learned that if someone has added Facebook or Twitter data” to their Kabbage account “they are 20 percent less likely to be delinquent.”

Big Data or Big Brother?

Other than social media Kabbage also looks at other types of alternative data: sales records and employee history, as well as how often the company uses 2-day shipping for its products (therefore implying they place customer service/satisfaction high on their priority list). Kabbage takes qualitative data and turns it into quantitative data, taking every piece of information into account when assessing risk.

Many people see this as a pro to alternative data. More information means better-informed decisions. But some analysts are starting to wonder how much information is too much information? While banks are typically only looking at numbers, companies like Kabbage are also privileged to age, race, religion, and other factors. Marketplace lending lacks the regulations placed on banks; again, this can be seen as a negative or a positive depending on the situation and the outcome.

While there are some worrisome aspects to using alternative data, Kabbage and other companies have been very successful in their use of it. According to Forbes of 2015, Kabbage has done $41million in revenue and have raised $106milling in venture funding. They, along with many other similar alternative lenders, continue to look “promising.”

Marketplace Lenders “Could Command $150 Billion to $490 Billion Globally by 2020”:

Morgan Stanley reported that in the year 2015, online lenders provided 7.9 billion in small-business loans, which is an enormous 68% increase from the previous year, but it is important to note that this number only makes up 3.3% of the total small-business loans in the US. Morgan Stanley believes online lenders’ share of not only small-business loans, but also P2P lending will continue to rise, stating in a report from June 2015 that marketplace lenders “could command $150 billion to $490 billion globally by 2020.”

The marriage of alternative lending and alternative data seems like a match made in heaven, but their sky-rocketing CAGR’s and minimal government regulations have many analysts worried of a potential (and some may argue inevitable) bubble burst. While there is a potential for billions of dollars of business within marketplace lending industry, it will be interesting to see how the use of alternative data continues to spread.