Benefits and challenges of using alternative data

May 14, 2021

Benefits and challenges of using alternative data

Alternative data has been broadly welcomed by companies looking to improve prediction rates, maximize returns and decrease unforeseen risks. This new source of data provides security, offering businesses more than just big data.


The rapid generation of alternative data obtained through emails, social networks, satellites, financial reports, geolocation, among other sources, has introduced a great new opportunity to improve profits in the market. The correct use of alternative data through machine learning gives companies a fascinating advantage; access to valuable information about the behavior of customers - and future customers - allowing companies to grow rapidly.


Nevertheless, its advantages come along with several challenges, and only some companies have been able to incorporate this type of data. The main limitations around alternative data lie in incomplete data sets, limited volume, low quality data, lack of data verification, and the absence of a data history to support it.


Alternative data is on its way to becoming a more frequent source for decision making, but its difficult implementation demands companies to rethink if they are ready for the challenge.



Benefits of alternative data


First of all, it is important to note that, thanks to alternative data, companies can compare and measure information in real time, generating truly innovative indicators. In this way, for example, credits can be offered on the spot to applicants with an alternative credit score.


Alternative data improves the self knowledge of a company. The large amount of existing alternative data allows institutions to have a more accurate perception of their own performance. The connection of these insights allows companies to make a correct interpretation of how they are perceived by people, comparing themselves against competitors, suppliers and other secure connection networks.


Another important benefit to be considered is the capacity to operate predictively with the usage of alternative dataThrough this novel source of information and in conjunction with traditional sources, investors can more reliably predict long-term results. Alternative data allows companies to predict client’s behaviours and in this way, growth projections become more effective, optimizing decision-making and reducing the probability of risk.



Challenges to be considered while using alternative data


Alternative data is relatively new, so at first glance it can raise several questions. There is a lack of historical records plus not all alternative data is publicly accessible.  Therefore, it is profoundly important to have an accurate understanding of where information is coming from, and the limitations of usage.


Currently there is a wide variety of alternative data sources, so it is essential for companies to organize them and have a clear distinction between those that are most relevant to the business. As there is no standard pattern of use, it is of utmost importance to understand how they work holistically and completely in relation to all sources of information.


Added to this scenario, companies face the challenge of data interpretation. With a wide variety of sources, it can be difficult to distinguish and judge the quality of each source in order to choose the correct one.  Any corruption of this data can result in incorrect decision making and great harm to the company.


Another important aspect to be considered is the accurate knowledge of the private legal terms of each source.  This includes understanding where the information is coming from, the limitations of its implementation and a correct and ethical use of its storage.


Finally, it is vital to highlight that as some data may be unstructured and incomplete its usage is limited.   By having an incomplete history record, without the necessary backup of information, sometimes it is necessary to let time pass and continue collecting data that will allow us to generate definitive patterns of behavior in the future.



Alternative data allows companies to take a more promising and competitive role in the industry, so there is no doubt that, if used correctly, the growth of the company is pretty much guaranteed. But to ensure that these sources will lead to correct decision-making, it is vital to generate technology teams or use external agencies to produce safe data.  In this way, the provenance and correct analysis of the alternative data is protected.