Companies that aggregate and analyze alternative data — everything from credit card transactions to online searches, mobile geolocation data and public records — recognize their role as data stewards and continue to be focused on privacy and security considerations. Responsible providers and users of this valuable resource make appropriate efforts to protect consumer privacy and security, while showing how alternative data analytics can benefit individuals, the economy, and society.
The surging demand for data analytics
There is no question about the growing value of alternative data analytics. Take just the asset management industry. Asset managers spent $272 million on alternative data analytics (and employees to analyze the information) in 2016, according to industry group alternativedata.org. Just four years later, they were projected to
They’re not alone. In the future, financial advisors will be able to use alternative data to better support their clients by offering them more personalized guidance. They’ll be able to access accurate real-time forecasting and budgeting data that can be incorporated into the financial plans they develop for their clients. For example, if data show new income indicating a client’s job change, an advisor could be alerted so they can contact them to discuss a 401(k) rollover. Advisors could also use large, de-identified data sets to see demographically-segmented trends in spending and investing patterns, allowing them to show clients what “people like you” are doing and how they compare.
Aside from business opportunities, alternative data analtyics can provide valuable insights for individuals and communities. Millions of American families are struggling financially under the pandemic, and the availability of vaccines will not reverse the economic impact overnight. Alternative data analytics provide powerful insights, tracking economic sector behaviors during this unprecedented time, which helps policymakers and merchants make better decisions, ultimately benefiting vulnerable American families.
As another example, mobile geolocation tracking and other non-traditional data points are helping to monitor and control the spread of COVID-19 around the world, through anonymized contract tracing.
Regulation is coming
With an increased focus on data privacy in recent years, and a new presidential administration, the potential exists for new
Unlike conventional financial data such as credit ratings — which must be maintained and delivered with the highest security standards — alternative data analytics is a rapidly-evolving space that is outpacing regulation. But the needle is already moving:
- In its
2020 examination priorities , the SEC’s Office of Compliance Inspections and Examinations referenced alternative data and cybersecurity risks as a new area of interest. - The California Consumer Privacy Act (CCPA), which took effect Jan. 1, 2020, includes new requirements and constraints on investment advisers who collect large data sets.
- The recently passed California Privacy Rights Act (CPRA) expands on the CCPA. Most provisions take effect in 2023.
Transparency builds trust
The promise of alternative data analytics is real. But it won’t be fully realized unless the privacy and security of personal information is protected — and there is transparency around how data is used legitimately and protected. Transparency means disclosing methods and practices of collection and de-identification and doing so with all parties, including financial institutions, asset managers, fintech companies, consumers and regulators.
Maintaining the security of data requires both safeguards and governance. Safeguards are the controls implemented to protect data from unauthorized access and unintended uses. Governance is the process of ensuring that data is used responsibly and the safeguards are functioning as they are intended. Each must be used in coordination with one another for effective privacy protection and security.
Scoring across nine quantitative and qualitative metrics, here’s how Backend Benchmarking ranks the industry’s digital advice providers.
Standards for responsible de-identification exist, and could be further codified through federal privacy regulations. Still, privacy protection should not be considered a one-time “threshold” that, when reached, absolves data providers. Rather, both data providers and those who utilize alternative data analytics can gain the trust of regulators and consumers through constant vigilance. Context is everything, and the collection and distribution of alternative data analytics must always consider the specific provider, the consumer associated with the data, and how the data is intended to be used by third parties.
A responsible, responsive data ecosystem
If we exclusively look at this ecosystem through the lens of privacy protection, we lose sight of the benefits of alternative data analytics. The key is to do it properly.
The alternative data analytics supply chain is best thought of as an ecosystem of connected stakeholders, including providers, buyers, regulators and consumers. Data analytics purchasers need assurance from providers that the supply chain is both secure and maintained. Meanwhile, regulators and consumers need confidence that data has been properly de-identified to protect privacy. All stakeholders also need assurance that the provisioning of the alternative data is permissioned. And everyone in the ecosystem benefits from recognizing that alternative data analytics is a powerful new tool that can safely and securely improve our communities and our lives.
Established data analytics providers understand the need to make security and privacy a top priority and are well positioned to respond to new regulatory initiatives. History provides many examples of regulation creating new business development — for example, safer cars. Stakeholders in the alternative data analytics space should look at proper industry practices as an opportunity for empowerment, not a handcuff.
