WE’RE HEARING a lot of talk about “big data” in the business press. Big data is the hot new frontier in the technology world, and the financial sector is among the first industries seeking to harness its profit potential.
So what is “big data”? Basically, big data is an attempt to manage increasingly large and complex amounts of data that cannot be easily stored, processed and analyzed using traditional analytical tools. Big data also seek to incorporate “unstructured data”—things that don’t easily fit into a traditional spreadsheet—into business analytics. In today’s social media saturated world, “unstructured data” includes things you might find out in places such as Facebook or LinkedIn about a person’s tastes, hobbies and habits. Location data are also a component of this trend.
Big data can be used to uncover correlations, trends and consumer sentiment that might otherwise go undiscovered. It has its roots in behavioral economics.
The goal of big data enthusiasts is to develop a deeper understanding of a consumer’s behavior in order to better market products and services to them and better understand the risk of extending credit to them.
Howard Rubin, founder of
“If you look at the history of data and business, it’s very much about transaction data,” Rubin said. “The world of big data is going to let them better understand customers and improve operational efficiencies.”
So what are the implications of big data for residential mortgage finance? Plenty, according to Rubin.
“You can imagine the emergence of better models for risk and underwriting.”
Fraud detection and prevention might also benefit from big data analytics.
He envisions big data not only presenting potential underwriting improvements, but also allowing banks to get a better understanding of market vagaries related to interest rate changes and preferences among different loan products. That sort of research in term should improve marketing campaigns and product development. Rubin also foresees big data helping banks to make better decisions about the packaging and bundling of financial products.
In addition to incorporating “unstructured data,” big data seeks to break down the silos that typically separated the databases of different divisions within large financial firms, so that wealth management might benefit from data in the mortgage division’s records, for instance.
“The advent of big data allows this little flat kernel of business to expand in a multidimensional field.
Rubin said the expansion of data storage and processing capacity enabled by recent technology advances, such as cloud computing, is one factor enabling business to delve deeper into this analytical frontier.
Big data also have implications for technology spending. A lot of what is happening in big data falls outside of the traditional IT department at corporations, he noted. When one looks at technology spending across an entire enterprise, including what’s happening in places like marketing departments and the increasing reliance on “bring your own device” practices, total technology spending dwarfs the traditional IT budget by a multiple of three or four, Rubin said.
That may require financial institutions to rethink how they manage their overall technology resources. Many issues that go beyond the traditional role of a chief information officer are cropping up, he said. In the future, companies may want to create new positions, such as a “chief digitalization officer” to help guide their overall technology strategy.
But big data is not without its perils. A few years ago, for instance, news media reported that auto insurance companies were incorporating things entirely unrelated to a consumer’s driving history into their pricing of auto insurance, such as
The news sparked something of a backlash from consumers.
The use of big data has plenty of potential to raise consumer concerns about privacy, Rubin acknowledges. There is bound to be debate about “how deep you can go” in terms of collecting behavioral information.
“I think that as the use of big data gets more personalized, things will become more visible and there is the risk of more resistance,” he said. “I think what we’ll see in the next few years is that the bounds of this will be tested.”
Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.
