“Everything [in finance] really springs from data,” says Roger Ehrenberg, a former hedge fund manager at Deutsche Bank who now makes investments in so-called big data companies.
Core disciplines like risk management, credit assessment and consumer marketing are all being influenced by this rise of data-intensive applications. But the next frontier stands to be more disruptive, as big data usher in a new level of product differentiation.
Dynamic pricing – or using real time data to price services on the fly – points to one of the areas of greatest potential, according to many investors and entrepreneurs.
For instance, Wealthfront, an online investment manager, says it adjusts its clients’ holdings frequently to recognize losses that bring tax benefits.
Progressive is also looking at ways of applying real-time data to create better services where drivers would be charged based on how often they use their vehicles.
“Everything [in finance] really springs from data,” says Roger Ehrenberg, a former hedge fund manager at Deutsche Bank who now makes investments in so-called big data companies. The falling costs of computing and communications lie behind the explosion in data that is triggering this upheaval. The founder of Progressive Insurance, a US car insurer, first dreamt of collecting information about his customers’ individual driving habits to help with risk assessment in the late 1980s. It was only in 2010 that the idea became cost-effective: since then, more than 1m customers have installed devices in their cars that report back how abruptly they brake or whether they are heavy on the accelerator. “The network of sensors is opening a universe of data that previously you couldn’t get at,” says Richard Hutchinson, general manager of usage-based insurance at Progressive. The architecture of the open web has also contributed, making it easier for newcomers to ingest feeds of digital information. Drawing on APIs, or open interfaces, from companies such as eBay and PayPal, Kabbage, an online lender to small businesses in the US, says it can track “thousands of data elements” that help reveal the health of a customer’s business. Through a special deal with UPS it also gets parcel shipment data. Throw in Facebook, and it has become possible to get a detailed sense of how a small business is faring,says Kathryn Petralia, chief operating officer: “You can measure the level of reciprocal engagement between a company and its customers.”