Alternative data is information gathered from non-traditional information sources. Analysis of alternative data can provide insights beyond that which an industry’s regular data sources are capable of providing.
The question of what constitutes alternative data varies from industry to industry. In banking, for example, a lender may traditionally rely on an applicant’s credit score to assess risk and determine the probability that a loan will be paid back. When the applicant has no prior credit history, however, alternative data that illustrates the applicant’s history of meeting financial obligations, such as paying a cell phone bill on time each month, can be useful information. A bank that includes alternative data sources in risk assessment for a loan may also factor the applicant’s history of paying rent on time and whether or not the applicant consistently makes more than the required minimum monthly payment on credit card bills.
In recent years, the increase of data from mobile devices, satellites, sensors and websites has led to large amounts of structured, semistructured and unstructured data, also known as big data. All that data has the potential to be mined for information and potentially help people make better data-driven decisions. In response to the demand for alternative data, some traditional research firms have branched out to become alt-data providers, selling corporate clients data from non-traditional sources and services to analyze that data..
Once a data source begins to be used on a regular basis, it is no longer considered to be an alternative source. Current use cases for alternative data include:
- Precision agriculture – farmers can analyze time-series images taken by drones to make more accurate predictions about crop yields.
- Healthcare – public healthcare workers can mine social media for specific keywords to fine-tune initiatives that track the spread of influenza.
- Investment firms – analysts can use satellite imagery to analyze the number of cars in a shopping mall parking lot and predict the state of a local economy.
- Military – autonomous robots can be used as additional eyes and ears to help improve situational awareness.