The Financial Sector Conduct Authority (FSCA) has published new research proposing how should FinTechs handle non-traditional (alternative) data on the provision of financial services in South Africa.
There’s currently no protection for South Africans who exposes their alternative data to FinTechs, and the use of these non-traditional data is not regulated.
Alternative data has grown in prominence in South Africa and is increasingly being used by FinTechs and traditional financial institutions in serving customers.
FinTechs are making use of external data like social site postings, search engine keywords, online transactions, photo albums, and group chats to gather insights about consumers’ preferences and cross-sell/targeted adverts.
Furthermore, telecom companies are analysing unstructured, internal data like call records, and URL/ contents to reduce churn (e.g., call centres’ reps’ behaviour, key phrases that led to churn like “sorry, I can’t help you with that”).
South Africans are not even aware that FinTechs are using their alternative data to influence their buying of goods and services such as insurance.
FSCA said based on the overall findings, it is evident that things such as data privacy, data protection, fairness and transparency are significant challenges emanating from the use of non-traditional data on the provision of financial service.
The South African financial watchdog now want to strengthen aspects such as consumer education, regulatory frameworks, licensing, supervision and enforcement to combat new risks resulting from the use of non-traditional data.
According to the FSCA, financial regulators need to put proper safeguards in place to ensure that the financial system is geared towards the realisation of better consumers outcomes.
To manage non-traditional data, FSCA proposes:
- Financial Service Providers (FSPs) should be clear about their use of customer data, attain customer agreement to their customer data policies and, where appropriate, seek consent for specific uses.
- FSPs should be held responsible and accountable for data security.
- FSPs should disclose to customers which of their data points they are using and enable customers to intervene and limit use where applicable.
- FSPs should, where appropriate, allow customers to access, download, transfer or permit third parties to manage data about them.
- FSPs should be held responsible and accountable for violation of customers’ data privacy.
- Finally, FSPs should be able to comprehensively test, validate and explain their use of data analytics or algorithms and models to customers.
“As we can see from both domestic and international markets that technological innovations have improved the ability of FSPs to capture and use non-traditional data. These technologies allow FSPs to collect a greater variety of non-traditional data, manage and transfer data, permits greater insight into customer behaviours and preferences,” FSCA explains.
“However, innovations have also led to greater uncertainty on what it means to use non-traditional data appropriately. Absence of guidelines on the usage of non-traditional data poses risks to market stability because of changing economic incentives. For example, Increased availability of more granular customer data could encourage companies to focus on their most profitable customer segments at the exclusion of less profitable ones.
“Therefore, finding consensus among financial regulators on the appropriate use of non-traditional data is critical to balancing financial stability, consumer protection, innovation and economic growth. With the proposed recommendations, we believe it will be possible to address the challenges posed using non-traditional data in the provision of financial services.”
