June 03, 2021
The development of information technology such as the world wide web and the growing number of devices capable of recording and transmitting data has turned data into a commodity in the 21st century. Although previously, only a few data types were analyzed by businesses and investors, including a combination of traditional and alternative data.
Nowadays, businesses and data providers collect huge volumes of alternative data. As a result, third-party data providers can enrich the data businesses already have. Over time, this practice gave rise to data brokerage: the collection of individual, sensor, social media, and company data. Businesses and investors leverage this data for various business purposes. Today, the companies and individuals collecting this data are known as data brokers or data providers.
The term data brokers is defined as private persons or, more often than not, firms that specialize in gathering information from various public web sources. Data brokers then process, clean, and structure the collected data and then license for businesses and financial firms. Data brokers gather information from publicly available sources, especially those on the internet. Sometimes data brokers might buy the information to supplement the data sets they already have, consequently increasing their value. Data brokers in most contexts are known as data suppliers or data providers.
Initially, information broker as a profession emerged long before the age of the internet, back in the 1950s. This was due to the introduction of modern credit scores to determine the creditworthiness of private persons. However, only in the 1990s, with further advances in information technology, data brokerage has started to shape into the kind of industry it is today. Due to the increased demand for high-quality alternative data, data providers today are usually firms specializing in it since the volumes of data that need to be handled are often too great for single agents.
The goal of the data broker is to have the kind of data that is of value for businesses. To achieve this, information brokers collect data from multiple sources. These are usually public sources, such as online databases. Additionally, data broker companies might utilize various techniques of coming into possession of customer data, such as surveying and web tracking.
The responsibilities of data brokers are of two main kinds. Firstly, data brokers deal with sensitive information, and it must be handled responsibly, respecting individuals’ privacy. For this reason, data brokers install security measures to protect the information from falling into the wrong hands. Additionally, companies often license data for a particular usage instead of selling it. As a result, companies dealing with information on other firms would usually raise fewer concerns from the general public than those licensing consumer information.
Secondly, a data broker is responsible for following various guidelines regarding the handling of the data. Like all kinds of laws, data governance laws differ by country. Thus how information brokers are allowed to operate varies by jurisdiction. As business is becoming increasingly globalized, there are attempts to regulate data governance on a global level. A relatively recent example is the General Data Protection Regulation (GDPR) introduced by the European Union.
Data providers usually specialize in the kind of information they collect and manage. For example, some data brokers provide information to scientific or government organizations rather than businesses and financial organizations, collecting the kind of data that would interest such entities.
Data brokers dealing with business-relevant data may also cover specific areas, industries, or topics. Below are four common types of data brokers, categorized by the kind of information they provide and their purpose.
Among the most commonly recognized data brokers are those that provide information for the purpose of targeted marketing or ABM. Such providers create databases with information such as a professional’s age, income, buying habits, internet activity, and similar, helping to create their consumer profile. For certain companies, this information might become a sales lead that they could then target through specific marketing strategies.
Alternatively, data brokers working with B2B companies collect information such as firmographics, company funding data, community and repository data, and product review data for data enrichment purposes. B2B companies compile multiple data sources, sometimes from numerous data providers, to create dashboards and automated marketing tools for their customers, often B2C companies. This method is practiced by lead generation companies and by HR tech companies that enhance talent acquisition.
Some data brokers specialize in double-checking the information on people or businesses in order to prevent possible fraud. For example, banks or financial firms might turn to a data broker to find out more about an entity before granting a loan. The data that the broker holds or can collect might help establish the accuracy of the information provided by the load claimer, thus preventing granting a fraudulent claim.
Banks and loan firms also use data brokers to calibrate the loan offers for particular applicants. Such a data broker would then collect financial data and information such as online purchase history, from which companies could determine the individual’s financial situation and predict buying intent. This would let the bank know what size of loan could be risked with that person and the interest rate that should be set.
Information brokers are also used for the purposes of risk mitigation by insurance companies, as particular website visits or purchases of medical items might indicate higher medical risks, thus making the insurer raise the interest rates of life insurance.
A data broker of this type would create a database about private people that may be accessed through the broker’s website. The website might provide general biographic data such as date of birth, education and employment history, marital status, and such personal information as affiliations and interests. Professional profile websites, also known as people search websites, are used by private individuals to retrace lost contacts or simply find out more about acquaintances. Companies use these websites for various ranking purposes, such as job candidate ranking and lead scoring.
In contemporary business, data is a necessary asset for most companies to handle various workflow challenges effectively. However, because not all firms can collect the needed data themselves, data providers have a crucial role in knowledge and data management.
The value that data brokers bring is of multiple kinds from the business perspective, as data is utilized in many different areas. The most common examples of the added value data companies provide to businesses and investors include:
Investors traditionally have used limited sources and types of data for investment decisions. After the proliferation of alternative data types, it is beyond the capabilities of most financial firms to gather all the necessary data for investment models themselves. According to the report published by Alternative Investment Management Associated, over 50% of hedge funds are already using some alternative data to estimate that the percentage will reach a maximum within five years. Data brokers come in to provide the data needed for investment models.
Before launching a product, service, or a whole new startup, entrepreneurs might want to conduct a market analysis to answer relevant questions about demand and competition. However, even for a small industry sector, such as market analysis, companies may require a considerable volume of data. This volume is enormous when global markets are to be taken into consideration. Usually, there are no other ways to get all the necessary information other than turning to a data company.
The data-driven approach to hiring has recently gained momentum, with more companies allowing algorithms to screen potential candidates. People making final hiring decisions would expect to have extensive profiles of the candidates before the interview. This mirrors the practice of lead profiling, which analyses, scores, and ranks sales leads in order to approach them correctly. Companies usually use more than the aforementioned professional profile search websites to get the data for these practices. When B2B companies can’t find the necessary information for contacting new leads, they contact a data provider.
One of the most common practices that data brokers are associated with is targeted advertising. This is most noticeable to private customers who see targeted ads online or receive email offers based on their online activity. Allowing companies to run targeted advertising, data providers save their time and effort, connecting businesses with the people most likely to need what they offer.
The data broker industry is a product of its time, created by the growing demand for data in business. Although the discussion regarding privacy concerns related to sharing personal information is still very much in progress, the value brought by information brokers both to businesses and to consumers indicates that this industry is here to stay. Therefore, an important goal for the international political community is to create such data regulations that would simultaneously protect consumers’ privacy and retain the business value of data brokerage.