Machine Learning and the Finance Industry



Did you know that the term “artificial intelligence” was first coined in 1956? Even since then the world has rapidly evolved technologically. From the early days of radio, to television, to the internet, and now we have Artificial Intelligence and Machine Learning. Artificial Intelligence (AI) involves many aspects – including processing robotics and the process of automation by robotics. Due to large amounts of data and the increase in demand for understanding data patterns, AI and machine learning (ML) have become very popular (especially among large companies). When it comes to the financial services industry, thousands of organisations are using ML systems to more efficiently identify data patterns to gain target audience insights and much more. 


The financial services industry is full of data records. Hence the relevance of using ML to succeed in this domain. There are many use-cases of ML in the financial industry but risk assessment, fraud detection, financial advice, trading, and managing finance are the most popular (or obvious) business functions within the industry for machine learning systems. 



Risk Assessment 

To determine which customers are eligible for a credit card, banks use credit scores. However, this method of grouping customers is not necessarily efficient for business.  

Machine learning is now being used to scan thousands of personal financial records for loan repayment routines, the number of active loans, and the number of existing credit cards an individual has – to determine customised interest rates. Lenders can now determine those who are credit-worthy options if they do not possess an extensive credit history. For example, some machine learning algorithms use alternative data, such as mobile phone data, to evaluate loan suitability and customised loan rates. In addition to this, ML-powered models are objective – this removes any biases that a human credit officer may make. A vehicle lending company has experienced a 23% annual decrease in losses by implementing an AI system of loan evaluation. 


Fraud Detection and Management 

All organisations aim to reduce risk conditions. The financial industry (and banks in particular) take fraud very seriously – seeing as given loans are basically somebody else’s money. ML security and fraud identification systems are used to alert organisations of unusual behaviour by analysing past spending patterns across many transaction tools. A card being used in a faraway area from where it was previously used or a withdrawal of an amount of money that is unusual for the particular account, for example, are all detectable by ML systems. Understandably, these events may not be fraudulent. One of the benefits of ML-based fraud systems is that they can learn. If a regular transaction is marked as irregular by the system, it can be corrected and learn from its mistake. This allows for better informed decisions about what is flagged as fraudulent behaviour and what is not. 


Financial Advisory Services 

Pressure on financial institutions to reduce their commission on individual investments has increased. Luckily machines can give financial advice for a single down payment. Another use case for ML in financial advice is automated advisory – combining ML calculations with human insight to provide more efficient investment options to customers. This collaboration is key. An AI system is neither an all-knowing solution nor a simple marketing accessory; it is just as important to consider the human perspective along with the AI decisions when it comes to financial decision-making. 



It is not such a recent experience that investment companies have been relying on technology and data scientists to predict future patterns in the market. In the trading field, investments are dependent on one’s ability to accurately predict the future. ML systems are highly useful in this regard: they can produce calculations from large data in a short time. Machine learning allows such systems to predict patterns based on past data (even taking into account – and planning for – anomalies such as the 2008 financial crisis). Depending on one’s appetite for risk, ML systems can suggest portfolio combinations: a person with an interest in high-risk shares depend on ML-calculated decisions on when to buy, hold, and sell. Those with a tendency towards low-risk portfolios can make decisions based on alerts from ML systems about when the market is expected to fall. 



Finance Management 

In an increasingly materialistic and connected world, managing finances can be a challenge to many people. Personal Financial Management (PFM) is one of the more recent ML-based developments. By analysing where consumers are spending their money, ML models build algorithms to help consumers make more informed decisions about their money. The model creates a spending graph which is personalised based on individual data from one’s web footprint. This may upset advocates of privacy breaching, but this is becoming a more popular way to manage personal finances as it removes the need to make length spreadsheets or hand-written budgets. From these small PFM suggestions to bigger investment portfolio suggestions, ML systems can be beneficial time- and money-saving tools to both customers and employees in the financial services industry. 


Machine learning is the future of many business functions within the finance industry. Soon enough it will be able to handle more financially sensitive and tedious tasks and provide more efficient solutions. The long-term cost saving benefit of ML systems are encouraging multiple financial service organisations to implement this technology. Although, currently, the implementation of ML systems in the finance industry is still in its infancy, the speed at which it is helping the industry progress predicts losses will be fewer, trading will be smarter, and customer experience will be better.