Big data in the financial sector

In this article, Rayan AKKAWI (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022) explains the role of big data in the financial sector.

Big data is a term used for contemporary technologies and methodologies that are used to collect, process, and analyze complex data. Today, data is being created at an exponential rate. In fact, and according to a 2015 IBM study, 90% of the data in the world has been created in the past two years. As big data gets bigger, it becomes even more important and essential for executives in the financial sector to stay ahead of the curve. Also, it is expected that data creation will continue to grow moving forward in time.

Big Data in The Financial Sector

For decades, financial analysts have relied on data to extract insights. Today, with the rise of data science and machine learning, automated algorithms and complex analytical tools are being used hand in hand to get a head of the curve in diferetn areas of the financial sector.

Fraud prevention

First, data has helped with fraud prevention such as identity theft and credit card schemes. Abnormally high transactions from conservative spenders and out of region purchases often signal credit card fraud. Whenever this happens, the card is automatically blocked, and a notification is sent out to the card owner. This protects users, insurance companies, and banks from huge financial loses in a small period. This also made things even easier and more practical avoiding the hassle of having to call and cancel the card. Data science comes in the form of tool like random forests that can detect a certain suspicion. In addition, and to lower the chance of identity theft, data has helped ease this process through 3D passwords, text messages, and PINT code which have backed up the safety of online transactions.

Anomaly detection

Second, data has helped the financial sector through anomaly detection. Data analysis is not only created to avoid a problem but also to detect it. For example, data today helps with catching illegal insider traders. To do so, data analysts created anomaly detection algorithms that can analyze history in trading patterns and thus detect and catch abnormal transactions of illegal traders.

Customer analytics

Third, data has helped with improving customer analytics. Data analyzes previous behavioral trends of consumers based on historical transactions and then makes future predictions of how consumers are likely to act. With the help of socioeconomic characteristics, we can create clusters of consumers and group customers based on how much money we expect to gain or lose from each client in the future. Following that, we can come up with decisions to focus on a certain type of clients to make profits and cut on other customers to make savings. Thus, financial institutions minimize human errors by utilizing data science. To achieve that, first, by identifying uncertain interactions and then monitor them going forward. Finally, prioritizing the investments most vulnerable at a given time. For example, banks use this approach to create adaptive real risk score time models to identify risky clients and those who are suitable for a mortgage or a loan.

Algorithmic trading

Fourth and most importantly data has created algorithmic trading. Machines make trading based on algorithms multiple times every second with no need for approval by a stand-by analyst. These trades can be in any market and even in multiple markets simultaneously. Thus, algorithmic trading has mitigated opportunity costs. Thus, there are algorithmic rules that can help in identifying if there is a need to trade or not to trade and reinforces business models where errors are highly penalized and then adjust hyper parameters. We can see algorithms that exploit arbitrage opportunities where they can find inconsistencies and make trades which can cause problems. The huge upside is that it is high frequency trading; whenever it will find an opportunity to make a trading, it will. However, the downside is that imprecision could lead to huge losses due to lack of human supervision. That is why sometimes human interventions are needed.

Conclusion

Thus, we can say that data has become the hottest commodity that results in getting an edge over competition. Financial institutions spend a huge amount of money to get exclusive rights to data. By having more information, they can construct better models. The most valuable commodities are not analysts but the data itself. That is how the data science has revolutionized finance.

Characteristics of Big Data

When talking about Big Data, four main characteristics need to be considered to understand the why Big Data plays a transformational role in the financial sector: volume, variety, velocity, and value.

Volume

First, the amount also known as volume of data being produced on daily basis by users has been increasing exponentially by users. This large output of data has helped create Zettabytes (10¹² Gigabyte) and Yottabytes (10¹⁵ Gigabyte) of datasets in which companies can benefit by extracting knowledge and insights out of it. However, this amount of data cannot be processed using regular computers and laptops. Since they would require a lot of processing power.

Variety

Second, as the massive amount of data is being generated by multiple sources, the output of this data is unstructured making it hard to organize the data extract insights. Raw data extracted from the source without being processed does not provide any value to business as it does provide stakeholders with the ability to analyze it.

Velocity

Third, to address the issue of processing technological advancements have brought us to the tipping point where technologies such as cloud computing have enabled companies to process this large amount of data by utilizing the ability to share computational power. Furthermore, cloud platforms have not only helped in the processing part of data but by the emergence or cloud solution such as data lakes and data warehouses. Businesses are able to store this data in its original from to make sure that they can benefit from it.

Value

Finally, this brings us to the most important aspect of Big Data and that in being able to extract insights and value out of the data to understand what it is telling us. This process is tedious and time consuming however with ETL tool (Extract Transform Load) the data in its raw format is transformed so that standardized data sets can be produced. Insights can be extracted through Business Intelligence (BI) tools to create visualization that help business decisions. As well as predictive artificial intelligence models that help business predict when to take a strategic decision. In the case of financial markets, these decisions are when to buy or sell assets, and how much to invest.

Challenges Solved by Big Data in the Financial Industry

Utilizing Big Data in the finance industry presents a lot of benefits and helps the industry to overcome multiple challenges.

Data Quality

As previously mentioned, the multiple data sources present a huge challenge from a data management standpoint. Making it an ongoing and a tedious effort to maintain the integrity and the reliability of the records collected. Therefore, adding information processing systems and standardizing the data gathering and transformation processes helps improve the accuracy of the decision-making process, especially in financial services companies where real-time data enables fast decision making and elevates the performance of companies.

Data Silos

Since financial data comes from multiple sources (applications, emails, documents, and more), the use of data integration tools help simplifies and consolidate the data of the institution. These technologies facilitate processes and make them faster and more agile, which are important characteristics in the financial markets.

Robo-Advisory

Big Data and analytics have had a huge impact on the financial advisory sector. Where financial advisors are being replaced by machine learning algorithms and AI models to manage portfolio and provide customers with personalized advice and without human intervention.

Why should I be interested in this post?

This article is just an eye opener on the trends and the future state of the financial industry.

Like many other industries, the financial sector is becoming one of the most data driven field. Therefore, as future leaders it is vital to keep track and push towards data driven solutions to excel and succeed within the financial sector.

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About the author

The article was written in May 2022 by Rayan AKKAWI (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022).