5 Uses Of Machine Learning In Financial Services

Machine learning is enabling leaps and bounds in the financial industry. Here we will tell you what are some of the advantages and uses of machine learning

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05 February 2024 7:10 AM
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5 Uses Of Machine Learning In Financial Services
5 Uses Of Machine Learning In Financial Services

Automatic learning or machine learning is a subset of data science that uses statistical models to obtain information and make predictions. This Blogstrove article explores the advantages of machine learning, as its name suggests, is that it learns from experience without being explicitly programmed. It is in charge of selecting the models and feeding them with data. The model automatically adjusts its parameters to improve the results.

Data analytics specialists train machine learning models on existing data sets and then apply them to real-life situations. The model is launched as a background process and returns results automatically, based on your settings. The models can be trained frequently according to the needs of the company, in order to keep them up to date. Some companies update their models every day, although it also depends on the amount of data obtained.

Generally, the more data is available and added to the model, the more accurate the results will be. Fortunately, in the financial industry, there are large amounts of data about different types of transactions, customers, and invoices, among others. So, without a doubt, data is an indispensable component of machine learning.

Machine Learning Adoption Barriers

Technology is advancing very fast, in addition, the volume of information is increasing more and more, so in the future, it will be impossible to see the uses of machine learning in financial services.

However, most financial institutions are not yet ready to extract the real value of this technology. Because?

1. Companies are unaware of the real benefits of machine learning.

2. Machine learning research and development is often expensive.

3. There is a shortage of machine learning and artificial intelligence engineers.  

4. Managers of financial institutions are not risky and take a long time to update the data infrastructure.

Few companies have implemented machine learning; however, those that have implemented it report great benefits. For example: reduced operating costs thanks to process automation. There is also an increase in revenue thanks to better productivity and better user experience. In addition, strengthened security increases.

Also Read: Understanding The JQuery Syntax And Basic Concepts

Uses of machine learning in financial services

Some of the machine learning applications that have been carried out by companies around the world are the following.

1. Automation of processes

Process automation allows you to streamline manual work, automate repetitive tasks, and increase productivity. Here are some uses: chatbots, call centre automation, paperwork automation, employee training, and more. One of the clearest examples is the case of JPMorgan. JPMorgan Chase developed software called COiN to automate the document review process. This once-foolproof automation can produce accurate results, taking just a few seconds. It is an alternative to the conventional documentation carried out by lawyers, which usually takes days or weeks. 

A review of JP Morgan's credit agreements was a part of the COiN software's initial testing. The key technique that the software uses is known as image recognition. By using image recognition, the software can compare and distinguish between different agreements. The company has also stated that COiN is unsupervised learning software, which means there is minimal human involvement once it has been implemented. This is an important step that reduces the time, resources, and effort required to review documents. A review of JP Morgan's credit agreements was a part of the COiN software's initial testing.

2. Security

One of the security threats that have increased the most is financial fraud. In Mexico, only in the first half of 2018 for an amount of 9 thousand 231 million pesos, 3.5 million claims were registered. But between 2011 and 2018, more than 30.8 million fraud claims have been registered. But algorithms are a wonderful tool for detecting fraud. 

For instance, banks may use this technology to continuously track hundreds of transactional details for every account. The algorithm looks at every action a cardholder takes and assesses whether an activity attempt is characteristic of that particular user. Such a model detects fraudulent behavior with high precision.

In order to verify the transaction, the system may ask the user for further identification if it notices unusual account behavior.  Or even block the transaction entirely, if there is at least a 95% chance that it is a fraud. Which can be crossed with information from previous fraud complaints. Machine learning algorithms need only a few seconds (or even seconds) to evaluate a transaction. Speed helps prevent fraud in real-time, not just detect it after the crime has already been committed. Economic monitoring is another use case of machine learning in financial services in the security aspect. The system may be trained by data scientists to recognize several micropayments and money laundering tactics.

Machine learning algorithms can also significantly improve network security. Because machine learning is unmatched in its ability to analyze dozens of characteristics in real-time, data scientists train a system to identify and isolate cyber threats. And this technology is likely to power the most advanced cybersecurity networks in the nearest future.

3. Credit rating

The risk assessment tasks that are so prevalent in banking and insurance are ideal candidates for machine learning algorithms. Data scientists train models using hundreds of data entries for each of thousands of consumer profiles. The same credit-scoring tasks may be completed by a well-trained algorithm in real-world situations. Such scoring systems facilitate the speedier and more precise work of human employees.

Banks and insurance companies have a large amount of historical consumer data, so they can use these inputs to train machine learning models. Alternatively, they can take advantage of data sets generated by large telecommunications or utility companies. The bank aims to increase access to credit for clients with poor credit histories in Latin America. Destacame uses open APIs to access utility providers' bill payment data. Destacame generates a credit score for a consumer based on bill payment behavior and provides the result to the bank.

4. Algorithmic trading

Another of the uses of machine learning in financial services is in algorithmic trading. Machine learning helps make better business decisions. A mathematical model monitors news and trading results in real-time and detects patterns that can force stock prices up or down. You can then act proactively to sell, hold, or buy shares based on your predictions.

Human traders are unable to concurrently analyze thousands of data sources as machine learning systems can. Human traders benefit from a little advantage over the market average thanks to machine learning algorithms. And, given the large volumes of trading, that small advantage often translates into significant profits.

5. Advice on wealth management

Robot advisors are now common in the financial domain. Currently, there are two main applications of machine learning in the advisory domain. Portfolio Management is an online wealth management service that distributes, manages, and maximizes customer assets using algorithms and statistics. Users enter their current assets and financial goals, for example, saving $1 million by age 50. A robo-advisor then allocates current assets to investment opportunities based on risk preferences and desired objectives.

Conclusion

Machine learning is not just a technological advancement; it's a transformative force reshaping the financial landscape. The applications discussed highlight its potential to streamline operations, enhance security, and provide more informed financial services. Write For Us about your best use of machine learning in data science.

Also Read: Why Do Businesses Need Managed IT Services

FAQs

How does machine learning enhance security in the financial industry?

Machine learning tracks transactional details, detecting fraudulent behavior in real-time, thereby fortifying security measures.

What are the primary barriers to the widespread adoption of machine learning in finance?

Limited awareness of benefits, high research costs, a shortage of skilled engineers, and slow data infrastructure updates hinder adoption.

Can machine learning improve credit ratings?

Machine learning algorithms analyze historical consumer data, providing faster and more accurate credit scores.

How does machine learning impact algorithmic trading?

Machine learning monitors real-time data, identifying patterns that influence stock prices, giving traders a significant advantage.

What is the role of robo-advisors in wealth management?

Robo-advisors, powered by machine learning, offer cost-effective portfolio management and personalized product recommendations in wealth management