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Why Machine Learning Is Said To Be the Future of Finance

Prakash Matre
Prakash Matre at September 06, 2023

Machine Learning - Future of Finance

Machine learning in finance has transformed the entire financial ecosystem. The financial ecosystem can be as complex or as simple as you want it to be. Complex because of the massive amount of data received by fintech and finance companies, and simple due to the incorporation of machine learning in finance. Machine learning is a subset of data science. The best part about machine learning is that it learns from experience. Simply put, the more data you feed it, the better it becomes. The belief is that systems can pick information from the data, identify the patterns, and make decisions with minimal human intervention. Another advantage of machine learning is the ability to retrain models as many times as you want. The system works in the background and gives you the result based on its training. The system adjusts and readjusts itself to the model you have chosen and gives you accurate results. Since it is data-driven, machine learning and finance go hand in hand. Initially, machine learning was used only for hedge funds. However, as the field grew, the application of machine learning in finance expanded with it.

Let us understand how machine learning for finance works. Fintech and finance sectors receive volumes of data - thousands of transactions, invoices, payments, vendors, customers, etc. The system learns from this data, integrates it with past experiences, checks for patterns, and returns the results. To process so much data in a short time is humanly impossible, and that is why machine learning is a booming field.

Machine Learning Applications In Finance

  • Trading

Traders rely on mathematical models to monitor business and trade activities in real time. The aim is to detect and study patterns that can force stock prices to rise or fall. Based on its predictions, the trader can decide to hold, buy, or sell the stocks. A crucial aspect of trading is the interference of human emotions. Unlike humans, algorithmic trading does not take into consideration emotion. It relies solely on the objectively available data. Traders cannot process volumes of data all at once. Algorithmic trading will give you an edge over the market by speedily processing hoards of data and then analyzing it. As a result, these small advantages bring you significant profits.

  • Prevention and Detection of Fraud

Fintech and finance companies are at a higher risk of fraud due to increasing transactions, third-party integrations, and the number of users. It is crucial to have a solid security system to store all this data securely for future retention and use. The traditional security systems no longer serve well to save data breaches by modern fraudsters. Finance machine learning algorithms can study thousands of transactions in seconds or even split seconds to detect suspicious behaviour. Based on the already existing information about the account holders, and their previous transaction patterns, finance machine learning algorithms also aim to check the congruence between the recent transaction and the previously demonstrated behaviour.

Furthermore, it takes into account several other aspects like the location and IP address. If the system recognizes a potential fraud or suspects fraudulent behaviour, it will raise a red flag. Moreover, it can also decline the transaction until further action by a human. Additionally, machine learning algorithms are well-equipped to ask for additional verification from a user when it suspects something fishy. Furthermore, it can even detect multiple microtransactions and raise a flag to avoid money laundering practices. Machine learning in finance can prevent fraud in real time. Notable fintech like Paypal and Payoneer heavily rely on machine learning to enhance their security systems.

  • Credit Scoring and Underwriting

The banking and insurance industry accesses the data of millions of customers. Data scientists can train models on thousands of customers and feed the system with hoards of data for use in real-life situations. Faster underwriting and credit scoring processes will help your employees work much faster. The system algorithm can also study the customers' already available data to decide whether they are eligible for a loan or not. Furthermore, it will also help you detect special cases. The system can study the previous patterns of the consumer to form an accurate forecast of their future behaviour.

  • Financial Advisory and Decision Making

Robo-advisory is speedily making its mark in the finance industry. They study the investors' goals and risk tolerance to provide suitable investment options. Furthermore, they can advise you for optimized allocation and management of your current assets to meet your goals. It requires the customers to input their goals to establish a portfolio that aligns with their aim.


The essence of machine learning:- 

Certainly! Here's an overview of the essence of machine learning:

Machine Learning (ML) is a subset of artificial intelligence (AI) that focuses on the development of algorithms and statistical models that enable computers to learn and make predictions or decisions without being explicitly programmed. The essence of machine learning can be distilled into several key principles:

  • Data as the Foundation: Machine learning relies heavily on data. Algorithms learn from historical data to identify patterns, relationships, and trends. High-quality, diverse, and relevant data is essential for training accurate models.
  • Learning and Adaptation: ML algorithms have the ability to learn from data and adapt to new information. They improve their performance over time as they encounter more data, making them valuable for tasks where rules or patterns change.
  • Supervised and Unsupervised Learning: ML encompasses various learning paradigms. In supervised learning, models are trained on labelled data with clear input-output pairs. In unsupervised learning, models identify patterns and structures in unlabeled data without explicit guidance.
  • Feature Engineering: Feature selection and engineering play a crucial role in ML. It involves choosing the most relevant attributes from the data and transforming them into a format suitable for model training.
  • Model Selection and Training: ML involves selecting appropriate algorithms and models for a given task. Training involves adjusting model parameters to minimize prediction errors on a training dataset.
  • Generalization: ML models aim to generalize from the training data to make accurate predictions on unseen or new data. Overfitting (model fitting too closely to the training data) and underfitting (model oversimplification) are common challenges to address.
  • Evaluation and Validation: ML models need to be rigorously evaluated using validation datasets to assess their performance. Common metrics include accuracy, precision, recall, F1-score, and ROC curves, depending on the task.
  • Bias and Fairness: ML models can inherit biases from the training data, leading to unfair or discriminatory outcomes. Ensuring fairness and mitigating bias is a critical ethical consideration in ML.
  • Continuous Improvement: ML models should be continuously monitored and updated to maintain their effectiveness. This includes retraining models with new data and adapting to changing environments.
  • Real-World Applications: ML is used in a wide range of applications, from natural language processing and image recognition to autonomous vehicles and medical diagnosis. It has the potential to transform industries and improve decision-making processes.

In summary, the essence of machine learning revolves around the ability of algorithms to learn from data, make predictions or decisions, and adapt to changing circumstances. It has a profound impact on various industries and continues to advance our understanding of data-driven problem-solving.

Final Say

Organizations in the finance sector are rapidly integrating machine learning into their daily operations to ensure accuracy, speed, and optimization. It is easier for organizations to propel when they aim to work at optimal levels and make the best out of the resources at their expense. According to reports, nearly 48% of companies use data analysis, machine learning, or AI tools to overcome issues on data quality. Compared to other departments, the marketing and sales department prioritizes using machine learning and AI (40%) for their success. The efficiency in screening through COVID-19-related studies and other global outbreaks is a result of machine learning. By 2025, we will need a whopping 97 million individuals to fulfil the roles of AI and machine learning specialists, process automation specialists, and many more.

The statistics clearly chart out the growing demand for machine learning in the finance sector and other sectors. One of the main reasons why companies are unable to integrate machine learning is a lack of understanding. And that is where a machine learning specialist can help you. It will not be wrong to state that shortly, we can expect most of the functions to be automated using machine learning.



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