Potential of Machine Learning in Finance

, , Leave a comment


In today’s dynamic financial landscape, staying ahead of your competition has become much more difficult than it was before. So if you want to be at the first of the line, it’s important to leverage cutting-edge technologies, like machine learning.


Well, tackling the finance department of an organization is all about being in control of data. And, with machine learning offering you the power to harness advanced algorithms, you’ll be able to do precisely that. But, that’s not where it ends though.

With ML, you’ll also use predictive analysis to your advantage and learn about the risks the organization might encounter in the long run. Thus, it’ll become easier for you to strategize accordingly, make better decisions, improve your overall efficiency, and mitigate risks.

Here, we’ll discuss more on the same topic in order to understand the nooks and crannies of ML and how it works. So, without any further ado, let’s get started with it.

What is Machine Learning?

Learning in Finance

Machine learning (ML) is a part or a branch of AI (Artificial Intelligence), which primarily focuses on using data intelligence and algorithms. And it does so to imitate the way we learn, answer, or operate on a large scale. This largely improves the technology’s efficiency and accuracy.

The aforesaid technology usually works with some specific concepts or elements to provide a better result. Here’s what you need to know about them –

1: Data

As you can already guess, machine learning relies heavily on data. It requires a large dataset that represents the problem or domain it aims to address. The data can be structured (e.g., in a tabular format) or unstructured (e.g., text, images, audio).

2: Training Data

Although it may have resemblance, training data doesn’t really offer the same information as traditional data. It is the portion of the dataset used to train a machine learning model.

Training data consists of labeled examples, where both the input data and the desired output (target or label) are provided. It helps ML make predictions or classifications.

3: Features

As the name implies, features are the individual measurable properties or characteristics of a piece of data. They’re used as input variables to train an ML model. Thus, choosing relevant and informative features tends to be crucial for model performance.

4: Data Model

A model is a mathematical or computational representation of a system or a problem. In ML, the model is trained using the training data to learn patterns and relationships.

Different algorithms and architectures may be used to create models, such as decision trees, neural networks, or support vector machines.

5: Supervised and Unsupervised Learning

Supervised learning is a type of ML proceeding where most of the training data is labeled, meaning the desired output is known. It learns from this labeled data to make predictions or classifications on new, unseen information categorically.

Conversely, unsupervised learning is a type of machine learning where the training data is unlabeled. The machine learning model learns patterns and structures in the data without any specific guidance. It also discovers relationships or clusters within the dataset.

6: Testing and Development

The testing and development element generally comes after the model has been evaluated in a proper manner. So, let’s learn how that’s done before discussing anything else.

The evaluation of an ML model is done through different metrics. The process is employed to assess how well the model performs on unseen data, such as accuracy, precision, recall, and F1 score. It helps identify potential issues, such as overfitting or underfitting.

Once you’ve trained and evaluated the model, you may test the same on new, unseen data to assess its generalization performance. If the model performs well, you can deploy it to make predictions or automate tasks in real-world applications.

7: The Aspect of Underfitting and Overfitting

Overfitting occurs when a model performs well on the training data but fails to generalize to new, unseen data. It usually happens with a well-developed machine learning model.

Underfitting, conversely, can happen when a model is too simple to capture the underlying patterns in the data. Balancing these issues is a critical challenge in ML.

How is Machine Learning Used in Finance?

Although it doesn’t seem so from a general viewpoint, the finance department of a company goes through a lot. And, in most cases, these are related to a mountain of manual work that’s mostly done by humans. Now, let’s think about it:

What would happen if you could automate all of these tasks at one go? Wouldn’t it be easier for you to manage the pressure of your finance department this way?

This is where machine learning comes in.

It helps a company in automating all mundane finance-related tasks and reduces the number of errors accordingly. Furthermore, it can also quicken the process of any financial work. So, in a way, the technology will help you in saving a lot of your time too.

But, how else does it benefit your business?

Let’s find out more about it.

1: Detecting Fraudulence

Using ML algorithms can help you analyze historical transaction data informatively. This, in turn, will make it easier for you to –

  • Identify patterns indicative of fraudulent activities,
  • Helping financial institutions prevent and
  • Detect fraud in real-time.

This will ensure that your organization’s financial state isn’t being tampered with. And, even if someone is making movements in that aspect, you will get notified about it instantly.

2: Assessment of Credit-related Risk

When it comes to taking care of your finances, there are some credit-related risks that you or your company has to cater to too. However, with machine learning, now, this task would not require manual proceedings or human attention anymore.

With ML, you can assess a wide range of variables such as credit history, income, and some other financial data easily. It, sequentially, can help you understand the creditworthiness and predict the probability of default for individual borrowers or companies.

3: The Benefit of Algorithmic Trading

With the algorithms produced by machine learning, you can evaluate market data, historical price movements, and other relevant factors to identify trading opportunities quite easily.

Hence, it becomes easier for you to execute the trades related to your business automatically and move quickly in the market. Also, as you have a record of your previous sales, you will be able to create a better marketing strategy.

Furthermore, algorithmic trading is also pseudonymous with maximizing returns, as long as you can use it properly. So, that’ll be a huge benefit for your organization as well.

4: Minimizing Human-related Errors

No matter how carefully everyone in your company works, human error is unavoidable.

But, if we’re considering the financial sector, even a minor mistake can cost the corporation a lot of money. Hence, if you want to minimize the effect of the same, you may have to keep three or more people in a single operational space.

Now, this is something where machine learning can really come in clutch for you.

With it, you can do each and every task automatically, without making a single error. Also, it will be easier for you to complete the job quickly while ensuring excellent accuracy.

5: More Time-Efficient

Using machine learning in your organizational structure will also be less time-consuming, as the work will be automated in the first place. Besides, it can also speed up most, if not all, of the manual processes by offering accurate data in an efficient manner.

Furthermore, the ML technology will keep improving with time as well. Thus, after a while, you may not need any human assistance and, therefore, can save your money in that aspect.

Bonus: No Space for Biasness

Most of the machine learning modules, unlike humans, do not have a sense of judgment. So, it will always choose the correct piece of data, rather than the questionable ones.

Hence, with it, auditing your finance status will become much more transparent without any questions of shady business. Also, in a way, it’ll make it easier for you to come up with new business plans and strategies, as you know where your organization is lacking the most.

How to Build a Machine Learning Model in Your Organization?

Integrating a machine learning model will depend on the type of technology you’re thinking about opting for. However, no matter what you choose, there are some steps that you have to specifically go through while implementing it. Here’s what you need to know about them.

1: Contextualize the Theme of Machine Learning

Before you even get started with the implementation, the first thing you must contextualize is why you need it. And, once you’ve panned that out, you have to talk to the people in your team and let them know about your decision. Ensure that you are integrating the system only after everyone in the organization has agreed to it.

Also, when you are contextualizing the idea of machine learning, you have to agree on some details related to it. Here are a few of them –

  • The type of the issue that the tech model can solve.
  • The core source of training data and whether the amount is sufficient or not.
  • Whether the pre-trained or -issued models can be deployed or not.

Apart from that, you’ll also need to name the people whom you want to give the permission to work with the model. That will be enough for this step.

2: Explore the Data Thoroughly

Now, it’s time to identify the model you want to go along with. And, for that, you will need to explore the data you have first. That will give you an idea about –

  • The tasks the model might need to perform
  • The nature of the core data

Depending on the information you have, you can choose between three types of ML models. Here is what we are talking about –

  • Supervised machine learning models usually require a labeled dataset that has been properly prepared by a data scientist.
  • An unsupervised machine learning module will have to be trained on the unlabeled dataset. It will learn from the same and create answers accordingly.
  • Finally, reinforcement machine learning is about learning through trials and errors. An example of such is the driverless cars you probably have heard of.

3: Clean The Entire Dataset

Most of the machine learning models will begin learning from the beginning. However, still, you have to clean the dataset for it, so that it can understand everything efficiently.

However, the makeup of all of these datasets will differ considering the type of machine you are currently using. Just ensure that it has both labeled output variables and input variables.

The process of cleaning and labeling the data is generally completed by a data scientist. You can, then, accumulate the dataset and prepare to put them into the ML module.

Note: Once it is done, you can split whatever dataset you have prepared and cross validate it accordingly. After that, you can build the machine learning model in your organization.

FAQs – Frequently Asked Questions

This section will be primarily dedicated to the questions that might come to your mind when you’re going through this article. So, without any further ado, let’s get started with it.

1: How Else Can Machine Learning Improve Our Finance Department?

Apart from the aforesaid, ML technology may also improve consumer relations due to the integration of smarter chatbots. These can keep record from the previous queries asked by an audience and improve the answers it produces more effectively.

2: Can Machine Learning Change the Finance Department?

Yes, machine learning can, indeed, alter the finance department by reducing the risk of fraud and money laundering effectively. Moreover, it can also monitor the security system of your organization and detect potential breaches before they even happen or occur.

3: Will AI Take Over the Finance Industry?

In truth, the prominence of AI, especially in the finance industry, has grown pretty massively since the last decade. And you can expect it to improve even more in the future. But, it still does not have the capability to take over the industry due to the lack of human creativity and judgment. Besides it can’t offer any substance in the aspects of risk management or strategic planning either. So, that makes it even more “useless” in the dynamic finance segment.

Can ML Live Up To the Hype?

Thanks to how enormously methodical machine learning or AI, in general, is, it has certainly become an unmovable part of the finance industry.

And due to the emergence of the age of automation, it has also become possible for the same to improve its status even more.

So, if you want to move quickly into the flamboyant industry, it will be important for you to integrate ML within your system as soon as possible.

Otherwise, you might end up missing out on a lot of things!


Leave a Reply