Big Data is a big deal… particularly for financial markets. As the CEO of a Big Data company, I’d like to share with you some insights into this shift, which is spurring transparency, capital availability and better risk awareness. Add in the coolness and creativity factors – more Sand Hill Road, less Wall Street – and it’s clear that Big Data is already having big impacts on always-changing financial markets. And this is change that you, not just your IT professionals, should believe in.
We’ve all heard about the importance of Big Data and how it’s changing the world, in industries ranging from finance to government to health care to manufacturing. But though the data itself is meant to help us act smarter, the term describing it is so amorphous that it’s not always clear what exactly “Big Data” means or how exactly it can help.
First, a defining moment: What is “Big Data”? One element of the term is precisely what its name implies: extremely large data sets. But Big Data is, well, bigger than just the amount of data involved. The jargony way of putting it is that it involves volume (that’s the big part of Big Data) as well as velocity and variety – in other words, a constant flow of different kinds of data, all subject to rapid change…and lots of it. With all of this data, the tricky part is putting it in a form that’s easy to understand and visualize, with the goal of making better, more informed decisions.
The use of Big Data is trending up. The research firm International Data Corp. is forecasting that the market for Big Data will grow at an annual rate of 23% through 2019, according to IT news site CIO. The report found that securities and investment services and banking are two of the industries with the fastest growth rates for Big Data use.
And so I give you five ways that Big Data is changing finance.
- Creating transparency
One of the major causes of the Great Recession was the impenetrable haze of the financial world, which made it difficult to understand the risks involved in murky practices.
“Lack of transparency contributed greatly to the crisis: the exposures of financial institutions to risky mortgage assets and other potential losses were unknown to market participants, and indeed many firms did not know their own exposures,” the National Commission on the Causes of the Financial and Economic Crisis in the United States said in its 2011 report.
Many deals in the finance world have historically been based on relationships: who knows whom and how trustworthy they are rumored to be. When data about financial markets is made public, it opens a window onto an otherwise opaque industry, alerting current and prospective investors to potential risks and offering information that can let them know when things are starting to go sour – before it’s too late. In the long term, bringing more financial data to light facilitates trading and helps financial markets grow.
Transparency can also help companies and regulators detect fraud and other suspect activity, for instance by tracking exactly what’s happening on the trading floor or by monitoring billing errors and possible identity theft for consumers, as BillGuard (recently acquired by Prosper Marketplace) does.
- Analyzing risk
For instance, online lenders can look behind the scenes at what prospective customers are doing when they fill out loan forms: Are they making a lot of deletions as they decide how they want to represent themselves? That could be a sign they’re lying. Did they spend enough time on the terms and conditions page to indicate that they actually read it through? That could indicate they’re serious customers. In addition, text analytics can be used to look for red flags in prospective borrowers’ descriptions of why they want a loan.
Big Data can also help credit checks go faster by analyzing customer credit reports, spending habits, social media profiles and credit card repayment rates in seconds, notes European risk management consulting company Advantage Reply. “Time is critical in the world of risk management,” says Reply executive partner Jason Hill. “If you can react to a risk faster, you have a competitive advantage.”
- Trading by algorithm
Big Data has reached the capital markets in a big way with algorithmic trading, which incorporates unstructured data such as stock feeds, tweets and breaking news into an algorithmic engine to yield better-informed trading decisions.
Algorithmic trading is surging in popularity, and will account for about a third of total currencies trading in 2016, though it was virtually nonexistent a decade ago, the Wall Street Journal recently reported. The paper also said algorithmic trading is reshaping the $12.7 trillion Treasury market.
- Leveraging consumer data
In any business, it’s important to know who your customers are and why they do or don’t stay. That’s just as true in banking as in retail, but many banks have traditionally kept their customer data in separate “silos,” such as multiple unlinked profiles in account management and loan servicing. Failing to integrate customer data into a Big Data system – and, of course, to analyze the integrated data – has a cost.
Banks that apply analytics to customer data have a lead of 4 percentage points in market share over banks that do not, and banks that use analytics to understand customer attrition have a lead of 12 percentage points over banks that do not, according to a 2014 Capgemini Consulting report on Big Data in banking.
- Transforming culture
Though cultural transformation is the least tangible way that Big Data is changing the finance industry, it may well be the most important.
When you’re trying to break down old-school methods, you have to take off that creativity-strangling necktie and adopt a startup mindset. The way to break the mold of Wall Street is to not be Wall Street: to recognize the value of openness, to tolerate failure, and to encourage innovation in part by coworker collaboration, whether through the “brain sport” of ping pong or the diner booths that Google has found work better than traditional conference rooms.
Indeed, Google is a prime example of how a company can use some of its massive amounts of data to find out the best way to retain employees and keep them healthy, including providing treadmill desks and nap pods, and putting the M&Ms in a less eye-catching location. “We try to bring as much analytics and data and science to what we do on the people side as our engineers do on the product side,” said Laszlo Bock, the head of Google’s human resources department, which it calls people operations.
All told, Big Data isn’t just a buzzword. It really is a big deal, and it’s changing the finance industry for the better by transforming the culture and making the finance industry realize that if it doesn’t become more open and transparent, it will ultimately lose out in a big way.
This article was written by Ely Razin from Forbes and was legally licensed through the NewsCred publisher network.