Banking / Finance

FinTech: finance in the era of big data and analytics

Since the beginning of the century, the proliferation of information technology has upended industry after industry, either completely remaking them for the 21st century or destroying them irreparably. The exponential improvements in price-performance experienced by information technology are carried over into the sectors that welcomed this change instead of resisting and being killed as a result.

The finance industry has certainly not been immune to this wave of transformation. In fact, because the financial sector is heavily dependent on receiving and using the most accurate information out there in short periods, it has been acutely affected by information technology.

The traditional financial services people have viewed as immovable have been completely upended in the past decade. No longer do investors need to see a personal financial advisor to set up an investment account and pay sales charges to a brokerage to invest their money.

With technology becoming so sophisticated and ubiquitous, investors are going virtual in droves to employing the use of investment apps and virtual financial advisors to maximize their returns. They can do this by cutting out the middleman and all the costs associated with that. Additionally, there’s the option to practice and get a “real feel” for the way big data influences these trading outlets. By subscribing to a practice account, officially known in the industry as a virtual trading account or a paper trading account, one can gain the self-confidence they need to go the road assisted by the massive amounts of interpreted data.

How big data changed the game

The rise of big data has shaken the personal finance industry up, mostly for the better. With data storage becoming so cheap, we as a society have taken to storing every single bit of data we generate from our daily activities. That all ends up in a massive data bank somewhere waiting to be analyzed and interpreted by data scientists or analytical algorithms.

In the realm of personal finance, this has given rise to knowledgeable and beneficial virtual financial advisors. With the amount of data that has been analyzed and interpreted with regards to financial trends, these analytical systems have painted a very detailed picture of how the overall financial system works and how markets treat investor money depending on where it is placed.

For example, we have a pretty decent idea of how much risk you need to take on to generate a positive average return. This accuracy gets even sharper with longer time horizons where the fluctuations even out. This, in turn, gives the investor a pretty good idea of what needs to be done to achieve their financial goals in a timely fashion.

How this works in the standard investment app is that when you are setting up your account with them, they will ask you some questions to better determine the best investment strategy for you. Questions include but are not limited to your age, current income, balance sheet details, retirement goals, and much more.

It might sound a little nosy. Still, the information is supposed to remain private, and the information is asked for with the purpose of better determining your investor profile and what asset classes and what proportions will best suit your specific financial situation. The result has been dramatically increased competition in the financial industry.

Fintech for financial institutions

The importance of financial institutions getting their hands on the best information possible cannot be stressed enough. This is because every single decision a financial institution makes with regards to investing is to be done entirely based on the information they gather and what they can glean from it.

Therefore, the accuracy of the data needs to be flawless. Imagine that billions of dollars are riding on the accuracy of the data received, and one wrong interpretation causes the investment to go bad. That is the high stakes nature of the institutional investing world.

Every trade can gain or lose millions, sometimes in very short spaces of time. Fortunately, the amount of errors has the potential to go down to negligible levels, all thanks to the increasing sophistication of analytical algorithms. Analytical algorithms are specially designed computer systems that are good at processing mountains of data and coming up with useful interpretations and implications from it.

The algorithm starts off with a few basic guidelines to give it some direction as well as specific goals that the owner wishes to accomplish. With that, the algorithm will either be given a cache of data, or it can scour open data banks throughout the internet in search of relevant data stores. It will process this data and try to look for useful trends and causal correlations between all sorts of variables.

After doing all of that, the algorithm will then have a much better understanding of how the market behaves and how to turn it into the advantage of the financial institution. The algorithm can also be given the autonomy of making investment decisions on its own as well. If the program is sophisticated and reliable enough, some financial institutions are confident in entrusting a pool of investment funds to a good algorithm program to invests as it sees fit based on the guidelines given.

Finance in the digital age

The information age has completely transformed the financial industry and irreversibly so. Technology has allowed just about everyone access to a whole array of investment vehicles and products that were previously the realm of just a privileged few.

As the years continue to go by, this trend will not slow down until every conceivable industry, and every conceivable facet of our daily lives have been completely changed by technology. Since this is pretty much inevitable, what we choose to do in response to it is entirely up to us.

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