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The Impact of Big Data Analytics on the Banking Industry

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DOI: 10.13140/RG.2.1.1138.4163

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The Impact of Big Data Analytics on the Banking Industry P a ge |1

The Impact of Big Data Analytics on the

Banking Industry
Moody A Amakobe
CS872-1503C-01- Introduction to Big Data Analytics
Colorado Technical University

1. Introduction

Big data has made a significant impact in

many sectors of the U.S. and world economies
like healthcare, manufacturing and retail. Ac-
cording to a report by Researchmoz (2014),
apart from the government sector, the financial
services sector has more to gain from leverag-
ing big data; the technology will not only help
financial institutions maximize the value of data
but will also help them gain competitive ad-
vantages, minimize costs, convert challenges to
opportunities and minimize risks in real time.
The report goes on to explain the huge oppor-
tunity for financial services firms to apply new
data sets and algorithms to business operations
which will optimize capital allocation, cash
Fig 1. Big data maturity levels, Microsoft and
management and currency processing. Capgem-
Celent, How Big is Big Data: Big Data Usage and
ini Consulting (2014) reports that 60% of finan-
Attitudes among North American Financial Ser-
cial institutions in North America believe that
vices Firm, March 2013.
big data analytics offer a significant competitive
advantage and 90% think that successful big The figure shows that financial firms are look-
data initiatives will define the winners in the ing forward to the application of big data. Big
future. However, only 37% of banks have hands Data and Big Data Analytics will be defined in
on experience with live big data implementa- the next sections; then, the paper will analyze
tions, while the rest are still focusing on pilots
the impact that big data analytics have had on
and experiments. The figure below shows the
the banking industry and why it is important to
big data adoption levels in banks.
continue investing in these programs.

What is Big Data?

Saas (n.d) defines big data as a popular
term used in describing the vast growth and
The Impact of Big Data Analytics on the Banking Industry P a ge |2

availability of data, both structured and un- and unstructured data feeds from ex-
structured. According to Dewey (2014) big data ternal sources.
refers to a technological phenomenon which Neef (2010) states that the ability to apply so-
arose in the mid-1980s due to the improvement phisticated algorithms and powerful computers
of computers, growing storage and processing to large data sets, revealing correlations and
capacities. These have provided new and im- insights previously inaccessible through conven-
proved ways of sifting through the infinite tional data warehousing or BI tools, makes big
quantities of data available. The author adds data different from just "more data".
that big data is in-field shorthand that refers to
the sheer mass of data produced on a daily ba- What is Big Data Analytics?
sis within global networks at a pace exceeding According to a new study by Accenture
the capacity of current databases. Pence (2014) and GE (2015) executives across different sec-
described big data not only by the amount of tors are seeing the enormous potential offered
information but also its variety and complexity by a combination of big data analytics and the
as well as the speed by which the data has to be internet of things. The survey revealed a grow-
analyzed or delivered. Ingram Micro Advisor ing urgency within organizations to adopt big
(n.d.) distinguishes big data from congenital data analytics in order to advance their indus-
data with its three Vs, namely: trial internet strategy. A TDWI survey (2011)
 Volume: The quantity of analyzed data showed that 38% of organizations reported
exceeds the capability of conventional practicing advanced analytics while 85% said
analytics and statistical modeling tools. they would be practicing within three years.
Analysis of big data scales to handle TDWI research (2011) adds that the rush to big
petabytes and has the possibility to data analytics is due to changes in the business
handle larger volumes. Pence (2014) environment and the need to seize more busi-
adds that the sheer volume of stored ness opportunities; advanced analytics has be-
data is exploding, and IBM predicts that come the best way to discover new customer
by 2020 there will be 35 zettabytes segments, identify suppliers, associate products
stored. of affinity and understand sales. Qubole (n.d)
 Velocity: This is the speed of accessing cited a survey of 540 enterprise decision mak-
data. Conventional Business Intelli- ers who stated that they adopted big data and
gence (BI) applications use historical analytics to improve customer retention, assist
data dating back weeks, months or with product development and gain a competi-
quarters, while big-data relies on real tive advantage.
time information in order to deliver Firms such as Google have successfully
rapid insights. Pence (2014) states that gained a competitive advantage, especially be-
the velocity of data depends on not on- cause data analytics is the foundation of their
ly the speed of the data flow but also enterprise (Court, 2015). According to an article
the pace at which it must be collected, in the Wall Street Journal (Fairless, 2015) ,
analyzed and retrieved. Google has developed sophisticated profiles of
 Variety: Big data looks at all sorts of in- consumers that aids the organization in target-
formation beyond what is structured ing advertising with such precision that new
and stored in the DW (Data Ware- rivals cannot even hope to catch up. Google
house). It also has the ability to assimi- also, according to Sullivan (2013), has re-
late stored data and both structured invented human resource management by the
use of big data people analytics, forcing many
The Impact of Big Data Analytics on the Banking Industry P a ge |3

organizations to realize that there is a new path

to corporate greatness. Kumar (2015) states that fraud has caused
Impact to the Banking Industry more than $1.744 billion in losses annually
According to The Financial Brand (2014), while the banking industry continues to spend
financial institutions are struggling to profit millions each year on technologies aimed to
from the vast volumes of data and banks only reduce fraud and retain customers. The author
use a small portion of the data to generate in- proposes a comprehensive fraud detection
sights that would enhance customer experienc- technique that detects both known and novel
es. The article posits that banks that apply big fraud instances as they occur in real time, with
data analytics have a 4% point lead in market a higher level of accuracy using distributed Ha-
share over banks that do not. This report will doop-based platforms that make it possible to
focus on the following key areas. cost-effectively and efficiently store and pro-
 Fraud detection cess large data sets. An example of software
 Marketing that uses this technique is Skytree, a machine
 Credit risk management learning platform built to work on large data
sets at high performance is given. Machine
Fraud Detection learning, according to Krishnamurthy (2013),
Urban (2014) found that big data ana- takes place when agile systems are configured
lytics have become an essential part of any to learn from each other – thus discovering the
strategy to help detect and prevent financial patterns buried in the data while learning, un-
crime, owing to the ever evolving attack meth- aided, to deliver high quality insights. These are
ods used by criminals exploiting multichannel effectively used to combine data from suspi-
vulnerabilities to compromise technology sys- cious transactions. Palmer (2014) suggests that
tems. Big data has enabled banks to implement the following stages of enterprise counter fraud
real time analytics on a large scale to meet the measures:
growing threats. ACL provides the following fig-  Detect: By applying advanced analytics
ure to show the distribution of fraud schemes in to all key fraud data to aid in predicting
the banking/financial services. if an action is potentially fraudulent.
 Respond: Applying fraud insights to
take action in real time.
 Investigate: By performing and manag-
ing inquiries into suspicious activity that
are supported by data analysis and col-
laborative sophisticated case manage-
ment.
 Discover: Using new big data analytics
capabilities that help in the identifica-
tion of suspicious activity by analyzing
historical data to search for patterns of
fraud and financial crimes.

Fig 2. Distribution of fraud schemes in bank- Firms like Pactera (n.d) have developed big
ing/financial Services, ACL services limited. data solutions that process large amounts of
(2014). Fraud detection using data analytics in structured and unstructured data that can de-
the banking industry. tect fraud without disrupting services to cus-
The Impact of Big Data Analytics on the Banking Industry P a ge |4

tomers. The solutions architecture is made up Conclusion

of data analytics, integration and decision. In the current, highly competitive finan-
Marketing cial market, big data holds the key to unlocking
Xerago (2015) defines marketing analyt- marketing potential. Advanced analytics are
ics as the practice of measuring, managing and enabling banks to manage the increasing cost of
analyzing market performance to maximize the compliance and the risk of non-compliance.
effectiveness of and return on investment (ROI) However, the financial service firms are still lag-
from the marketing activities. The report ging behind in implementing big data analytic
stresses that marketing analytics will help banks tools, which signifies an untapped potential for
sift through the data and assist in decision- value creation, available for the banking indus-
making, which will lead to increase profitability. try. This needs to be evaluated from an IT (In-
Pramanick (2013) states that banks are always formation Technology) or LoB (Line of Business)
at risk of losing customers and need strategies perspective.
that are dependent in identifying the right ac-
tion to the right customer. Thus banks should
invest in customer analytics that effectively
segment their customers. This will assist in de-
termining pricing, products and services, the
right customer approach and marketing meth-
ods. Morabito (2015) adds that big data ena-
bled marketing automation will assist banks in
servicing individual customer needs while keep-
ing the marketing costs low, enabling a person-
alized experience at a good ROI.

Credit Risk Management

Saas (n.d) defines credit risk as the
probability of loss due to a borrower’s failure to
make payments on any type of debt. Credit risk
management is the practice of mitigating those
losses by understanding the adequacy of both
bank capital and loan loss reserves. According
to a study by the financial services association
of the European financial services community,
country members have turned to data analytics
to their credit risk models. Big data analytics
tools aid bankers with deeper insights into their
customer’s behaviors by analyzing information
including credit reports, spending habits and
repayment rates of credit applicants. Big data
software determines the likelihood that an indi-
vidual would default on a loan or fail to con-
stantly meet payment deadlines (Hortonworks
Inc, 2013).
The Impact of Big Data Analytics on the Banking Industry P a ge |5

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