InspireEducateTransform.

Business Analytics in
Finance domain
BFSI and various functions
Shilpa Kadam
Sr. Data Scientist
Sep 8, 2015
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Contents

Types of financial institutions and their roles

Various functions of an organization
Business analytics in financial services
Banking
Insurance
Services

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Financial institutes
A financial institution is an establishment that conducts
financial transactions such as investments, loans and
deposits
Banking Financial Services and Insurance is an industry
term of art for companies that provide range of services.
Banking may include core banking, retail, private,
corporate, investment, cards, etc.
Financial services may include stock-broking,
payment gateways, mutual funds, etc.
Insurance covers both life and general insurances.

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BFSI

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For example

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Some of the services

in each

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Various functions of an
organization

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Analytics in Financial services

Financial institutions need to support business activities
and decision making in a fashion that is timely, relevant,
verifiable, and personalized to meet a variety of
stakeholder requirements.
Financial services companies seek in-depth insights to
solve critical business issues, reduce risk, and drive
growth.
By applying advanced analytics to capture and
understand their data, companies in the banking and
securities, insurance, and investment sectors can
leverage their data to build stronger, more robust
business models. In doing so, they can make more
proactive decisions that deliver customer value.
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Analytics in Financial services

Data is becoming the source of significant competitive advantage
for any organization.
However, the firms are overwhelmed by the volume and complexity
of unstructured data.
Predictive analytics projects should be viewed as the combination of
people, processes and technology.
Predictive analytics have applicability to a wide range of business
processes.
In one example, an asset management firm used predictive
analytics to improve marketing efforts.
The company wanted to change from a mass marketing
approach where every prospect received the same offer to an
approach that enabled personalization.
The company used predictive analytics to predict the likelihood
of a prospective customer accepting an offer.

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Common applications of predictive

analytics
Fraud detection and security Predictive analytics can help stop losses
due to fraudulent activity before they occur. By combining multiple detection
methods business rules, anomaly detection, link analytics, etc. you get
greater accuracy and better predictive performance.
And in todays world, cybersecurity is a growing concern.
High-performance behavioural analytics examines all actions on a network
in real time
to spot abnormalities that may indicate occupational fraud,
zero-day vulnerabilities and
advanced persistent threats.
Marketing Most modern organizations use predictive analytics to
determine customer responses or purchases, as well as promote cross-sell
opportunities.
Predictive models help businesses attract, retain and grow the most
profitable customers
and maximize their marketing spending.

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Common applications of predictive

analytics
Operations Many companies use predictive models to forecast inventory
and manage factory resources. Airlines use predictive analytics to decide how
many tickets to sell at each price for a flight. Hotels try to predict the number
of guests they can expect on any given night to adjust prices to maximize
occupancy and increase revenue. Predictive analytics enables organizations to
function more efficiently.
Risk One of the most well-known examples of predictive analytics is credit
scoring. Credit scores are used ubiquitously to assess a buyers likelihood of
default for purchases ranging from homes to cars to insurance. A credit score
is a number generated by a predictive model that incorporates all of the data
relevant to a persons creditworthiness. Other risk-related uses include
insurance claims and collections.

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Analytical life cycle

The analytical life cycle guides you through the steps needed to produce
fact-based insights that ultimately lead to competitive advantage.
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Analytical life cycle

Identify the problem.Business units specify the need, scope,
market conditions and goal related to the business question they
want to solve, which will lead to the selection of one or more
modelling techniques.
Prepare data for analysis.Depending on the business question
and proposed analysis methods, this step involves using specialized
techniques to locate, access, clean and prepare the data for optimal
results. In our multifaceted data world, that could mean data from
transactional systems, unstructured text files and data warehouses.
Explore data.Now its time to explore the data in an interactive
and visual fashion to quickly identify relevant variables, trends and
relationships. (The shape of the data when variables are plotted out
is called distribution of data. You can use shapes to identify the
patterns.)
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Analytical life cycle

Transform data and create models.A skilled analyst or modeler builds

the model using statistical, data mining or text mining software, including
the critical capability of transforming and selecting key variables. Models
need to be built rapidly so modelers can use trial and error to find the
model that produces the best results.

Test and validate models.Once built, the model is registered, tested (or
validated), approved and declared ready for use against your data. With a
centralized model repository, you can store extensive documentation about
the model, scoring code and associated metadata (data about the data) for
collaborative sharing and version control necessary for auditing purposes.

Deploy models.When approved for production use, the model is applied

to new data to generate predictive insights.

Monitor and assess models.The predictive performance of the model is

monitored to ensure it is up to date and delivering valid results. If the
model performance degrades, its time to make changes. When it no longer
works or serves a business need, it is retired.

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Various functions in
banking

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Analytics in banking
Banks come across several challenges in
various functions such as:

Risk and regulatory compliance,

Quality management,
Client centricity,
Track and monitor sales, margins and operational performance,
Business process improvements,
expansion into new markets,
a renewed focus on customer profitability, etc.

To address any of the above challenges banks have taken

initiatives to consider what todays analytics capabilities can offer.

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Some of the questions that can be

addressed using business
analytics in banking
What is the impact of the change in laws and regulations
in banking? And how does it impact the profitability?
Who are my high-value customers?
What is the optimal risk given the scenario?
Identify any suspicious/fraudulent activities
Identify target products and services to prospects or
customers
Product pricing to increase profitability

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Approach to adopt analytics

Prioritize the areas of focus.
Streamline the data/data management
methods.
Integrate with/build decision management
systems.
Build analytics team.
Create smart tools and techniques to
address the issues.
Connect with leadership of various
functions within the organization to
communicate the insights and support

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Example business case: Anti-money

laundering
What is money laundering?
Money laundering is a way to conceal illegally obtained funds.
Money laundering works by transferring money in elaborate and
complicated financial transactions which mislead anyone who
may seek to trace and review the transactions

Many financial institutions regularly evaluate the

effectiveness of their interdiction systems with an
eye toward improving the quality of the
monitoring, reporting and investigation process.

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Evaluating the vendors

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References

Read about SAS anti-money laundering alert systems and its working.
https://www.youtube.com/watch?v=3zFLAC89s0o
https://www.youtube.com/watch?v=z4D7f0hBolA
https://www.youtube.com/watch?v=IXBFxIXSRnE
https://www.youtube.com/watch?v=XCR_LBzur-k
http://www.ipcsit.com/vol2/94-C140.pdf

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Analytics in Insurance
Insurance companies globally are faced with new
challenges such as unforeseeable disasters, greater
customer expectations, soft markets, new approaches to
distribution, regulatory compliance and consolidation.

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Various operations of insurance

company

Ratemaking
Underwriting
Sales and marketing
Claim settlement
Reinsurance
Legal services
Loss control
Accounting
Information systems, etc.

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Example business case: claims

management

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Analysis output: Dashboard

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Vendors in claims systems

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Research report: ROI on business analytics

solutions
IDC research shows that:

The return on investment (ROI) of business analytics solutions that incorporate

predictive analytics is about 250%, significantly higher than the 89% ROI of projects
focused only on information access and internal productivity gains.

Benefits of predictive analytics projects are sustained over long periods of time, and
those that rely more on analytics tend to be more competitive.

Predictive analytics projects result in many intangible or difficult to quantify benefits

that give further impetus to investment in these solutions.

Investment in predictive analytics continues at a healthy pace, even in tough

economic times. For example, over the past 10 years, the compound annual growth
rate (CAGR) of the IDC-tracked $1.6 billion worldwide advanced analytics software
market has been 7%, compared with a 3% CAGR for the overall IT market during the
same period.

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References
http://
www.slideshare.net/maryasholevar/chapter-4-40596655
http://
www.slideshare.net/arhirst/business-analytics-solutionsfrom-sap-for-the-insurance-industry-july-2011
http://
www.slideshare.net/mktghexaware/hexaware-insuranceanalytics-8005775
http://
www.slideshare.net/davidpittman1/data-analytics-and-th
e-insurance-industry?related=1
http://
www.besmart.company/MKT/Promos/2012/0612_PA/0612_
businessvalue_PA.pdf
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Risk management models in

financial services
Market risk: is theriskthat the value of an investment
will decrease due to moves inmarketfactors. Volatility
frequently refers to the standard deviation of the change
in value of a financial instrument with a specific time
horizon
Value a full range of market instruments, perform stress tests
and optimize portfolios across the entire firm, and gain an
enterprise view of market risk.
Managing market risk: Today and tomorrow - McKinsey ...

VaR: The most popular and traditional measure of risk

isvolatility
For investors, risk is about the odds of losing money, and VAR is
based on that common-sense fact. By assuming investors care
about the odds of a really big loss, VAR answers the question,
"What is my worst-case scenario?" or "How much could I lose in

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Value at risk
A VAR statistic has three components: a time period, a
confidence level and a loss amount (or loss percentage).
Keep these three parts in mind as we give some
examples of variations of the question that VAR
answers:
What is the most I can - with a 95% or 99% level of
confidence - expect to lose in dollars over the next
month?
What is the maximum percentage I can - with 95% or
99% confidence - expect to lose over the next year?
There are three methods of calculating VAR: the historical
method, the variance-covariance method and theMonte
Carlo simulation.
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Historical method
The historical method simply re-organizes actual
historical returns, putting them in order from worst to
best. It then assumes that history will repeat itself, from
Notice the red bars that compose the
a risk perspective.
"left tail" of the histogram. These are
the lowest 5% of daily returns (since
the returns are ordered from left to
right, the worst are always the "left
tail").
The red bars run from daily losses of
4% to 8%. Because these are the
worst 5% of all daily returns, we can
say with 95% confidence that the
worst daily loss will not exceed 4%.
Put another way, we expect with 95%
confidence that our gain will exceed
-4%.

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Variance-covariance method
This method assumes that stock returns are normally distributed. In
other words, it requires that we estimate only two factors anexpected(or average) return and astandard deviation- which
allow us to plot a normal distribution curve

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Monte Carlo Simulation

The third method involves developing a model for

future stock price returns and running multiple
hypothetical trials through the model.

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Risk management models in

financial services
Credit risk: is theriskof default on a debt that may
arise from a borrower failing to make required
payments. In the first resort, theriskis that of the
lender and includes lost principal and interest,
disruption to cash flows, and increased collection costs..

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Credit risk modeling

http://www.slideshare.net/MagnifyAnalyticSolutions/m-sug-draftmasite

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Vendors in credit risk

modeling

http://www.celent.com/reports/beyond-basel-ii-evaluating-financial-and-credit-risk-solution-vendors-2008

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In general for BI and analytics

http://
www.informationweek.com/big-data/big-data-analytics/gartner-bi-magic-q
uadrant-winners-and-losers/a/d-id/1114013
https://biwizard.wordpress.com/2015/02/24/gartner-2015-magic-quadrant
/

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Risk management models in

financial services
Liquidity risk: is theriskthat a given security or asset
cannot be traded quickly enough in the market to
prevent a loss (or make the required profit).
Operational risk:is defined as theriskof loss
resulting from inadequate or failed processes, people
and systems or from external events.

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1008.pdf?56d2038eb68e90a4fd0bfa9098f5b272
http://www.slideshare.net/arunavnayak75/an-overview-of-the-basel-norms
https://www.math.nyu.edu/faculty/avellane/ICBI_20131120.pdf

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Vendors in the Operational risk

management tools

http://
www.healthit.myindustrytracker.com/en/article/79524/gartner-positioned-s
as-as-a-leader-in-magic-quadrant-for-operational-risk-mana
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Summary
Financial institutes
Banking
Anti-money laundering

Insurance
claims management

Financial services
credit scoring
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Exercise
Please download the data from the following link:
https://archive.ics.uci.edu/ml/datasets/Bank+Marketing
Understand the business need
Find data summary
Understand the attributes.

Independent and dependent attributes

Identify any preprocessing steps that are required. State for each attribute.
Find all relationships between the attributes and provide visuals.
Which error metric do you think is suitable to evaluate the model?
Name the models that could be used for prediction
What is your model evaluation strategy?
Report the model output and error metric.
Design a dashboard to present the analysis such that it is easy for the end
users to take business decisions.

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