The terms machine learning and artificial intelligence are often used interchangeably, but the former is actually an advanced subset of the latter. Just because something is artificially intelligent doesn’t necessarily mean it can learn.
Machine learning technology can adapt to different situations and learn as it goes — and the finance industry is taking advantage of these functions, implementing machine learning in all facets of finance.
Machine Learning in Finance
Machine Learning in Finance: The Push for Fairness
Today, machine learning impacts virtually every corner of finance. Hedge funds and investment firms use machine learning models, fed with vast amounts of traditional and alternative data, to help evaluate stocks and assets. Financial institutions and payments services alike use sophisticated machine learning to spot fraudulent activity. And financial experts have adopted AI to predict and manage risk.
But the adoption of machine learning remains notably fraught in one subcategory in particular: consumer finance. Many companies now use machine learning models when deciding whether to offer car loans, personal loans and mortgages. Optimists contend that more sophisticated models can lead to fairer loans than the notoriously problematic old-school FICO algorithm, but equity advocates counter that models trained on unfair patterns and biased data merely amplify existing loan discrimination.
“We’re learning that these algorithms — not just in financial services, but across a bunch of domains — if left to their own devices, they do harmful things,” said Kareem Saleh, co-founder of FairPlay, a platform that measures algorithmic fairness in lending models.
“We’re learning that these algorithms — not just in financial services, but across a bunch of domains — if left to their own devices, they do harmful things.”
Several advancements could help mitigate machine learning lending bias, but one of the most important, according to Saleh, is increased self-auditing. Laws already prohibit discriminatory lending, but fluctuating levels of enforcement, plus the fact that regulators are still learning the intricacies of how AI and machine learning affect consumer underwriting, means accountability can be uneven. Also key, Saleh said, is taking a more holistic view of a borrower’s identity and information. For example, consistency of employment variables often discriminate against women who temporarily leave the workforce to raise or care for family, he noted.
At the same time, Saleh said that emerging fintech companies, if not always traditional lenders, are becoming more proactive about auditing models. Audits improve both company reputation and the bottom line — lenders ought to feel incentivized to accept borrowers who do repay with interest, regardless of what the FICO model warns. Plus the regulatory muscle might actually catch up in time: Washington, D.C.’s push for more transparency from companies that use AI and ML for high-impact decisions appears to be gathering momentum.
Upstart, an alt-data- and ML-based personal lender, is an interesting case study. The company agreed to share audit results with federal monitors in exchange for no regulatory action. The numbers were promising: 27 percent more approved applicants over a traditional model and 16 percent lower average annual percentage rates.
Still, such transparency remains rare, which means widespread, verified fairness remains a target, rather than a realization.
“We are still in the first inning of this ballgame,” Saleh said.
That said, machine learning adoption in finance, whether consumer finance or investment funds, continues to expand on the ground.
Companies Using Machine Learning in Finance
Location: New York, New York
Canoe Software uses cloud-based machine learning technology to reimagine the future of alternative investments. Its products help solve challenges related to document and data management, transforming complex documents into actionable intelligence within seconds. Institutional investors, wealth managers and general partners use Canoe’s products to improve data accuracy, team efficiency and client satisfaction.
Location: Chicago, Illinois
Tegus’s machine-learning-powered platform helps financial professionals navigate through interviews and information with AI-generated transcript summaries and topics, making research easy. Tegus’ market intelligence software serves institutional investors, corporations and consultancies, helping them make well-informed decisions.
Location: Lenexa, Kansas
TrueML operates a machine learning-powered platform that enables consumers to repay their debts and pursue financial health. Its digital solution features pre-built content libraries, best practices and data science models that work to ensure consumers’ unique needs and references are recognized. TrueML works to discern the most appropriate and effective messaging, outreach times and communication cadence to reach consumers.
Bectran is a B2B SaaS company providing cloud-based risk management solutions for finance departments, focusing on credit, collection and accounts receivable processes. Its management suite uses machine learning to improve operational efficiency and facilitate collections communications. It serves a wide range of industries including manufacturing, construction, food and media.
Location: Milwaukee, Wisconsin
Northwestern Mutual is a financial services company with more of a century of experience helping customers meet their financial goals through wealth management, investment services, retirement planning, insurance and more. The company is making strides in machine learning across its business. For example, its marketing team has developed machine learning algorithms that match customers with advisors who can guide them through its advisor-led financial planning process and says it’s had a success rate of over 95 percent.
Location: Fully Remote
Enigma aims to provide financial services institutions with access to data on the identity, activity and financial health of small and medium businesses. The company uses data science and proprietary machine learning models to turn data collected from hundreds of sources into insights that Enigma’s client companies can use to inform sales and marketing, risk assessments and customer onboarding.
Location: New York, New York
Trumid, a fixed income trading platform, uses AI technologies to develop automation tools and optimize the credit trading experience. For example, the company uses advanced machine learning in its Fair Value Model Price, or FVMP. This proprietary model assigns pricing intelligence on over 20,000 USD-denominated corporate bonds in real time.
Location: San Francisco, California
Affirm is a payment service enabling consumers to finance items and pay for them over time. Consumers agree to the amount upfront so they know precisely how much they’re paying. Affirm is accepted at a large variety of retailers and businesses including Wayfair, Expedia, Peloton and Casper, making larger purchases more accessible and affordable. Affirm can identify more credit-deserving consumers than traditional scoring systems through intelligent underwriting models, according to the company. These models use machine learning to more accurately assess ability to repay and fairly price risk at the point of sale. This helps reduce fraud rates and defaults while allowing users to have wider access to credit.
Location: Mountain View, California
Datavisor uses unsupervised machine learning to catalyze fraud detection. With unsupervised learning, no retraining is necessary for machines to detect new types of fraudulent activity. Datavisor’s technology combines graph analysis with clustering techniques to detect patterns in unlabeled data across billions of accounts. Datavisor’s technology protects more than four billion accounts worldwide with its technology, according to the company’s site.
Location: Menlo Park, California
Deserve’s credit cards help young adults build their credit history. With a focus on students, the card also offers no annual fees and rewards users for making specific purchases. Deserve employs machine learning tools instead of traditional credit-worthiness sources to approve its cardholders.
Location: Chicago, Illinois
Enova develops and provides a variety of financial products and services for businesses and individuals. The company’s brand, Enova Decisions, is used in multiple industries — including finance. The service helps companies gain more customers through machine learning models that provide personalized risk and credit analysis. Enova Decisions has helped companies like online lender Headway Capital to automate decisions, assess default risk and provide customers with pre-qualified loans and pricing in real time.
Location: San Mateo, California
Feedzai works with global finance companies, banks and retailers to provide machine learning solutions for managing risk online and in person. For risks like fraud and money laundering, Feedzai assesses and detects suspicious patterns in transaction and event data. According to a Feedzai case study, the company’s technology enabled a major U.K. bank to lower fraud losses by more than $20 million.
Location: New York, New York
Fintech Studios is an intelligent search and analytics platform providing search for financial professionals across millions of financial and business resources. From blogs and news to research and big data analytics, the platform uses artificial intelligence and machine learning to identify the most relevant information across 49 languages. Fintech Studios’ variety of products allow financial professionals — from brokers and financial advisors to those at hedge funds and private equity firms — to quickly gain access to the information they need.
Location: Atlanta, Georgia
Kabbage provides lines of credit to small businesses and has worked with more than 150,000 companies. Its simple application process for businesses (accessible online or through a mobile app) uses machine learning algorithms to determine whether or not an applicant is approved, reducing the possibility for human error. Since being acquired by American Express in 2020, Kabbage has announced flexible lines of credit for qualifying small businesses up to $150,000, backed by AmEx.
Location: New York, New York
Riskified is a fraud solution for e-commerce enterprises. The machine learning solution identifies bad orders and prevents chargebacks for merchants. The fraud detection solution ensures fewer misidentifications of fraudulent activity and continuously learns new methods of fraud, staying ahead of bad orders and helping businesses retain more customers. Riskified helped footwear retailer Finish Line to decrease chargebacks by 70 percent, saw more accurate charge declines and ultimately enabled the Finish Line team to focus its time on other business operations and needs.
Location: San Francisco, California
Machine learning performs essential functions even at the most basic level of finance, like point-of-sale retail transactions. Every time you insert your card into a ubiquitous Square stand or terminal, for instance, machine learning and reinforcement learning models operate in the background, flagging sellers to moderate or high levels of risk. The models take in thousands of data points across the ever-building body of transactions to detect new patterns of fraudulent activity. Square’s dispute management has saved vendors $330 million since 2011, according to the company.
Location: San Francisco, California
Neobanks, or fully digital banks, have been active in the United Kingdom for years, but the movement is finally beginning to mature in the United States, thanks to companies like Chime, Current and Varo Bank. Machine learning plays important roles; the company deploys models for fraud detection, recommendation systems and risk assessment.
Location: San Mateo, California
Upstart is an AI lending platform aiming to improve access to affordable credit while reducing the risk and costs of lending for its bank partners. The company extends more than three million customers personal loans, automotive retail and refinance loans, home equity lines of credit, and small dollar “relief” loans.
Location: Amsterdam, the Netherland
Adyen is a fintech company that offers a platform that covers a range of business functions that include revenue optimization, fraud prevention and accepting payments in-app, in-person and online. The company’s global sales team works out of over two dozen cities that include Shanghai, Chicago, Toronto, Mexico City and San Francisco.
IMC is a proprietary trading firm that uses advanced research and technology to trade on over 100 venues globally, providing liquidity in more than 200,000 securities. The company is focused on enhancing its mission-critical infrastructure and harnessing disruptive technologies like AI and machine learning to support its growing trading operations and achieve its goal of becoming the world’s leading trading firm.
