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Application of Predictive Analytics at Financial Institutions: A Systematic

Literature Review

Conference Paper · August 2019

DOI: 10.1109/IIAI-AAI.2019.00178

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 2019 8th International Congress on Advanced Applied Informatics (IIAI-AAI)

Application of Predictive Analytics

at Financial Institutions:
A Systematic Literature Review
Elisa Indriasari Haryono Soeparno Ford Lumban Gaol Tokuro Matsuo
Doctor of Computer Science Bioinformatics and Data Science Doctor of Computer Science Professor at Advanced Institute
Bina Nusantara University Research Center Bina Nusantara University of Industrial Technology
Jakarta, Indonesia Bina Nusantara University Jakarta, Indonesia Japan
elisa.indriasari@yahoo.com Jakarta, Indonesia fgaol@binus.edu tokuro@tokuro.net
haryono@binus.edu

Abstract— The issues that relate with the automatics and
intelligent tracing of the transaction and banking customer
become the main issues nowadays. Whereas most of transaction
that already moved to digital and online transaction that needed
more intelligent features on the Predictive Analyst. The rise of
predictive analytics (PA) is one of the biggest disruptions in
financial services. In the last years, PA methods grew sharply to
give the baseline of data driven decision-making process for
forecasting future business situation. PA uses various algorithms
to discover different patterns in the big data environment that
might create more value for businesses including in financial
institutions.
The potential implementation of data science in financial
industry is still to be explored. In this paper, we summarize work
done on PA at financial industry. We also explore the potential
application of PA and investigating how data science and big data
is going to be used in financial institutions in the future.
Keywords—predictive analytics, data science, financial
institutions, big data, data science
predictions about the future.[5] The objective of this study is exploring
the algorithm and potential application of predictive analytics using
data science in the big data environment as discussed in academic
literature and its empirical implementations at financial institutions.
A. Predictive Analysis, Data Science and Big Data
Before discussing about the relation between predictive analytics,
data science and big data, it’s important to understand the definitions.
Predictive analytics is a set of business intelligence (BI) technologies
that uncovers relationships and patterns within large volumes of data
that can be used to predict behaviour and events. [3]
Figure 1 represented the predictive analytics process. Traditional BI
performed data analytics process started by collecting data raw,
arranging report and performing data analysis, furthermore monitoring
business activity. Traditional BI is more descriptive model that help you
understand what is happening and also identify business problems and
opportunities. While predictive analytics is forward-looking, using past
events to anticipate the future. Predictive analytics methods can answer
“what is going to happen in future?”.

I. INTRODUCTION
In the rapid changing of the business world caused by technology
disruption. Enterprises have many challenges in building
competitiveness for winning the competition. Dataϋdriven decision
making has become one of the most fundamental competence that not
only yields in strong revenue performance and superior customer
experience but also boost innovation and strategic competitive
advantage. On top of that, the ability to analyze the data and provide
important role on the decision making and tracking purpose of the
transaction.[1] Unarguably, the financial industry is expanding with an
increasing magnitude and fast rapidity, according to the observable
transformation in in consumers' preventions and expectations, which
are arising from the emerging technology and significant availability of
variety of products and services.[2]
Traditional business intelligence (BI) has been implemented for Fig.1 Predictive Analytics Process [6]
decades as data warehouses and reporting solutions in financial
industry. But currently firms need to construct better predictions for The problem of voluminous data processing has been tackled by
anticipating current agile business situation. Predictive analytics can the data science in the last decade. Data science is an interdisciplinary
assist financial institutions for optimizing business processes, knowing method, which extracts valuable information from huge data by using
customer behaviour, identifying unexpected opportunities, and scientific methods, techniques, and processes. [4]
preventing problems before its occurred. [3]Traditional BI cannot cover
the demands of organisations needs for bigger data store capacity and Figure 2 represented scenario for predictive analytics in data
faster data process. The amount of data stored by financial services science. Managers identify business goals based on understanding data
institutions is rapidly increasing, for these kind of requirements, big from various source, Analyst perform data preparation needed and
data technology can be implemented.[4] The combined force of building predictive analytics model. Further scenario is evaluation of
predictive analytics and big data analytics using data science methods the model until getting the appropriate model to be deployed.
propose a wealth of prospect for organisations which desire to create

978-1-7281-2627-2/19/$31.00 ©2019 IEEE 877

DOI 10.1109/IIAI-AAI.2019.00178

Fig 2. Predictive analytics scenario in data science [7]
Finance industry experts define big data as the tool which allows
an organization to create, manipulate, and manage very large data sets
in a given timeframe and the storage required to support the volume of
data, characterized by variety, volume and velocity.[8] To build
capabilities of Predictive Analytics in Big Data Environment,
Enterprise should have multidisciplinary team. Figure 3 represented
multidisciplinary team is required to build big data analytics
capabilities.
Fig 3. Multidisciplinary team [1]
878
Emerging technologies in Information Technology can be terrific
solutions in the decision-making process at the financial institutions.
There is strong evidence that business performance can be increased
substantially by using predictive analytics based on data-science
techniques in the big data environment.
B. Predictive Modelling Algorithm
Predictive modelling is the process by which a model is constructed
to predict an outcome. [9] Models can be designed to discover
relationships between various behaviour factors. Following are four
algorithms of predictive modelling: [9]
1) Classification: Classification algorithms is a data mining task
of predicting the value of a categorical variable by building a model
based on a set of training data, categorize new inputs as belonging to
one of a set of categories. An example of classification is identifying
whether an image contains a specific type of object, such as a truck or
a car, or a product of ac-ceptable quality coming from a manufacturing
line.
2) Regression: Regression is a data mining task of predicting the
value of target (numerical variable) by building a model based on one
or more predictors (numerical and categorical variables). On the other
hand, regression is useful for predicting outputs that are continuous.
That means the answer to your question is represented by a quantity
that can be flexibly determined based on the inputs of the model rather
than being confined to a set of possible labels.
3) Clustering: A cluster is a subset of data which are similar.
Clustering is the process of dividing a dataset into groups such that the
members of each group are as similar as possible to one another, and
different groups are as dissimilar as from one another. An example of
clustering is creat-ing a set of consumer segments based on data about
individual consumers, including demographics, preferences, and buyer
behaviour.
4) Association rules: Association Rules is a rule-based machine
learning approach for finding out interesting rela-tions between
variables in large databases. It is designated to identify strong rules
discovered in databases using some measures of interestingness. An
association rule is an expression X → Y, where X and Y are sets of
items. The intuitive meaning of such a rule is that transac-tions of the
database which contain X tend to contain Y. Association rules applied
for market basket analysis. An example of such a rule might that 98%
of customers that purchases tires and automobile accessories also have
automotive carried out.
Figure 4 represented predictive modelling methods in Data Science.
 Fig 4. Predictive Modelling. [9]

II. METHOD SLR

Description
Protocol
This paper deploys a qualitative research approach involving an
extensive literature review of secondary literature on predictive x Science Direct (www.sciencedirect.com)
analytics. The goal is to explore potential predictive analytics x AIS elibrary (https://aisel.aisnet.org/)
application using Data Science in the Big Data Environment for x ACM Digital Library (https://dl.acm.org/)
financial institutions. Systematic literature review (SLR) will be used x Springer Link (link.springer.com)
as research methods. The SLR process in the domain of IT/IS illustrated x Google Scholar (https://scholar.google.com/)
in Figure 5. Search (“predictive analytics finance banking” OR
terms “data science finance banking”)

B. Literature search result

We performed the data extracted from six digital libraries. The
literature study performed on the papers which met the date range of
January 2013 to January 2019 related to Predictive Analytics. The
Figure 6 illustrated the result of the searching process.

Fig. 5 The SLR process in the domain of IT/IS.

A. SLR Protocol
Based on Figure 5 we specify SLR protocol for this research as
follows:

TABLE I. THE SLR PROTOCOL

SLR
Description
Protocol
RQ: What potential predictive analytics application
Research
developed in financial services for improving
Question
efficiency of operation and enhancing profitability?
Sources x IEEEXplore Digital Library Fig. 6 Search Result.
Searched (http:/ieeexplore.ieee.org)

879
 III. RESULT Digital
SID Paper Title Year
A. Demographics Library
sustainability: A proposed
Figure 7 show the Predictive Analytic papers published by outlet integrated framework [11]
type and by year. The data collection was limited to publications from Bankruptcy Prediction of
2013 to 2019 with 87 research papers collected and analysed. Figure IEEE Xplore
Construction Businesses:
8A illustrates the incremental progress in the number of publications S4 Digital 2015
from January 2013 to January 2019. Figure 8 shows the digital library Towards a Big Data Analytics
Library
where publications downloaded. Most of the articles relating to Approach.[12]
predictive analytics were published in the proceeding’s outlet type. Data Mining Techniques in
IEEE Xplore
Detecting and Predicting
S5 Digital 2017
Cyber Crimes in Banking
Library
Sector. [13]
Developing the Logical IEEE Xplore
S6 Framework of the Scoring Digital 2016
Process. [14] Library
FOREX Rate Prediction using
IEEE Xplore
Chaos and Quantile
S7 Digital 2015
Regression Random
Library
Forest.[15]
iCARE: A framework for big IEEE Xplore
S8 data-based banking customer Digital 2014
analytics.[16] Library
Meta-Analytics for Risk
IEEE Xplore
Forecast Using Big Data Meta-
S9 Digital 2015
Regression in Financial
Library
Fig 7. Numbers of Articles per outlet per type Industry.[17]
Predicting regional economic
IEEE Xplore
indices using
S10 Digital 2017
big data of individual bank
Library
card transactions. [18]
Predictive Analytics for
IEEE Xplore
Banking User Data using
S11 Digital 2017
AWS Machine Learning
Library
Cloud Service.[19]
An Enterprise Resource
Management Model for IEEE Xplore
S12 Business Intelligence, Data Digital 2017
Mining and Predictive Library
Analytics.[20]
Some Challenges and Lessons- IEEE Xplore
S13 Learnt From the Digital 2018
Practice of Analytics.[21] Library
Predicting Cyber Security
Fig. 8 Distribution of articles over years Incidents Using Feature-Based
ACM Digital
S14 Characterization of Network- 2015
B. Selected papers Library
Level Malicious
Table 2 presents selected papers to be reviewed. Activities.[22]
Application of Predictive
TABLE II. SELECTED PAPERS Analytics in Customer AIS
S15 Relationship Management: A Electronic 2014
Digital Literature review and Library
SID Paper Title Year
Library classification. [23]
A Comparative Study of Modern Advanced Analytics
Predictive Algorithms for IEEE Xplore Platforms and Predictive AIS
S1 Business Analytics and Digital 2016 S16 Models for Stock Price Electronic 2017
Decision Support systems: Library Forecasting: IBM Watson Library
Finance as a Case Study [9] Analytics Case.[24]
Analytics Using R for IEEE Xplore Detecting and Preventing
S2 Predicting Credit Defaulters Digital 2016 S17 Fraud with Data Science Direct 2015
[10] Library Analytics.[25]
Application of Social Media IEEE Xplore Predictive Modelling For
S3 Analytics in the banking sector Digital 2018 S18 Credit Card Fraud Detection Science Direct 2018
to drive growth and Library Using Data Analytics.[26]

880
 Digital Figure 8 represented the categorization of financial industry. The
SID Paper Title Year financial institutions can be divided into 2 categories: (i) banking and
Library
Knowledge-based systems (2) non-banking segments
predicting creditworthiness in D. Survey result of Predictive Analytics in Financial Services
S19 Science Direct 2016
retail banking with limited
scoring data. [27] In this section we present and summarize a number of papers
Regulatory learning: How to where predictive analytics is implemented in financial institutions. The
supervise machine learning analysis was performed in three stages. First, a broad sense of how
S20 Science Direct 2018 many articles study PA was gained. Next, papers were reviewed and
models? An application to
credit scoring.[28] synthesized for each algorithm in the PA. Finally, relevant aspects of
A reference architecture for these studies as appropriate applications for each PA methods.
big data solutions –
Google TABLE III. POTENTIAL PREDICTIVE ANALYTICS APPLICATION IN
S21 introducing a model to 2015
Scholar FINANCIAL INDUSTRY
perform predictive analytics
using big data technology.[5] Application Predictive Analytics Methods ID
Data science and its Decision Tree Regression, Multiple
relationship to big data and Google Stock
S22 2013 Linear Regression, Support Vector S1
data-driven decision Scholar prediction
Regression
making.[29] Credit
Data Science and Google defaulters Decision Tree Regression using R S2
S23 2013
Prediction.[30] Scholar prediction
Data Science, Predictive Social Natural Language Processing (NLP),
Analytics, and Big Data: A media Information Retrieval (IR), structured S3
Google
S24 Revolution That will 2013 prediction and unstructured Data Mining (DM)
Scholar
Transform Supply Chain Bankruptcy The common ML tools used in BPM
Design and Management.[31] S4
prediction studies include ANN, RS, SVM.
Emerging Technologies and Cyber-crime K-Means, J48 Prediction tree,
Opportunities S5
prediction Influenced Association Classifier.
S25 for Innovation in Financial Springer 2018 Model on the principle of logistic
Data regression using Knowledge Discovery
Analytics: A Perspective.[32] in Databases (KDD) process by means
Predicting direct marketing Scoring
of statistical programming language R, S6
response in banking: process
S26 Springer 2016 open source integrated development
comparison of class imbalance environment R Studio and software for
methods.[33] predictive analytics RapidMiner.
Predictive and Prescriptive Forex rate Quantile Regression Random Forest
S27 Analytics Springer 2019 S7
prediction (QRRF)
in Big Data Era.[4] 1. K-means clustering algorithm to
conduct:
o Potential customer identification
C. Financial Services Segmentation o Market potential analysis
Customer o Customer segmentation and S8
buying habit preference analysis
prediction o Customer network analysis
o Channel allocation and operation
optimization
2. Binary classification model using
S11
Amazon Web Service (AWS).
Meta Meta-Analytics Risk Forecast
Risk Model (MMA-RFM) with a crucial
S9
Prediction algorithm Regression using Meta Meta-
Analytics Algorithm (RMMA).
Macro Standard Generalized Linear Model
econom-ic (GLM) using a logistic regression S10
prediction algorithm.
Machine learning technique SVM to a
Predicting set of reputation blacklists (RBLs) to
S12
cyber crime generate predictions for future security
incidents that may happen to a network.
Fig. 8 Financial Services Predictive analytics techniques that
CRM could be applied and assisted in CRM
S13
prediction strategies:
1. Customer Acquisition:

881
Application Predictive Analytics Methods ID E. Application of Predictive Analytics in the Big Data
o Customer targeting: Regression Environment at Financial Institutions
forests/ Random forests, Logistic In this section we present and summarize a number of predictive
Regression. analytic application implemented in financial institutions. Figure 9
o Customer segment: represented application of predictive analytics for Financial
Segmentation, Data Mining, Institutions. The white box denoted the application that already
Decision Tree. investigated by research. And the gray box denoted the application that
2. Customer Attraction: have not be investigated by research.
o Monte Carlo Simulation
o Logistic Regression
o Neural Network
3. Customer Retention:
o Loyalty: Model Goodness
Measures, Multiple Regression
o Complaint Management:
Predictive Validity
o Customer Churn: Logistic
Regression, Decision Tree,
Sequence Analysis
4. Customer Development
o Up/Cross Selling: Sequence
Analysis, Decision Tree
o Market Basket: Multiple Kernel
Learning, Support vector
Machine, Segmentation
o Customer Profitability: Decision
Tree, Markov Chain,
Optimization
5. Customer Equity Growth
o Customer Life Time Value:
Hybrid Data Mining, Markov
Chain, Optimization, Analytical
Hierarchy Process, Sup-port
vector Machine, Quantile
Regression.
Predictive models for stock prices
Stock
forecasting using modern analytical S14
Prediction
platforms (IBM Watson Analytics).
A combination of statistical, data
visualization, data mining, and filtering
Fraud tools. There is the possibility to
S15
prediction maximize the benefits offered by the Fig 9. Application of Predictive Analytics in the Financial Services
Office package (Excel, Access) or
Active Data for Excel/Office. IV. CONCLUSIONS
Big data analytical framework to process
large volume of data and implemented Emerging technologies in Information Technology can be terrific
Credit card solutions in the decision-making process at the financial institutions.
various machine learning algorithms for
fraud S16 There is strong evidence that business performance can be increased
fraud detection and observed their
detection substantially by using predictive analytics based on data-science
performance on benchmark dataset to
techniques in the big data environment. This study mainly focuses on
detect frauds on real time basis.
application of predictive analytics using data science. This paper
Logistic regression (LR), Classification
perform literature and identify algorithms and techniques of predictive
and Regression Tree (CART) and analytics that has been used in the academic research.
Cascade Correlation Neural Network
Credit In financial institutions, Predictive Analytics can be used for: (i)
(CCNN) in building knowledge-based
prediction in improve business effectiveness (ii) risk prevention (iii) operational
scoring models. To compare various S17
retail efficiency (iv) revenue growth. Many applications of predictive
models’ performances, we use ROC
banking analytics can be deploying in financial institutions to achieve better
curves and Gini coefficients as
evaluation criteria and the Kolmogorov- performance on operational and business. The predictive analytics
Smirnov curve as a robustness test. methods and its application represented in this paper can be used for
Credit Methods: logistic regression, LASSO further research agenda, empirical research studies and also can be used
S21 as a guideline for practitioners to the adopt of PA in the financial
scoring approach, random forest.
institutions.

882
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