What’s this all about?
Personal finance management (PFM) has been lauded as the future of banking since Mint launched in 2007 but offerings developed by banks were not broadly adopted. In the following article, we examine the features available from traditional banks to determine why that might be and how recent developments are enabling the emergence of a new wave of tools. Could the current PFM trends be a forerunner for an end state of banking where financial institutions become our very own digital financial advisors?
Read on if you:
- Are keen to know what PFM traditional banks, neo-banks and third parties are offering
- Want to know how the latest offerings show that customers are moving towards more visual, interactive and contextual experiences
- Have an interest in how PFM might evolve
Advances in AI and machine learning, widespread mobile adoption and Open Banking are some of the forces behind a new era in PFM.
Indeed, consumers have access to more financial services than ever before, with a huge range of tools and apps available at their fingertips. These generally fall under the following categories:
- Wealth management
- Savings and investment
Research by Business Insider Intelligence shows that the less mature simply aggregate and display customers’ financial data. The more mature use predictive analytics and modelling to generate forward-looking insights.
Given that the average person owns a reported 5.3 bank accounts, PFM players are taking advantage of the opportunities to bring value to underserved customers. However, there are arguments that some propositions amount to features rather than full products. Despite increasing customer bases, many providers struggle to be profitable, with Mint’s success story – today part of Intuit – a notable exception.
Big banks are taking notice of the developments in this space. Goldman Sachs has its eye on the tech-native generations, compiling research which shows that 92 million millennials, the largest generation in US history, will soon be in “their prime spending years”. In fact, Goldman’s Marcus digital banking app recently launched a suite of PFM tools with Head of Products, Adam Dell stating that successful digital financial services offerings in the post-COVID era will be distinguished by three main features: they will have a low-cost means of delivery, represent a fair deal for the customer and will provide “delightful digital experiences”.
PFM tools currently provided by traditional banks
PFM has been lauded as the future of banking since Mint launched in 2007. However, Celent research from 2017 suggests that generally, user share levelled out at just 10 or 12 per cent. Looking at what some European banks are doing to help customers manage their financial health, the most that some offer is advice on how to sit down with a good old-fashioned spreadsheet or pen and paper. Indeed, only two of the five banks surveyed provide money management tools on their banking apps.
Those with more developed offerings have, for example, in one case, a tab on the app where users can put spending into categories and set budgets. Automation is utilised to place personal account transactions into the categories – fairly standard.
The second bank only allows the full functionality of its services to be used on a desktop computer or tablet. Savings goals can be set but you must manually transfer the money yourself. Automation is also used by this banking app just to place personal account transactions into high-level categories. In fact, what features are available are tucked away in an inconspicuous dropdown menu, creating more work for users to actually obtain value.
Indeed, this suggests, as has been found with other banks, that these financial institutions have not been fully able to capitalise on the opportunities presented by PFM due to conflicting stakeholders and difficulty in connecting systems and data.
What the neo-banks and third-party apps are doing
Neo-banks like Revolut, N26 and Monzo have integrated money management features into their digital offerings. Common features include automatic, real-time categories, budget planning, push notifications when you’ve blown your budget, and clearly labelled merchants.
Another commonality among neo-banks is goal-focused saving tools. Revolut’s Vaults feature lets users round up purchases to the nearest whole number and place the spare change into a ‘Vault’ dedicated to a specific goal, e.g. Hawaii flights. Meanwhile, N26’s Spaces feature allows users to create sub-accounts for all their goals and ‘Rules’ to set up recurring transfers between their main account and Spaces.
Additionally, Revolut has introduced a subscription management tool to notify users when bills are due, subscriptions must be paid and if they need to add money to their account for a scheduled payment. It also plans to introduce a feature to alert users when a trial period is ending so that they can decide if they want to continue a subscription or block the scheduled payment.
Emma impresses UK users and reviewers with a similar feature which helps cut back on wasteful subscriptions. Users connect their bank accounts, credit cards and investment accounts under Emma and it analyses your spending for you. If, for example, you’re paying for Spotify and Apple Music, it’ll let you know that you’re duplicating and help to cancel. It also notifies you if you’re paying unnecessary banking fees.
You Need A Budget (YNAB) is based on the zero-based budgeting system popularised by Dave Ramsey. This involves accounting for every cent of your spending. The app has five features: Budget Together (which provides access to real-time data), Goal Tracking, Reports, Personal Support (which includes free online workshops) and Secure Data.
Even this high-level overview of what’s available outside traditional banking apps underscores why these businesses see an opportunity to create value in helping users take control of their finances.
Alexa, pay my bills
With the introduction of Open Banking APIs, the stage is set for PFM tools to become a marketplace for consumers making all financial decisions in one app. However, there are opportunities to improve what’s there with reports finding that some of the functionality available is not all that intuitive.
Additionally, value-added services do not yet play a critical role in the customer value proposition but they do differentiate the neo-banks and third parties from the traditional banks, allowing them to utilise these tools as acquisition hooks.
Further advancements in AI will play a role in how this trend develops.
“The end state of the bank of the future is a digital assistant that is constantly thinking about your best financial interests,” says Adam Dell in an interview with CNBC. “Almost like having your own CFO whose job it is to optimise your money, uncover ways for you to improve your financial situation, and is relentless in that pursuit.”
In the States, American Express and Capital One have already debuted Amazon Alexa skills allowing customers to check their balances, access discounts and pay bills. Perhaps this could be a forerunner for the likes of KPMG’s EVA vision where the ‘Invisible Bank’ will be embedded in a broader, more digital and connected way of life.
The Sifted report concludes that the consensus remains that fintechs should opt for pre-made banking software until they’ve proven their business model and drawn in investors, especially as ‘fintech enablers’ improve their offerings. Indeed, learning from the mistakes of the first wave, the next generation of upstart challenger banks are reportedly focused on creating ‘good products at low cost’ rather than ‘growth at all costs’ and concentrating on a core niche.
Looking to ensure profitability, the new players are taking advantage of the arrival of ready-made, white-label banking technology or banking as a service (BaaS). This has allowed them to outsource their tech layer and launch quicker and less expensively than their predecessors.
The latest PFM tools are a sign that consumers’ digital experiences are becoming more visual, more contextual and more interactive. Crucially, however, as banks move towards a customer-centric rather than transactional outlook, they should view PFM not as isolated investments but as a piece of the overall pie.
Banks’ ability to deliver these types of experiences rests on their ability to master digital, partner efficiently and utilise data but, at the same time, flexibility is vital in order to be able to embrace the technological advancements ahead.
Banks must have the capability to achieve this and capability is really a manifestation of one thing: technology.