What’s Next for Personal Finance Management (PFM)?

September 2, 2018

MONTHLY ANALYSIS

The overall wealth of the nation has increased over the last 20 years. According to a report titled The Changing Wealth of Nations 2018 by the World Bank, (which tracked the wealth of 141 countries between 1995 and 2014 by aggregating natural capital, human capital, produced capital & net foreign assets), the global wealth grew an estimated 66% from $690 trillion to $1,143 trillion. Overall, human capital (earnings over a person’s lifetime) was the largest component of wealth. Still, the knowledge an individual possesses to manage money has not grown exponentially despite the vast publicly available information and growth of personal finance platforms across the world. TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) provides a P-Fin Index (personal finance index) which comprises of 28 questions from eight functional areas such as savings, earnings, investing, risk, etc. According to the index data, 52 % of U.S. adults surveyed were not able to answer more than one-half of the index questions correctly.

From the evolution of Excel-based tools towards the app-based model, personal finance management has come a long way and is still evolving. No longer do people need or aspire to have simple budgeting and expense management tools; they are looking for answers to sophisticated questions like: How can I cut down expenses by 10%? How can I lower my education debt and so on. Personal finance management (PFMs) platform/apps have seen a rise in functionality ranging from simple budgeting to gamification models to banking functions. Not only is there an increasing awareness about consumer finance, but it is also inculcating money management habits. Customers are demanding more features from a single platform; they are looking for a platform to manage all their financials with features like easy visualization with a click of a button, video-based view of their financials, a plethora of product options to choose from (customized solutions), and learning material on finance & money management.

What’s broadly lacking in Personal Finance Management (PFM) today?

The personal finance management industry has evolved over the years, but the power to generate revenues has not fully materialized. The following problems have made the task even more difficult:

  • Product-focused rather than solution provider: PFM apps are focusing more on products rather than solving individual customers’ problems. Rather than looking up information on products like highest-rated index funds, top mutual funds, low-cost debt funds (these terms are difficult to understand for users), users are more interested to know about how they can achieve a goal of $50k or $100k in three years. PFMs ought to solve these questions instead of an all-in-one holistic approach.

  • **Lack of superior customer experience: **Customers are looking for services which offer a one-touch experience. Many PFMs lack expertise in building state-of-the-art designs. Furthermore, there is a lack of in-depth analysis for building solutions for customers’ problems even after receiving feedback.

  • Part-and-parcel of digital bank offering: PFMs services are now becoming a part of standard digital banking. Banks have started to realize the importance of offering multiple services on digital channels as it helps them with customer engagement, customer convenience, and cross-product selling. Banks pose a big threat to PFMs, so PFMs need to figure out whether they want to partner-up or remain standalone.

  • **Lack of customized options: **Offering a few options to choose from for decision-making sounds good, but it has to be relevant and customized. Users are looking for a platform where they can get multiple financial products and customized solutions from a single platform – like buying on-demand insurance, getting microloans with zero paperwork, remitting money instantly, etc.

  • **Data privacy & security: **With data becoming increasingly important to build customized solutions and target relevant users, customers ought to have an inherent doubt whether their data will be safe. Hence they seem to share their information reluctantly, especially in European countries. This hinders innovation from building dynamic products.

What PFM products can do more of? (and some examples of FinTechs that are showing the way)

  • A Gamification-based approach where users are rewarded if they achieve their goals. Gamification lets users to be rewarded for their positive behavior as well as educates users about money management (fun format). Qapital helps users to automate their savings by utilizing IFTTT applet technology. This enables users to set up savings triggers that automatically save money when users reached a certain goal, such as achieving a fitness goal, getting 8 hours of sleep, a favorite team’s win, etc. Long Game Savings is a mobile-based savings account that uses games to motivate users to save more. When users save money, they earn coins which are used to play mini-games where they can win cash (up to $1,000,000) and crypto (up to one BTC or ETH). Also, when users level up, it unlocks new games & rewards and earns users free cryptocurrency.

  • Real-time analysis & forecasting for spending & saving and automatically parking money for fixed expenses such as rent, utility bills, etc. Seedly allows users to understand their cash flow and budgeting needs. It automatically imports transactions from various banks (DBS, OCBC, etc.) and credit cards. Also, its blog and community provide users with opinions, views, and insights related to financial products such as savings accounts, P2P lending, insurance, etc. Seedly adapts to users preferences and behaviors by leveraging machine learning and artificial intelligence. It can automatically categorize expenses into 33 key groups.

  • Tracking users’ net worth by providing estimates of things such as cars, appliances, art, etc., WealthPlus helps users to track their net worth over time. It provides engaging charts which help users to see how their how wealth is trending over a number of categories like banking, investments, auto, mortgage, loans, and more. Users can also add their own categories and compare their current net worth to the previous month. Furthermore, it provides users with information on savings and investment strategies.

  • Flagging of rising bills, suspicious & fraudulent activity, duplicate payments, and other user expenditure like refunds. For example, in the case of overseas spending, banks suspend unusual transactions without notifying the customer or insist on a callback to the fraud department. The UK-based Tandem flags suspicious activity via a push notification and gives users a nudge. If users confirm that it’s them conducting the activity, they can continue spending hassle-free.

  • Expense optimization by suggesting new alternative options such as insurance switching. Tandem helps in reducing a user’s energy bills by finding better alternative deals. It automatically notifies users about how much they can save per month by switching to a different service provider. Users can also switch to a different service provider through the app itself.

  • Leveraging data to build and offer alternative on-demand/everyday products such as micro-credit, small overdraft, advance salary, etc. Fiinu, a UK-based startup, has developed Fiinuscore (a lending product). Using PSD2 and Open Banking, it will be able to provide small overdrafts to users within the payday loan price cap.

  • Value-added products: PFMs can provide users with value-added features such as remittance facility, crypto buying & selling, personal credit build-up & monitoring, tax & advisory, etc. Revolut allows consumers to hold, exchange, and transfer up to 25 currencies via the Revolut app for no fees. Users can open free EUR and GBP accounts in three minutes. It allows its users to lock-in exchange rates in real time via the app. Consumers can also set up a free multi-currency recurring payment system on-the-go for rent, bills & more in 25 currencies. A user can transfer money to bank accounts in over 120 countries for free.

What does the future hold for PFM companies? (from an industry/business perspective)

  1. **Partnerships with banks: **Many personal finance management startups are actively looking to partner with banks. They are being seen as partners and not competitors. Many banks have tried building PFM products themselves but have failed in implementation and execution. Many PFMs have adopted B2B2C and B2C approaches. This allows them to monetize their white label offering. Tink, a Sweden-based PFM app, has a direct-to-consumer (D2C) application which helps users to manage their money in any account in any bank. Users can transfer money, pay bills, save towards goals, borrow loans, and open new accounts. Along with its D2C model, Tink offers products in partnership with banks. Its offerings include Account Aggregation, Payment Initiation, Personal Finance Management, and Smart Categorization. With ABN AMRO, Tink has developed and launched the Grip app, built entirely on top of Tink’s platform. Another Europe-based company called Meniga has deployed its PFM solution with ING Bank. Also, Bankdata, a financial IT company, partnered with Meniga to add its PFM solutions to 11 Danish banks to improve user experience in their online and mobile banking platforms.

  2. Acquisition by banks, financial institution & startups: Banks, financial institutions, and startups are looking to provide their customers with a great customer experience and multiple features. Instead of building in-house, they tend to acquire tech startups. For example, Walnut, a personal finance management app that helps users to automatically track expenses & more, has been acquired by Capital Float mainly for its product Walnut Prime. Walnut Prime leverages alternate data range that includes income, security saving, etc., to provide credit products. Clarity Money, which helps consumers manage their personal finances, was acquired by Goldman Sachs to augment its Marcus online lending business.

  3. Marketplace model: Customers are looking to avail services (like loans, insurance, tax, etc.) from a single platform. Furthermore, companies look to offer value-added services to their customers to increase retention and increase customer value over time. Starling Bank has launched its marketplace platform which integrates with various financial services spanning pensions, savings, travel insurance, and mortgage brokerage. This will help Starling Bank to provide users with access to a choice of third-party money-related apps & services. Also, it helps to create a network effect on both sides of its market.

  4. Standalone PFM apps: A number of personal finance management startups have been shut owing to wrong product lines, poor customer experience, limited features, inability to evolve with time, competition, high customer acquisition costs, etc. For example, Level Money – a funded startup which was acquired by Capital One and had a good customer base – shut down in 2017. PFMs need to focus on the aspects of visualization & customer experience, build solutions for individual customer problems, and look for alternative cross-selling opportunities, etc., in order to survive the ever-growing competition.

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