To most companies in the financial services sector, Personal Financial Management (‘PFM’) is just another buzzword that offers little opportunity for profits. But pioneering banks who explore the frontiers of PFM may find potential they could tap, if they adopt the right app.
It’s understandable that banks have not raced to launch PFM tools, since it’s a completely foreign concept to the majority of consumers. However, many consumers perform basic PFM tasks on a regular basis, from tracking discretionary spending to paying bills. And with the proliferation of digital, PFM now encompasses everything from categorizing card transactions to receiving low-balance alerts to prevent overdraft.
But older generations, unaccustomed to receiving such PFM services from banks, have kept to checkbooks and spreadsheets to manage their finances – tools ill-suited to support the increasingly web-based financial lives of modern-day consumers.
Of course, few of these financial activities are popular pastimes for the average consumer, making it difficult to market them to consumers. There is limited fun involved in managing one’s finances and many do just enough maintenance to ensure that they have spending money for the month. On the other end of the spectrum, even the most disciplined consumers are susceptible to abandoning good financial habits after one bad month of spending.
Financial technology (‘fintech’) companies have catered to those with PFM ambition through web and mobile apps (e.g. Mint, Personal Capital and BillGuard). These third-party apps sync with a consumer’s disparate financial accounts and provide personalized guidance related to spending and saving with minimal effort required by the user. As opposed to static, offline tools, third-party apps inform consumers of upcoming bills, offer spending comparisons and provide a snapshot of their overall financial health.
The independent nature of third parties has worked to their advantage in the PFM space. According to Javelin Strategy & Research, roughly 49% of consumers in a 2013 survey indicated the desire to aggregate financial activity across accounts provided by different financial institutions (FIs). This finding helps explain why only 8% of consumers leverage PFM products provided by banks, which are often restricted to only the bank’s portion of the customer’s larger financial picture.
However, FIs have clear advantages that could help them reclaim the PFM space. First, security concerns and lengthy configuration efforts associated with third-party apps often push potential users away. Second, FIs are already the primary owners of consumer financial data and traditionally viewed as centers of trust, making it possible to include sample PFM insights on monthly statements.
The product of such PFM opportunity and inherit advantages held by the financial services sector has been the introduction of a new class of FIs deemed ‘neobanks’. These banks – which include Moven, Simple and GoBank – operate on PFM-centric models that are designed to optimize consumer engagement. In their short existence in the marketplace, neobanks have gained traction by enabling users to source financial activity from external accounts and adding a social flavor to their platforms.
With their established customer bases, traditional banks can quickly step into the PFM mix by first making FI-agnostic tools better available to the uninformed, financially-responsible customer. And by integrating PFM offerings with newer services like merchant-funded offers, banks can appeal to informed but disinterested customers.
While PFM may be limited in opportunities for direct revenue, an increased level of engagement with customers can ultimately produce higher cross-sell volume of standard bank products like credit cards and investment funds. And still, PFM can be used to generate fee income related to merchant-funded offers, bill pay, credit scoring and financial guidance.
The ongoing transformation in the financial services sector and the proliferation of web and mobile technology has made it the right time for banks to leverage their position in the financial services sector to combat emerging apps and establish a footprint on the PFM turf.