A common theme in the financial services sector of late has been the struggle to differentiate products and services from competition. And yet, banks have dragged their feet on a service that could set them light years apart, if delivered correctly: personal financial management (PFM). I’m not talking about the wealth management services offered in private banks but rather technology-driven guidance on a consumer’s spending habits, credit worthiness and financial goals.
This market of PFM, currently owned by third-party providers like Intuit, is essential for banks to target as core lending and deposit-taking functions become increasingly commoditized. As owners of consumers’ financial activity, banks are well-equipped to offer such services – so why haven’t they run with the opportunity? There appear to be several barriers standing in the way, but none of which can’t be overcome with the right strategy.
Addressing the Multi-FI Account Holder
Current PFM tools offered by banks are likely to be confined to that particular institution’s product portfolio, making the solution worthless if a consumer’s financial activity is spread across multiple FIs. Should a bank intentionally link to external accounts (as Moven has done), an awkward phenomenon occurs in which insights are drawn on the use of a competitor’s product; it’s like the Chevy dealership providing you with diagnostics on your Ford Escape.
Nonetheless, consumers lack an accurate understanding of their financial condition without a central dashboard that encompasses all financial accounts. The checking and credit card activity from your U.S. Bank account will only paint half of the financial picture if you also have a student loan from Discover and money market fund at JP Morgan. Third-party providers are capitalizing on this lack of loyalty to a specific FI, able to freely provide insights on cross-branded financial activity.
A bank naturally wants its brand stamped on each and every one of its customers’ financial products but must accommodate competing FIs rather than shutting them out of the picture, if they expect customers to adopt a PFM solution. Citibank may highlight a user’s heavy monthly spend on gas with their Amex card, yielding an opportunity to promote in-house cards that earn rewards on gas expenditures. Syncing up with competing accounts can ultimately provide banks with a selling point for their own products.
Using Technology to Alleviate User Maintenance
As any experienced PFM user will tell you, proper classification of expenses is vital to producing valuable insights on monthly spend. Even the most widely-used PFM tools struggle in their ability to assess what type of expense came from a given vendor. This leads to cumbersome maintenance work on the user’s end, which can eventually lead to product attrition. Just as troubling, users can lose accuracy in expense breakout with the mass shopping run at Target or the simple cash transaction.
No consumer wants to regularly audit her transactions that typically exceed two dozen each week. Instead, PFM software should be able to detect that the $3.00 transaction at Shell was really just a snack from inside the convenience shop, rather than fuel. Consumers should not be required to perform more than one or two short reviews of transactions each month before running a trustworthy report on their monthly spend.
One way of reducing month-end maintenance is through expense classification at the point-of-purchase, whereby digital receipts appear on a user’s smartphone immediately following a transaction. This tactic, employed by Moven, isn’t nearly as annoying as having to manually reconcile dozens of transactions at the end of the month. American Express offers a similar real-time receipting feature through Apple’s Passbook app.
Developing a Valid Business Case
Given the challenges described above and the industry’s broad unfamiliarity with PFM, banks lack a clear business case to enter the market. But what many don’t realize is that a large portion of consumers will pay for this type of service if a seamless and user-friendly experience can be provided. Consumers value transparency into their cash flow and, up until recently, have had to go to tremendous lengths to capture that detail on their own. Delivering on this need is a matter of packaging and deploying data that is already at the fingertips of BI departments.
PFM can become an important piece to banks’ noninterest income strategy, with an open-ended nature that sets it apart from transactional and penalty-based fees. High-spend alerts, credit assessment and ad-hoc reports are all examples of value-add features that can be appended to a PFM solution, driving customization for disparate user bases. As a number of studies have found, consumers will gladly pay fees for services that offer real value.
PFM is a profit-driven undertaking right now but may soon be ‘table stakes’ for the industry as a whole, which would serve as the most compelling business case of all. At the minimum, PFM is a source of differentiation in digital banking, a space that has become relatively homogeneous across firms in a short period of time. The conversations in banking c-suites should be less focused on if PFM should be pursued and more concentrated on how best to pursue it.
Leveraging the Right Resources
Banks would be wise in identifying sustainable business partners as they venture into the uncharted waters of PFM (and digital universe as a whole). Technology companies can play key roles in PFM software development and integration with current mobile apps. They may also assist with the very challenges described above: aggregation of cross-FI accounts and precision in expense classification. Partnering with these firms allows banks to focus on their core competency of financial advisory.
If banks lack the basic human capital and data infrastructure to pilot a proprietary solution, they may consider purchasing an off-the-shelf product like MoneyDesktop (left). While this may put a damper on net margin, it at least provides banks with a way of engaging their customers and meeting new table stakes in the industry. Such white label solutions can level-set the playing field for community and regional banks that don’t share the IT budgets of bigger banks.
From an internal perspective, banks should tap the BI capabilities of core banking systems and the advisory skills of personal bankers. With an expected flight from branch-based advisory in the coming years, banks can gradually redeploy some of these bankers into roles that analyze transactional activity remotely and push insights to the consumer through web and mobile channels. Consulting firms can serve as vehicles for corresponding master data, IT strategy and change management initiatives.
Delivering a Personalized Solution
Just as is the case with other banking products, PFM needs to be packaged differently for each consumer segment. Take the recent college grad that isn’t accustomed to managing substantial disposable income: PFM offers tools for comparing nightlife spend to that of his peers and working toward a down payment on a home. Compare that to the PFM need of his father, who is more interested in knowing how often he can dine out during retirement.
As of now, the college student is forced to actively seek out this type of financial software, much like I did in 2010. With quality customer data at their disposal, this individual’s bank can be clued in on his graduation date and e-mail him ahead of time, detailing their ‘New to the Workforce’ PFM package. This offer might be accompanied by a quick snapshot of his senior year spending and how it’s forecasted to change based on the average starting salary for his field of study.
It’s important to note that, to justify a monthly fee, banks must deliver a superior PFM experience to what the user is getting for free in third-party apps like Mint. This may come in the form of personalized goal-setting, contextual deals at frequently visited merchants or financial guidance at the point-of-purchase. Most importantly, the solution must be fully embedded in a bank’s digital landscape, a value proposition that can’t be replicated by third parties.
PFM is just a layer to the technology-driven disruption running through the banking industry. Management must devote time and money in aligning IT strategy with that of the business to meet new customer demands. PFM, however, is a great place to start, serving as an important piece to the digital puzzle rather than just a standalone revenue stream. Such is the reason that neobanks like Moven and Simple have built their platforms completely around the concept of PFM.
Executives still operating under the 3-6-3 model should take note of this new competition before it’s too late. There is simply no reason why third parties control a market that should be owned by the financial services sector. This emerging space holds too much potential for banks to be sitting on the sideline. With traditional revenue streams drying up and new threats emerging in the financial arena, it’s time to take PFM to the bank.