PFM 2.0: Reigniting The Personal Financial Management Revolution in Banking

Thanks to the power of data, APIs and artificial intelligence, banking providers can engage consumers with personal financial management tools in new and exciting ways.

Over three decades ago, Intuit launched the first mass-market personal financial management (PFM) tool, spawning a new category for competition in the retail banking space. Not long ago, PFM was a subject that excited banking experts around the world. But PFM solutions have languished in recent years — enthusiasm and growth rates have both faded.

However, a confluence of factors has the potential to change that. One new factor is the enhanced capabilities of the latest artificial-intelligence-powered PFM tools. Another is the clear indications of greater consumer interest in better managing their financial affairs. These developments could herald a new era for PFM, with widespread consumer adoption of proactive and personalized financial guidance.

Earlier iterations of PFM failed to gain market traction for a number of reasons. For starters, they assumed consumers would be willing to put work into managing their finances (e.g., assign transactions to various categories). As it turns out, that assumption isn’t even remotely true. These early PFM tools also lacked a personal touch. Challenges in data integration meant that data was not updated in real-time, which left people wondering about the accuracy and usefulness of the information. Ultimately, they fell short of their primary promise: delivering relevant, useful insights, and advice.

PFM’s latest chapter comes at a pivotal moment. Technological advances in artificial intelligence, near universal acceptance of the mobile channel, and the needs of today’s consumers for assistance in managing their financial lives has created an environment ripe for a comeback. Here’s a glance at the four biggest factors driving the return of PFM.

The Need For Help With Finances Is Real

In an attention-starved world that prizes busyness as virtually an end in itself, people have less bandwidth to devote to managing their personal finances. According to a survey by MyBankTracker, 53% of Millennials and 32% of Americans overall spend no time managing their personal finances. Startling as it is, that fact alone doesn’t guarantee PFM success. But it is a clear indication that the need is there.

At the same time, consumers have access to more financial services than ever, with new types of cards, savings accounts, and banking products adding choices and complexity.

Both of these factors underscore the potential for highly personalized, forward-looking financial tools — requiring minimal effort on the consumer’s part — that can help them take control of their day-to-day finances, make better decisions about their money, and improve their overall financial outlook.

Read More: The Banking Industry’s Guide to Major PFM Providers

Financial Institutions Must Find New Ways to Engage Consumers

While consumers need user-friendly tools to stay on top of their finances, banks and credit unions urgently require new ways of nurturing consumer relationships. Legacy institutions increasingly are faced with competition from a new generation of financial services providers — many of them digital-first innovators in the fintech space. The threats are coming from many directions — Venmo with person-to-person payments, SoFi with online loans, and challenger banks such as N26 that are acquiring customers at a rapid pace. Moreover, in the PFM space, many digital apps and options are on the scene.

The writing on the wall is clear: financial institutions can ill afford complacency.

According to Ron Shevlin, director of research at Cornerstone Advisers, “banking providers will seek to prove that they have their customers’ best interests in mind when marketing and cross-selling to them. The result will be a focus on ‘We’re here to help you improve your financial health,’ and a positioning of PFM-related tools and apps as ways to measure and improve financial health.”

PFM 1.0 PFM 2.0
Query-based (Pull)
Relies on the user to pull the data they need.
Proactive Everyday Engagement (Push)
Proactively engages the user daily, pushing relevant and timely information.
Asking the Customer to Enter Data
Expecting users to do work before they see the benefits, resulting in lower adoption rates.
Automated Data Analysis
Proactively presents information to the user, resulting in higher engagement and usage.
Provides information, expecting the user to figure out what it means and what to do about it.
Actionable and Automated
Offers actionable recommendations and automated money management that take away the guesswork.
Planning and Budgeting
Expects the user to engage in planning and budgeting, with no immediate sense of accomplishment.
Goals and Challenges
Helps users act on an immediate goal that is within their reach — like spending less on restaurants so they can save for a vacation — setting them up for success rather than failure.
Same for All Users
Doesn’t match the nuances and particulars of individual needs and what’s relevant to the user now.
Bite-Sized and Personalized
With relevant and bite-sized insight and advice, individuals can take actions tailored to their own personal financial situation.
Time-Lapsed Transaction and Balance Data
Paints a picture based on a time-lapsed snapshot that doesn’t always include recent transactions.
Real-Time Data and Forward-Looking Balances
Real-time data provides an accurate picture of current and future cash flows and balances.
Average-Based Cashflow Forecast
Cashflow forecasts don’t account for variability in income and spending and can lead to mistaken actions.
Pattern-Based Cashflow Forecast
Reliable cashflow forecasts allow users to anticipate issues and opportunities and take early action.
Separate App
Requires the user to use a new app, placing a barrier to adoption and use.
Embedded in Digital Banking Experience
Enhances a familiar experience and increases engagement with the bank app.
Static presentation cannot adjust to individual needs.
Self-learning analytics continuously improves the data presented to users based on their interaction with the system to increase engagement, satisfaction, and response.

Read More: Citibank Launches PFM Mobile App to Steal Customers

Open Banking and APIs Make Account Aggregation and Integration a Reality

The use of big data and data analytics is transforming entire sectors of the global economy, and financial services is no exception. At the micro level, easier access to aggregated financial data across institutions provides a more complete and accurate picture of an individual’s personal financial situation.

In Europe this trend is being spurred in part by measures like the Revised Payment Services Directive (PSD2), but customer demand for universal access to their data is becoming a big factor in the U.S. market as well. Banking companies and fintech providers continue to spar over what data can be accessed and how. Clearly this is still a work in progress, but the direction towards application programming interface (API)-based open access to personal financial data is well underway. The trend will end banking institutions’ exclusive hold on account information and allow consumers to manage their finances through third-party services.

This new state of affairs will enable unprecedented visibility into a person’s entire range of financial assets, cash flows, user behavior, and spending habits (with their permission, of course). This information in turn can be wielded to help consumers optimize their financial management across multiple accounts, institutions, and service providers. If consumers lack sufficient funds to cover an upcoming payment, for instance, their financial institution can alert them to move money from another institution and avoid overdraft charges.

Artificial Intelligence: The Great Enabler

Many of the newer financial management tools for consumers rely on artificial intelligence software. AI is able to do much of the heavy lifting for consumers — making it an especially valuable tool for those who don’t have the time, resources, or desire to seek out high-priced personal financial advisers.

Consumers increasingly are exposed to the benefits of AI in other facets of their lives including smart navigation, personalized music selections, and online shopping. They are expressing greater openness to AI’s integration into the management of their day-to-day finances. Seven out of ten consumers in an Accenture survey said they would be receptive to AI-driven advisory services for banking, investments, and insurance.

The convenience and value enabled by a new generation of proactive money management capabilities have revived interest from banking providers and consumers alike. Millions of bank customers have adopted financial management services. For instance, RBC reported an 8% increase in engagement for its NOMI Find & Save app and a doubling in client savings, while also generating 100 million insights for its customers.

The trend has caught on in the U.K. too. Consider banks like Tandem and its mobile app, or Metro Bank, which has introduced Insights, a service that provides users with real-time monitoring of transaction data and spending patterns to enable tailored financial guidance. This includes tipping customers off to higher-than-usual spending levels to alerting them when a subscription is about to be auto-renewed or helping them avoid overdraft charges with a particularly large upcoming payment. Such data points — otherwise easily missed — can prove highly valuable in nudging consumers to make smarter financial choices.

What will this mean? Consumers will have quick access to relevant, easily digestible tools for improving their financial lives, with banking services attuned to their unique needs and behavior. Already the above examples suggest that the newest iteration of PFM will have staying power.

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