The sheer range of personal finance management (PFM) mobile apps and tools today indicates that there is significant consumer demand for them. That’s not surprising given the expanding range of financial options available to people — from crypto to buy now, pay later. Many consumers are more interested in closely monitoring their personal financial health.
Despite the growing interest in these digital tools, banks and credit unions as a whole have failed to engage customers in using the PFM features in their own native apps. That means many consumers who want to keep track of their finances turn to third-party apps from fintechs and neobanks. According to Insider Intelligence, more than 40% of customers prefer PFM services from nonbank providers.
For traditional banks and credit unions, this should be an alarming statistic. It’s similar to how the advent of buy-now-pay-later (BNPL) services among fintech companies has put many banks in a catch-up position. PFM tools are likewise disrupting banking.
Insights and Predictions Are Essential Now
Banks overall realize that PFM is a great opportunity to keep their customers engaged and add value, but they’re not meeting users’ basic expectations. Just displaying information — even with a neat UI design — isn’t enough to keep customers using the app. Imagine Netflix being nothing more than an enormous library of movies that doesn’t provide suggestions and account for customers’ tastes.
The Way It Is:
Personalization and insight generation are everything now — whether it’s a social media feed, an online shopping site, a music streaming platform or a banking PFM app.
Tech-native financial companies — along with a handful of banks — have realized there is a pressing need for PFM tools that can provide a personalized customer experience. With today’s advances in machine learning and artificial intelligence, PFM tools can not only provide valuable insights and personalized financial advice but also make accurate predictions. They’re also in a different league entirely from the PFM technology of a decade or more ago that was essentially backward-looking and had limited appeal.
Crucially, with the advent of open banking, fintech firms can now gather data from a variety of sources, enabling a much more comprehensive view of a consumer’s financial health than ever before. This further complicates banks’ goal of keeping their apps as the primary source of personal financial information and advice.
All this calls for the rapid development and implementation of next-generation PFM tools that empower customers with granular insights into their spending patterns and personal budgeting advice from any touchpoint.
What Traditional Institutions Can Do
The biggest difference between neobanks and traditional banks is in their ability to collect and manage data. As in other banking areas that call for improvement, legacy systems remain the biggest barrier. In the context of PFM, banks mostly struggle with connecting their systems and data. Ideally, PFM upgrade or development should be a part of an overall digital transformation plan, with data being at the center of this transformation.
Enhancing PFM solutions implies a better understanding of customer data, implementation of sophisticated data analytics, leveraging of open-banking APIs and refined digital experiences. For traditional banks, achieving these goals often entails partnering to obtain the necessary capabilities.
For example, advanced analysis of transactional data, which is integral to modern PFM, calls for the application of ML models. In most cases, developing such an algorithm internally requires attracting new talent or significant investment in upgrading the skills of an in-house team. Given that there are many other PFM functions that need to be implemented— as well as other digital banking priorities — outsourcing such development may be more efficient.
- Financial Wellness: The Cornerstone of Greater Customer Engagement
- Top Five Customer Experience Trends in Banking for 2022
- Why Bank of America Believes Financial Health Is the Future of Banking
PFM as a Means to Personal Connections
It’s important to realize that the competition between neobanks and their older counterparts is not about technology per se. Rather, the technology allows establishing personal connections with customers at scale, and providing advanced PFM services is the most straightforward and efficient way to establish these connections.
Consumers choose to use third-party apps because they remove many frictions associated with everyday banking. This is why banks need to invest time and resources to figure out customer needs first. Instead of thinking about what new cool features to add, they should determine what functionality can make customers’ lives easier.
The bank of the new age must play an increasingly important role in encouraging customers to develop healthy financial habits and helping them in dealing with financial distress. Otherwise the gradual migration of customers to fintech competitors will accelerate.