The desire and need of consumers to acquire financial knowledge is growing rapidly, and financially conscious customers are increasingly seeking to monitor their financial health. The large number and variety of applications and tools for personal finance management (Personal Finance Managers, PFM by their acronyms in English) that exist today is an indicator of the high demand that exists for these products and services. Fintech is attending to this trend much better than traditional banks and customers are taking into account this. So, what can the banks do to face this network? What exactly are Personal Finance Managers (PFM)? What are its benefits? In this article we will dwell on these topics.
What is a PFM?
Currently, many banks offer the PFM service as part of their mobile banking application. Without restriction, most banks are offering basic PFM. A basic PFM provides simple cost tracking and tax generation functions to help people control and understand how much is being spent and what. In addition, it gathers data from different customer accounts they have with different banks and insurers to give them a consolidated view of their financial health. On the other hand, an advanced PFM provides additional features, such as providing personalized financial advice based on an automated analysis of customer transactions.
In what ways are banks lagging behind compared to Fintech?
Most banks have taken into account that personal finance managers have an opportunity to keep their customers engaged, interested and to add value. Without restrictions, its PFM applications are not fulfilling the basic expectations of their users, for example, presenting information and data with a clean and attractive interface, but this is not enough for customers to keep using the application. Sharing a personalized experience with customers is a key differentiator. With today’s advances in machine learning and artificial intelligence, PFM tools not only have to provide valuable information and personalized financial advice, but also make accurate predictions.
In fact, personalization and the generation of relevant information are critical factors for the success of PFMs. Customers are accustomed to receiving personalized content on their social networks, online shopping sites, music and movie streaming platforms, and expect the same from their bank PFM application. This is exactly where the PFMs developed by banks are standing still.
Therefore, despite the growing interest and demand for these digital tools, banks are struggling to attract customers to use PFM functionality in their own native applications. This means that many consumers who want to keep track of their personal finances prefer to do so through third -party applications of fintechs and neobancos.
What can banks do to overcome this crisis?
Banks should invest time and resources to understand what customers need as a priority, instead of thinking about adding new features just because they sound interesting. In addition to this, they must determine which functionality will facilitate the lives of their customers. They must also quickly develop and implement next -generation PFM tools that will provide their customers with important and granular information about their spending patterns and with advice on personal costs from each area.
Developing or improving PFM solutions generally involves a better understanding of customer data, the implementation of sophisticated data analysis, upgrading of Open Banking APIs and generating refined digital experiences. For banks, achieving these objectives quickly involves working together to acquire the necessary capabilities. Therefore, in order to develop better PFM products and have a faster go-to-market, banks must be open to partnering with third parties. These associations can help banks quickly create independent applications or improve their existing PFM offering.
The other challenge that banks face is their ability to collect and manage data. As in other banking areas that need to be improved, inherited systems remain as the biggest barrier. In the context of PFMs, banks have difficulties mainly in connecting their systems and data. Ideally, the updating, improvement or development of a PFM should be part of an overall digital transformation plan, with the data at the center of that transformation.
In addition, the use and exploitation of data to provide customized recommendations is a critical factor for the success of PFMs. For example, to perform transactional data analysis, which is an integral part of modern PFMs, machine learning models must be applied. In most cases, developing an algorithm as this requires attracting new talent or investing significantly in improving the skills of the internal team. Given that there are many other PFM functions that need to be implemented – as well as other digital banking priorities – looking for these developments through outsourcing can be much more efficient.
In addition, with the advent of Open Banking, fintech companies can now retrieve data from a variety of sources, allowing better than never having a complete view of the financial health of consumers. This further complicates the objective of banks to maintain their applications as the main source of information and personal financial advice. Therefore, banks should make use of Open Banking and the aggregation of data from other financial companies with which customers relate, with the goal of developing better PFMs.
Ankit Sharma, PwC Financial Services Advisory, Mexico