Banking at a Generational Crossroads for Personal Financial Management

Where traditional banks and emerging players collide

(written while at Money2020)

October 4, 2016

Unless you’re among those wealthy enough to necessitate a money manager or those with too few real assets to manage, you’re probably squarely in the middle of the vast majority of Americans. And for this group, there’s traditionally only been a few options for staying on top of one’s finances.

On one side, there are banking solutions with limited options and no integration with other banks. On the opposite end of the spectrum, there’s DIY personal finance software (either cloud or desktop) that can integrate with most banks and offers insight across your portfolio of accounts. And arguably, one doesn’t offer some users enough options or granularity, and the other offers too much.

With banks struggling to post even flat year-over-year profits¹ and an up-and-coming 77-million strong, mobile-first millennial population asking for personal finance software that simply keeps them abreast of their financial situations, this is the problem today’s mobile personal financial management (PFM) applications hope to solve.

It’s all about the data

At first glance, the features offered by new PFM applications seem similar to offerings by traditional banks’ mobile solutions. When the user logs in, the first thing they see is a summary snapshot of their accounts, which is exactly what 90 percent of mobile banking users want, according to a 2015 Pew Research Center study.

But that’s where most of the similarities end and the differences we see between the two are because of data – big data.

Data scientists, money management wizards, programmers, and tons of data are the key ingredients going into a complex soup of software. This software doesn’t just track what has already happened; it also uses complex algorithms to actually model, predict, and even recommend financial activity based on the individual user, historical data, and academic research. It also uses crowd-sourced data from the masses.

How are banks responding?

The banking industry has realized it needs to both satisfy current customers, comprising generations of various technological prowess, while attracting newer customers who want real-time views into their financial situations in a format that is quick and easy to digest. The challenge is that most banks can’t do that yet, and many companies with solutions that can are at least initially in competition for the same customers.

Many newer entrants, like Moven, are going straight to consumers with either a stand-alone banking solution or one tying customers’ existing accounts and supplements brick-and-mortar banks’ mobile solutions with a bevy of new features. But many emerging and legacy companies, like Fiserv and IBM, are opting to partner with banks, offering white-labeling solutions that have all the great benefits afforded by big data and powerful artificial intelligence (AI) systems, but backed by the security (and trust) of the traditional bank.

At some point, ‘legacy’ and ’emerging’ need to connect and start building solutions that put the customer in a position to pick and choose the features they want, regardless of their stage in life, or net worth.

But this all costs money. Research and development, testing, integration, marketing, implementation, maintenance, upgrades, and support – it’s all a net-new cost that many smaller banks are struggling with. One way banks are saving money is by closing bank branches, and while that may seem counter-intuitive for an industry that’s traditionally been relationship-oriented, times have changed. Banking has become a much more transactional activity, and as many as 81 percent of consumers said that if their local branch closed they would not change banks.²

Another possible cost saver is to develop newer mobile-first solutions in-house or even to invest in early-stage companies developing these solutions. Many bigger banks – think Citi, Wells Fargo and Capital One to name a few – have launched their own innovation labs, or accelerators, in hopes of incubating talent and solutions that enhance their existing solutions.

Integration or coordination

Currently, solutions from both traditional FIs and emerging PFM solutions are a mixed bag of features. Maybe you can get a checking and savings account, but only a debit card. Or, your ‘big bank’ offers a mobile banking option, but it’s mostly a re-skinned version of their online portal, perhaps with snapshot check deposit for that ‘mobile’ feel.

At some point, ‘legacy’ and ’emerging’ need to connect and start building solutions that put the customer in a position to pick and choose the features they want, regardless of their stage in life, or net worth. Until this happens, there will continue to be a divide between those whose banking decisions are driven primarily by trust and the less risk-averse who are attracted to eye-catching graphics and gamified peer-to-peer offerings. Both offer short-term benefits to consumers, but long-term sustainability and growth will elude banks and data-based artificial intelligence solutions as all populations age.