The evolution of PFM

The evolution of PFM

How much money do I spend on gas? Banks can still win the PFM (Personal Finance Management) race Unless you have a photographic memory when it comes to payments and bill management, you re unlikely to be able to answer the above question in under a minute. To help people answer questions like this, the software industry came up with a new concept called Personal Financial Management (PFM) 1. In this Point of View, we will discuss the pluses and minuses of different approaches to PFM and explain why we believe banks need to develop tailored solutions that leverage the benefits of PFM for their businesses. Wikipedia: Personal Financial Management (PFM) refers to software that helps users manage their money. PFM often lets users categorize transactions and add accounts from multiple institutions into a single view. PFM also typically includes data visualizations such as spending trends, budgets and net worth. Today s PFM ecosystems are characterized by the following alternatives: 1. Standalone PFM These are web-based or desktop applications that enable end users to gather their financial data from different bank accounts into one place. Once the data has been collected, these solutions automatically categorize spending and income line items and create graphical representations to help users identify relevant insights at a glance. Some of the better-known examples of standalone PFMs include Mint, Meniga, and Fintonic; the list of providers is growing continuously. 1 PFM started in 1983 with the founding of Intuit. Scott Cook and Tom Proulx, the company s founders, witnessed the rise of the personal computer and saw an opportunity to develop personal financial software. Their flagship product, Quicken, became a standard for many households and was eventually followed by QuickBooks, which continues to help small businesses manage their finances today. 02

2. Integrated online and mobile banking systems Based on a third party solution, this element integrates a product into an online banking platform and mobile banking app. An example of this is ING Direct, powered by Meniga. Meninga launched the Meniga Personal Finance Management (PFM) with ING Direct in 2014, featuring custom integration with the ING online banking system. The software supports all aspects of personal finance management, including automatic and highly accurate categorization of customer transactions, budgeting, social media integration, savings goals, etc. These functions give ING Direct customers direct access to a comprehensive representation of their financial health. In October 2015, Caixa launched a new service called Mis Finanzas (My Finances), a holistic approach to managing personal finances for its customers. The tool manages a customer s financial activity over the past 24 months with features that include: Automatic categorization (40 different categories) Visual representation of financial information Support for savings programs through the establishment of individual saving goals across multiple categories Multi-device support that enables customers to access their financial status and profile from a laptop, tablet or mobile devices. 3. Custom developed solutions Banks often develop their own PFM solutions that are fully integrated into their existing banking infrastructure. CaixaBank is a good example of bespoke PFM: case study: 03

These three different approaches all come with pros and cons, and banks need to thoroughly assess their requirements before coming to a decision about an individual response to the PFM market. Banks were relatively late entrants into the area of PFM; they only began to integrate PFM functionality into their online and mobile banking apps in 2010. Today, the integration of PFM functionality is one of the biggest sticking points within banks digital transformation programs. But why is that? From the Customer Perspective Customers do not just want a log of their expenses and incomes; they are looking for financial insight: Very Interested Interested From the Bank s Perspective Cost efficiency: Personal advice provided face-to-face by a financial adviser is tailored to individual customers but is not scalable and is more expensive to operate. Customer loyaltyt/retention: A bank that integrates PFM functionality increases the likelihood of customers adopting this bank as their primary bank. Cross-selling: When banks know their customers in terms of expenses, incomes, and saving goals, they are in a far better position to create personalized offers for additional products and services. Digital platforms (channels): A tool that provides valuable insight to customers is far more likely to be used, so PFMs can increase the adoption rate for online and mobile banking solutions. Innovation and positioning: The integration of PFM functionality into banking systems can still be a differentiator within the industry today. 58% 24% 53% 16% 46% 12% 51% North America The integration of PFM functionality requires engagement by a number of different parts of the bank. The success of PFM is also highly dependent on the technology and flexibility of the bank s existing IT infrastructure. For instance, gathering customer data from different sources, consolidating them, and then storing and exploiting that data meaningfully, are different tasks but all have a lot to do with technology. 33% 36% 33% Finding the right approach to PFM is clearly a key element in the digital transformation process. 18-34 years old (n=940) 35-50 years old (n=1560) 55+ years old (n=1346) SOURCE: Accenture, 2014 When it comes to personal data and financial information, customers trust their banks more than external providers. For this reason, they want this service to be inside their banking app, not through a third-party Fintech solution. 04

How to beat both PFM Fintechs and industry competitors As already noted, banks only began to implement PFM solutions when there was already quite a big market, largely shaped by independent software providers. Banks realised that these software vendors have the potential to provide more than just consolidation services across the different elements of a customer s financial data. Fintechs are entering core banking areas, offering mobile payment solutions, money transfers, social banking, and other functionality. The world of banking is no longer a closed shop, and ban ks need to act if they want to retain their customers and their earnings. As the stand-alone software tools also come with some downsides for customers, banks still have a good chance to keep existing or even win back lost customers. Since they are third party solutions, Fintech offerings are not linked to any bank. So customers will have a single place where all their financial data is consolidated, but they still need to use another app or online system to check your finances. WHAT DO ACCOUNTS HOLDERS WANT? Features ranked as Highly Valuable in a mobile app: View all your finances in one place Pay a merchant in-store or online Remote Deposit Pay another person (P2P) Make an appointment in a nearby branch Video chat with a banker 17% 32% 52% 63% 62% SOURCE: Celent Research on U.S. Mobile App Preferences, July 2013 75% When users provide their financial data to a third party, they are not providing their digital signature. So these companies will not be able to play with the money, but they still have access to a lot of personal information about behaviour, habits, interests, etc, which raises privacy concerns. What happens if the service is closed down? Here, there are two options, both ending up in the same place: The third party maintaining the PFM may go out of business or just decide to close down the product. The bank shuts down the API services that allow thirdparty PFM solutions to access customers financial data. Banks essentially have two options to offer PFM to their customers: through the integration of a third party solution into their banking system, as with ING and Meniga, or by creating their own PFM solution, like Caixa. Integration of a third-party solution Time to market is often faster, as the solution is already mature and only needs to be integrated with the bank s system. Ability to leverage the third-party supplier s customer base. Depending on the partnership model, banking services could be offered to the larger community of customers using this specific third-party solution. This is, of course, limited to customers who use this software directly and who are not already connected with another bank that has integrated the same technology. Faster ramp-up: Banks can speed up their learning curve in the PFM market by leveraging the experience of the third party provider. Market testing: Product-based solutions are useful for testing with clients to gauge real requirements. But there are also some disadvantages: Even if the integration is smooth and seamless, it is still an integration, meaning that the PFM s functionality is not part of the core banking system, which has different implications: PFM is treated as enhanced functionality instead of being a touchpoint, a new way to interact with customers and provide much more than insight via charts and graphs. Money Summit put it this way: Digital money management needs to be fully integrated into the user experience if financial institutions want to help truly enrich their account holders financial lives. Other negatives of this classification include: 05

Reliance on a product provides a multichannel approach but is not omnichannel. Statement search is separate from the PFM functionality, instead of being fully integrated. Scalability issues: since customer data is processed by a third party solution, there are a couple of important areas of limitation: financial history availability and constrained or non-existent enrichment of financial data with external data sets (such as open data). Losing control over your business: the functionality included in the PFM form the foundation for proactive advice, cross-selling, and many addition services that banks will provide in the future. Being tied to a concrete solution means that: a) control of data is ceded to a thirdparty solution b) the number of value-added services that can be created on top of data and analytics is limited, and c) the bank s roadmap is inextricably linked to the third-party vendor s roadmap. Cost of the solution: these solutions have a clear, simple, and profitable business model for them, consisting of a license fee and in some implantations a pay per user fee derived from the use of MIPS, since financial data from customers is in a host environment. Developing a custom solution Although obviously custom development is the only way to get exactly what you need to satisfy your customers and fit with your internal structures, it s a scary concept for many IT managers. Custom development raises the spectre of high risk, high cost, and a never-ending project. So many would rather go with a solution that somewhat fits but the risk, cost, and time can be controlled. We believe that custom development is the preferred approach for banks. It is the only way to develop a fully integrated omni-channel customer experience that leverages all the data that already inside the bank as well as external data. We have proven through many client projects that risk, cost, and time can be successfully managed and controlled. With modern agile development approaches, projects can be speeded up and results achieved throughout the lifecycle of the project; this also provides flexibility to react to market changes, as well as controlling costs. When it comes to PFM, we believe that the process should be taken a step further into the world of Smart Transaction Management (STM). The key elements of STM are: Move data from Host to NoSQL databases Consolidate data and certify its integrity End of the day ETL and near real-time ETL during the day Automatic Categorisation of financial statements Consider transaction metadata to increase the accuracy of categorisation, for instance: transaction code, merchant category code, point-of-sale ID, etc Proactive and meaningful advice Gather data form other sources: provided by customer or from open datasets Enrich existing financial data with previously gathered info 06

Through custom development, the process can be approached in different phases. First of all, data is extracted from the host to a NoSQL database, enabling the scalability of data while consistently reducing the cost of host access. Information at glance: Of course, a range of graphical representations of balance, expenses categories, and savings goals is a mandatory requirement. The second step is to take metadata into account to perform the automatic categorisation of financial statements and increase the accuracy of the categorisation engine. The last step is to enrich that financial data with external data to provide meaningful advice to customers. This is much more than a PFM, it is more Smart Transaction Management! Do you think I always pay for the same things with the same card? Really? A holistic search of all bank statements allows the customer to search across all expenses and incomes regardless of card or account used. It also supports the use of natural language, meaning customers can just enter gas, fuel, gasoline or the name of a gasoline station in the search field to see all statements associated with this category. And of course, it also means customers can view their entire financial history, whether they have been a customer of the bank for a few months or many years. Smart filtering: As customers search through their statements, the filters appearing on the screen adapt automatically to simplify the search. The smart filters are displayed in the left panel of image below; the, accounts, categories, dates, and amount filters adjust automatically each time the customer searches the information to make the search easier. 07

I would like to be notified (as a customer) If my electricity bill is higher than average : To do this, the STM will display comparative data to identify anomalous amounts. Additionally, since time is of the essence when expenses are above average, this information is proactively delivered to mobile devices, on the assumption that customers always have their smartphones with them. The gas station is just one example. Cross-selling, recommendations and many other opportunities to improve the customer experience can be included in Smart Transaction Management solutions. Not being tied to a product means that the bank is the owner and controller of all data (financial and otherwise), and so the avenues to create valuable services not included in PFM systems are endless. The criteria we follow when implementing STM solutions are: Accurate categorization Level of proactive advice Customer experience But there are other criteria to look for when considering a project like this. As we are discussing banking solutions, we can get rid of standalone PFM solutions. Criteria Integrated PFM Bespoke PFM plus STM Accuracy of categorization High High And by exploiting external data, for example, the bank is also able to advise the customer about cheaper and closer gas stations, so the customer never misses out on an opportunity to save money by driving 100m further. Level of proactive advice Low-Medium High Customer experience Medium High Time to market Short Term Medium Term Costs High Medium Tactical vs. strategic Tactical Strategic 08

How GFT can help It s clear from this short document that we live in exciting times for digital transformation and enhanced customer experiences in banking through PFM solutions. Of course, there are different degrees of technical complexity and business aspiration in the two avenues described above, but these two alternatives can be aligned from the very beginning with the support of GFT. GFT has experience in the integration of PFM solutions and in implementing Smart Transaction Management initiatives for financial institutions. Every institution has different deadlines and expectations, and both approaches are good if applied in a manner appropriate to meeting those deadlines and expectations. The GFT Digital Innovation Banking Lab offers financial institutions the opportunity to learn about and experience just some of these solutions and to understand how they can be applied to individual situations to deliver real results. GFT s innovation and design thinking workshops guide institutions through the creation of clear innovation roadmaps that lay out the journey to digital transformation. PFMs and STMs are just the first step. About the Author Dr. Ignasi Barri GFT Innovation Manager Dr Barri holds a PhD in Computer Science, along with a degree in Business Administration and Management and postgraduate studies in Open Source Engineering. Always linked to innovation and R&D projects, especially in international environments, Dr Barri is now focused on Digital Transformation projects. He co-manages the GFT Digital Innovation Banking Lab, a physical space where GFT makes innovation tangible through the combination of new technologies, different methodologies, business models, social trends, and customer experience. About GFT Group GFT Group is a business change and technology consultancy trusted by the worlds leading financial services institutions to solve their most critical challenges. Specifically defining answers to the current constant of regulatory change - whilst innovating to meet the demands of the digital revolution. GFT Group brings together advisory, creative and technology capabilities with innovation culture and specialist knowledge of the finance sector, to transform the client s businesses. Utilising the CODE_n innovation platform, GFT is able to provide international start-ups, technology pioneers and established companies access to a global network, which enables them to tap into the disruptive trends in financial services markets and harness them for their out of the box thinking. Headquartered in Germany, the GFT Technologies SE achieved consolidated revenue of around EUR 365 million in 2014 and is represented in twelve countries with a global team spanning 3,400 employees. gft.com 09

gft.com