Personal Finance Management: Banks Most Powerful Tool

Technology has radically changed our lives, from how we work to what powers our cars. The financial landscape has not escaped from this revolution, and banks are changing how they do business to cater to an increasingly tech-savvy audience.

Personal finance management (PFM) is a concept that is gaining importance in the financial industry, and it consists of using technology to help individuals manage their money better.

Research suggests that many Gen-Zers and millennials feel comfortable letting technology companies manage their finances. The reason for this is that the tools provided by the so-called ‘fintech’ are easier to use and interpret than traditional checkbooks and printed bank statements. 

Banks have recognized this change in consumer preferences, and they have responded by embracing PFM to connect with this growing audience of tech-savvy individuals so they can better serve them.

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What is PFM, and How Does It Work?

PFM is a type of software that collects, organizes, and sorts all the data that banks typically process for their customers, such as debit card transactions and loan payments. These programs can present this data so users can get insightful information that can help them make better decisions regarding managing their finances.

Even though the concept may sound unfamiliar, PFM is present everywhere nowadays and especially in the online realm. For example, when a buyer applies for a loan from a buy-now-pay-later (BNPL) firm, PFM is used to display all the information concerning the transaction that is taking place.

Quickbooks and Mint are some of the most popular customer-facing PFMs. However, PFM for banks and financial institutions can be turned into even more powerful systems as they can use the vast amount of data they process and store to create powerful applications that help their customers manage their finances.

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One example would be a budget app that can be easily integrated with the customer’s bank account so all income and expenses can be tracked on a real-time basis to compare them with the budgeted amount.

Another example would be an investment app that establishes the ideal monthly contribution and the kind of products the customer could opt to enroll for to achieve their financial goals. 

As the population’s youngest cohort – and not so young in the case of millennials – is accustomed to and likes to use technology for almost everything, banks have the opportunity to innovate by using PFM as a tool to remain competitive.

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What Are the Top Benefits of PFM for Customers? 

PFM has many benefits for banks from a marketing perspective. Still, it is also highly beneficial for customers as it can provide them with valuable tools to manage their finances. The following summarizes how PFM can directly benefit a financial institution’s customers.

Guidance to achieve their financial goals: one example of this is investment planning tools, which are used to estimate how much money a customer must contribute and the kind of instruments they may have to invest in to generate a certain amount of money for either a trip, college tuition for their kids, or another similar goal.

Keeping track of expenses: banks have access to all their customers’ transaction data, which allows them to create tools to track how money is spent within a certain period for budgeting purposes.

Estimate the cost of debt: Nowadays, banks offer calculators to estimate how much it would cost a customer to take on some debt, whether a mortgage or a cash advance. These tools typically allow users to analyze different scenarios by varying the applicable interest rate, credit period, and loan amount to decide which arrangement would be best for them.

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PFM Can Be a Powerful Differentiator Amid the Rising Trend of DeFi

Banks’ business model is currently being threatened by the increasing popularity of a blockchain-powered industry called decentralized finance or DeFi. This solution proposes that no intermediary is needed for individuals and businesses to access the traditional products and services offered by financial institutions, as smart contracts powered by blockchain technology can eliminate the need for an intermediary.

Even though the DeFi ecosystem is still far from becoming a real threat to the traditional banking business, traditional financial institutions can differentiate themselves from their decentralized competitors by offering something they lack – a new user experience.

DeFi platforms are largely unregulated, and their user interface is still clumsy and relatively complex for those unfamiliar with the cryptocurrency market. 

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In this sense, banks have the upper hand as they have a good amount of resources to invest in IT and the development of user-friendly apps. In addition, they continue to be perceived as the safer choice due to the safeguards most governments provide for depositors of traditional financial institutions.

Through PFM and the creation of attractive technological tools, banks can maintain their leadership and continue to be the most appealing choice to people and businesses, even if DeFi platforms up their game and improve some of the current elements lacking in that particular space.

This could increase the cost of opportunity for customers who may be seriously considering changing teams and could buy banks time to figure out what their role will be in a world that is increasingly and rapidly pivoting toward decentralization.