Personal Finance Management (PFM) may hold the key to Consumer Fintech. Last week we reported on a Swedish PFM startup called Tink that will be able to leverage PSD2 regulations to be a layer above any bank account. Today we do a deeper dive into how PFM and PSD2 could commoditize the bank account and really bring change to consumers.
One key to value creation is how close are you to the consumer? If the consumer spends time with your service then a) you are the brand they relate to and b) your service is where they leave their data exhaust and that is the key to personalization (which in turn leads to more use and so on i.e. it is a virtuous circle).
People don’t want bank accounts. That is a product. They want to have more money. To do that they need tools to manage their money better – tools that we tend to refer to as PFM tools). People want a service not a product.
Meet the family CFO
Picture Mom & Pop at the kitchen table paying bills and reviewing budgets. Either Mom or Pop is the CFO; the CFO is the one who pays attention to the financial details and executes on what is agreed (OK, it is often more messy than that in practice). Update this iconic image via Modern Family. Now update it again and think of networked families (with single young adults in college or working in a distant location). How does that family budget work? Then think of diaspora networks and cash flowing from single young adults working in a distant location back to “the old folks back home” (who may be raising your children). Or think of cash flowing the other way in developed economies (“the bank of Mom/Dad” and rich Auntie Flo lending to Young Nephew Joe so he can buy a house). Now update that image again to accommodate the Gig Economy and the fact that globally most people are self-employed. Now you have variable revenue that needs forecasting, direct costs (paying Uber, AirBnB, Amazon etc) and fixed overheads (rent/mortgage, food etc). You have cash flow and you have a balance sheet (assets and debt). That sounds like a business to me and a business needs to be managed.
One fundamental trend in Fintech is the democratization of complex functionality. Things that were previously only available to companies with big budgets can now be done by small business and the really really small business that we call micro entrepreneur and that look to some like consumers. They need the same tools that the CFO & Treasurer use to manage cash flows, expenses, assets, liabilities etc.
Jessica, who brought Tink to our attention, normally covers small business, so the tools to do those things – manage cash flows, expenses, assets, liabilities etc – are normal things in her world. What PFM services like Tink can do is bring that down to the individual or family level.
The following scenario is not based on any individual PMF product – YMMV based on which product you use. However none of this is rocket science, it is all very doable using stable current technology (no Blockchain moonshots needed).
One Expenses Line Item is Bank Fees
Wells Fargo got away with their scam for so long because we are mostly too busy to pay attention to lots of small fees. You see the fees, they irritate you but you put them in a category along with untangling the headset cable – something you will do someday but not today.
Unless a tool makes these annoying extra charges more visible and easy to manage. If your PFM tool gave you insights such as which fees grew the most this period? So even if Bank fees are less than .1% of your total expenses, if they went up 20% you might pay attention.
The point is PFM then looks like it is on your side of the table and banks look like utility vendors who want to charge you more (along with other utilities like Telecoms and Heat). If the PFM can help reduce those utility fees (maybe via plug-in apps that specialize in different utility types) it becomes the must-use app on a daily basis and meets the toothbrush test.
The consumer mind-shift if consumers rely on a PFM to mediate their bank relationship is critical. Banks then become utility costs to be managed. Big companies already think this way and have the tools to manage Banks like a utility cost. Banks have work hard to add value in order to stay relevant to big companies, because the clout lies with the big companies not the banks.
Consumer banking has always been seen differently. Banks have the clout and individual consumers have little negotiating leverage. Part of that clout differential is simply information asymmetry – the bank has the information advantage compared to Mom & Pop at the kitchen table. A consumer with a good PFM tool levels that information playing field. Now the consumer has clout.
A more expensive Line Item in family budget is Interest Charges
Bank Fees are usually a small line item in the family budget. However Interest Charges are usually a significant line item in the family budget and that line item is also critical to Banks. A PFM can easily help consumers with modeling (what if scenarios), using real data about what the current rates are in the market for consumers like you. The consumer can then make an informed decision on whether it is worth expending effort to renegotiate some debt. Maybe the PFM app can deliver.
You see what happens there. The PFM app becomes an adviser and the bank becomes a utility vendor. That utility can still be highly profitable at scale – like any utility but the big fat margins get eroded.
Was that a Fee or an Interest Charge or what was it?
Who charges higher interest rates – PayDay Lenders or Banks? PayDay Lenders got media-slammed for egregiously high interest rates, but Overdraft charges that are not pre-negotiated lines of credit are often higher. This often blurs the line between fees and interest. The PFM tool can aggregate and slice and dice those charges any way the consumer wants.
Lets move to the Balance Sheet
The Family CFO now guides the conversation from the Cash Flow Statement (families don’t care about P&L other than at tax time) to the Balance Sheet Statement. She (the family money person is often a woman even if gender inequality on pay means she contributes less on the revenue line) points out that the family has excess cash that can be used to generate cash over different time durations. The PFM tool helps the CFO see the difference between lending the excess cash to a bank (known as a Deposit account) and lending to another Consumer via a Market Place Lending platform. The former has no risk (assuming Deposit Insurance) and the latter has some risk but higher returns. A good PFM tool can help the CFO to assess the risk reward trade off. It’s all about data UX simplicity.
Beware the gorilla
The gorilla in the PFM space is Intuit, with a current market of 27 Unicorns ($27 billion) and many Big Tech love the space. Microsoft for example has spent a lot in this market and is a player with Microsoft Money. New entrants have to be better, faster, cheaper to win.
One Market Place Lender, Prosper, saw this opportunity early and moved in with Prosper Daily. Done right this should reduce their CAC.
If there is an Uber of banking, my guess is that it will be a PFM. Expect more in this space.