PFMs: strategies and the struggle to generate customer value

What are PFMs? Personal Financial Managers (PFMs) are solutions that, based on the aggregation of accounts (“multi-banking”), are born to review the user’s transactional activities and extract insights into consumer behaviour, in order to provide recommendations that will ultimately improve your financial health.

Is there a demand for this type of service? What value and features do they offer the user? What kind of companies operate in this space? With which strategies?

In the beginning, many of these initiatives were not successful, with slow adoption curves and very low engagement metrics (peak adoption rates of 10–12%). Why? There were several reasons for this:

• Pull” strategies: the user had to provide information/data before viewing results and companies assumed that they would be willing to interpret graphics or make use of certain features.
• Level of customisation: the solutions did not take into account (or took too long to understand) the financial peculiarities of each user and what was relevant for each one, projecting a basic “show and tell” with little added value.
• “Time-lapsed”: there were problems in viewing photos/aggregation of positions in real-time, which impaired the user experience, generating little credibility.
• A new environment: in certain cases (see B2C models), downloading a native app was a clear entry barrier (according to studies, users prefer to utilise money management tools in their secure digital banking environments).

Despite this first “blow” (Level Money from Capital One, Prosper Daily, etc.), at InnoCells, we see signs that continue to support the Product Market Fit, as well as drivers that could push these solutions:

• Various market reports confirm the pain points of financial management: “I don’t know how much I spend per month”; “I don’t have control over my subscriptions”; “I want to start saving but I don’t feel capable”; “I want to start investing but I don’t know how”, etc. In fact, a high percentage of users perform financial planning activities in archaic tools such as Excel or similar software.

Fintech Singapore 2019 research

The adoption of budgeting and financial planning started from 8% in 2015, then slowly grew to 10% in 2017 and finally is making 29% in 2019

• We believe that the progress made in Open Banking regulations as well as in technology (Artificial Intelligence, Smart Analytics, automation) will be drivers to create more intelligent experiences (we already see clear tools in areas such as navigation, music/video recommendations, online shopping, etc.).
• The great diversity of financial products (cards, accounts, insurance, etc.) offers opportunities/potential to centralise analysis and draw conclusions.
• The COVID-19 crisis could promote greater savings awareness (e.g. Weathfront or Betterment in the US have seen an opportunity to expand their value propositions by launching new products).

“71% of Gen Zers believe brands should help them achieve personal goals and aspirations” psfq research

Therefore, we firmly believe that new solutions capable of generating real value for users will gradually emerge (going from “Personal Financial Management” to “Personal Financial Experiences”) — something that is simultaneously confirmed by the interest seen by the investment community (both VCs and CVCs):

• “Push” strategies: launching suggestions and proactive actions, with automatisms that save the user time, are relevant and translate into actionable recommendations (e.g. Can I afford this or not?, I will be able to afford it in X months, I won’t meet my savings plan because I’ve eaten out too much, I’ve spent too much on transport, etc.).
• Forward-looking and self-learning skills: helping the user to anticipate future situations (e.g. understanding periods in which the consumer spends more, in order to anticipate messages more adapted to the environment [summer vs. winter, life circumstances: pregnancy, upcoming retirement, etc.]).
• In a trusted place: the user prefers everything to happen at the same place, embedded in their digital banking experience, hence the trend from many companies to turn to B2B models.

“There’s ample demand for bank-provided PFM tools (…) Over 75% of respondents to an RFi survey said they would prefer to use PFM tools from their primary financial services provider (typically a bank). This compares with just 6% who said they’d prefer PFM tools from fintechs or neobanks” Business Insider Intelligence’s Research

Generating engagement with the bank user is not an easy task, so those capable of building the most suitable catalogue of features will “win”. We could classify them according to their degree of maturity: from more aggregation and visualisation features, to more “enrichment”/analysis features, and finally those with the most predictive features with the capacity to anticipate and automate certain actions. Although the range of features is very extensive, we have detected some “key” functionalities, which are likely to generate greater engagement in comparison to others:

• Management of recurring payments: we are paying more and more subscriptions (energy, telco, gaming, gym, streaming, software, etc.), so giving the user the possibility to cancel those they no longer want or to be able to change to other providers, becomes a high added value service. In addition, it allows for the integration of a high level of customisation according to the customer profile (for example, a student will have streaming or online storage expenses, while a pensioner will have insurance, telco, etc.).

“59% of mobile banking users said the ability to cancel subscription digital media services within their mobile banking app is “extremely valuable,” but only seven of the top 20 banks (35%) offer this capability” Business Insider Intelligence’s Research

• Setting challenges and objectives: generate engagement by creating greater proximity to the particular needs of each customer / life circumstances of the user (e.g. the purchase of their first car, the purchase of property, saving for retirement, etc.). Here the gamification techniques that many players have used (challenges, progress, etc.) take on special relevance.

Qapital (US|SeriesB): “Rather than simply rounding up the fees on transactions or depositing a set amount of money into your account every week or month, Qapital allows users to set up advanced rules with conditions for when money will be saved”

• Card-linked offers (CLO): with the developments of Machine Learning technology and Big Data analysis, it is a new way for the bank’s individual customers to easily receive and redeem personalised and contextual offers (the merchant improves transactionality and banks improve retention by generating engagement in online channels).

“FIs compete against tech giants like Apple, which is eyeing the financial services world. After launching Apple Pay, the company is working on a new e-commerce solution similar to Card-Linked Offers, which delivers targeted offers via mobile based on customers’ transactional data. Combined with the effective use of proximity marketing, CLOs can help reach customers at the right place and at the right time (…)”

• Blocking of shops: freezing of payments in certain retailers in which the user consumes frequently (gambling, etc.).

Personal finance is, as we said, a very busy sector on both sides: supply and demand. The range of players offering PFM features is very wide: from traditional banks, white-label solution providers, neo-banks, wealth managers, etc. On the other hand, it is a sector that is being actively explored by various types of investors: from CVCs (such as Swedbank, Commerzbank, BBVA, etc.) to VCs (Insight, Lightspeed, Sequoia, Accel, Insight, Anthemis, etc.).

During these years, a clear trend has been observed in many companies that have switched from B2C models to B2B models, for various reasons: the user’s willingness to interact under a single digital banking experience, the barriers/risks when it comes to creating a brand (generation of an environment of trust), challenges in attracting users (absence of network effects), the isolation of transactions and less intelligence (arising from not being able to integrate with the bank’s sets of banking data), etc.

In addition to these difficulties, there are concerns about the capacity of these B2C models to monetise this type of value proposition: the users’ low propensity to pay for some services (commoditisation) has forced these players to redefine their business models, tending to build their propositions around freemium models, monetising through various levers:

1. Additional paid services: “premium features”

2. Space in the app to let third parties advertise — targeted advertising

3. Referral systems (referral links to third party products)

4. Sale of reports to third parties (aggregated data of users, consumption trends, etc.)

Despite this trend towards B2B, some players are still exploring B2C (most in early maturity phases: Seed to Series B: Emma, Snoop, Plum, Polaroo, etc.). It is important to mention that there are success stories in models adjacent to the PFM world (Mint, Credit Karma, etc.) that validate the viability of this route, providing us with a broad list of best practices: model for recommending third party products, creation of quality content for brand building (SEO, social media, etc.), offer of free tools at the beginning as a lever for engagement, designs that appeal to a sense of credibility, etc.

What differentiation strategies do they adopt? In order to achieve competitive advantages, many PFMs have roadmaps aimed at building more holistic propositions around the aggregation of banking offerings (e.g., financing, investment, insurance products, etc.), creating in parallel marketplace-type offerings.

This trend to extend the product offer not only applies to PFM models but can also be extrapolated to other solutions that began with different propositions (e.g. Wealth Managers, Lenders, Middleware Layers, Tax Solutions, Neo-banks, etc.): in short, new players and different strategies that in the end seek to centralise the user’s finances in a One-Stop-Shop Solution.

“Wealth tech firms are creating millennial-friendly platforms that provide a more holistic suite of services and analytics tools. For example, Wealthfront is currently working on connecting clients with mortgage providers, while Betterment recently announced an addition of checking and savings products through partnerships with banks”

Traditional banks are faced with threats from new competitors and commitment to this type of tool can be crucial in improving customer engagement and loyalty (“not sales-only”):

• Increase the customer’s lifetime value (in general, PFM tool users are more affluent and tend to have the main banking products: mortgage, insurance, etc.).
• Generate up- and cross-selling opportunities (including new revenue streams) through the personalisation of the offer, obtaining a greater variety of insights into the customer’s needs.
• Engagement generation would involve a boost in the growing use of digital channels (digital transformation).
• Comply with changes in customer behaviour in the future (new generations).

“Younger consumers aren’t visiting branches any more or developing long-term working relationships with bankers: 70% of millennials have no personal relationship with a banker, and 78% never go to a branch if they can help it”

As for the execution strategy, although we are seeing everything (from in-house launches to partnerships), it is true that collaborations are beginning to predominate, possibly due to the advantages they have in terms of architectural independence, agility, technological focus or time-to-market.

“But banks are falling short of customers’ expectations. Consumers are more dissatisfied with their banks’ PFM services than with any other type of services they provide, and more than 40% of those surveyed stated that they find PFM services from nonbank providers more useful and helpful” Business Insider Intelligence’s Research

Will PFMs be consolidated or will it be a proposition covered by digital banks? What is the best path to becoming a One-Stop Solution? What features will be able to generate user engagement? Will new areas that are not strictly financial be covered? There are still many unknowns to be resolved in the medium term.

We believe that financial education is a fundamental skill. It is, therefore, necessary to know the financial tools and risks involved much earlier than previous generations, helping to instil correct habits and attitudes when it comes to money management.