Personal Financial Management (PFM) has evolved greatly since its birth in the early eighties. Originally developed to bring money management into what was then a widespread technological shift to the nascent personal computer age, PFM has since become a sophisticated means of managing your money.

But in its current “visible” guise, PFM is not nearly as innovative as it can be, and it is the “invisible” idea of PFM that is set to overhaul banking as we know it.

In this article, we look at why the unseen PFM is inevitable and why it will be the driving force in transforming banking. Additionally, we look at how banks will evolve to intuitively anticipate their customers’ financial needs as well as scrutinize the major threat that all banks face if they fail to adapt.

Why PFM will change from visible to invisible

Just 12% of people go to the gym. Many more pay for their gym membership of course, without actually going. Most people would like to be in better shape, but they simply don’t go to the gym, largely because it takes effort, discipline and time.

Money management evokes a similar response. Most people would like to manage their money better, but it takes some effort and discipline (but not so much time thanks to advances in PFM technology). Like the minority of the general population who go to the gym, it is a minority who actively manage their money.

Now, to go back to the gym analogy, what percentage of people would say yes to being fit, strong and healthy without needing to work out? They would simply need to provide some personal data and hey presto, this gym, workin away in the background, does all the heavy lifting, running and sweating for them. Wouldn’t practically everyone say yes?

Invisible PFM will carry out the hard money management work for people. The need to actively manage personal finances will reduce drastically.

In its place, you will simply provide some data to your bank and its unseen PFM, working hard in the background, will take care of everything. It will automate your bill payments, make recommendations based on your personal information and financial circumstances, and solve financial headaches.

Let’s say you are 50 years old and you have no pension plan in place. Through a Siri-like PFM medium, the PFM will intuitively decide to offer you a pension solution. 

Let’s say you have a pending bill payment and you don’t have enough money in your account to cover it.  Your bank’s Siri-like equivalent will contact you to warn of this impending headache and offer you a range of best options to solve the problem (locating the lowest-interest loan on offer, for instance).

This way your payment doesn’t bounce, you don’t incur a charge from your bank and your credit score doesn’t take a hit. This way, the customer’s problems are solved for them. This is far from personal banking as we know it today, of course.

A game-changer, but how will banks get there?

Banks have the necessary ingredients needed to transform into a customer-centric partner that truly solves their customers’ problems. The oft-cited “digital transformation” of banks has brought some advances, but they are modest. They largely still offer what they did during the analogue era: functionalities to process transactions and little else.

Online banking offers a tool to manage your finances more conveniently than before, but that doesn’t make it convenient. Moreover, it still falls very short in solving many problems that bank customers encounter. Nothing is intuitive, the customers still have to actively participate and keep an eye on their own financial management.

What we face is a situation where even if we want to bring a more intuitive product to market – even if there is a demand for a product that really solves people’s personal money management problems, it isn’t yet possible within the current approach to PFM. True digital transformation first requires a true understanding of what the customer wants and needs.

So what can banks do? They can follow this mantra – know me, help me, monetize me. 

Know me – understand the customer’s personal financial management needs and wants by leveraging their financial data, personal circumstances and information, and by engaging with them. The bank-customer relationship has become colder than it once was thanks to a lack of personalization (call centers and so forth). To truly know their customer, banks must learn how to re-engage with their customer.

Help me – actively solve their customers’ financial headaches and offer them financial solutions that require minimal effort on their part. To truly help their customers, banks will know when to offer solutions, anticipating potential problems, or offer up helpful options to improve their financial circumstances. Say a customer books a vacation. The invisible PFM will register this transaction chase through data analysis, and intelligently, proactively offer the customer competitive foreign exchange rates.

Monetize me – if you know your customer, you can help them, and if you help them, they will pay you for it. In the above example we see how through knowing your customer, the PFM understands where it can help the customer through proactively offering good exchange rates for their vacation, before monetizing the customer – the exchange rate transaction fee (or spread).

This is the banking model of the near future, based on this evolution in PFM.

Chipping away – the threat facing banks

Between two and four per cent of people change bank regularly, so banks may think that they don’t face much threat at all. But this is short-term thinking, that nuisance of a human trait. 

Banks face two significant threats, perhaps even existential.

One, a chipping away of their dominance by new market entrants. It is likely a mere matter of time before an entrant offers invisible PFM.

The main reason why up to 98% of people do not change bank regularly is because there is next to no differentiation between what the incumbent banks offer. But if a new banking entrant offers an intuitive solution, it will certainly throw the cat amongst the banking pigeons.

Two, banks face threats from their incumbent rivals. If MegaBank A chooses to “play safe” as many banks see it and keep doing what they have always done, how do they know that MegaBank B or C or D or E is not hard at work transitioning to an invisible PFM model, which would render them uncompetitive?  

These threats are real and the bank that sits on its hands will be at risk of being cast aside by the inevitable rise of this new PFM.