Making banking personal: The future of financial wellness

In 1776, Adam Smith proclaimed in the Wealth of Nations that “Consumption is the sole end and purpose of all production.” [1] Since then, academics, governments and others have tried to predict and model consumer spending. However, the reality is that even at the personal level, it can be challenging for individuals to predict and plan their own spending and align it with income. This blog considers how banks can help people understand and manage their money better.

For over two centuries, economists have debated and modelled consumer spending patterns. In 1936, English economist John Maynard Keynes postulated that consumer spending was a function of current income. In the 1950s, American economist Milton Friedman questioned whether spending (consumption) was a function of current income or whether people spent according to their lifetime income (i.e., “permanent” income).

Spending in relation to permanent income

In the Permanent Income Hypothesis model, the key determinant of consumption is an individual's lifetime income, not their current income. The important point is that long-term expectations change consumption. Some still debate whether Keynes or Friedman are right, but we can probably all agree that the relationship between lifetime income and spending is very important.

The financial consequences of life

Almost all life events have financial consequences, and major life events such as going to college, purchasing a car, getting married, buying a house and raising a family all cost considerable money. People must plan for contingencies and prepare for unforeseen events too, hence saving for a “rainy day.”

Ultimately, the ways in which individuals manage their money depends on a combination of expectations, access and circumstances. For example, whether a person expects to earn or inherit more money in future or face the threat of unemployment; their degree of access to the banking system (banked vs. unbanked); their general health and age, etc. People plan and save to varying degrees and with varying levels of success.

Banks to the rescue?

Banks can help customers manage their money better, and many offer useful and engaging apps that promote financial wellness. The best of these services draw from the vast wealth of customer data, which banks possess. Basic services help accountholders keep track of their incoming and outgoing funds, showing for example:

• Summaries and reports detailing how the customer’s money is being used
• Visual depictions of spending categories such as household, travel, medical, etc.
• Alerts of large payments, low balance warnings and bills coming due
• Notifications when a trial offer or subscription service will next take payment, giving the customer sufficient time to cancel the subscription before being billed

While these services are useful, they’re just a taste of what banks can do with data, particularly the financial data from their customers. Much has already been written (here and elsewhere) about customer journeys and how every bank must use technology to facilitate seamless omnichannel journeys that attract and retain customers. By harnessing artificial intelligence (AI), advanced analytics and data, a bank can support each customer’s life journey.

Even though customers now have more expectations of their banks than ever, banks have a unique opportunity to build long-term loyalty via personalized and innovative data-driven services.

Match banking with life

A person’s financial data tells a factual story, and it reveals a lot more than spending patterns. By analyzing data, a bank can understand changes in a customer’s lifestyle and behaviors. Each life stage offers further opportunities for banks to increase engagement with their customers, provide impactful advice and useful tools and cross-sell or upsell. For example:

Getting married – Offer ways to use joint finance to maximize benefit and minimize tax liability, or offer bundled financial products to meet new financial goals.

Buying a house – For many people this is the biggest financial commitment of a lifetime. In addition to mortgage lending, banks can offer ways to help customers ease the home buying process and the responsibilities of home ownership.

Having a baby – The bank can help set up a fund to provide for schooling or embark on long-term financial planning. Perhaps discuss a home equity line or other avenue to help the growing family expand or renovate their home.

Retirement – It’s never too early to help your customers plan for their retirements. Providing education, tools and advice at appropriate times along life’s journey can go a long way to building trust and loyalty.

Banks will truly fortify customer relationships by harnessing the value of their data and using it in personalized, timely and innovative ways. While some banks acknowledge this as an opportunity, many have yet to grasp it or to realize its full potential. This is an opportunity that is not to be missed and one which will only expand in the age of open banking.

Open banking and open finance

Open banking is a global movement that seeks to make banking more collaborative, innovative and customer centric. In practice, it puts customers in charge of their own data. With a customer’s permission, a bank can offer customers an aggregated view of their finances by combining data from multiple accounts, even at different banks. This can be seen as both an opportunity and threat to an individual bank as each vies to be the customer-facing brand.

Open banking success will be driven by data, and banks that get the data science right will be well rewarded with loyal customers. As open banking morphs into open finance, there will be even more data and more opportunities. These include:

• Switching and renewal services. For example, for insurance products, a bank can provide a comparison of providers to ensure the customer gets the best value.
• Money saving advice to encourage people to make the best use of their money across a range of products (and providers), such as mortgage, life insurance and pensions.
• Up-to-the-moment product information. For example, interest rates and fees can be used in conjunction with customer financial transaction data, life goals and real-time property market valuations to provide advice, such as quantifying the benefits of early mortgage repayments.

People are open to suggestions and will act on them – particularly from a financial institution that has earned their trust. The future of banking will be both data-driven and personal. By aligning banking services with individual customer needs, a bank can elevate its position from transaction vendor to trusted partner.

[1] Adam Smith, 1776. An Inquiry into the Nature and Causes of the Wealth of Nations.