Financial anxiety is clogging users’ financial activities — could automation be a solution?
- A significant portion of U.S. consumers struggle with managing their finances because of financial anxiety.
- With AI becoming increasingly advanced, autonomous finance could take some of the load off.
While consumers’ online shopping habits may have stolen the show for financial service providers during the earlier stages of the pandemic, it’s the more insidious financial anxiety that’s getting attention now.
Meanwhile, a study by FINRA Investor Education Foundation and the Global Financial Literacy Foundation found that 50% of participants said they felt stressed while talking about their finances, while 60% said they felt stressed just thinking about them. High debt, low financial literacy, and money management challenges were among top reasons for financial anxiety.
Alongside the fog of financial anxiety, there’s also been the growth of AI. According to Robert Le, senior analyst at PitchBook, artificial intelligence has gotten a serious makeover recently.
“If you think about even just three to five years ago, autonomous finance wouldn’t have been as viable because AI wasn’t advanced enough and the infrastructure -- that is, the ability to access financial data sources -- didn’t exist,” said Le. “AI and machine learning are much more advanced now.”
The advancement of AI and its use in financial services brought about more interest from financial service providers. Autonomous finance means allowing AI to automate financial decisions and actions so that the user doesn’t feel overwhelmed.
Enthusiasm for autonomous money is spreading through the financial ecosystem. Many businesses are using AI to automate as many financial activities as possible.
Wealthfront, for instance, which started out as a robo advisor, began moving into automated banking in 2020. Automation is sort of the company’s slogan.
“Automation is a key and a fundamental of everything we do as a long term vision,” said Dan Carroll, co-founder and CSO of Wealthfront.
The company recently launched the first version of its budgeting tool ‘self-driving money’. Through self-driving money, Wealthfront’s automation basically decides how to allocate savings after the bills are paid, routing the money across short-term, long-term, and emergency funds, depending on the user’s goals.
“Your paycheck is deposited into Wealthfront and based on your goals and lifestyle, we automatically route your money,” said Carroll. “Your bills are paid, we invest the right amount in your IRA, we invest the right amount in your personal account, and your emergency fund is topped off.”
According to Carroll, one of the perks of automation is its ability to personalize products more thoroughly. AI follows a script that’s set up by the user, not the system.
“If Wealthfront knows everything about your financial life, and has all your goals and accounts in one place, we can effectively help you reach the vision you have for your life,” said Carroll.
Douugh is another example of an automated banking app.
“We’re coming into the fintech space with a core purpose of helping people manage and grow their money autonomously,” said Andy Taylor, CEO and founder of the company. “We focus on leveraging open banking data to enrich an AI engine that is really helping customers plan, forecast, and get on the path to financial wellness. And that's everything from your everyday budgeting to savings.”
But autonomous financial management has its risks. For example, by leaving everything up to AI, users can become oblivious to what’s happening with their finances.
“A risk that could arise is the lack of accountability in our actions,” said Michael Shea, financial planner at Applied Capital. “What I mean by this is that we can set it and forget it and fail to watch what we are doing.”
But according to Douugh’s Taylor, autonomous finance can also act as a sort of personal trainer. Rather than acting silently in the background, the system can let the user know what it’s doing and in that way help them keep their financial activity in line with their financial goals.
“It could be as simple as saying, ‘pull back on your food and drink spending today because you're getting close to hitting your limit, and this is this is the ramification of you hitting that limit -- we have to take money out of [somewhere else in your account],’” said Taylor. “We're there to keep you on the straight and narrow and resist you from temptation.”
He compares autonomous finance to autonomous cars -- the tech is there, and it’s just a matter of time before the trust is, too.
“I always use the Tesla analogy,” said Taylor. “Right now, the customer isn’t ready for a driverless car with no steering wheel -- the trust isn't there. But it will happen over time, and it will happen very quickly. And it will happen when people realize that the machine can do a 100 times better job of driving that car than they can.”
But one of the dilemmas with autonomous cars is the ethical paradox. Different people have different ideas of what these cars’ moral code should be in situations where humans’ lives are at risk. And when it comes to autonomous money, while no one’s life may be at stake, their personal well being could still take a hit if something goes wrong.
“A good example is if you automate your retirement portfolio and the investments become too conservative in comparison to your goals,” said Applied Capital’s Shea. “This can create a big opportunity cost by missing out on big market gains due to not being adequately invested in stocks.”
But even here, it may just be a matter of asking more questions and improving insights. Poulomi Damany is the general manager of Credit Karma Money, which encompasses Credit Karma’s checking and savings products. According to Poulomi, just like a self-driving car can give you a heads-up about what turn it’s taking, autonomous finance can send notifications before each action.
“We send you push notifications, and we share them on your money tab in the app,” said Poulomi. “So we're constantly reminding you that this [activity] is in line with what we're calling the ‘safe to spend insights’ that we're building. And we’ll tell you when you're going to go below or above a certain limit that you’ve set for yourself.”
Credit Karma also uses automation as a way to motivate certain financial habits. Instant Karma, for instance, refunds random everyday expenses made through a debit card.
“What we’re trying to say is, ‘hey, we’re going to help you stay within your means, and that means spending with what you have and not taking on debt,’” said Poulomi. “And this is a way for us to nudge that reaction.”
Ultimately it doesn’t look like autonomy will reach the 100% marker in handling finances any time soon. For now, humans remain in the driver’s seat. Still, AI may make being behind the wheel much more comfortable.
Digits is a SaaS that provides a dashboard for small businesses and startups to manage and track their expenses in real-time through AI. According to Jeff Seibert, co-founder of the company, the goal of the platform isn’t to replace accountants but to elevate their role.
“Let's say your company spends $100 on T-shirts. The software doesn’t know if that was for marketing, internal team building, or employee gifts,” said Seibert. “There's no way we can solve that. And so I think the fear that they'll be replaced is more of a myth. The way we view it is we want to make Digits collaborative.”
For now, human error and financial anxiety continue to get in the way of consumers’ plans for financial wellness. But AI is not quite there yet to save the day all on its own. Hybrid solutions continue to be autonomous finance’s trusty duct tape.
“In the vision for fully autonomous finance, an invoice that comes into accounts payable could automatically be paid without a human needing to review,” said PitchBook's Le. “But what happens if an invoice gets paid incorrectly? Who will be responsible for that payment if it is not returned by the receiver? This is just one example.”
“We believe that in the mid-term, most of these solutions will be hybrid. Simple, highly predictable tasks will be automated to help teams focus on more high-value tasks and exceptions. It’s similar to self-driving cars today.”