The Customer Effect
Why PFM apps are moving into investing
- PFM platforms are increasingly getting into investing, a way they can take the advice they give and pool it into concrete results.
- Investing is a way PFM platforms can generate additional revenue when PFM services on their own are not very profitable.
A customer who uses personal finance and budgeting tools like Digit, Penny, MoneyLion, or Clarity Money may also want advice on how to invest. That's the bet one PFM startup is making, and more may follow. This week, Credit Sesame picked up $42 million in funding to develop robo-advisory capabilities, which may be a sign of bigger changes coming on how PFM startups will serve their customers. "This [robo-advisory] technology translates consumer financial and credit information into simple and actionable steps that consumers can easily understand and utilize to improve their financial profile and leverage their credit," said founder and CEO Adrian Nazari, in a statement. Credit Sesame offers customers free credit scores and personalized advice on how to improve their credit and financial health in general. The idea of using investments as a way to apply the financial advice that PFM platforms offer is seen as an added benefit for the customer, and others in the space see the value of this relationship. Tim Hong, CMO of PFM platform MoneyLion, said PFM platforms have a unique vantage point in being able to help customers navigate the world of investing. "Investments are scary; the language that's used among many online brokerages is much more targeted towards the more affluent," said Hong. Investing is seen as a natural evolution from what PFM platforms are offering now, which already includes auto-saving, budgeting and personalized tips. In other words, as customers demand more services, investing is a natural fit. "As personal finance management platforms become more features-rich, investing is a natural progression if they seek to be more sophisticated," said Rick Chen, head of public relations at Credit Karma, a personal finance platform and credit monitoring service. It's also becoming easier for PFM platforms to integrate investment functions into their business, thanks to technological evolutions and opportunities to partner with other players. "It's becoming easier because of cloud computing and APIs that some of the clearing and custody firms are using," said Michael Raneri, senior managing director and fintech advisory leader at PwC, who explained that the process to partner would involve becoming an RIA and then affiliating with a broker-dealer so the PFM platforms can handle the front end of that relationship, and a clearing and custody firm can handle the back end. So without building anything themselves, the PFM apps could make investment services part of their product offerings. Neither Chen or Hong would comment on whether they are building in investment offerings within their apps, but Hong said the move towards investing is part of a larger trend in the PFM world in recent years where the bundling of services is becoming more common. "Since 2008, there's been an unbundling of the bank -- when startups took out part of what was reserved for the bank, and made it more convenient and cheaper put it on mobile apps, but what we're seeing now is the trend around the re-bundling of the bank -- how do you bring together different financial products and advice to solve these bigger goals?" The banks, too, are increasingly bundling personal finance advice into their mobile apps, as seen by recent moves from HSBC, RBC, JPMorgan Chase, TD and others. RBC's mobile banking app, for example, lets customers give the app permission to automatically pull funds out of their checking account into interest-bearing savings accounts. For the banks and startups alike, investments are a way to generate revenue when bare-bones PFM isn't a big money maker. "PFM services are like 'table stakes'; they're expected to be in the mobile banking apps," said Carlos Carvajal, CMO at Kony, a technology company that works with banks on mobile apps and personal finance tools. "What we're hearing about now is how do we go beyond that, taking it beyond basic PFM and creating a larger base around wealth management, and the driver behind it is that it's a lot more profitable." But some feel helping customers build up their savings should be the priority. For the founder of Digit, an automated savings app that lets customers put money away for emergencies and other pre-defined savings goals, focusing on savings alone is staying true to the aim of the PFM tools. "Services that move away from saving, or any other basic financial needs, and shift toward investing are neglecting the most dire financial problems today, and the people who need help most," said CEO and founder Ethan Bloch. "So while we wouldn’t rule anything out in the future, Digit is squarely focused on improving financial health, and that comes down to saving, paying off bills and debts, and making ends meet."