Budgeting finances in 2023: Open banking and PFMs
Open banking allows consumers to manage their finances more accurately and efficiently through the use of modern-day personal finance management tools. The use of these types of applications enables customers to elevate their financial literacy, save money and budget more effectively. These services are now taking it one step further with the addition of easy-to-use investment options that will allow users to not only manage their assets but also to grow them.
In the last few years that open banking has been around, it has become a vital component across multiple industries including lending, accounting, identity, and income verification, along with many other customer-focused financial services. Open banking refers to the process that enables third-party service providers (TPSPs) to access customer financial information through secure API connections to banks. Allowing providers to gather this data, enables them to create a greater amount of personalised services and product offerings for customers and meet their needs in an increasingly effective way, creating more user-focused client experiences.
One way in which consumers can directly benefit from open banking is through the use of personal finance management (PFM) tools, which allow them to create their own budgets, manage their funds, save money and overcome debt. Not only does this allow customers to learn money-saving techniques and strengthen their financial literacy, it also enables them to capitalise on their nest eggs by self-investing.
Open banking as the backbone of modern PFMs
Open banking powers personal finance management applications, by allowing customers to connect all their bank and neobank accounts directly to the tool. Selecting this option enables users to view all their financial movements and payments in real-time, in just one location. This gives them the opportunity to stay in control of all their finances, and allows in-built PFM application algorithms to thoroughly analyse their data and suggest personalised programs and tips.
With guided support, reminders and recommendations, clients can reach their financial goals, get rid of unnecessary costs and subscriptions, and grow their savings accounts. These savings can then be invested into stocks, cryptocurrencies and other assets by the users to create an even stronger financial foundation for their future. In recent years, some of these applications have even evolved to allow customers to invest directly through their PFM systems. Many players who’ve joined this new wave of customer asset growth have made investing even more accessible to beginners, by establishing low-cost pricing models starting at £1.
One such application is MoneyBox, which lets its users pick from one of the three investing profile options, Cautious, Balanced and Adventurous, with different levels of risk associated with each one. These starting options allow inexperienced investors to start their journey quickly without significant room for customisation, with each option comprising a variety of tracker funds that are diversified, each with a different allocation. As their expertise and knowledge grow, users can switch to more customisable options, giving them more freedom over the specifics.
Another option in this category is Plum. This application focuses on automation, allowing its users to set specific “smart rules” in regard to their saving capabilities, which the tool then uses to systematically put away small amounts of income into a savings account, or into a goal account, such as for holidays or larger gifts. Similarly, the tool enables users to set investment guidelines with specific affordable deposit amounts, which are then to be distributed by the application into chosen stocks and investment funds.
Other applications are also jumping on this trend, with budgeting tool Emma releasing their own version of low-cost self-investing through their application in July 2022. The application now also offers commission-free stock trading with access to 2,000 fractional global stocks.
Giving control to the consumer
With the world increasingly moving into the digital era, customers now find themselves being able to access financial services, assistance, and opportunities through easy-to-use online applications. Tools such as personal finance management apps allow consumers to not only manage their finances but grow their assets, establish pension funds and invest in their future. Where previous generations had to seek face-to-face expert consultations and visit brick-and-mortar branches, modern-day customers can learn financial literacy online and digitally self-invest through straightforward channels.
Connecting all their financial accounts in one PFM tool through open banking allows users to view and analyse their financial health and to make informed decisions in regard to their finances, basing their movements and investments on existing funds and recorded monthly expenses. This provides them with more significant safeguards, protecting them from making decisions that are unaffordable or that could lead to a higher chance of debt in the future.
About the Author: Rolands Mesters is the CEO and co-founder of Nordigen, the only freemium open banking API that connects to more than 2,300 banks, making it the largest network of bank connections in Europe. Rolands is a sales and growth hacker who is passionate about fintech and alternative lending.