Budgeting apps - A red ocean looking for a market

In August 2019, I wrote a blog post on PFM tools called "PFM, BFM, Financial Butler, Financial Cockpit…​ - Will the cumbersome administrative tasks on your financials finally be taken over?". Since then, driven by the go-live of PSD2 and Open Banking APIs, numerous Fintechs are developing new solutions acting as your personal financial butler. As most of the Fintechs focus on managing your financial budget, the name "Budgeting-app" is used more and more.
Dozens of examples of such apps already exist in the market (such as Dyme, Mint, YNAB, Monny, PocketGuard, Cake, Yolt, Emma, Oval Money, Cleo, Buddy, Spendo, Roov, Pocket Buget, Money Pro, SayMoney…​) making the market a red ocean, where competition is fierce.

At the same time banks are also providing more and more account aggregation and budgeting features in their banking-app, making it hard to convince customers to manage their finances in a third-party app. Especially now that specialized firms, like Tink, Strands, Personetics…​ offer packaged, white-labelled solutions to financial institutions, the barrier for banks to provide a compelling experience is not that high anymore.

For 3rd party apps to still convince customers (and create their own blue ocean), they should look for new innovative use cases, beyond the traditional functionalities like:

• Account aggregation (allowing to collect information on all income & expense transactions)
• Categorization of transactions (including data cleaning)
• Reporting (spending per category, cash flows past and future predictions…​)
• Management of budget plans and saving goals
• Identification of recurring expenses (and tracking increases or reductions over time)
• Automatic saving of excess money
• Comparisons with people like me, previous periods…​
• Suggestions and personalized recommendations (e.g. on how to reduce expenses)
• Notifications

One way to offer additional functionalities is by extending to other financial services, like insurances, investments and credits. Unfortunately, without a strong partnership with a large bank, it is difficult for a 3rd party app to give a good user experience as there are no Open APIs yet for those products. Furthermore, when a 3rd party app, partners with 1 bank, it loses its independent character, which is one of the strongest reasons why people use such an app in the first place.
Budgeting-apps can play in this field but will have to make compromises. Examples of strategies are partnering with 1 or a few banks (giving good user experience, but compromising neutrality), lead generation to a large number of banks (i.e. allowing to keep neutrality, but resulting in a very weak integration, thus lowering user experience), becoming a bank yourself (very capital intensive and complex strategy) or putting those plans on hold till Open Banking APIs for those financial products are also available (which will take several years).

Given the issues with expansion to adjacent financial products, most budgeting-apps explore other options. Typical examples are:

• Coupons in the form of cash-back by targeting customers based on insights gained from the financial transactions (e.g. only show a coupon for customers shopping at competition or to customers who haven’t passed by the merchant for a while)
• Offering cheaper deals, based on identified expenses. E.g. proposing cheaper merchants offering same products as where you shop, renegotiating contracts for large recurring expenses like water, gas, electricity, telecom…​
• Expense management, i.e. keeping track of your expense notes for personal usage or even to communicate to your accountant or employer or to the tax authority
• Receiving bills and automatic payment via a pay button (via integrations and/or by scanning QR codes on bill, cfr. POM in Belgium)
• Manage bill sharing
• Management of money pot for buying group gift for friend, family or colleague
• Collecting the commands for ordering food as a group
• Manage loyalty programs, i.e. identify transactions at specific shop(s) and grant points for each transaction
• Counterparty risk assessment, i.e. based on financial transaction information allow to expose a financial profile, which can be used by counterparties to get an idea of your financial risk profile, before engaging in a transaction with you (cfr. CPRA product of Capilever)
• …​

Apart from differentiating the budgeting-app by other financial transaction related services (as showed above), the budgeting-app can also focus on niches. Either it can specialize in a specific user journey (like travel, real estate, wedding, birth, pension, finding a job…​) or a specific customer segment. Both approaches have pros and cons.

Specializing in a specific user journey allows to provide strong value-added services, but makes it difficult to convince a customer to create a consent, as it usually consists of a one-shot action (the time to give a consent might not weigh up against the time gained by retrieving the transaction data).
Specializing on a specific target audience via an adapted screen lay-out, gamification, chat bots…​ can be very powerful to have a smaller, but very happy and engaged audience, but due to the limited volumes, the business case might be difficult to be positive, especially as margins on a budgeting-app are not very large.

This brings us to the most important subject for a budgeting-app. Due to their innovative character and potential to become the next unicorn, this business is very VC-driven. Nonetheless, it is very difficult to make a profitable and sustainable business out of it, due to the strong competition (from other Fintechs, banks and other large industries like the telecom industry) and difficult to monetize.

Monetization can be done in different ways:

• Ask a subscription fee to the users (always or to get access to a premium version of the app). As customers are used to free, excellent services of companies like Facebook and Google, there is very little willingness to pay a subscription fee for such an app.
• Advertisement: show targeted advertisements on the app
• Lead generation fee (referral): receive a lead generation fee from partners, when a product of them is sold, thanks to the budgeting-app
• Market analysis: sell data and insights (patterns) to merchants, which can help them to better attract new customers and retain their existing customers. Thanks to the access to the financial data of all users, budgeting-apps can create valuable insights for merchants, e.g. analyzing which other shops a merchant’s customers frequent, what market share a merchant or specific shop has, identify to which shops customers who left a merchant went to, where did new customers shop before, better classification of customers (based on financial situation, merchant loyalty, sensitivity to promotions…​)
• Cost saving percentage: some budgeting-apps that propose you cheaper alternatives, take a percentage of the saving, when a proposal is accepted

For all monetization forms, volume is however essential. As the initial investment costs to build this type of product are relatively high and a significant marketing effort is required to distinguish for competition, this type of businesses require always significant upfront funding before they can become break-even. Around 100.000 active users of the app are an absolute minimum to be attractive for merchants to buy services of the platform, which is very costly to obtain in the beginning. Clearly the large existing customer bases of banks and telco players is an enormous advantage for this (especially as they can make a business case out of their existing products and consider the budgeting-features just as an extra service to their customers). Apart from these players, we can expect maybe 2-3 international large players and 1 or 2 local players being active in this space. In any case, much less than the current playing field, where dozens of solutions per country are offered. It will be interesting to see how this consolidation evolution further unfolds.

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