Financial Optimization - Core business of a bank?

You could argue that the main role of a bank is to increase the buying power of its customers, i.e. support their customers in increasing their assets.

This can be through credits or investments. Both solutions make purchases possible, which can give a positive return in the future, i.e. an investment is a purchase of a financial product aiming to generate a return, while a credit can allow you to buy something, which can save or generate money in the long-term, e.g. a credit for a house to avoid long-term rent payments.
Increasing the buying power by optimizing financial flows can however also be done in many other ways. These are domains where banks are ideally positioned to offer additional services, but most banks have left those untouched till now.
This is about to change, as banks try to build out financial ecosystems and offer more value-added services. The increasing number of PFM (for Individuals) and BFM (for Businesses) banking modules is a first step in this direction. By visualizing and categorizing incoming (income) and outgoing (expenses) money flows, better insights into the customer’s finances can be obtained. Obviously this is just a first step. In the future, we can expect to get even more detailed insights and to receive tangible actions/recommendations to increase your buying power.

Obviously with the Covid crisis striking hard, increasing the buy power of your customers is more than welcome, especially for businesses, where budgets are tight, due to increasing costs and decreasing revenues. Add to this, that several studies predict that companies will have to deal with a high departure of employees after the Corona-crisis has settled, as many employees have postponed switching jobs due to the uncertainty and complexity to onboard at a new firm.
As such employee retention will be crucial. Obviously this starts with motivating your employees, but nonetheless salary and benefits remain also a key method to retain your employees. This leads however also to additional costs, unless financial optimizations can be identified.

There are many ways to optimize the buying power of an individual or company, via financial optimizations. E.g.

• By getting better insights into your income and expenses, allowing to

  • Avoid missed incomes, e.g. getting warned when something needs to be invoiced, reminders for missed payments…​

  • Identifying unnecessary expenses, e.g. subscriptions which are paid but no longer used

  • Optimizing your liquidity management, i.e. avoiding paying overdrafts and investing excess money quicker and better in investments with a longer time-horizon

• Deals in all kind of forms, like group offers, loyalty cards, coupons, cash-backs…​

• Optimizing your expenses by renegotiating with vendors or switching vendors. Typical examples are switching utilities companies (like electricity, gas and internet), switching mobile phone provider, switching insurance company…​

• Salary optimizations via extra-legal advantages (like social vouchers, car/bike leasing, bonus plans…​) and different salary plans (like in Belgium the Flex Benefit / Cafeteria plan or Mobility Budget, individual and collective bonus plans or ways to make use of authors rights)

• Fiscal optimizations, via banking products (like pension and long-term saving), but also by automatically identifying and claiming deductible items. How many people haven’t missed out on the tax advantage of deductible items, simply because they didn’t know or forgot to put them on their tax forms.

• Subsidy requests, i.e. the government and different institutions provide all types of subsidies, grants and rewards which need to be claimed. Often it requires a lot of knowledge to know what can be claimed and how those can be claimed, resulting in many individuals and businesses missing out on a lot of money.

Several Fintechs and other firms can help to identify and execute upon those optimizations, like:

• Getting better insights: several PFM and BFM apps are available, which can also be offered as white-labelled solutions to banks. Examples of stand-along PFM apps are Cake, Acorns, Albert, Digit, Goodbudget, Mint…​, while several white-labelled solutions also exist, like Tink (OpenWrks), Strands, Wealth Access, Saltedge…​
  Cfr. my blog on PFM/BFM apps, i.e. "PFM, BFM, Financial Butler, Financial Cockpit, Account Aggregator…​ - Will the cumbersome administrative tasks on your financials finally be taken over by your financial institution?" - https://bankloch.blogspot.com/2020/02/pfm-bfm-financial-butler-financial.html

• Deals: also here stand-alone solutions, like Swave, Cake, FamilyCard, Trooper, Acorns (Found Money feature)…​ exist side-by-side with white-labelled solutions which allow to incorporate deals in a banking app, like e.g. Isifid or deal lead-generators for banks and Fintechs like e.g. Izify. Several banks, like e.g. KBC and ING in Belgium already provide such deals in their banking apps.
  Cfr. my blog on Deals, i.e. "Deals as a competitive differentiator in the financial sector" - https://bankloch.blogspot.com/2020/11/deals-as-competitive-differentiator-in.html

• Optimizing your expenses with stand-alone solutions like LookAfterMyBillis or Cushion.ai or integrated in banking apps, like e.g. the solution of the Swedish company Minna Technologiesintegrated in banking apps of Swedbank, Danske, ING…​ or the recently released solution MoneyMax of the Belgian challenger bank Aion (https://www.aion.be/en/max-bills).

• Salary optimizations via extra-legal advantages, offered by different vendors, i.e.

  • Providers of such extra-legal advantage products, like e.g. Monizze for social vouchers, Ctec for bike-leasing, KBC Car lease for car-leasing, BlueTrees for bonus plans, KBC for group insurances, SkipR or Jeasy for mobility-as-a-service solutions…​

  • HR Legal firms providing services to setup remuneration policies for employees, like Payflip offering automated services to setup such policies for SMEs, in context of cafeteria plans, mobility budgets, author rights or bonus plans

  • HR and accounting platform which are gradually offering also services for salary optimization

  • Social Secretariats transforming from pure salary administration services to more value-added services, like salary optimization

• …​

In order to propose those financial optimizations, you need however a maximum of insights in the customer’s (being an individual or company) finances, i.e.

• Assets

• Liabilities

• Income flows

• Expense flows

In short you need to be able to generate a real-time detailed financial reporting (i.e. balance & cash flows) of your customer (cfr. my blog "Your Personal Balance Sheet - Should everybody have one?" - https://bankloch.blogspot.com/2020/05/your-personal-balance-sheet-should.html). Furthermore you should have more info about the money flows than just the payment details, i.e. ideally you should also have the invoice/purchase order/ticket details.
This is where a whole new eco-system of players comes in the picture:

• Automatic cleaning and enrichment of financial transactions, i.e. convert the cryptic counterparty names of payment transactions to more comprehensive names and at the same time enrich them with info like address, GPS position, merchant logo, merchant category…​ A whole ecosystem of data specialists exists here, like Tink or Invers (https://www.invers.nl/) specialized in this type of financial transaction enrichment, but also more general data specialists like Data.be, Bureau van Dijk, Graydon, OpenCompanies, Altares Dun & Bradstreet…​

• Peer-to-peer payment apps, which are ideal to collect all expense information. Examples are Tricount, Splitwise, Settle Up…​ See also my previous blog "Peer-to-peer payments - A crucial component towards a cashless society" - https://bankloch.blogspot.com/2020/12/peer-to-peer-payments-crucial-component.html

• Expense management solutions: expense management solutions help to manage both private and professional expense (like Rydoo, MobileXpense, Declaree, SRXP, Dicom, WebExpenses, Spendesk…​). The ticket information is typically used for expense validation and for VAT purposes but can obviously also be used to get detailed insights in the spending patterns.

• Social Secretariats, which can provide all details of salary expenses (to employers) and salary income (to employees). Via an Open Architecture, they could expose APIs allowing bank to easily retrieve all details of money flows (with the consent of employers and employees).

• Social voucher issuing companies, which can provide all info about your social voucher financial transactions.

• Credit card and companies like Paypal, which expose APIs to get details of your credit card bills

• Accounting Platforms (like TOCO, Yuki, OkiOki, Billtobox, Clearfacts…​), which also support features to collect expense notes, in order to communicate them to your accountant. This combined with the fact that they are usually also connected to the accounting systems of the accountant, they contain a wealth of financial information and can act as such as a hub to other parties to get detailed insights in the money flows of independents and SMEs.

• Document management platforms (like Doccle, UnifiedPost, ZoomIt…​), which allow to collect invoices and other documents associated to expenses. This means the info can also be easily used for insights.

• Digital invoicing systems (like Accountable, Billit, Digiteal…​), handling the generation, submitting, archiving and reconciliation of invoices. These systems make the link between the financial flows and invoices obviously much simpler.

Once a bank can obtain these more detailed insights into the details of each incoming and outgoing money flow, all kind of new options become available:

• Better insights: the PFM/BFM modules can not only assign expenses and incomes to much more detailed categories in a much more accurate way (including bill splitting), but also much better forecasts can be created (e.g. more detailed info on which one-off and recurring products and services are bought)

• Automate: banks could support an automatic booking of money flows in accounting systems, with a detailed categorization (including bill splitting) in booking posts.

• Optimize: banks can automatically identify cheaper merchants, but also cheaper products, derived from your bills.

• Better deals: banks could offer cash-backs on specific products (or brands) instead of being able to offer only cash-backs on the full transaction amount.

Clearly with Open Architectures becoming more and more the standard in all sectors and ecosystems growing rapidly (in different directions), we can hope that we will have a consolidated, detailed and complete financial overview (with automatically generated and personalized recommendations) in our banking app in the near future.