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In 1776, Adam Smith proclaimed in the Wealth of Nations that “Consumption is the sole end and purpose of all production.” [1] Since then, academics, governments and others have tried to predict and model consumer spending. However, the reality is that even at the personal level it can be challenging for individuals to predict and plan their own spending and align it with income. This blog considers how banks can help people understand and manage their money better.
For over two centuries, economists have debated and modelled consumer spending patterns. In 1936, English economist John Maynard Keynes postulated that consumer spending was a function of current income. In the 1950s American economist Milton Friedman questioned whether spending (consumption) was a function of current income or whether people spent according to their lifetime income (i.e., “permanent” income).
Spending in Relation to Permanent Income
In the Permanent Income Hypothesis model, the key determinant of consumption is an individual's lifetime income, not their current income. The important point is that long-term expectations change consumption. Some still debate whether Keynes or Friedman are right, but we can probably all agree that the relationship between lifetime income and spending is very important.
The Financial Consequences of Life
Almost all life events have financial consequences, and major life events such as going to college, purchasing a car, getting married, buying a house, and raising a family all cost considerable money. People must plan for contingencies and prepare for unforeseen events too, hence saving for a “rainy day.” Ultimately, the ways in which individuals manage their money depends on a combination of expectations, access and circumstances—for example, whether a person expects to earn or inherit more money in future, or face the threat of unemployment; their degree of access to the banking system (banked vs. unbanked); their general health and age, etc. People plan and save to varying degrees and with varying levels of success.
Banks to the Rescue?
Banks can help customers manage their money better, and many offer useful and engaging apps that promote financial wellness. The best of these services draw from the vast wealth of customer data which banks possess. Basic services help accountholders keep track of their incoming and outgoing funds, showing for example:
While these services are useful, they’re just a taste of what banks can do with data, particularly the financial data from their customers. Much has already been written (here and elsewhere) about customer journeys and how every bank must use technology to facilitate seamless omnichannel journeys that attract and retain customers. By harnessing artificial intelligence (AI), advanced analytics and data, a bank can support each customer’s life journey. Even though customers now have more expectations of their banks than ever, banks have a unique opportunity to build long-term loyalty via personalized and innovative data-driven services.
Match Banking with Life
A person’s financial data tells a factual story, and it reveals a lot more than spending patterns. By analyzing data, a bank can understand changes in a customer’s lifestyle and behaviors. Each life stage offers further opportunities for banks to increase engagement with their customers, provide impactful advice and useful tools, and cross-sell or upsell. For example:
Getting married – Offer ways to use joint finance to maximize benefit and minimize tax liability; or offer bundled financial products to meet new financial goals.
Buying a house – For many people this is the biggest financial commitment of a lifetime. In addition to mortgage lending, banks can offer ways to help customers ease the home buying process and the responsibilities of home ownership.
Having a baby – The bank can help set up a fund to provide for schooling, or embark on long-term financial planning. Perhaps discuss a home equity line or other avenue to help the growing family expand or renovate their home.
Retirement – It’s never too early to help your customers plan for their retirement. Providing education, tools and advice at appropriate times along life’s journey can go a long way to building trust and loyalty.
Banks will truly fortify customer relationships by harnessing the value of their data, and using it in personalized, timely and innovative ways. While some banks acknowledge this as an opportunity, many have yet to grasp it, or to realize its full potential. This is an opportunity that is not to be missed, and one which will only expand in the age of open banking.
Open Banking and Open Finance
Open banking is a global movement that seeks to make banking more collaborative, innovative and customer centric. In practice it puts customers in charge of their own data. With a customer’s permission a bank can offer customers an aggregated view of their finances by combining data from multiple accounts, even at different banks. This can be seen as both an opportunity and threat to an individual bank as each vies to be the customer-facing brand.
Open banking success will be driven by data, and banks that get the data science right will be well rewarded with loyal customers. As open banking morphs into open finance, there will be even more data and more opportunities. These include:
It’s worth noting that Amazon generates 35% of its revenue through its recommendation engine. [2] People are open to suggestions and will act on them – particularly from a financial institution that has earned their trust.
The reality is that the age of mass customization has arrived. The future of banking will be both data-driven and personal. By aligning banking services with individual customer needs, a bank can elevate its position from transaction vendor to trusted partner.
[1] Adam Smith, 1776. An Inquiry into the Nature and Causes of the Wealth of Nations.
[2] https://www.quora.com/What-percentage-of-eCommerce-sales-are-driven-by-recommendations
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Oleksandr Strozhemin Co-founder and CEO at Trinetix
13 August
Elaine Mullan Head of Marketing and Business Development at Corlytics
12 August
Abhinav Paliwal CEO at PayNet Systems- A Neo Banking Software Platform
Donica Venter Marketing coordinator at Traderoot
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