Liquidity management as a (banking) service

The last few years we have been overwhelmed by PFM tools and account aggregators, giving us insights in our financial situation, like our spending habits, sources of revenue or forecasts of our expected future cash flows.
While those tools are definitely useful, they still require quite some effort of the user and even more self-control of the user to make real tangible improvements to his financial flows (like reducing certain budget posts or saving more money).
The reason for this is that all those tools are mainly reporting and analytics tools giving post-factum insights, but not helping you pro-actively manage your money. Personally, I consider this lack of pro-active tooling to manage your day-to-day cash, as one of the most important gaps in the financial sector today.

The type of liquidity or cash management tooling that can really assist you pro-actively depends obviously on the stage of your live, e.g.

• As a minor or student, you take your first steps in money management, i.e. you learn how to work with money, but usually all expenses you make are for fun stuff. While money management in this stage of your live is still relatively easy, some gaps in today’s banking applications do exist. For example think about students at high school who receive an allowance from their parents for food, books and clothing, but spend it all in parties and pubs.
  There is a need for parents to control spending, without micro-managing the finances of their children. While today, parents can only check something after the purchase is already made, it would be much more effective that parents can define pro-actively certain rules how money can be used by their children, e.g. that it can only be used in certain stores/certain sectors, a maximum amount per day/month, a maximum percentage of the total account balance used per day/month…​ This brings us to the concept of rule-based money, which I already introduced in an earlier blog (cfr. https://bankloch.blogspot.com/2021/01/can-digitalization-of-money-provide.html). 
  Additionally there is a need for assigning goals and timelines to (parts of your) saved money. Collecting this info allows young people to make saving more tangible and fun, but also allows the bank to (propose to) park parts of the money in more long-term (preferably risk-averse) investments, which bring more return.

• Once you start working and rent or buy your own place, liquidity management becomes much more complex, as the number of expenses (many of them recurring) drastically increase. This often leads to short-, medium- and long-term imbalances in your finances:

  • Short-term imbalances are typically caused by the fact that your salary is only deposited at the end of the month, making the last 1-2 weeks of the month more financially difficult than the beginning of the month.

  • Medium-term imbalances happen because certain months of the year are typically much more expensive than others, as large bills like taxes and insurance or utilities bills often all come together on the same month.

  • Long-term imbalances come from the fact that salaries still tend to increase with seniority, while expensive periods in your life (like the period that your children go to day-care or to high-school or the period you are building or renovating your home) tend to be more spread over your live.

  • Balancing out those imbalances is currently a manual effort done by almost every adult on a daily basis. Tooling to level out those imbalances would therefore be more than welcome. This should be accommodated by products which bring investment and lending products more together, like Lombard credits (allowing to lend fast and cheap against your long-term investments), Pay-day advances(which allow to lend against your upcoming salary payment) or a product like Capilever’s FLEX product. The idea of all those products is that you don’t need to keep a liquid reserve on your current or saving account, but instead that you spend or invest any excess money, while having access to fast, easy and cheap , backed by existing "less liquid assets" or "upcoming revenue flows".

• Freshly retired people have a new liquidity issue. Often they get a large lump sum of their pension saving or group insurance but need to manage living from this money themselves. This can be overly complex, e.g. if you take a part of the lump sum every month, it means you need to define a maximum age, which is quite morbid to define. At the same time you need to take inflation into account as a monthly amount of X EUR today is not the same as the same X EUR in 10 years. You could also live only of the interest and/or P&L generated on the lump sum which avoids setting a maximum age, but this requires an often unrealistically big capital and also requires taking inflation into account. Some simple solutions exist, like distribution investment funds or de-investment plans, but those are quite basic. More advanced products could be considered, like e.g. a reversed life-insurance, i.e. you pay a one-time lump sum, which depends on your calculated life expectancy and the premium you want to receive on a monthly basis. Once this is paid, you receive a monthly amount till you decease. In other words the inverse of a standard life-insurance, i.e. instead of receiving a lump sum upon decease, you pay a lump sum at the start of your insurance contract and instead of paying premiums till you decease, you actually receive premiums till you decease. This kind of insurance product would give people a guarantee that they get a monthly amount (which could be adjusted with inflation) independent of how old they become.

• Finally older people with health and potentially mental issues, might need again a solution to protect their spending pattern. Today financial management of the elderly is often taken off by their children, but this is very intrusive. A better solution would be to also impose certain pro-active money spending rules (rule-based money), so that older people can keep their autonomy, while keeping a certain level of financial security (i.e. protecting them from unwanted expenses).

These kinds of banking products would - in my humble opinion - really be innovative, as they take away the burden of people to actively manage their day-to-day finances (manage their liquidity), but instead they allows to outsource your finances to a bank, i.e. from just outsourcing the deposit of money to a bank to also outsourcing the day-to-day decision taking of liquidity management.

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