Self-Driving Money: Why developing AI-based personal finance tools is an economic imperative.

The UK's financial advice gap is leaving consumers worse off and hindering economic growth. Developing AI-based personal finance tools is essential for closing this gap and improving the resilience of households and economy as a whole.

The UK faces significant challenges. Among them, the gap in financial advice available to consumers is both vast and detrimental. While the wealthiest have access to sophisticated financial strategies, the average consumer is often left to navigate their finances with limited tools and guidance. This disparity impacts not just individual wellbeing but the broader economy as well, as financial mismanagement at the household level cascades into macroeconomic consequences.

Advances in data-driven financial technology offer a possible solution. In particular, the development of reliable AI-based personal financial management systems—or "self-driving money". By empowering individuals with easy-to-use automated financial planning tools, these systems can deliver transformational economic benefits.

ECONOMIC IMPACT OF THE FINANCIAL ADVICE GAP

The UK’s financial advice gap is a pressing issue. Millions of consumers lack access to quality financial advice, leaving them to make critical financial decisions without the necessary knowledge or guidance. A staggering 70% of UK consumers do not receive any form of financial advice, resulting in an estimated average financial detriment of nearly £50,000 over a decade. This lack of guidance means that individuals miss out on critical opportunities for wealth accumulation and optimal financial planning. 

This gap is not just a personal problem; it has significant macroeconomic implications. The absence of professional advice can lead to inadequate savings and poor investment decisions, ultimately diminishing consumer surplus. Poor financial planning leads to lower household savings rates, inadequate retirement funding, and inefficient allocation of resources. These factors contribute to sluggish capital formation and reduced investment in the economy, stunting growth and productivity.

CUSTOMER INERTIA AND THE LIMITS OF TRADITIONAL BANKING

A significant barrier to better financial outcomes for many consumers is inertia. People tend to stick with the financial products and services offered by their primary bank, even when better options are available elsewhere. This inertia diminishes the incentive for banks to innovate and offer improved returns or more tailored financial solutions. 

Today, nearly 90% of primary bank accounts and 70% of instant savings accounts are concentrated within the six largest banks and building societies. Traditional banking, with its high-cost infrastructure, siloed functions and centralised decision-making, often lacks the agility needed to meet the diverse and evolving needs of consumers. Overcoming customer inertia requires a fundamental shift in how financial services are delivered—a shift that self-driving money can facilitate.

THE PROMISE OF SELF-DRIVING MONEY

Self-driving money represents a revolutionary approach to personal finance. AI-based systems that can automate and optimise financial planning, reducing the burden on individuals and enabling them to achieve their financial goals more effectively. By leveraging advanced algorithms and machine learning, self-driving money can provide personalised financial strategies that were previously only available to the wealthiest individuals. This democratisation of financial planning through self-driving money has the potential to close the financial advice gap, empowering all consumers with the tools they need to make better financial decisions. 

MACROECONOMIC BENEFITS OF IMPROVED FINANCIAL MANAGEMENT

The macroeconomic case for better personal finances is clear. By enabling households to better manage their finances, AI-based financial management systems can contribute to a healthier economy in direct and indirect ways:

• Increased savings rates: As households become better at managing their finances, savings rates are likely to increase. Higher savings provide a larger pool of capital that can be invested in the economy.

• Greater long-term investment: Improved financial planning can lead to a higher allocation of resources toward long-term investments, such as pension savings. This, in turn, supports investment in economic growth and innovation.

• Enhanced productivity: With greater capital formation and better resource allocation, the economy can experience enhanced productivity. This is critical for breaking the cycle of stagnant productivity that has otherwise plagued the UK since 2008.

• Economic stability: As consumer savings improve across the population, personal finances become more resilient, with benefits that ripple across all sectors.

ENCOURAGING INVESTMENT IN AI-BASED FINANCIAL MANAGEMENT

To unlock these benefits, there is a pressing need for increased research and development in AI-based personal financial management. By encouraging the development of reliable, safe, and effective self-driving money systems, policymakers can help create a financial environment that supports better outcomes for all consumers and, by extension, the entire economy.

In summary, development of AI-based personal financial management systems represents a significant opportunity to transform the UK financial services and by implication the economy as a whole. By closing the financial advice gap and empowering individuals with better financial tools, these systems can drive higher savings rates, greater investment, and improved productivity. The macroeconomic case for investment in this area is compelling: it is not just about improving individual financial outcomes but about fostering a more dynamic, resilient, and growing economy.