An Effective Means for Controlling Short-Term Finances

It seems that personal financial management (PFM) has finally captured the attention of big banks, evidenced by Bank of America’s recently-announced plan for the delivery of PFM features for its native mobile banking app.

But amidst a series of developments in PFM capabilities over the past 12 months, consumers continue to mismanage weekly spending funds. An unclear picture of a consumer’s real checking account balance available for everyday spending can lead to overspending and inconsistent deposits to savings accounts.

In 2013, I described how a dynamic PFM app could leverage a consumer’s known cash flows to define safe spending levels for the duration of a week or weekend. While these concepts still have yet to come to fruition in the market, they can be instituted in a more compact form through the introduction of an ‘effective balance’.

The effective balance addresses a pain point faced by credit card-loving consumers that trade away some financial transparency for lucrative card rewards. With credit card bills due just once a month, the consumer is tasked with a bit of mental math in determining their truly available balance. Consumers should have access to a quick balance figure that takes into account all known financial activity taking place over the coming 10 to 14 days.

The effective balance would be a calculated value summarizes all upcoming cash flow, including: current credit card debt, rent/interest payments, utility bills and pre-defined savings deposits. The value would also reflect cash flows that may not be recurring monthly obligations like the aforementioned categories but instead expenses that are highly likely to take place, such as a weekend hotel stay or fuel for a planned road trip.

Of course, there are many potential variables that could add to the equation, including the choice to pay off some or all credit card debt upon bill presentment and the relative proximity of each upcoming cash flow. To address these factors, the calculation could be editable by the consumer, allowing for the selection of categories and assumptions that are relevant to him or her.

To the Fintechs and Neobanks of the industry, this feature probably sounds a lot like the ‘Safe to Spend’ feature already available in many mobile banking apps. The differentiator here is the use of data science to identify highly likely cash flows. A bank deploying this feature would need to leverage data sources outside the traditional realm of banking, such as smartphone, location and social data.

What seems like a daunting technological undertaking may ultimately prove to be an enabler of smart financial decision making and cash flow management by the consumer. Banks will need to keep simplicity in mind when designing this balance feature and the ability to adjust its calculation criteria. As consumer PFM needs begin to permeate banks’ mobile agendas, look for this type of financial lever to grab the attention of millennial consumers.

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