Budgeting of finances in 2023: Open banking and PFM
Open banking allows consumers to manage their finances more accurately and efficiently through the use of modern tools for personal financial management. The use of this type of application enables customers to increase their financial literacy, save money and budget more effectively. These services are now taking it a step further with the addition of user-friendly investment options that allow users to not only manage their assets but also grow them.
In the last few years of open banking’s existence, it has become an important component across multiple industries, including lending, accounting, identity and income verification, along with many other customer-focused financial services. Open banking refers to the process that enables third-party service providers (TPSPs) to access customer information through secure API connections to banks. By allowing providers to collect this data, they can create a greater amount of personalized services and product offerings for customers and meet their needs in an increasingly efficient way, creating more user-focused customer experiences.
One way consumers can directly benefit from open banking is through the use of personal financial management (PFM) tools, which allow them to create their own budgets, manage their money, save money and overcome debt. Not only does this enable customers to learn money saving techniques and strengthen their financial literacy, it also enables them to leverage their nest eggs by investing themselves.
Open banking as the backbone of modern PFMs
Open banking powers personal financial management applications by allowing customers to connect all their bank and neobank accounts directly to the tool. By choosing this option, users can see all their financial movements and payments in real time, in just one place. This gives them the ability to be in control of all their finances, and allows built-in PFM application algorithms to thoroughly analyze their data and suggest personalized programs and tips.
With guided support, reminders and recommendations, clients can reach their financial goals, get rid of unnecessary costs and subscriptions and grow their savings accounts. These savings can then be invested in stocks, cryptocurrencies and other assets by users to create an even stronger financial foundation for their future. In recent years, some of these applications have even evolved to allow clients to invest directly through their PFM systems. Many players who have joined this new wave of client funds growth have made investing even more accessible to beginners by establishing affordable pricing models starting at £1.
One such application is MoneyBox, which allows users to choose from one of three investment profile options, Cautious, Balanced and Adventurous, with different levels of risk associated with each. These starter options allow novice investors to start their journey quickly without significant room for customization, with each option consisting of a range of tracker funds that are diversified, each with a different allocation. As their expertise and knowledge grows, users can switch to more customizable options, giving them more freedom over the details.
Another option in this category is Plum. This application focuses on automation, allowing users to set specific “smart rules” in relation to their savings opportunities, which the tool then uses to systematically set aside small amounts of income in a savings account, or to a target account, such as holidays or large gifts . Likewise, the tool allows users to set investment guidelines with specific reasonable deposit amounts, which will then be distributed by the application to selected stocks and mutual funds.
Other applications are also jumping on this trend, with budgeting tool Emma launching its own version of low-cost self-investing through its application in July 2022. The application now also offers commission-free stock trading with access to 2,000 shares of global stocks.
Give control to the consumer
As the world increasingly moves into the digital era, customers are now finding that they can access financial services, assistance and opportunities through user-friendly online applications. Tools like personal financial management apps allow consumers to not only manage their finances, but grow their assets, build retirement funds and invest in the future. Where previous generations had to seek face-to-face expert consultations and visit physical branches, modern customers can learn financial literacy online and digitally self-invest through simple channels.
By connecting all their financial accounts in one PFM tool through open banking, users can view and analyze their financial health and make informed decisions regarding their finances, based on movements and investments on existing funds and recorded monthly expenses. This gives them more significant safeguards, protecting them from making decisions that are unaffordable or that could lead to a higher chance of debt in the future.
About the author: Rolands Mesters is the CEO and co-founder of Nordigen, the only freemium open banking API that connects to more than 2,300 banks, making it the largest network of bank connections in Europe. Rolands is a sales and growth hacker who is passionate about fintech and alternative lending.
