Market Watch Mindset Personal Finance

Next: Algorithmic Banking?

Algorithmic trading has made the headlines, most often negatively. The underlying idea is that computers can make, on a broader scale, better decisions than a trader. On the other hand, criticism is rising to curb a practice that some consider contrary to the benefits of the market.

But, on a different scale, I believe algorithmic based decisions could be a major next step in banking and PFM. PFM is about helping bank customers better understand their finance and make the right decisions. Goal setting plays an important part in this process, as it ties into financial life decisions and monthly budget. But the actual movements of money from for example checking account to savings could be intelligently made by a predictive money management tool.

For most people, the key cash movements of their budget are fixed: income and rent. On average monthly budget for food could be almost equivalent. With these components, as a first step, you could imagine programmed decisions that would move extra cash the day before a salary should be deposited to a savings account, preventing the misuse of extra liquidity. On the other way around, in case of over spending, the program could decide to allocate expenses to a credit card / credit line and automatically add that line of credit as a savings goal in the next month budget, making an arbitrage between the cost of credit and savings rate. An alert based system would warn the customer of any change or even ask for approval if needed. Different algorithm profiles could be defined depending the volatility of previous months budgets, taking stronger savings options for people with controlled budget and protecting more people with more volatile income and spendings. Personal accounts could work more like bank or company themselves, which try to optimize their cash for maximized returns.

But automated decisions to prevent an account for running a debit balance are going against a bank culture of generating revenues from penalty fees on their customers. This is challenging for banks, especially since running different banks algorithms against historic account data could help provide what-ifs scenarios to compare how 2 banks would fare. Algorithmic banking could generate a change in banks behavior and business models.

Do you think algorithmic banking is not far from us?

12 replies on “Next: Algorithmic Banking?”

You’ve described a lot of things that BankSimple will set out to provide to their customers. To me it is dead obvious that this is the “right” way to offer retail banking services, but as you point out, this is anathema to existing retail banking revenue models which boil down too often to “confused customers and inertia equal more fees”…


Thats what I was getting at with….
I finish by saying…

“It is clear that banks themselves will not move to this model any time soon. Too big to fail, too big to move, too much momentum to change their business model, whatever the problem is. They need more income that a treasury and transaction service can provide. I can only see a new very lightweight agile bank or a third party layer between the banks and the customer moving towards this kind of system.”

I agree with Sean – I think Bank Simple is really onto something. And it is something that is firmly on the Money Toolkit radar!

Leave a Reply