Should people manage their bank accounts? No!

One of the points raised many times at Next Bank Europe is that banks should give better tools for people to manage their accounts and finance. Actually, when asked, most people want to be able to better manage their bank accounts.

However, maybe this is looking at this problem through the wrong lens. Actively managing my own finance is a social holy grail. Amazon has at least 14,000 references for Personal Finance Management. TV shows are devoted to educating people on better personal finance management.



What is more surprising is that personal finance, accounting are rarely taught to children and studied in school. Society sets proper personal finance management as a key life goal but does little to equip people with this taskIt’s no surprise that people’s finances range from well-managed to sub-optimal (too much cash on checking account for example) to catastrophic.

But the focus put on Finance Management has another consequence. It constrains the problem of building a better bank to a very specific framework. For people to better manage their finance, banking innovators believe they should make their various products more transparent and easy to use. What if the question was: should people even use these tools?

In another industry, increase in processing power and digitization of data have made automation a reality. Google’s self driving car is probably the best example of what was assumed to be a human only activity being converted to algorithms.



Financial management is most likely a problem that is actually simpler. Most of the data is already digitized via the electronification of money and commerce. For a majority people, wages and rent/mortgage explain the principles financial movements each month. Algorithms can learn spending patterns and adapt accordingly.

Banking simulator courtesy of Josh Reich (Simple / i2pi )

This does not prevent people from managing their life. Actually, by switching decisions from financial products (mortgage, CDs, etc..) to life goals (retirements, products), it is putting financial management back in a framework that people are more familiar with. 

Overdraft fee is probably the most typical example. Overdrawing on a checking account while having a savings account is a very simple interest rate arbitrage model. This would take a program no time to calculate and decide whether funds should be drawn from the savings account to cover. There is no real technical complexity in building this safeguard. But most Banks don’t.

A cynical view on this would be that since Non Interest revenue are a growing part of Banks’ income, there is little pressure for them to increase efficiency on this front…

Is it science fiction?

In wealth management, startups are building on this idea. Companies like Betterment (an Anthemis investment) or Nutmeg in the UK are bringing automation to investment.

Simple (another Anthemis investment) gives you a Safe to Spend Balance and automatically saves for you toward your goals.

Services are most likely going to tie together these various components, as investments and personal finance management are closely linked. Longer term, we could see this trend apply to a better understanding and leverage of personal assets.


10 replies on “Should people manage their bank accounts? No!”

I think you’re hinting towards the inherent misalignment in interests between banks and their customers. Efficient money management leaves a lot of fee money on the table.

Very interesting analysis. The overdraft example is striking. I have been fighting for *years* (litterally) to have my bank text me a message whenever I am in overdraft. They say it’s not possible >:-> I dream of a smart app that balances the accounts and sends me *analytical* reports…

Its coming, needs to start from multiple angles. We are lucky to fund some of the startups in this field but I think economics could help. Any PHD on personal finance simulation and optimization?

Very interesting. One distinction I would make is that a story (and possibly educational tools) need to be crafted around the algo so that is something that will actually be adapted, and – more importantly – followed.

The investment analogy is interesting in this regard. We have had crude technology to automate investing for as long as the index fund has existed (at least 1970s), yet most people don’t find it particularly easy to follow this kind of “algorithm.” One reason might be that the algos should have a behavioral component to them (don’t assume I am going to sit through a 50% “correction” based on some kind of monte-carlo analysis). Another might be that investors don’t really understand what they are doing so they “exit” from the algorithm at precisely the wrong time.

I think at some point you don’t follow the algo, the algo runs it for you. So in my view, its less a question of advice than building trust that the system does what’s best for you. In investing, this is what Betterment is doing by automating reallocation.

In my view the key is the “building trust that the system does what’s best for you” which might take some level of education. Even if the algo does stuff for you, people will always have the option of opting out of it (or just never opting into it).

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