Tag: autonomous finance

How Autonomous Finance Apps Threaten Banks

Heavily funded Neobanks market themselves as the future of finance – mobile-first and customer obsessed. We could all use less Wells Fargo in our lives after all. However, Neobanks (Chime, N26, etc…) are not the only threat that banks should be concerned about.

Less heavily funded and heralded are autonomous finance apps (Albert, Astra, Northstar, etc…). These apps manage assets where they already reside, spread across existing accounts.

Personal finance manager apps pose a serious threat to banks by turning the deposit holding bank (Bank of America, Wells Fargo, etc…) into commodity services differentiated only by their yield or fees.

The app manages funds according to the user’s rules. 

  • Want to save $100 each month? The app takes $100 from your direct deposit account and moves it to a high-yield savings account.
  • A new savings account is introduced that offers higher yield. Great, the app manages moving funds so you maximize earnings.

No single bank is motivated to offer features that work across accounts. They want all your deposits in their bank, not others. Their mission is to bundle all the finance products you need in one place and keep your business.

By removing the friction of managing funds across banks, these apps change the nature of the relationship between the user and their money. This is the threat to banks.

Gradually, the user’s attention and relationship shifts from their primary bank to this app that manages their assets. When they think about how to save, get a loan or deal with their finances they open the autonomous finance app first, not the bank’s app.

If the app manages the flow of funds across accounts, does the user care which company offers the underlying accounts? As long as it carries insurance, the criteria becomes solely the lowest fees or highest yield, not the bank brand. That’s dangerously close to accounts and the institutions that offer them becoming commodities.

Banks beware. These apps may look like toys today, but we’ve learned that the next big thing often starts out looking like a toy.

One Way to Improve Open Finance Apps

Banks need a regulatory push to make our data more accessible and transportable.

Regulation could help here…gulp.

Particularly in the US, our financial data should be more easily accessible and transportable. This would make it simpler for more applications to be built to give us views into our financial life (bank account, brokerage, etc…). That in turn would allow different segments of the population to be better served for their needs. Worried about overdrafts? Remittance fees? There’s an app for that.

Wait. Doesn’t Plaid make financial data easy for developers to access $5.3B different ways? And didn’t Mint begin this trend over a decade ago? Yes and yes.

Notice I said improve in the title though, not enable.

First a quick background on how Plaid, Yodlee, and others work today. Primarily they compile your financial data via screen scraping. They access your account using the credentials you provide and parse the interesting data (account balance, tx dates, etc…) to share through a formal API to an app developer. For the app developer it saves time and allows them to focus on their unique business value rather than plumbing.

To be clear, I’m not condemning screen scraping. I’ve used it in multiple companies to structure data that resides in unstructured formats on websites or PDFs.

It does have serious problems though. For one, it’s brittle. The underlying site changes often and when it does your scraper breaks. So access to some banks is constantly under repair and there is no way to know when. Also, it can break completely when the provider of the website wants to break your scraper. And they have multiple reasons to want to do this.

So what can be done? Why don’t banks adhere to a standard format of making data available? It is your data in the first place. Unfortunately, they have no motivation to do so. They prefer you live within their universe of products and not easily manage finances across banks or have simple access to products elsewhere that would compress their margins.

Europe offers a roadmap to solve this with their PSD2 initiative. Among others things, PSD2 requires banks to adhere to a standard API for data access. Unfortunately, there probably isn’t another way to make this happen among banks that aren’t motivated to do it on their own. More unfortunately, we probably won’t see a similar rule in the US.

This wouldn’t negate the value of Plaid and similar services (see Tink for proof). It would serve to make their APIs more robust and reliable. The winners would be end users benefiting from more ways to manage their financial health. And we should all want that outcome.

Visa, Plaid & Networks

Plaid’s acquisition is a tailwind for the next wave of fintech infrastructure networks.

Big news, $5.3B big. Everybody has takes, including Visa themselves, on why fintech infrastructure is more important than DTC fintech. We’re all geniuses in hindsight.

Unsurprisingly, Ben Thompson has one of the best explanations of the rationale [paywall]. It ties back to the power of a network that can not only provide read-only access to your money, which is what Plaid offers. The future is programmatic read and write access.

Visa today sits in the middle of a 3 sided network.

  • Merchants – who offer products and benefit from a network that extends credit and fixed payment terms
  • Consumers – who need credit and convenience
  • Banks – who have money to extend credit

Plaid today sits in the middle of a read-only 3 sided network, a threat and opportunity to Visa’s business

  • Consumers – who want modern access to their finances
  • Banks – where money resides and earns interest, is lent/borrowed/etc…
  • Developers – building new financial products

Today, Plaid dominates in the read-only use case for developers. Tomorrow, and what drove the acquisition premium is a read+write network that Visa can operate alongside it’s current one. Ben Thompson’s explanation:

More importantly, though, is the power of inertia: as long as it is hard to move money around, the more likely it is that that money will stay in the bank, collecting minuscule interest; or, if customers need value-added services, the path of lowest resistance will be simply getting them from their bank.

An API-based world could change this dramatically: suddenly consumers could commission robo-advisors to move their cash to whoever is offering the best rates, or to automatically refinance debt. Value-added services from multiple vendors would be equally easy to access, meaning they would have to compete on price or terms. In other words, much like the open Internet, banks fear that profits will be rapidly transformed into consumer benefit.

Ben Thompson

Plaid’s founders, team and investors are huge winners obviously. The secondary effect is the rising tide this will provide to the next wave of fintech infrastructure players like Astra, Alpaca & SynapseFi.

Automated Finance Apps Are Eating Deposits

Apps automating personal finance will improve financial health and relegate bank accounts to commodities offering highest yield and lowest fees.

Banks wage an ongoing war to hold your money. You’ve seen the tactics — higher interest rates and free credit reports are the modern free toaster to open a new account and setup direct deposit.

You get those free toasters because:

  1. Banks earn money by holding your money. 
  2. There’s inertia to deposited money. You’re too busy to move it around optimally, it generally stays where deposited. The bank that gets it first gets to keep making money from it.

In the perfect world, your money would flow from paychecks to where it’s needed at just the right moment. It would earn you the highest return in the right accounts for the right purpose, while ensuring your bills and payments are covered. 

A new generation of apps are changing money management by automating personal finance. These apps will become the primary way people manage their money, owning the customer relationship and ultimately their deposits.

Autonomous Finance apps that improves financial health and save time are the new battleground in finance.

Personal Finance Today

Today, your finances probably look something like this.

Your income flows into a main account and perhaps you move some for savings and bills elsewhere. If you’re like most people, you probably don’t do that, just operating out of that one account.

Banks battle to be that primary account. 

Maybe there are higher yielding accounts elsewhere? Maybe you should be moving set amounts every month for savings? Maybe you’ve exceeded the SIPC insurance limit and really should split money into separate accounts so you’re protected from a black swan? Maybe you’re forgetting to move funds some months and accruing overdraft fees? 

People are busy and distracted. So maybe they do none of these things even though it’s in their best interest.

How Autonomous Finance Apps Change Things

Tomorrow, Autonomous Finance apps will be the primary way you manage your money.

The application manages the movement of funds according to rules you set or that it figures out based on your behavior. 

  • Need $1,000 in your checking account on the 5th of the month? No problem, the app will make it happen and ensure you don’t get hit with an overdraft fee. 
  • Want to put aside $100 each month for a large purchase? Done.
  • A new savings account is introduced that offers higher yield? Easy, the app manages moving funds so you maximize earnings.

The key thing here is that your primary relationship is with the application. The accounts used become commodities that can be interchanged by you or the app itself. Accounts compete purely on their utility for the purpose they serve—interest rate, fees, etc…

Owning the customer will take more than getting them to open an account and setup direct deposit. The software eats the inertia of how accounts are used. Owning that software and providing the user the best experience is the new battleground. 

Who is best poised to create that software? Startups and FAANGs or the banks that most people like less than their dentist?

Autonomous Finance Apps Today

The universe of apps today is large and growing. Each approaching the problem uniquely for their target markets. Here’s a round up of just a few.

Ultimately, only one or two of these businesses are likely to emerge as large, standalone players. We’ll all benefit from how they will rewire the competitive landscape by having more options to manage our money more easily and efficiently.