Tools of the Computer Age: Making Finance Personal

• Contemporary trends indicate an expanding market for better PFM tools and differentiated customer segments.
• AAs can solve challenges faced by the PFM industry in acquiring, sharing, & using customer data and maintaining data security.

Personal finance management (PFM) is often misunderstood as merely a platform for product recommendations and algorithmic suggestions for financial products. Many perceive it as a tool that provides investment options and guides users toward specific products. However, the true essence of PFM goes beyond mere recommendations and focuses on the process and habit of creating wealth.

In reality, personal finance management entails a comprehensive process that involves making informed decisions about where to allocate one’s money and when to invest. It encompasses understanding financial goals, budgeting, saving, investing, and planning for the future. PFM is about developing a systematic approach to managing finances and building a solid foundation for long-term wealth creation

The current landscape and market for PFM tools have witnessed significant growth and interest in recent years, primarily through mutual funds and demat accounts. Mutual funds, known for their structured investment approach in capital markets, offer comparatively lower risks with the potential for better returns. Similarly, SIPs provide millennials with a disciplined approach to investing.

Over the past three years, one crore new investors have entered the mutual fund market in the country, with millennials accounting for 53% of these new investors. Millennials have added 1.24 crore Systematic Investment Plans (SIPs) in the last three years. In addition to mutual funds and SIPs, the capital markets have also experienced an influx of new investors, with seven crore individuals opening new demat accounts.

But at the same time, it is worth noting that a staggering 89% of those who directly invest in the capital markets end up losing money, primarily due to the high-risk nature of these investments and a need for more awareness. Only 14% of mutual fund investors have chosen to invest directly, while the majority of investors rely on expert advice.

The increasing interest in personal finance management (PFM) tools and investment avenues emphasizes the critical need for good tools and expert advice. Dependency on reliable tools and guidance is essential for making informed decisions about the right products and asset classes. Personal finance management becomes fundamental to achieving long-term financial success by enabling individuals to build wealth wisely and develop good financial habits.

The Indian market for personal finance management (PFM) tools is witnessing the evolution of three distinct customer segments, each with unique financial needs and objectives. These segments can be broadly categorized as below:

• Beginners & Youngsters: The first segment comprises investors just starting their financial journeys. They are in the early stages of wealth creation and are focused on developing the habit of financial discipline. These individuals still need to be disciplined investors and are still figuring out how to manage their expenses, save for investment, and build wealth. For this segment, their primary needs from PFM tools revolve around discovering their spending patterns, creating budgets, and saving more.
• Middle-income groups: The second segment consists of investors seeking PFM tools to navigate their financial inflows & outflows and make investments for the future. These individuals are at a stage where they need to determine their investment strategies portfolio allocation, and risk appetite in line with different asset classes. They require comprehensive insights into their financial situation, help discover appropriate investment opportunities and make informed decisions. Portfolio insights and performance tracking become critical for this segment to monitor their investments and ensure long-term wealth building.
• Family offices & High Net Worth Individuals (HNIs): The third segment encompasses investors primarily focused on wealth building and portfolio rebalancing. These individuals require advanced PFM tools that offer comprehensive portfolio insights and monitoring capabilities. They need a consolidated view of their investments across different asset classes, enabling them to analyze performance, identify opportunities for rebalancing, and optimize their portfolio allocations.

As the PFM market in India continues to grow and evolve, providers need to understand the unique needs of these customer segments and tailor their offerings accordingly. By addressing the specific requirements of each segment, PFM tools can effectively support individuals in their financial journeys, empowering them to make informed decisions and achieve their wealth-creation objectives.

Personal finance management (PFM) tools and applications face several challenges accessing and using consumer data. These challenges include:

• Friction in acquiring data: Obtaining consumer data can take time and effort. PFM tools often rely on data scraping, which can be unreliable and error-prone. It is also challenging to get seamless permissions repeatedly and periodically. At the same time, consumers are reluctant to share their financial data due to concerns about privacy and security.
• Pain points in sharing data: The sharing of fragmented data across many financial information providers (FIPs) into the PFM tools and platforms is far from seamless. Additionally, consumers may want to keep their data private from third parties.
• Poor data quality and delivery: Even when data is acquired and shared, it may be of poor quality. This can be due to many factors, such as incomplete or inaccurate data or data not delivered on time.
• Data vulnerability and security issues: PFM tools and applications that store and use consumer data are vulnerable to security breaches. This can lead to the unauthorized disclosure of sensitive financial information. It is difficult to ensure data control and ownership after data sharing & use-case completion.

Account aggregators (AAs) help solve PFM tools and applications’ challenges in accessing and using consumer data. AAs provide a secure and convenient way for consumers to share their financial data. Here are some of the ways that AAs can help PFM tools and applications:

• Access: AAs provide a single access point for PFM tools and applications to a consumer’s financial data. This eliminates the need for PFM tools to rely on data scraping or other unreliable data acquisition methods.
• Reduces friction: AAs simplify sharing financial data with PFM tools and applications. Consumers can consent to share their data with a single click, and PFM tools can access the data in real-time.
• Ensures the correct data: AAs only share data explicitly authorized by the consumer. At the same time, data-sharing via AAs ensures that PFM tools and applications receive the right data as it is fetched from the source.
• Data security: AAs ensure privacy by design, channeling data flows underpinned with informed consent, data control & ownership, and granular, revocable consent.

Recognizing the growing demand for comprehensive financial management tools, CAMS has ventured into the AA industry as an Account Aggregator and a Technology Service Provider (TSP), creating tools to help FIUs make the right decisions and provide the right nudges to the investors.

CAMS is building a comprehensive PFM tool for a consolidated view across different asset categories. This profile view will give investors valuable insights into their investment strategies, portfolio balance, exposure, and asset class allocation, all tailored to their risk appetite and investment goals. CAMS is also developing APIs that allow FIUs to assess and analyze portfolios. The APIs are designed to provide FIUs with tools to craft, balance, and allocate portfolios most appropriately. It will also offer nudges and recommendations to help FIUs guide their clients toward investment decisions.

CAMS is also building a bank statement analyzer to offer insights into crucial financial indicators. It incorporates multi-level categorization to assess credit history, discretionary and non-discretionary incomes, Fixed Obligation to Income Ratio (FOIR), and repayment capacity. By considering these factors, the algorithm helps financial institutions evaluate the risk associated with lending and determine appropriate loan amounts based on an individual’s financial profile.

This talk was a part of the ‘SamvAAd 2023: Let’s Open Finance’ event hosted by Sahamati. It was the first annual Account Aggregator (AA) community event that brought together more than 300 financial institutions across sectors such as banking, investment, pension, and insurance and fintech TSPs (technology service providers).

Listen to the complete talk here:

Check out & download RBI-regulated AA Apps here → https://sahamati.org.in/aa-apps/