WORKWEEK

Grab your fedora and bullwhip; we’re going to be starting with some fintech archeology today.

Journey back with me to the halcyon days of 2008, when the traditional banking system was imploding, consumers were pissed, and web startups focused on personal finance were just beginning to flourish. Here’s the New York Times:

When the financial sector took a dive this fall, the entrepreneurs behind a new batch of personal finance sites worried that they were in the wrong place at the wrong time.

After all, if people no longer trusted their banks, why would they trust some start-up with their most private financial information?

As it turns out, interest in these sites is up, not down. Burned by their banks and the stock market, people seeking help with budgeting, saving and investing are turning to sites with names like Mint, SmartyPig, Cake Financial, Wesabe and Credit Karma.

Visits to online personal finance sites are up threefold over last year, said Jim Bruene, founder of the trade publisher Online Financial Innovations, and many of the sites say they have grown quickly since the crisis worsened in September.

Mint, which tracks users’ financial accounts and creates budgets, has 630,000 registered users, a quarter of whom have joined since the fall.

Mint, which was acquired by Intuit about a year after this New York Times article was published, became the face of a new and intriguing idea – beyond executing simple transactions, the internet could be leveraged to help consumers understand and improve their financial lives.

I swear, back in 2008, this was a novel idea!

It so intrigued the industry, that banks and credit unions (which were much less open to the value of financial technology and digital banking than they are now) all glommed onto the idea that personal financial management (PFM) was a critical online and mobile banking feature that they couldn’t afford to not offer.

The hype peaked around 2012, when industry observers started pointing out an inconvenient fact – despite a significant increase in the availability of PFM tools, most consumers weren’t using them:

In a September survey of more than 1,100 U.S. consumers, Aite found that only 27 percent use PFM from any host, be it their own institution or a third-party site like Mint.com.

The problem, Aite research analyst Ron Shevlin says, is not a lack of promotion by banks to spark their customers’ interest. Instead, it’s a lack of recognition in the industry of what users want PFM to do for them.

“Why so few consumers use this tool is that so few are engaged or active in the management of their financial life,” says Shevlin. “Eighty percent of people don’t do budgeting. These are the people who aren’t the Quicken junkies.” 

Banks and credit unions stuck with it for a while, but the fintech industrial complex moved on to other things (BBVA would acquire Simple just a few years later, kicking off the digital bank fever, and P2P lending would explode in popularity shortly thereafter).

And it felt like that was that. PFM was a neat idea that never quite made as much sense in the real world as it did on a whiteboard, and everyone kinda collectively agreed to set this particular fintech acronym aside and move on.

PFM was dead … or so I thought.

The Many Faces of PFM  

My mistake, in believing that PFM was dead, was confusing the dominant design pattern for PFM in the late 2000s and early 2010s (expense categorization and budgeting) with the underlying job to be done (JTBD).

The fact that only 15-20% of U.S consumers ever used a digital tool for expense categorization and budgeting didn’t mean that there wasn’t a more fundamental customer need sitting underneath those PFM products. 

There was, and it’s worth trying to define, more precisely, what that need is.

What is personal financial management?

Here’s my definition, which I think strikes a good balance between being overly broad and narrowly specific – personal financial management (PFM) is any product that helps customers have more money or get more utility out of the money they already have while doing less work.

This definition includes budgeting but is not confined to it. It excludes most neobanks (a safe, low-cost place to keep money), credit cards (the customer doesn’t have to do any work but it’s not money they’re getting, it’s debt), and brokerage apps (helps customers get more money, but absolutely requires more work).

If we apply this definition to the last 18 years of fintech history, it becomes clear that PFM is alive and well.

Looking at this graphic – which, I know, is not comprehensive and is undoubtedly missing lots of interesting companies, please forgive me – a couple of things jump out.

First, the companies listed in the graphic offer a wide range of different capabilities to consumers, which I am lumping under the umbrella category of Personal Financial Management. 

These capabilities include:

• Budgeting – helping customers understand and control their spending. Traditional PFM tools, both old (Mint) and new (Copilot) are good examples.
• Goals & Planning – provoking customers to set short and long-term financial goals and prescribing a plan for how customers can achieve them within the desired timeframe. Monarch’s planning tool is a good example.  
• Building Better Financial Habits – training customers, through rewards and challenges, to develop more financially healthy habits. Ostrich (financial challenges) and Debbie (rewards for paying off debt) are good examples.  
• Fostering a Community – giving customers a place to share challenges, celebrate milestones, and find the motivation to improve their financial health. Snowball Wealth and FRICH are two good examples. 
• Financial Coaching – helping customers better understand their relationship with money and developing a more productive financial mindset. This coaching can be delivered through software (Stackin’ is a good example) or human financial planners (Ellevest’s financial coaches are a good example).  
• Finding Opportunities to Save Money – identifying opportunities where customers can save money (canceling unused subscriptions, negotiating lower bill payments, etc.) and automating the seizing of those opportunities. Truebill is a good example.
• Managing Benefits – helping customers keep track of their benefits (food stamps, unemployment, disability, etc.) in order to ensure that they are fully utilizing them. Providers (the app created by Propel) is a good example.
• Earn More Money – aggregating and recommending opportunities for customers to earn more money, based on each customer’s unique earning situation. Steady is a good example.     
• Automated Saving – setting aside money for customers to save without requiring them to do much (or any) work. Digit is a good (and recently notorious) example. 
• Automated Investing – developing and executing long-term investment strategies on customers’ behalf, based on their goals and risk tolerances. There are a few different flavors here, including investing spare change (Acorns, Stash) and more fully-featured robo advising (Wealthfront, Betterment). 
• Tracking and Improving Credit Scores – keeping track of customers’ credit scores and providing them with advice on how to improve it. Credit Karma is a good example.
• Finding Better Financial Products – recommending financial products that will provide a superior outcome (lower costs, greater rewards or yield, etc.) for customers compared to what they are using today. NerdWallet and Credit Karma are both good examples.
• Calculating and Tracking Net Worth – giving customers a comprehensive understanding of their net worth and helping them track changes to it over time. Lunch Money and Personal Capital are two good examples.
• Optimizing Wealth Building – providing advice for higher net worth customers on how they can optimize their financial decisions to accelerate their wealth building. Personal Capital and Ellevest are good examples. 
• Optimizing Taxes – providing advice for customers on how they can optimize decisions around taxes (withholding, tax loss harvesting, etc.) to deliver better short or long-term financial results. Traditionally, this function has been provided by certified public accountants (CPAs), but it is increasingly a feature built into wealth management products (see Wealthfront and Betterment). I also expect to see these capabilities become much more broadly available as tax planning infrastructure providers like April and Column Tax get more traction.

Second, PFM is cyclical.

There are novel ideas in PFM, certainly. These usually arise when something fundamentally new starts impacting consumers’ finances, and fintech companies invent a clever solution to address it. The rise of the subscription economy and the subsequent emergence of Truebill is a good example. I expect that the emergence of BNPL will trigger a similar reaction in the PFM space (once the BNPL companies start sharing their customer data through data aggregators).

That said, I’m struck by just how many new companies in the PFM space are building solutions on top of old ideas. Some of these solutions are literally just slicker versions of the things we already have (Copilot is very similar to Mint but much better looking). And some of these solutions are software equivalents to the services that human beings have historically provided (building decision engines to replace CFPs and CPAs).

And third, it seems highly likely that there are some future unicorns hiding in the latest cohort of PFM providers.

Take a look at this graphic again:

The companies in the first cohort (2004 – 2010) have collectively raised more than $2.1 billion in venture funding to date and have already seen some great exits. The second cohort (2010 – 2016) has collectively raised more than $1.8 billion in venture funding and has seen a lot of similar successes.

Not all of the companies in the third cohort (2016 – 2022) – which have collectively raised more than $130 million – are going to make it, obviously. There will be plenty of them that I completely forget when I’m updating this graphic in 2028. However, I’m encouraged by the fact that this third cohort is both populous and diverse in terms of product concepts. There will be some monster companies that come out of this group.

And that brings me to my final point – as we head into the next era of PFM, I think there are some lessons that new fintech founders can take from the last 18 years of PFM product innovation:

1. You are your business model. As I’ve written about before, your business model is the gravity well that your product revolves around. If you pick the wrong business model, it will become a black hole that will devour you and your customers, regardless of how pure your intentions are. There is a very good reason why a large percentage of the PFM companies in cohorts 2 and 3 charge a monthly subscription fee rather than rely on the pay-for-play model that Mint, Credit Karma, and NerdWallet chose.
2. Be wary of the infrastructure you build your product on. Open banking and data aggregation is the foundation that most of the companies in the PFM space rest upon. For good reason, account aggregation is a powerful capability. However, it’s also very finicky and unreliable, even after two decades of work to improve it (you can read more about the challenges of data aggregation here). It’s risky to build on top of data aggregators, so make sure you do it smart or, perhaps, try to build your MVP without it (as Ostrich is doing).
3. The 15% problem is real. I challenge you to find a credible survey that finds usage of digital budgeting tools significantly greater than 15-20% for the general consumer population. You know what? Don’t bother. You won’t be able to do it. Why not? Because there is a small percentage of the general consumer population (about 15%) that enjoys building budgets and categorizing and tracking expenses and seeing detailed charts of cashflow patterns and that consumer segment never gets meaningfully bigger. These are the folks that like building spreadsheets in excel and (I strongly suspect) taking every new digital productivity tool for a test drive. These consumers are very passionate and are often early adopters of new budgeting and expense tracking apps, which can often fool the fintech founders building those apps into thinking they’ve found a more attractive product-market fit than they actually have.
4. There is no perfect PFM tool for all consumers. Related to the point above, even if you avoid the fifteen percenters, don’t fool yourself into thinking that you’ll be able to design a successful mass-market PFM product. I don’t think such a thing exists. Different customer segments need different capabilities. Wealth and tax optimization capabilities make perfect sense for a couple that pulls down $650,000 a year. A household that earns $35,000 a year needs different features. Know who you are building for. 
5. Budgeting isn’t an adequate substitute for having money. One reason I like Steady so much is that they are addressing a problem that fintech (and banking) has largely ignored – a lot of consumers don’t make enough money. My hope is that other PFM providers building for lower-income consumers will continue to innovate in this area. Budgeting can only do so much.  
6. Have a philosophy. Effective software is built around a philosophy for how it should be used. The more specific the philosophy, the more your software will resonate with your target customer segment. The reason that YNAB has so many passionate fans is that it is dogmatically designed around a zero-based budget philosophy. Remember – it won’t be for everyone. Consumers outside your target segment may hate your product (related: I really don’t like Superhuman because I am passionately opposed to the religion of inbox zero). That’s the cost of doing business.
7. It’s OK to involve humans in the experience. I know this advice is a bit sacrilegious in SaaSland, but when it comes to money, there will likely always be a need for humans to be involved. PFM providers are building decision engines to codify what financial planning and accounting experts know. That’s great, but there is an emotional aspect to money that human beings are great at, and that will be much more difficult (perhaps impossible) to replace with software. Whether it’s financial coaches or community-driven human-to-human interactions, you should be prepared to keep people plugged into your product.  
8. Strike a balance between self-driving money and hands-on-the-wheel money. Full self-driving money may be impossible to build, but even if it is technically possible, I’m not sure consumers are ever going to be comfortable with it. Hands-on-the-wheel money has had a moment recently, but I also don’t think customers are going to want to have to do that much work to manage their finance long-term. Finding a balance between these two extremes will be the key to success.
9. Money is fundamentally about happiness. Most financial advice assumes that the best advice is whatever maximizes the financial return for the customer. This is dangerously untrue. The best financial advice is whatever maximizes the customer’s ability to extract happiness from money. And happiness is deeply subjective. Understanding what makes your customers happy is a critical building block when designing a compelling PFM product.  
10. Delivering better outcomes is all that really matters. Helping customers better understand what’s happening with their money is valuable only to the extent that that understanding translates into actions that deliver better financial outcomes for those customers. The next generation of PFM products will take steps to shrink the gap between understanding and action in order to deliver better outcomes faster.

PFM Isn’t Dead

I was wrong to think that PFM died in 2012. It didn’t die; it evolved. It multiplied. It became perhaps the most tantalizing unsolved problem space in financial services. Fintech founders, even those that have tried and failed to build successful PFM products in the past, can’t resist it.

This is an unambiguously good thing for consumers and for our industry. I can’t wait to see what comes out of this space next.