November 11, 2021
Algorithm gives a scale for advising
Banks need to boost data and personalize service
It is not new that researchers try to incorporate elements of financial behavior in the world of financial planning and investments. Behind all of this is the understanding that the human being is less rational than what was believed decades ago and much more susceptible to emotional reactions in many aspects of life, including money management.
To bypass some biases, artificial intelligence can help the consumer to organize their finances and invest better, according to Jody Bhagat, president for the Americas at Personetics, a company specialized in personalization based on data for financial services. The company has among its clients the creation of a tool in real-time, “Pay Yourself First”, for US Bank, and has business not only in the United States, also in London and Tel Aviv. It is currently building its services in Brazil.
The executive, who participates in the panel Anbima Summit on Thursday, evaluates that in Brazil established banks have the ability to interest new participants, using their most critical tool: client data. “Although we are in the initial stages of this move to the competitive scene, the coming of open banking and the transition to open finance (the sharing of banking services, investments, insurance and credit) will create greater transparency and more control in the hands of the consumer,” he says. “We will probably see a tightening of the market and more client turnover. The emerging winners will offer more personalized solutions based on the behaviors and needs of the client.
Personetics received this year $75 million USD from the growth fund of private equity manager Warburg Pincus. The operation already had support from venture capital investors Viola Ventures, Lightspeed Ventures, Sequoia Capital and Nyca Partners.
Valor: How can technology help the consumer to plan their financial life and invest more?
Jody Bhagat: Advances in data enrichment and AI (Artificial Intelligence) algorithms can help the consumer to better manage daily banking and equity. This is done by taking in and analyzing transaction data of the client to identify a) what happened? B) what is important to know? C) what action should I take? Technology allows financial institutions to understand the needs of the client and the cash flow on a deeper level, and they proactively get involved with personalized interactions and advice for the client. Even more important, personalized interactions and advice can be created on a scale and efficiently for any client data base, instead of limiting personalized services to only wealthy clients.
Valor: Which behavioral biases can the use of artificial intelligence help to bypass?
Bhagat: Behavioral biases can lead to less than ideal decision-making, and AI algorithms that are more objective can improve some of these behaviors. A simple example is an investor who wants to begin to invest in a long-term goal but does not know exactly how much to put aside and when to do it. AI algorithms can encourage the individual to contribute a specific quantity to an investment account, at the same time considering their future needs and cash flow.
Valor: Do tools such as “Pay Yourself First,” recently adopted by US Bank, tend to be a turning point for the sector?
Bhagat: Pay Yourself First is an automated financial solution, patented and innovative, geared toward clients in retail and affluent retail, to help them increase their savings and wealth. Currently about 30% of consumers create a simple automatic transfer of money at the time of deposit of a paycheck in the checking account in a basic transaction into a savings or investment account. There is a tendency for consumers to be conservative in the predetermined transfer amount since they do not want to inadvertently be in a situation of a tight budget. Pay Yourself First analyzes the clients’ cash flow patterns and expected needs at the time of deposit to determine how much can safely be transferred. It could send the total intended amount, part of it or none, if the deposits and withdrawals on the account have changed significantly. With Pay Yourself First, clients can reserve money to invest more confidently, knowing that the AI algorithm is “watching over them.”
Valor: At what stage do you see the competition between banks and fintechs in Brazil? Have you been following this movement?
Bhagat: Established banks are facing challenges on multiple fronts: competitor banks gaining a larger share of new accounts, fintechs that selectively look for banking needs – usually lending opportunities – and retailers and providers of technology that offer new distribution points for banking services. Established banks need to confront these new participants and expand their franchise of clients, promoting their most critical tool: client data. Although we are in the initial stages of this move to the competitive scene, the coming of open banking and the transition to open finance (the sharing of banking services, investments, insurance and credit) will bring greater transparency and more control in the hands of the consumer. We will probably see a tightening of the market and more client turnover. The emerging winners will offer more personalized solutions based on the behaviors and needs of the client.
Valor: In Brazil, research shows that the consumer prefers human service rather than investing using a robot. Could the development of more supportive models break this barrier?
Bhagat: Many developments could happen simultaneously, resulting in evolution of client behavior and the adoption of AI tools for investing. There will be segments of the clients with long-lasting relationships, who prefer human interaction, and others who prefer AI when it comes to investing. For more sophisticated financial needs – for example financial planning and real estate financing – clients in general prefer human interaction and advising. Tools driven by AI for investing and banking operations will increasingly be adopted by more clients as it increases confidence in them. In summary, yes, AI based tools will grow in adoption for investment and will conquer a larger share of clients. Clients need to believe in the brand and in the AI algorithm, and the demonstration of performance and results will accelerate the confidence building. For more sophisticated needs, such as financial planning, there will probably be a strong tendency to look for human assistance.
Valor: We have seen initiatives in the marketplace in Brazil that unite financial services and the commercialization of goods and services. Is this a tendency that comes with digital acceleration? If banks are going to become retail companies and retail companies are becoming banks, who will differentiate?
Bhagat: The arrival of open banking and a greater transition to open finance will change the competitive scene and how the client purchases financial services and makes transactions. While the United Kingdom and Europe were the first to adopt open banking in a regulatory manner, Brazil is in the front, moving more aggressively than the rest of the world toward open finance. This will create more transparency in prices, more distribution points to buy, and grouping of financial services and greater turnover and transition of clients. In the environment of greater transparency and choice, the winners will be those who differentiate themselves by service and personalized choice where the clients feel that the institution “knows me, values me and advises me better than others.” It will be ever more important for financial institutions to transmit to their clients the benefits of having a relationship with the bank – not only when it is time to make a new sale, but in a consistent and efficient way throughout the length of the relationship.
Valor: Will products like revolving credit come into play with the arrival of fintechs who have been promoting these types of services without cost in the international market? Does this source of revenue tend to dry up for established banks?
Bhagat: Revolving credit and charges have been a point of confusion for consumers, regulators and even banks. The majority of bank executives do not prefer a business model based on revolving credit fees, but the industry has continued to embrace the fees and this represents 5% to 8% of the liquid income of banks. The fees are a source of dissatisfaction, from high operational costs in calls to clients and refunds, and usually these are charged to those who are least able to pay these costs. Clients wants the bank to keep them in mind and to help them to better manage daily banking, instead of adding fees. The levels of fees will remain stable for some time, but we will see a decline as banks find more creative ways to help the client and a level of compensation of fees. The answer is in the use of personalization guided by data to understand the patterns of cash flow of the clients and help them prevent having an issue of account deficit. Banks can offer alternatives to solve the issue.