AI-Powered PFM Helps Banks and Customers During Recessions

Interest rates are rising worldwide, and business owners could soon feel the sting of whether to refinance an existing commitment or apply for a new one.

Defaults could start to pick up if a slowdown in economic activity accompanies this increase in interest rates. Banks must proactively respond to these changes in the macroeconomic backdrop to keep performing positively.

This is where personal finance management (PFM) comes into play to improve the relationship with the customer by offering guidance, insights, and tools to help them stay current in their commitments and foster their financial stability.

PFM And Using AI

What is personal finance management (PFM), and how is AI changing the game?

Personal finance management (PFM) refers to software that can facilitate managing money for an individual. These solutions typically collect, organize, and sort the significant amount of financial data available nowadays to produce insightful reports and recommendations.

PFM is present in consumers’ day-to-day lives when they interact with an online banking app or apply for a buy-now-pay-later (BNPL) loan.

Banks have typically limited their PFM to providing customer data and have let them decide how to use this information for their benefit. However, customers’ needs have been evolving since technology took over the financial world, and they are now demanding further collaboration with their banks to improve their finances.

As a result, PFM for banks and financial institutions is now becoming a priority. The companies that offer this kind of solution use artificial intelligence to predict what customers need to react to.

Through AI, banks can rapidly offer customers customized products and service offerings by using the vast amount of data they have collected, which can help individuals find solutions to their financial needs without requiring the assistance of a human adviser.

In addition, these AI-powered solutions can be a great tool to help customers achieve their financial goals. The system can intentionally promote savings and investment products that aim to generate wealth or produce a new income stream.

Why PFM Is Essential Today

Why is PFM so Relevant in Today’s Challenging Macro Backdrop?

Some customers may be pushed to the limits as the world seems to be entering a recessionary cycle. This means that the likelihood that they will default on some of their financial commitments could rise and would benefit banks if they act proactively to avoid this situation.

In this regard, the Conference Board, a global non-profit that studies the world economy, social trends, and the political landscape, recently stated that the odds of a recession in the United States have increased to 96%.

Previous occasions when the model has predicted a similar outcome include the dot-com bubble of 2000, the global financial crisis of 2007-2008, and the COVID-19 pandemic in 2020.

This upcoming recession would be triggered by the hawkish measures adopted by the US Federal Reserve, such as increasing the institution’s benchmark interest rate quite rapidly to reduce inflation within the country.

An AI-powered PFM could propose refinancing alternatives, deliver thoroughly estimated cash flow statements based on the customers’ current income and forecasted expenditures, and propose debt consolidation to help people stay current.

Moreover, they could analyze the customers’ finances and propose financing alternatives to relieve any cash shortage they may be experiencing.

Taking a proactive approach to PFM is a win-win situation for the customer and the bank. The former benefits from the algorithm’s recommendations, and the institution may successfully protect its balance sheet and foster the positive performance of its finances by reducing default rates.

Process Automation: The Next Frontier

Suggesting a course of action is essential for banks in guiding individual customers, entrepreneurs, and business owners through a challenging economic season. However, individuals are pretty busy nowadays and may need more time to complete lengthy application forms or visit a local institution branch.

This is where the next frontier of PFM is, as traditional processes need to be automated with the assistance of AI-powered software. Using the data, the bank collects during its relationship with the customer, the system can quickly complete all the required steps to file an application and other similar tasks.

In addition to improving the customer’s experience by saving them time and effort, banks can also benefit by keeping costs as fewer personnel is required to handle applications if an automated system is taking care of that particular task.

Moreover, the revision and approval process for loans and new accounts can be simplified to the point that little human oversight is required, resulting in savings for institutions.

Bottom Line

Artificial intelligence is revolutionizing how businesses work, from how they interact with customers to how their products and services are developed. The vast amount of data available on the internet and the power of modern supercomputers have facilitated the creation of intelligent systems that can optimize a business’s internal processes cost-effectively.