Art Seredyuk is the CEO and co-founder of PocketGuard, a financial advisory personal app the keeps it simple.
Robo-advisors have been heralded as the future of financial management, democratizing an insular world of investment, and using big data to help us make better money decisions. The replacement of exclusive services with sophisticated algorithms has opened the door to a global audience, in theory.
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Today almost anyone can experience the power of big data, but the reality is that the average American is not in a financial position to take advantage of this. Gallup claims that 55% of Americans are invested in the stock market, however a huge 80% of Americans are in debt. This equates to $12 trillion of consumer debt in the U.S., and the worrying truth is that many in the red are not really aware of the full extent of it.
What would happen if we were to harness the remarkable capabilities of these emerging technologies to tackle the debt crisis? This could help to develop transparency, display future projections, and educate consumers. Instead of simply aiding those with disposable finances to make more, we could really start to attack the problem. Let’s take a deeper look into this.
A robo revolution
Financial managers, investment consultants and hedge fund managers have long been reserved for the rich and famous. However a new breed of algorithm-based robo-advisor has surfaced, allowing those with a little spare cash to benefit from the same kind of advice, and profit from investment.
This technology lets individuals easily allocate funds according to saving goals, target dates and their chosen level of risk, which means customers today have full control and visibility from their online dashboard. This means the customer can let technology figure it out - sending them frequent updates and forecasted results, using the most up-to-date information.
By 2020 robo-advisors will manage $2 trillion in the U.S., 5.6% of total U.S. investment assets, according to management consulting firm A.T. Kearney. This is a predicted tenfold increase in 5 years, and it shows that robo-advisors mean business.
These investment platforms are great, but what about the people who are confronting debt, struggling day-to-day with their own financial management? These are the people who really need this financial help.
The ongoing battle against rising debt
Average U.S. debt currently sits at $129,579 per household. This accumulating debt starts at a young age. Meta Brown’s consumer debt study revealed “a skewed perception” of finances across the country, highlighting a significant disparity between how much consumers believed they had compared to their actual debt. This makes a big case for improved transparency from the start, particularly when considering that the average student debt is $47,712.
Young professionals today starting in the negative will struggle when it comes to milestone purchases such as buying a home or a car. Travel opportunities become limited, and many delay starting a family.
Some actors are actively working to improve the transparency. Some sites help students by comparing different lenders. In 2012, Indiana University started sending its students “debt letters” - spelling out the total owed including interest, and associated monthly Payments after graduation. This is an improvement, however there is still a dire need for a tool that shows a better reflection of an individual’s overall financial situation - and while the technology exists, no one has created it yet.
Through prioritizing today’s needs over future security, many end up pushing back retirement dates, and are left with very little financial support in later years. Through tapping into their 401(k) (9%) and taking out loans against their accounts (16%), Americans today are in effect "stealing from themselves".
Millennials are in many cases often unaware of the bigger picture when it comes to borrowing. 63% of this age group do not own credit cards. They do not understand the importance of these tools in building a credit rating, and these spending habits and financial patterns will have big effects down the road. We have yet to see the impact of spiraling tuition fees and house prices. However, they are likely to be far worse than the economic strains of past generations.
Advisory technology to save us from future pains
Algorithm-based financial technologies can create a portfolio of ideal financial instruments for a person in debt, in the same way that robo-advisors create investment portfolios. The idea here is to calculate and compare usage of different financial products, placing this is the context of an individual’s financial environment.
Using a person’s own credit rating, financial needs, and the amount they could realistically commit in repayments, these tools can advise loan amounts and providers. They could be used to provide critical insight and educate a new generation in better spending behaviors. Technology could enable consumers to maximize the value of different cash reward programs. This could be through the automatic selection of a better credit card to use for buying your gas, or finding the best cash rewards scheme for buying your groceries.
Using clear visualization technology can communicate complex entities such as dynamic APR, and decreasing credit scores in an understandable and actionable way. These tools would provide regular updates and warnings, so that spenders do not need to act in such a reactive way. Upcoming payments could be flagged, as well as recurrent bills for unused services. This method of communication is ideally suited to the digital-savvy millennial, and would provide a greater awareness of a topic that is truly important.
There are some early birds in this field, but we believe that more and more fintech entrepreneurs will tackle these problems as the technology develops, harnessing machine learning to automate calculations based on known spending patterns and income, for a future scenario.
The growing disparity between rich and poor in the U.S. is a major concern. 0.3% of annual income goes to the poorest 20%, meanwhile 51.4% goes to the pockets of the richest 20%. The successes of those with disposable income to invest have enabled businesses to develop effective tools to visualize and handle money. Now it is time to turn this technology to the overwhelming mass of U.S. debt, using intelligent technology to build smarter spending habits.
