Can fintech help you choose wisely (or should regulators)
Clicking through the updated T&C’s of an insurance provider, signing off a mortgage agreement or ticking the boxes off a credit card renewal. If it sounds familiar, it is because they are part of the little things we tend to do blindly, but not always to the best of our knowledge. How do we make sure accurate and user-friendly information guide our financial decision-making, and how can digital providers control –for better or for worse- the outcome?
Making right choices is all about accessing the right information. Correct?
Well, it’s a bit more subtle than that.
As people need to be informed when making financial decisions, they do not always have the necessary know-how that account for the complexity of those choices.
If we have a tendency to hastily approve or sign general conditions, it probably is because we assume they are reasonable, or because we know it is a sine qua non condition to validate a purchase.
People are emotional beings — meaning that all habits are a mix of learnings, experiences and exposure over a lifetime that merges into patterns.
It is well known that emotions can either enhance an individual’s ability to make rational financial choices or, inversely, lead to suboptimal decision-making.
People need information, but information that is relevant to them.
More is (not) better
To bridge the information asymmetry, companies and regulators have gradually introduced mandatory disclosure with the intention to better inform the public. These disclosures have found limitations, placing an unrealistic burden on consumers — for example, expecting them to overcome complexity and sophisticated sales strategies.
When looking at online decision-making environments for financial products (such as pension policies, credit offers and investment prospectus), a combined study by the Australian and Dutch financial supervisory authorities found that while disclosure is necessary, it alone is often not sufficient to drive good consumer outcomes.
More broadly, there is an overall poor understanding of the economic landscape and low trust in financial institutions — the so-called ‘twin deficit’ problem — which lead consumers to make worse personal finance decisions.
People need information, but information that is relevant to them. Evidence show that personalization and contextual information — meaning relevant to individual circumstances — can increase engagement and comprehension.
A Bank of England experiment showed that monetary policy reports that included visuals and day-to-day examples close to the readership increase comprehension scores by 42%, compared to the textual versions.
So while financial services and offerings become more digital, the challenge of financial choices in the digital age only gets bigger. Unless financial technology can offer a solution.
As financial services providers access more granular data on our spending, saving and purchasing patterns, they want to ensure we consume more.
Digital is (maybe) better
Supposedly, digital tools and the rise of fintech solutions allow people to be better informed and equipped to make good choices. Because digital is more user-friendly, no?
Traditional brands have always acted on consumer emotions to drive consumption and purchase behavior. Now that financial services providers access more granular data on spending, saving and purchasing patterns, their marketeers are all over the tips & tricks to ensure we consume more (yes, even money we don’t have).
Meaning; it is not so much about the technology itself, if not the result it tries to deliver.
Over the past decade consumers turned to financial technology to help them make better financial decisions and improve their financial status. As an example, 83% of American consumers polled actively ask their financial institutions for tools to help achieve their financial goals.
Using fintech solutions for example to budget can alleviate common mistakes of budget management such as remembering and calculating cumulative expenses or allocating expenses to budget categories. They actually can help rationalizing irrational choices in multiple ways.
In Iceland, a large number of citizens use an online platform that aggregates bank information and transactions. Through the data, researchers found that users of fintech solutions accessed information about their current account balance more often, leading to significant reduction in high-interest unsecured debt and bank fees.
A University of Pennsylvania experiment evidenced that consumers could be nudged, or actively encouraged to change their spending habits by simply installing an extension to their internet browser displaying reminder messages.
Fintech companies are also working closely with established banks to gain deeper insights into how people engage with both money and technology, and helping incumbents take a much more consumer-led approach, rather than simply trying to sell a product.
Add to that the advances in Open Banking and PSD2, and providers, aggregators and apps can empower consumers by offering easy-to-access real-time spending record, bank and credit cards information, and customized tips for savings.
One-size-fits-all? Far from that.
Not everyone in society is equally equipped when it comes to digital tools. We know that people of different generations and demographic backgrounds incorporate new technology into their lives at different rates.
Field researchers even found that, contrary to common beliefs, using fintech to inform budget standing can change consumer behavior in an unexpected way: in the end, they’ll spend more.
Which means we’re back to education and policy choices, to warrant for well-prepared citizens.
With increasing choice, complexity and low financial literacy levels, chances of irrational behavior are high.
Less is (hopefully) more
The point where the homo economicus, would, according to rational choice theory, be consistently logical and seek the highest level of satisfaction from their economic decisions is long gone.
With increasing choice, complexity of products, subtlety of digital environments and low financial literacy levels, chances of showing signs of irrational behavior resulting in suboptimal choices are high.
As an easy fix, mandated disclosure was introduced as a technique to improve decisions people, particularly to protect ‘the naïve from the sophisticated’.
However, we cannot assume that disclosures alone effectively protect consumers and enable sound decision-making. Academics have found various examples on how mandated disclosure fails — it rests on false assumptions about how people think, act, and live.
People tend to be averse to making unfamiliar decisions, so they are inclined to avoid making choices about them and are prone to make them with less care than the disclosures desire.
This poses the question on the extent of policy interventions and paternalism. Is it a policymaker’s role to seek the common good (however that’s defined) or just guide people into balancing all the available options? And how far are you willing to go.
With any policy choice, comes unexpected outcomes. Just look at financial instruments introduced to save businesses from insolvencies over the past months of the pandemic, and what externalities they brought. Reviewing existing regulation to ensure that the consumer perspective is sufficiently taken into account becomes necessary.
As the European Commission has initiated the work in promoting financial education and digital financial skills to ensure that consumers are able to make the most of what digital finance has to offer, we can expect other regulators and governments to follow.
Better is actually more
Making up your mind is not easy. Making up your mind about things you are not an expert in, is even harder. Doing so in a (digital) environment that tempts you to go beyond your initial threshold, is killing.
The role of disclosure as the default option relied on to protect consumers. However, as with any measures, there needs to be a balance in trade-offs. By overloading people with information and red flags, we run the risk of giving them a flawed sense of security.
Digital providers want to add transparency, greater and fairer choice to consumers and businesses, so they can make informed decisions. As fintechs become commonplace, we may start to see a shift in behavior.
That said, people’s beliefs and relatability and how they respond to policy decisions remain crucial. Policymakers should seek the appropriate balance between consumer protection and industry innovation for effecting good consumer outcomes, and avoiding poor ones.
In turn, making sure deciding in the digital age does not stay binary — more or less — but relies on quality.
