The new generation of fintech tools offers the potential to help consumers manage their increasingly complicated financial lives, but also poses risks that will need to be managed as the marketplace matures.1
In many ways, the new generation of fintech tools can be seen as the financial equivalent of an autopilot. The powerful new fintech tools represent the convergence of numerous advances in research and technology–ranging from new insights into consumer decision making to a revolution in available data, cloud computing, and artificial intelligence (AI). They operate by guiding consumers through complex decisions by offering new ways of looking at a consumer’s overall financial picture or simplifying choices, for example with behavioural nudges.
As consumers start to rely on financial autopilots, however, it is important that they remain in the driver’s seat and have a good handle on what is happening under the hood. Consumers need to know and decide who they are contracting with, what data of theirs is being used by whom and for what purpose, how to revoke data access and delete stored data, and how to seek relief if things go wrong. In short, consumers should remain in control of the data they provide. In addition, consumers should receive clear disclosure of the factors that are reflected in the recommendations they receive. If these issues can be appropriately addressed, the new fintech capabilities have enormous potential to deliver analytically grounded financial services and simplified choices, tailored to the consumers’ needs and preferences, and accessible via their smartphone.
New Tools to Help Consumers Manage Their Finances
Given the complexity and importance of these decisions, it is encouraging to see the fast-growing development of advanced, technology-enabled tools to help consumers navigate the complex issues in their financial lives. These tools build on important advances in our understanding of consumer financial behavior and the applications, or “app,” ecosystem.
Researchers have invested decades of work exploring how consumers actually make decisions. We all tend to use shortcuts to simplify financial decisions, and it turns out many of these can prove faulty, particularly when dealing with complex problems.17 For example, empirical evidence consistently shows that consumers overvalue the present and undervalue the future.18 Researchers have documented that consumers make better savings decisions when they are presented with fewer options.19 They have shown the importance of “anchoring” bias–the tendency to place disproportionate weight on the first piece of information presented. This bias can lead consumers either to make poor financial choices or instead to tip the scales in favor of beneficial choices, as with automatic savings defaults.20 Similarly, “nudges” can help consumers in the right circumstances or instead backfire in surprising ways.
These behavioral insights are especially powerful when paired with the remarkable advances we have seen in the technological tools available to the average consumer, especially through their smartphones.22 Smartphones are ubiquitous. The 2016 Federal Reserve Survey of Consumer and Mobile Financial Services (SCMF) found that 87 percent of the U.S. adult population had a mobile phone, the vast majority of which were smartphones. 23 Smartphone use is prevalent even among the unbanked and underbanked populations. Survey evidence suggests we are three times more likely to reach for our phone than our significant other when we first wake up in the morning.24
Some evidence suggests that smartphones are already helping consumers make better financial decisions. The 2016 SCMF found that 62 percent of mobile banking users checked their account balances on their phones before making a large purchase, and half of those that did so decided not to purchase an item as a result.25 In addition, 41 percent of smartphone owners checked product reviews or searched product information online while shopping in a retail store, and 79 percent of those respondents reported changing their purchase decision based on the information they accessed on their smartphone.26
And those use cases just scratch the surface of what is possible. First of all, the smartphone platform has become a launch pad for a whole ecosystem of apps created by outside developers for a wide variety of services, including helping consumers manage their financial lives.