We see tremendous potential in financial services innovation, but we are not convinced that it has taken all Canadians forward.
As academics and practitioners, we have spent time trying to understand the financial services ecosystem and its evolution. Financial technology, or “fintech,” has received considerable media attention and funding. And rightly so. Automated deposit technology facilitating savings, budgeting apps, margin compression in financial advice and other innovations have had benefits. But we pose the following questions: Is innovation fair? Does it benefit everyone equally? Is it inclusive?
We argue that innovation can also be used against the consumer. A technical segregation of consumers into “the knowledgeable” and “the clueless” with respect to financial acumen through data analysis could be used to target products in a manner that is optimal for profits but suboptimal for society.
We debated the effects of innovation on financial inclusion at a recent event organized by the Behavioural Economics in Action Research Centre (BEAR) at the University of Toronto’s Rotman School of Management. According to the World Bank, financial inclusion is about more than just “financial access,” but providing people with “useful and affordable financial products and services that meet their needs ... delivered in a responsible and sustainable way."
There are many success stories of course. Rotating savings and credit associations (ROSCAs) such as India’s chit funds and Latin America’s tandas and their contemporary equivalent peer-to-peer lending platforms are classic examples of innovation in microfinancing that increase access to startup capital. U.S. food-stamp program digitization and integration with third-party apps is another example of innovation increasing inclusion. A Harvard Business School study reports that users of a benefits management app were able to more efficiently manage their digital food stamp allowances to the point of eliminating roughly one day of extreme hunger a month compared with those not using the app.
M-Pesa, a mobile phone-based money storage and payment system, is estimated to have lifted almost 200,000 Kenyan households out of extreme poverty (living on less than $1.25 a day). Moreover, there was an additional layer of inclusion: there was a greater benefit to female-led households, and mobile-money services innovation and access may have contributed to 185,000 women transitioning from subsistence-farming occupations to retail, sales, and other business occupations.
But success isn’t everywhere. Easier access to credit via innovative online lending businesses is trapping many into a cycle of high-interest loan use to fund day-to-day expenses. These businesses have often used the cognitive challenges associated with making savvy financial decisions to shroud, obfuscate and confuse people into accepting loans that are not in their best interest. Many Canadians already find the financial landscape to be cognitively challenging and the need to navigate new technology only increases the feeling of entrapment. Behavioural economics tells us that when the environment gets too complex, people simply give up and remain with their old, suboptimal service or product decision.
Those among us who do embrace these new innovations can also fall into other traps. Easy access to online brokerage accounts increases the likelihood that people trade too frequently, hurting long-terms returns. We also know from research that too much trading can be injurious to our mental as well as financial health.
Debit card access and online banking for bill payments has led to billions of dollars in savings, but conversely, estimates suggest that Americans are on track to spend $110-billion in interest and fees on credit cards for the 12 months ending this March 31. Credit cards that offer cash back or other reward programs only benefit consumers who can pay balances in full every single month. For everyone else, they amount to penalty programs.
It is also important to note that many financial institutions have migrated services to digital channels, but Indigenous, rural and older Canadians have far lower internet or smartphone use.
Financial service innovation has the power to increase inclusion. But how can we convert this promise into results?
We have two specific prescriptions. First, despite its many benefits, one big pitfall of the innovation lab approach is that it results in a disconnect between the innovator and the user. Inclusive innovations are born in the field, through a deep understanding of the realities, constraints and environment that the user operates in. Second, innovators develop innovations that are most likely to benefit people like them. By being more inclusive about who does the innovating, and by deeply understanding the behaviours of the target user, we will hopefully see a stronger correlation between financial innovation and financial inclusion.
Dilip Soman and Avni Shah are professors at University of Toronto. Nicole Robitaille is a professor at Queen’s University. Doug Steiner is the CEO of Evree Corp., and Preet Banerjee is the founder of MoneyGaps.