Financial technology or fintech – has become the main driver of more efficient and competitive financial markets, giving disadvantaged consumers better access to finance. Especially in times of social distance to reduce the spread of COVID-19 and the proliferation of digital money transfer programs in many countries, the benefits of fintech and digital financial services have never been more apparent. But fintech poses risks for consumers.
The proliferation of digital fraud, the collapse of an end-to-end credit platform, and the plight of borrowers due to irresponsible practices in the provision of digital micro-credit illustrate these risks. While some of these risks are new, there are many new manifestations of risks that already exist in the financial markets. This includes not only those that arise from the underlying technology that makes fintech possible, but also from new business models, product brands, and types of suppliers.
Identify and address new manifestations
Consumer finance authorities (FCPs) are increasingly faced with the challenge of addressing these risks, but they often lack the knowledge or technical tools to do so. A new World Bank research paper, Consumer Risks in Fintech: New Manifestations of Consumer Risks and Emerging Regulatory Approaches, seeks to directly address this need, identify new risk manifestations for the fintech consumer, and offer a range of emerging policy approaches that can be used. has to do with it.
The article focuses on four main features of fintech: digital micro-credit, point-to-point lending, collective investment finance, and electronic money. They were selected as examples of fintech that can meet the most important basic needs of inexperienced and emerging financial consumers, such as payments, loans or savings, and investments.
These are some of the highlights of the identified risks and approaches:
Fiction or Misbehavior by Fintech Traders: Since Fintech’s business models can be innovative, opaque, or complex and many consumers are unaware of this, this can increase the risk of losses due to fraud or misconduct by traders or their constituencies. Determining the competence requirements for these operators, as well as licensing / registration and selection requirements, can help solve the problem.
Lack of platform/technology reliability or vulnerability: If a Fintech platform or other systems supporting a Fintech offering are unreliable or vulnerable to external threats, this could expose consumers to a greater risk of loss and other harm, including fraud from third parties. Approaches to address these challenges include specific technologies for outsourcing and risk management, operational reliability, and operational resources.
Disclosure and transparency to consumers in a digital environment: Standard risks associated with insufficient product information are increasing with the introduction of new types of product pricing, resources, and risks, and digital communication channels are testing consumers’ understanding. Adapt digital channel disclosure formats and ensure that the sequence and flow of information and user interfaces are increasingly recognized as essential to solving these problems.
Increased Risk for Inappropriate Products: Fintech may increase access to riskier or more complex financial products for consumers who do not have the knowledge or experience to properly evaluate or use them, leading to an increased risk of harm caused by non-products. Possible solutions include restrictions on individual investments or other exposure to less informed consumers and product suitability and product design obligations for fintech entrepreneurs.
Conflicting fintech business models leading to behavior that is not in the best interests of the consumer: Fintech business models can create conflicts of interest in circumstances not provided by regulators or that consumers do not expect. New approaches to addressing this problem include conflict reduction obligations and a range of constraints targeting specific types of conflict.
Algorithmic decision-making leads to potentially unfair outcomes – the use of consumer decision-making algorithms is especially common in highly automated fintech business models, and some one-off decisions can be taken.
A gradual and balanced approach is essential
Regulators considering any of these measures need to adapt the approach within the context of their country, taking into account not only risk mitigation issues but also the potential implications for the development and innovation of the financial sector.
A phased approach is essential. This should include market analysis, consumer experience, and the current regulatory framework; and determine the appropriate regulatory approach based on the assessment (including consideration of regulatory alternatives, if applicable). Ensuring effective supervision with sufficient resources of the measures being implemented and the implementation of additional measures – such as efforts to increase consumer awareness, operational capacity, and understanding – are also critical steps.