New Technology For A New Financial Sector
In the UK, last year’s report on “Consumer Priorities for Open Banking” by Faith Reynolds and Mark Chidley (which is, by the way, an excellent piece of work and well worth reading) set out just why it is that open banking by itself delivers quite limited benefits for consumers. They point towards a future of open finance (and, indeed, open everything else as well) and talk about an industry that uses the new technologies of artificial intelligence, APIs, digital identity and so on to take a more complete view of a customer’s situation and provide services that increase the overall financial health of that customer. I thought this was a very interesting way of creating a narrative for the next-generation of fintech and techfin propositions.
Fintechs should stop providing financial services and start providing financial health. This may seem to be just another buzzword for embedded finance strategists, but I think it is more than that. It’s a way of thinking about the next generation financial sector.
Coming from another direction from that UK report, the US Center for Financial Services Innovation (now the Financial Health Network) published an April 2019 report on “How Industry Executives View Financial Health”. It’s an interesting snapshot of the changing nature of the financial industry in developed economies, starting from the perspective that more than a decade on from the global financial crisis, financial institutions are still trying to regain the trust they lost with customers. The fintech non-revolution doesn’t seem to have helped: the vast majority of Americans still struggle with their financial health. In response to these changing circumstance, some financial institutions have shifted from a product-focused orientation to one that places the customer and their financial health at the heart of the proposition. We are beginning to see initiatives focused on financial health and wellness.
My good friend Rik Coeckelbergs, founder of “The Banking Scene” in Belgium, talks in those terms also. He recently wrote that a bank must support its customers in having “a financially balanced life, helping them to reduce financial stress by improving their financial wellbeing”. The more I think about it, the more I agree with Rik that this should be one of the societal responsibilities of banks as heavily-regulated players crucial to the nation’s well-being. Just as electricity companies are regulated to not only produce electricity but not to pollute their environment or kill consumers because of poor safety, so perhaps it is time to apply some similar thinking. Where should we start? As the CFSI reported, while more than two-thirds of executives surveyed said financial health was a “strategic priority”, less than a fifth were actually reporting on customer financial health, which would seem to be a good trigger for practical initiatives and a way to encourage regulators, partners and customers themselves to ask questions about improvements in financial wellbeing. That’s not to say that nothing is happening, of course! For example, JPMorgan Chase
National Wealth Service
Writing more recently in the Harvard Business Review, Todd Baker and Corey Stone explore some interesting ideas around this. They say that the prevailing paradigm (of markets and choice) has created a regulatory system that “largely places responsibility — absent the most egregious abuse — on the individual consumer”. They argue for a radically different regulatory structure to more directly connect the success of financial services providers to their customers’ financial health, a where-are-the-customers’-yachts approach where banks prosper when their account holders prosper. They draw an interesting analogy by comparing this approach with experiments in the American health marketplace that pay providers for improving patients health, “rather than paying them simply for treating patients regardless of the outcome of the medical intervention”.
My good friend Ron Shevlin wrote a great piece about this here in Forbes arguing that financial health platforms will emerge to provide this next generation of financial services and pointing out that it will provide some terrific opportunities for fintechs. He suggests that aggregators such as MX, Plaid, Yodlee or Finicity could be a real catalyst in making something happen. I agree: if we can connect the potential for open banking to provide the data to the potential for new players to use that data, we can expect to see real innovation. This kind of thinking delivers a useful narrative for stakeholders to communicate around the post-pandemic financial services they must necessarily develop to support communities in their recovery from the COVID chaos and beyond.
I think this is really important. Refocusing the sector on delivering financial health, rather than financial services has implications that go way beyond choosing better credit cards or spending less on coffee and more on pensions. The American Psychological Association considers financial stress to be one of the top stressors in America and research shows clearly that financial stress and economic hardships link to a variety of very negative physical and mental health outcomes, ranging from abuse and neglect to household dysfunction and heart disease. There is no doubt about it: improving financial health improves health in general.
In order to do this, financial health providers will need a better picture of individuals and their circumstances. They need the raw data to work with. Just as the doctor needs X-rays, bloods and histories, so the AI that powers an effective financial health provider needs your transaction records from your checking account, your mortgage, your pension, your insurers and everywhere else. This is an immediately achievable goal. In the current economic downturn, to highlight the obvious example, many people make a lot of mistakes in managing their finances during stressful and unfamiliar circumstances. But as was pointed out in the Wall Street Journal recently, most of these mistakes are very basic. It does not take a giant supercomputer and all of the data in the word to stop people from falling into common traps around the way they borrow, save, spend and invest.
If the next generation of fintechs can get hold of this data, then they have a real opportunity to build something very different to the “niche bank with a PFM front-end” that the first generation of fintechs gave us. This is where the connection with open banking, open finance and open data comes from and it is where the real consumer finance revolution come from.