Speech by Nikhil Rathi delivered at the Imperial College London Business School. How can consumer-facing technology help keep consumer markets honest?
Speaker: Nikhil Rathi, Chief Executive
Event: Imperial College London Business School. How can consumer-facing technology help keep consumer markets honest?
Delivered: 24 January 2024
Note: This is a drafted speech and may differ from the delivered version
Highlights
- We are at a global inflection point in the rise of technology in financial services and must use and adapt our existing regulatory tools to protect consumers and markets while making sure we continue to embrace innovation.
- We must be alert to competition impacts. Big data must not be the preserve of Big Tech: A digital identity authentication system and a commitment to Open Data could boost productivity and consumer confidence in how their data is used.
- A wider debate between policymakers, industry and consumers is needed about what we are willing to risk in search of innovation and better products and services – and we must be honest that we cannot mitigate all risk that arises from rapid adoption of new technologies.
- Consumer facing technology in financial services should be used to boost financial inclusion and security of data and services, or the industry risks triggering a Techlash.
Introduction
We are sufficiently early into 2024 to still want to tackle the cost of the festive season - to our wallets and our waistlines… but alas, far enough from New Year’s Day for some resolutions of restraint to have gone out of the window.
Luckily, all sorts of apps now steer us on to the path of healthy finances and lifestyles.
Several even encourage you to bet on weight loss, paying you when you shed the pounds and charging you when you don’t.
Gambling on sticking to a diet gives new meaning to the term ‘spread betting’.
Researchers at Warwick[1] found that the most effective way of getting people to lose weight was to threaten them with losing money.
A deposit contract where participants lost money for failing to maintain their healthy regime was 50% more effective than other financial incentives. In other words, lose kilos or you will lose pounds.
Other exciting – perhaps controversial - developments marry personal lifestyle data with financial information and environmental factors to give consumers a ‘life score’. Perhaps this gives a more holistic view of the individual and their propensity to pay off a mortgage than simply by scrutinising salary and savings.
Such digitisation accelerates risks and opportunities. Risks like a middle-aged prudent saver not being allowed to extend his mortgage past 65 because perhaps his daily step count is too low.
But also the opportunity for the Park Runner[2] to re-mortgage or extend her term as her lender takes her fitness into account when determining her ability to repay.
The future for consumer tech in financial services
But does having a smorgasbord of data on individuals at the mercy of the latest behavioural science and nudge theory consistently benefit individuals?
Who owns that data, should consumers be able to choose which piece of the pie they give away and to whom? Can they reclaim that data if they do not know who has it, how it is used or like what has happened to it?
AI – when fuelled by rich data - has the power to tackle inefficiencies and therefore accelerate productivity, growth and inclusion.
How can consumers, industry and wider society share the spoils of this rather than just the Tech and financial firms?
Let me articulate a few scenarios and what these may mean for regulation.
Given the convergence of lifestyle, financial and physical health when it comes to technology, I will stick with the weight analogy.
Technology-heavy adoption option
The first scenario is the hyper-digitised, super-personalised full fat option.
Take a look at the future through the eyes of 36-year-old Mo. He wants to view his balance, pay for goods, make sure his tax return is filed and check on the deeds of a potential first-time home for him and his young family.
His identity has already been authenticated through digital identity tools using biometrics: no more password anxiety to access these services.
There is full integration of financial and public services from banking to health.
Should Mo need an urgent knee operation, he is directed to the most suitable provider after seeing a consultant.
Mo is delighted that his insurance premiums are lower because Open Finance, Open Data and AI have helped slash fraud and detect financial crime.
Technology such as advanced telematics enables him to track his driving habits. Insurance coverage for this kicks in whenever he starts his car, priced according to the nature and time of his journey.
His friend Sally, a part-time working, lone mother of two with a long-term condition that is not life threatening, is not so happy.
She can meet all her bills, but the computer keeps saying no, deeming her too high a risk for many financial and insurance products.
With no human on the end of the line, she can’t explain her one-time missed car payment was down to her ex not sending child support on time.
She has, however, been accepted for a fractional share of a property. Using crypto. She hopes that her investment will grow, so she can one day afford real bricks and mortar. A fintech start-up has given her access to banking services that she couldn’t obtain from traditional banks.
So what are the potential benefits of full fat?
- Real improvements in tailored customer products, services, and prices particularly for non-outliers like Mo.
- Potentially more services and products for the previously financially excluded, like Sally, because as tech begins to lower costs, the costs to serve higher-risk consumers reduce.
- More intense competition with a more porous boundary between incumbents and challengers and easier switching. People are able to make their data and information available so firms compete more for customers with products and prices tailored to their personal circumstances.
- And a greater variety of firms offering what look like financial services – retailers, big tech, mobile providers, new arrivals.
All benefiting productivity.
Research by Innovate Finance[3] suggests that 98% of fintechs have had a positive impact on jobs and productivity.
And on average[4], fintechs are expanding at a rate of 20% a year.
The evolution of quantum computing[5] could result in better performance of firms' portfolio investments and mean better returns for Mo.
AI-powered applications mean that Mo can access real-time data on all his investments, allowing him to make easy changes to these and his entire pension portfolio.
The government and industry have rolled out a pensions dashboard and options for single pots to simplify what was once a bewildering system.
Fraud and financial crime have dropped as there is a secure way to prove digital identities. This lowers costs and the savings benefit consumers.
After initial concerns, people appreciate these radical changes and trust and satisfaction in financial services increase sharply.
What about the downsides?
Hyper-personalisation could mean more groups become ‘too hard to bother with’ for firms, entrenching, rather than reducing, financial exclusion. Not least as huge gaps remain in financial literacy.
The tech and banking giants gobble up the competition. Indeed any of the Big Techs[6] has the financial firepower to buy up all the UK’s major listed banks and financial services firms. Competition and financial regulators would though have something to say...
But ultimately Mo and Sally may be left with less, not more choice.
New forms of fraud and harms are unleashed, and security of digital identities compromised, undermining trust in technology - or even worse.
The boundaries between gaming, gambling, entertainment, trading and investing become so blurred as to endanger people’s long-term financial wellbeing.
We may have to brace ourselves for the Techlash.
Technology-lite option
Another potential scenario is the Skimmed option. Incremental progress on consumer technology but with little fat in terms of extra innovation.
Human contact, rather than AI prompts or robo advice, remains preferred. Maintaining physical bank branches becomes a competitive advantage. This pleases Sally until she is still rejected for a mortgage. It frustrates time-poor Mo, as he would like to keep a grip on his finances while scrolling on his commute home and prefers interacting with bots.
There is slow adoption of deep digitalisation beyond payments and savings. Mo’s current account remains free, though he would like faster, more tech-enabled services.
Big Tech firms remain focused on infrastructure such as the cloud. Wary of intrusive financial regulation, they avoid the regulatory sphere and the opportunities in their data are not captured by financial firms.
Incumbent providers, aware of their IT system sunk costs, double down on their existing strengths and are reluctant to play catch-up on tech or simply cannot afford it.
Privacy concerns and an inability to solve them limit personalisation.
So on the positive side we avoid some risks of widespread tech failures.
And what of the downsides:
- Current inequalities become entrenched. Mo fails to optimise his investments and Sally remains financially excluded.
- With little appetite for innovation, only tech giants seriously invest at scale, distorting competition further. The cost base of traditional firms becomes bloated, impacting the long-term return on capital and their attractiveness to investors. We miss out on productivity gains.
- We also miss out on the benefits of innovation, arresting the recent success of the UK as a fintech hub. Potential jobs, investment, and growth could be imperilled, our ambition thwarted.
What the future holds for regulation
Which scenario will prevail? We may even see a semi-skimmed option.
And who will drive which option we take? Technology neutrality has historically meant that regulators do not dictate which way we go.
But are we at a global inflection point now requiring a fundamentally different regulatory mindset? Should we enable the most ambitious adoption of consumer technologies, managing risks but not pretending we can fully mitigate them?
And what might that mean?
Our appetite for risk and innovation
I have spoken elsewhere about the need for a debate about societal and political risk appetite.
We can allow innovation in AI without excessive regulatory intrusion focusing on outcomes as articulated in our new Consumer Duty[7] and with Senior Manager accountability.
Yet rather than being able to stop every problem in advance, this will mean firms have governance in place that fixes some issues after the problems appear. This could apply to issues with the way that models work, data bias or uncertain long-term outcomes.
It has been argued that policies in the UK are often skewed towards the slow adopters rather than the fast, compared to, say, Scandinavia, where it is claimed the reverse is true.
That poses the question of cultural and political norms: what is our appetite for risk as a country? Do we think that a few people losing out is worth the risk of wider benefit to consumers and potentially economic productivity? And what about public trust? What happens when big technology systems fail – and is there public confidence that the authorities will act swiftly enough?
The consequences for competition
We will want competition and innovation to flourish, but avoid barriers to market entry being erected by monopolistic suppliers of the latest ‘must have’ tech.
This is when certain technologies or data become very much in demand which is beneficial when they drive innovation and competition.
However, the opposite can happen if everyone tips to these new essential technologies or data and when material barriers to entry – due to for example network effects – consolidate the market power of the providers.
Where this happens, the usual pro-competition remedies will be needed. And the impacts will need to be considered across markets and the wider ecosystems that firms are part of.
Our recent Big Tech consultation highlights one of the biggest competition concerns: data asymmetry. We concluded that in the short term – or perhaps beyond - Big Tech’s entry into financial services could benefit many customers. But in the longer term, there was a risk that the competition benefits could be eroded if the firms exploited their entrenched market power. And Big Tech is not a monolithic set of entities – each have different strategic intentions. Not all will want to venture into the more intrusive financial regulatory sphere.
Regulatory approach and partnership
At the FCA we have moved decisively towards outcomes-based regulation, encapsulated most significantly in our new Consumer Duty.
The Duty will also apply to consumer technology in financial services.
Firms have to demonstrate that their products and services are designed to deliver positive customer outcomes.
Investment in technology to tackle legacy infrastructure or to glean better understanding of customers’ needs can help with Consumer Duty compliance.
More generally, you can expect more deployment of our criminal powers in the year ahead as we know that the importance of deterrence through appropriate consequences for those causing markets and consumers serious harm.
We work across traditional sectoral and jurisdictional boundaries more than ever before.
Through the Digital Regulation Cooperation Forum[8] with the Information Commissioner’s Office[9], Ofcom[10] and CMA[11], we have tackled illegal online financial promotions, worked on promoting competition and data protection and are supporting government on new AI frameworks.
We are also examining consumers’ attitudes to and interaction with digital assets and are helping innovators to develop services responsibly. ICO and Ofcom work on age verification provides a framework that sectoral regulators such as the FCA can use for similar problems.
This year, the government’s Smart Data initiative will look at secure data sharing across markets.
Our industry Innovation Advisory Group[12] regularly gives us inspiration.
We collaborate with international peers through the Global Financial Innovation Network[13], which we established with over 80 global partners.
Supporting large open datasets and digital infrastructure
I have said before that we are becoming a data regulator as much as a financial services one. We have invested heavily in data skills and technology at the FCA over the last few years. For everyone not just our data analysts.
Data is central to future regulation. We have called for greater innovation and access to data metrics, for example in our recent Credit Information Markets Study[14].
In the UK, we were early adopters of Open Banking. That progress has slowed. If we do not find a way of making data sets more readily available to smaller players, then growth, innovation, competition, and our international competitiveness could stall.
Could a secure national identity authentication approach open this further, cutting down on inefficiencies for consumers and firms and massively reducing compliance costs?
And if so, who should provide it? The government has already undertaken a consultation[15] and we will watch with interest how it develops.
Operational resilience
Operational resilience and being alert to cyber and fraud will be key. Following last year’s Financial Services and Markets Act, we, alongside the Bank of England and PRA, are consulting on proposed rules for critical third parties around operational resilience when providing services to firms we regulate.
We have also worked with the City of London Corporation and others on sprints such as our Authorised Push Payment Synthetic Data Launch. The FCA has convened a Synthetic Data Expert Group[16] which provides tangible advice on using synthetic data including through our Digital Sandbox[17].
We fined one institution nearly £49m for failing to address outsourcing risk for their planned IT upgrade leaving customers with patchy service for half a year.
Financial exclusion and the potential for technological solutions
We are concerned about the risks of financial exclusion.
Without a greater commitment to financial education, these will be difficult to fully eliminate.
Our research[18] showed that access to free robo-advice significantly improved loan repayment decisions and decreased wealth inequalities rather than increased them. Those with the lowest financial education can miss out on savings worth 21.9 per cent, which translates to into 29 basis points of interest and fees per month. But this loss declines by 19.6 percentage points with the use of robo advice.
UK fintechs are already showing a commitment[3] to innovation in this sphere. A quarter of fintechs in the UK are having a significant impact on reducing inequality by widening access to financial services to different hard-to-reach groups, from those with dementia to people with addictions.
Having industry involved and investing from the outset on financial inclusion will build societal trust.
We’ve opened applications for our 3-month Financial Inclusion TechSprint[19], in which participants will have access to our Digital Sandbox to develop potential solutions.
Please apply by 13 February.
While digitisation of payments will help growth, we cannot leave behind people who rely on cash.
Hyper-personalisation of insurance could benefit many but must not lead to exclusion of those posing a higher risk.
Buy Now Pay Later, while offering benefits to those previously turned down for credit as well as others, also poses a risk and needs regulation.
The biggest asset for BNPL firms is the data that they receive from both the consumer and the merchants, allowing them to offer the optimal repayment scheme based on patterns of individual consumer behaviour. Some firms even gather information from social media accounts and web browsing[20].
Conclusion
So how should we regulate?
While we cannot fully predict the future, we are open for engagement and debate.
Whether it is the full fat or the skimmed option, our appetite as a society for consumer technology and innovation in financial services is growing fast.
Sometimes we think too much about what we stand to lose rather than what we stand to gain. We should be at the forefront of enabling technological innovation. And that means recognising that data is the preserve of the consumer and – with their permission – should be open to all, not just to the Big Tech firms.
Promoting financial inclusion, innovation and security, and debating these issues openly in fora such as the conference today will give us more than a slim chance that we will emerge fighting fit. Thank you.