Digital innovation offers the promise of empowering households to improve their personal finances — but, despite the increased adoption of digital technologies, in some markets, measures of household financial health are deteriorating anyway, according to new research.
In a paper published Wednesday by the Bank for International Settlements (BIS), analysts said the overall trends in financial health are mixed, even in the face of financial sector innovation, which highlights the critical importance of regulators to mitigate risks and facilitate responsible innovation that aims to enhance households’ outcomes.
The report noted that advances in fintech, coupled with the growing availability of powerful AI tools, and the entry of new players — including both Big Tech companies and other non-traditional firms — are transforming the delivery of financial services, and enhancing access for populations that have historically been excluded from mainstream financial services.
Among other things, these forces have increased access to credit, enhanced the availability of digital payments, improved fraud detection and enabled the increased personalization of financial services.
“Greater competition from new providers and new financial products can help individuals to pay, save, borrow, invest and insure themselves in new ways and at lower cost, and thrive financially,” it said.
At the same time, there’s no guarantee that digital innovations will lead to improved financial health for households and individuals, it cautioned — as innovations can also facilitate fraud and scams, and increased access to credit or investment products “can lead to borrowers taking on excessive debt, or savers making risky investments,” it said.
Indeed, “the available data suggest that in at least some countries, despite digital innovation, financial health outcomes have deteriorated in the last few years,” the paper noted.
For instance, while retail investors are increasingly using publicly-available AI tools to guide their investing — theoretically democratizing access to investment advice for investors that wouldn’t otherwise qualify for traditional advice — the improper use of these tools also poses “serious risks” to investors, it said.
“Currently, use of AI tools for investment purposes is without oversight, transparency or accountability,” the paper said. “Consumers may be misled by authoritative-sounding responses from these tools that may be inaccurate and may just induce increased risks.”
Additionally, the industry’s use of digital engagement practices to drive activity could increase investors’ exposure to unsuitable, excessively-risky investments, it said.
“These techniques are not always used in the interest of the client but may instead be used to persuade them to trade in more risky assets,” the paper said.
In particular, the growing availability of crypto-based investment products — including crypto exchange-traded products, crypto derivatives and margin-based trading — can expose investors to “substantial losses,” it warned.
Moreover, the shift to digital can also result in reduced access to traditional financial services, the paper noted, as the increased use of certain digital channels makes it less profitable for financial firms to support other channels, which can harm users (and particular demographics) that aren’t keen on using digital services.
“… without progress in digital literacy and services widely accepted by women, by older and lower income users and by users in underserved areas, there is potential for greater uptake of digital financial services to entail direct reductions in access for these groups,” it said.
There’s a clear role of regulators and other policymakers in balancing innovation with consumers’ needs, the paper said, including efforts to ensure the responsible use of new technologies, beefing up investor protection frameworks and undertaking initiatives to build financial literacy and knowledge.
At the same time, more targeted policy interventions may be warranted, such as efforts to combat digitally-enabled fraud, regulate digital lending and promote responsible digital practices in retail investing.
Governments can support households’ financial health too, “with the creation of public infrastructures that support their population and serve domestic policy goals” — such as digital identity and data-sharing frameworks, and fast payment systems — infrastructure that “can provide foundational ‘rails’ that enable individuals not only to access financial services, but to use them in ways that improve their financial health,” the paper said.
“By lowering transaction costs, improving interoperability and enabling secure data exchange, these systems can support more inclusive and efficient financial ecosystems,” it noted.
Yet, even then, positive outcomes are “not automatic,” the BIS said.
“Without strong governance, consumer protection and inclusive design, digital infrastructures may reinforce existing inequalities or expose users to new risks,” the paper concluded.