In theory, advances in financial technology can improve financial inclusion and democratize investment — but fintech also threatens to exacerbate investor inequality, according to new research from the Bank for International Settlements (BIS).

The monetary and economic department of the BIS published a working paper by a trio of economists, examining the interplay of fintech innovation, investor sophistication, and portfolio outcomes, using data from the Bank of Italy between 2004 and 2020.

The paper noted that fintech “promises to democratize the investment management sector and level-out the playing field,” by facilitating access to better savings and investment opportunities, and enabling more informed investment choices.

But in reality, these innovations can also intensify investor inequality, it said.

“For instance, fintech can allow sophisticated market players to acquire better data and formulate profitable trading strategies, while less sophisticated ones may lose out,” it said.

Indeed, among other things, the researchers find that “as financial technology improves, differences in financial returns and the proportion of risky assets of sophisticated versus unsophisticated investors grow.”

In other words, sophisticated investors benefit disproportionately from fintech improvements, growing their advantage in portfolio returns relative to less sophisticated investors.

“Advances in financial technology amplify inequalities in the two groups of investors if, at the same time, they do not reduce the investors’ sophistication gap,” the researchers said.

Fintech only works to level the playing field between sophisticated and unsophisticated investors, “if financial technology is accessible by everyone and if investors have a similar capacity to use it,” the paper said — warning that otherwise less sophisticated investors risk falling further behind.

“The policy implication of our findings is that financial technology enhancements need also to bridge the gap in investor sophistication levels in order to leave no one behind. Merely providing access to innovative sources of financial information and advice is not enough,” the paper said.

To benefit disadvantaged investors, the power of fintech innovations must not only be available to everyone. The innovations also need to be universally usable, it found.