Over the last few years a steady stream of new financial firms have launched products and services meant to make our lives a little bit easier. Often described as innovative or frictionless, some of these products could improve our financial health, while others look set to deliver a dose of pain.
And as more innovative and frictionless products and services come to market, there’s one word that we don’t tend to hear so much about: wisdom.
Financial firms have been busy removing friction from their processes in order to make things easier, but when it comes to themes like consumer credit or pension freedom, is this always a good thing? And should the use of the word ‘innovative’ in a product description ever limit proper scrutiny?
At a time when UK households are swimming in rising levels of debt, and the work to rebuild trust between consumers and financial firms remains on shaky ground, a lack of wisdom means that the financial industry is once again fueling the worst of our consumer instincts. Want a new car? No problem! What about a honeymoon you probably can’t afford? Sure thing!
The Snoop Dog-backed Klarna, one of Europe’s fastest growing finance firms offers a ‘buy now, pay later’ product. This helps merchants like The Fragrance Store to sell more stuff, so retailers are keen to jump on board. And while having a collection of perfume bottles cluttering our bathrooms may well be a status symbol of sorts, products like ‘buy now, pay later’ risk changing the phycological make up of a generation. And with around 50% of retail finance customers not paying back within the given timeframe, we’re really left with just another way of getting into debt.
And while the future probably does include mortgage decisions made in under 60 seconds, is there really any wisdom in offering consumers stacks of cash in less time than most of us spend brushing our teeth? It would of course be innovative, and quite the timesaver, to not brush our teeth at all, but to what end?
But it’s not just banking products that we should be wary of. Black box insurance has been around for a while, and can be the only game in town if you’re a young driver looking to get on the road. But over the course of the last few years, it’s become clear that not all is well with this innovative product. Issues with inaccurate data, hidden curfews and price gauging if additional miles are required, are leaving a sour taste in the mouth of young drivers sold a black box policy as a money saving device.
With financial products only getting more complex, and business models no longer as vanilla as taking in deposits and lending them out via long term mortgages, how consumers are sold financial products really does matter. We should be increasingly wary of lazy marketers throwing out words like ‘innovative’ and ‘frictionless’ to sell us something new and different when the average financial literacy of consumers has not increased in any meaningful way.
So how will the regulator meet the challenge of regulating more firms with increasingly complex retail products? Measuring, assessing and improving culture in finance is increasingly viewed as key. Moreover with the recent issues with Revolut, one of the UK’s most valuable FinTech firms, now largely viewed as a culture challenge, it’s clear that the theme of culture is here to stay.
It wasn’t that long ago that Wonga was winning innovation awards, and packaging-up subprime mortgage debt seemed rather innovative. And while financial firms are finding it increasingly easy to remove the friction from their processes, consumers will ultimately be faced with friction when the debt collector comes knocking on the door.
Michael Fotis is the Founder of Smart Money People, a financial services review website and research company.