Federal Reserve Board Governor Lael Brainard recently delivered a speech entitled “Where Do Consumers Fit in the Fintech Stack?” at “FinTech Risks and Opportunities: An Interdisciplinary Approach,” a conference sponsored by the University of Michigan.
Governor Brainard likened the new generation of fintech tools to the “financial equivalent of an autopilot.” According to Brainard, “[the powerful new fintech tools represent the convergence of numerous advances in research and technology – ranging from new insights into consumer decision making to a revolution in available data, cloud computing, and artificial intelligence (AI). They operate by guiding consumers through complex decisions by offering new ways of looking at a consumer’s overall financial picture or simplifying choices, for example with behavioral nudges.”
While she highlighted how fintech tools offer the potential to help consumers manage their “increasingly complicated financial lives,” she cautioned about the risks posed that will need to be carefully managed as the marketplace matures. “Consumers need to know and decide who they are contracting with, what data of theirs is being used by whom and for what purpose, how to revoke data access and delete stored data, and how to seek relief if things go wrong. In short, consumers should remain in control of the data they provide. In addition, consumers should receive clear disclosure of the factors that are reflected in the recommendations they receive. If these issues can be appropriately addressed, the new fintech capabilities have enormous potential to deliver analytically grounded financial services and simplified choices, tailored to the consumers’ needs and preferences, and accessible via their smartphones,” stated Brainard.
Brainard noted that consumers face complex financial choices. Given the complexity and importance of these decisions, she finds it encouraging to see the fast-growing development of “advanced, technology-enabled tools to help consumers navigate the complex issues in their financial lives.” She stated that these tools “build on important advances in our understanding of consumer financial behavior and the applications, or ‘app,’ ecosystem.”
In particular, she pointed out how smartphones are already helping consumers make better financial decisions, and offered three supporting reasons for such conclusion. First, the smartphone platform “has become a launch pad for a whole ecosystem of apps created by outside developers for a wide variety of services, including helping consumers manage their financial lives.” Second, the smartphone ecosystem puts the “enormous computing power of the cloud at the fingertips of consumers.” Third, fintech developers can draw from “enormous pools of data that were previously unavailable outside of banking institutions,” as consumer financial data are increasingly available to developers via data aggregators. She noted how aggregators do more than just provide access to raw data. They also “facilitate its use by developers, by cleaning the data, standardizing it across institutions, and offering their own application programming interfaces for easy integration,” while they are also beginning to provide off-the-shelf product stacks on their own platforms (similar to cloud computing providers). “This means that developers can quickly and easily incorporate product features, such as predicting creditworthiness, determining how much a consumer can save each month, or creating alerts for potential overdraft charges,” stated Brainard. “The convergence of smartphone ubiquity, cloud computing, data aggregation, and off-the-shelf AI products offer the potential to make tailored financial advice scalable.” For example, she noted how a fintech developer could pair historical data about “how different types of consumers fare with a specific product, on the one hand, with a consumer’s particular financial profile, on the other hand, to make a prediction about how that consumer is likely to fare with the product.”
As financial autopilots continue to evolve, Brainard highlighted the important considerations about whether and how best to communicate information to the consumer about the nature of the recommendations being made for those fintech advisors that do act as lead generators. According to Brainard, “t]here appears to be a wide variety of practices regarding the prominence and placement of advertising and other disclosures relative to the advice and recommendations such firms provide.” While overall, fintech assistants have increasingly improved the disclosures that explain to consumers how they get paid, she stated that this area remains a work in progress. She remains hopeful that industry, regulators, consumers, and other stakeholders will work together “to adapt the norms to distinguish between advice and sponsored recommendations.”
With respect to the data relationship, Brainard highlighted how there remain many questions about the consumer’s ability to opt out and control over data that will need to be addressed appropriately. She noted how consumers face complex issues in determining “who they are providing their data to, how their data will be used, for how long, and what to expect in the case of a breach or fraud.” Based on an examination of the terms and conditions for a number of fintech apps, she noted how it appears that consumers are “rarely provided information explaining how they can terminate the collection and storage of their data.”
In the case of a breach or fraud, Brainard suggested consumers may have limited remedies. Many fintech advisors include contractual waivers that seek to limit consumers’ ability to seek redress from the advisor or an underlying data aggregator. In addition, the consumer protections contained within the Electronic Funds Transfer Act and its implementing Regulation E with respect to erroneous or fraudulent transactions that would otherwise impact consumers’ credit and debit cards, such as data breaches, are not absolute. This is especially so in cases where a consumer gives another person an “access device” to his or her account and grants him or her authority to make transfers.
In terms of what can be done to make sure consumers have the “requisite information and control to remain squarely in the driver’s seat,” Brainard noted that establishing and implementing new norms is “in the shared interest of all of the participants in the fintech stack.” Banks or parties closely affiliated with banks that pay fees to fintech advisors to generate leads for their products, pursuant to a contract, should pay particular attention to the contractual provisions describing how a sponsored product should be described or displayed. As for consumers’ relationships with data aggregators, Brainard acknowledged that there is “an increasing recognition that consumers need better information about the terms of their relationships with aggregators, more control over what is shared, and the ability to terminate the relationship.” In her view, responsibility for establishing appropriate norms in the data aggregation space “should be shared, with banks, data aggregators, fintech developers, consumers, and regulators all having a role.” Governor Brainard remains optimistic fintech developers, data aggregators, bank partners, consumers, and regulators will work together “to keep consumers in the driver’s seat” as technological developments continue.
Regulators from all of the federal banking agencies as well as the Consumer Financial Protection Bureau have all spoken about and developed certain initiatives in the fintech space. We expect such trends to continue, with possible legislative activity on Capitol Hill that could receive bipartisan support. Stay tuned for further developments!
