Excluded by the data
Who benefits from the proliferation of financial data?
Despite recent developments in financial technology and big data, consumers still have the same basic financial needs. They still need general banking services, to save for retirement, to borrow loans and to buy insurance.
Mainstream financial services have struggled to meet the needs of poorer, vulnerable and marginalised consumers. The question is whether new technology will improve financial inclusion.
Consumers usually face financial exclusion for four reasons: they simply don’t have enough funds; they lack consumer know-how; they are considered to be higher risk and will be charged a higher price or just denied access to products or services; industry is simply too inefficient to serve all customers.
Technology might lead to consumers being offered more features—or gimmicks—to help them track their finances. It might change the way consumers interface with banking. But, there is little evidence to suggest that this will lead to the same game-changing improvements that arose from other more humble innovations, such as the cash machine.
In insurance and credit markets, the greater sharing of data between financial institutions, and more precise data profiling, will result in greater exclusion. There are few iron laws in financial services but generally the more profiling there is, the more price discrimination and outright exclusion there is.
In an ideal world, we would have large populations of consumers who are financially capable and who can use their personal data to turn the tables on financial providers, to shop around and get a better deal.
But, if anything, the proliferation of data helps the financial services industry more than it helps consumers. It creates the need for new tools, new intermediaries, new laws and regulations to manage the new data. This all costs money and pushes up the costs of end-to-end distribution which in turn makes more consumers less economically viable. More data means even more power for already powerful financial institutions to exploit behavioural biases or target consumers and communities for exclusion.
Technology and big data won’t change the dynamics of financial exclusion. It can’t change the basic problem of people being poor. It doesn’t change the risk profile of consumer—indeed it makes it easier for providers and intermediaries to identify and discriminate against people and communities. Financial services could become more inefficient as it fragments even further, and more intermediaries are interjected between consumer and provider.
Moreover, it is important to note that financial services do not exist in isolation. As consumers, the world is becoming harder to negotiate. Consumers must deal with a proliferation of complex, data-based relationships in telecoms, internet services, travel, even our healthcare as well as financial services. We are faced with choice in every aspect of our lives with a plethora of providers and intermediaries (based in the UK and all around the world) harvesting, processing and analysing our personal data. Markets, and our relationships with markets and public services, are becoming more individualised. Our data is becoming as valuable as our money. Even if we don’t buy something, it doesn’t mean our data isn’t commercially attractive to providers and intermediaries.
So, just as we are expected to have money management skills, we are expected to have data management skills to operate in the new consumer world including financial services.
Can data ability be enhanced? We know that financial education programmes have not proved effective in improving financial capability or at constraining provider behaviour. It’s early days when it comes to efforts to improve data ability. But, so far, we are not aware of any data education programmes that have managed to improve consumers data ability.
So, to conclude, irrespective of how much money consumers have, where they live, what age they are, they still need the same basic financial services. The question is: do the new technologies help or hinder the ability of excluded consumers to meet those needs? As it stands, they will cause greater exclusion and discrimination.
It certainly suggests that improving consumers’ data-ability is important. But, we should learn lessons from the repeated failures to improve financial capability and be realistic about the potential for data ability to protect consumers or make markets work.
Banking on Change is a publication which examines how we can develop a comprehensive policy approach towards financial inclusion. The report features contributions from the likes of John Glen MP, Peter Dowd MP, Anne Pieckielon, Chris Pond and Guy Opperman MP.
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