Financial technology companies have a lot to offer consumers, but let the buyer beware.
That was a key takeaway from Federal Reserve System governor Lael Brainard, who addressed a conference at the University of Michigan, Ann Arbor, Thursday in a speech titled, “Where Do Consumers Fit in the Fintech Stack?”
Her speech focused on concerns of consumers, and highlighted how fintechs should view advertising and disclosures, noting that they can take a cue or two from some of the biggest players in the search engine and product comparison areas.
Brainard addressed the various business models of financial technology companies, including fintech advisers.
Fintech advisers, a category that can include fintechs such as Acorns, a company that allows users to invest their “spare change,” and robo-advising company Betterment, streamline personal finance and investing decisions and activities via apps. Many fintech advisers use artificial intelligence, algorithms and machine learning to assist consumers in decision-making.
Brainard said some fintech advisers “may describe their service as providing tailored advice or making recommendations as they would to friends and family.”
But Brainard pointed out that in today’s environment, consumers are often unaware whether an adviser’s recommendation—of where to invest, as an example—”is based on the product’s alignment with his or her needs or different considerations.”
For example, some fintech advisers can make anywhere from $100 to $700 in lead generation fees for each customer who signs up for a credit card the adviser recommends, Brainard said.
Or in other cases, fintech advisers could change the order of loan offers or credit cards based on how likely the customer is of being approved.
“There 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,” Brainard said. “Overall, fintech assistants have increasingly improved the disclosures that explain to consumers how they get paid, but this is still a work in progress.”
Search engines such as Google, Bing and Yahoo, as well as product comparison sites such as Travelocity and Yelp, “may provide useful guidance” for fintech advisers, Brainard said. These popular sites have resulted in internet users adopting “norms and standards for how we can expect search and recommendation engines to operate.”
In Brainard’s view, consumers have come to expect search results to be sorted based on what’s organically most responsive to the search, unless the result is clearly labeled otherwise. She believes users know how to look for visual cues such as “Sponsored” or “Ad” or different formatting that separates ads from regular search results. “Even when an endorsement is made in a brief Twitter update, we now expect disclosures to be clear and conspicuous,” she said.
She thinks fintech advisers will have to adopt similar disclosure methodologies. She gave the example of personal financial management tools that now interact with consumers via text message.
“If consumers move to a world in which most of their interactions with their advisers occur via text-messaging chatbots—or voice communication—I am hopeful that industry, regulators, consumers, and other stakeholders will work together to adapt the norms to distinguish between advice and sponsored recommendations,” she said.
This is not the first time Brainard has spoken out publicly about the rapidly growing fintech sector. Earlier this year, she gave a speech about fintech’s relationships with banks, and indicated that the Fed should potentially be involved in rulemaking for companies in this space.
In that speech, she noted the special purpose bank charter that the Office of the Comptroller of the Currency proposed earlier this year, which would give fintechs the opportunity to operate as banks. Brainard said this move raises “interpretive and policy issues for the Federal Reserve regarding whether charter recipients would become Federal Reserve members or have access to Federal Reserve accounts and services, such as direct access to payment systems.”