Artificial intelligence (AI) technology has transformed the consumer financial services market and how consumers interact with the financial services ecosystem. This paradigm shift has been driven by the accelerated maturation of the algorithms; the historic level of investment flooding the financial services market; the competition for market share between incumbents and new entrants; and rapid changes in consumers’ preferences for digital financial products.
From AI-driven chatbots to sophisticated wealth robo advisors, AI applications have clear potential to expand opportunities for consumers living at the margin. However, experts have yet to discuss the relevance of AI for consumer financial protection in earnest, including the implications of AI solutions that could better protect consumers.
AI HYPE CREATES “WICKED” CONSUMER FINANCIAL PROTECTION PROBLEMS
With traditional banks vying to maintain market share and maximize shareholder values, it’s safe to say that the gold rush toward AI will only intensify. According to Autonomous Next’s 2018 Machine Intelligence forecast, banks, insurance companies, and investment management firms are poised to save more than $1.0 trillion by 2030 if they incorporate systematic investment in AI technologies into their business models. Banks are expected to reap the lion’s share of these savings.
While AI means long-run profits for banks, an AI sea change will likely disrupt consumers’ financial lives. In some ways, these changes will translate into better financial well-being for millions of consumers; in others, the outcomes will be more difficult to characterize. The net social and economic benefits to consumers will be closely tied to how banks operationalize potential savings.
In the interim, questions loom regarding consumers’ general welfare in an AI-centered financial ecosystem. Which consumers will likely be most visible in this new ecosystem? And when consumers are digitally excluded, what will likely be the social cost of their losses?
While AI means long-run profits for banks, an AI sea change will likely disrupt consumers’ financial lives. In some ways, these changes will translate into better financial well-being for millions of consumers; in others, the outcomes will be more difficult to characterize.
Unveiling the limitations of AI is crucial as miscalculating the true potential of AI algorithms can create wicked consumer protection problems, especially when financial products and services are involved. Horst Rittel famously declared, “wicked” problems are especially challenging because they are difficult to define, contain, and nearly impossible to solve with linear solutions. Even more vexing is the idea that solutions themselves can spawn new and unintended problems.
Over-reliance on AI-driven financial services will undoubtedly lead to wicked problems when bank and fintech algorithms choose which consumers to serve. It seems impossible to fathom a policy solution to address selection bias sanctioned by trusted (profitable) algorithmic models when literally all data in the world has effectively labeled a subgroup of consumers as permanent ‘bad decisions.’
To avoid this dystopian future, we should recognize that consumer financial protection is good social policy. AI can help democratize consumer financial protection by diffusing responsibility to other agents through extending the associated ecosystem. We must move toward a paradigm that furthers this democratization. In the digital era, consumer protection does not lie solely with federal and state regulators; it also involves financial institutions and consumer advocacy groups.
AI OPPORTUNITIES FOR CONSUMER FINANCIAL PROTECTION
Consumer financial protection in the age of AI provides an opportunity to engage non-public agents in the business of protecting consumers from financial harm. A primary objective of consumer financial protection is to make financial services and markets fairer for all consumers. AI can contribute to this goal by expanding access to safer and more effective financial products and services that allow consumers to build wealth and access credit.
Reducing systematic financial invisibility is one way AI can extend financial access. Financial exclusion remains a significant barrier to economic mobility for millions. Per Consumer Financial Protection Bureau (CFPB) estimates, approximately 15 percent of rural consumers aged 25 and older are likely to be credit invisible. Results from FDIC’s 2017 household banking survey reveal the growing challenge of connecting with rural consumers, who are less likely to use mobile banking and often rely disproportionately on rapidly sunsetting bank teller relationships to navigate their deposit accounts.
Despite these daunting trends, near-universal adoption of e-commerce retail, led by tech-centric retailers like Amazon and Walmart, has promoted openness to digital transactional models across all consumer segments. In some ways, ubiquitous online shopping experiences can ease wary consumers’ transition to a digital financial world by enhancing their trust in and comfort with virtual institutions.
Nudging these consumer segments toward digital interaction can go a long way in helping these groups navigate a financial ecosystem witnessing a dramatic reduction in brick-and-mortar bank branches. Between 2016 and 2017, “the total number of [bank] branches in the U.S. shrank by 1,700”–“the biggest decline on record” according to The Wall Street Journal.
The plight of retail network shrinkage is even more pronounced in rural communities. The Wall Street Journal noted, “The financial fabric of rural America is fraying. … In-person banking, crucial to many small businesses, is disappearing as banks consolidate and close rural branches.” Large banks continue to forge ahead in their digital transformations, investing in front-end infrastructure with tech-enabled communication via mobile apps and internet conversational interfaces. The fact that AI technology will change the retail business model is an unassailable conclusion.
As fintechs and banks seek to fill the void left by the departure of physical branches, the digital personal lending vertical in the U.S. has exploded, growing to a reported $120 billion since the Great Recession. The surge in digital loan platforms, buttressed by AI, has shown promise in expanding access to credit for previously marginalized consumers. Credit scores calculated by machine-learning algorithms, for instance, have improved financial institutions’ abilities to score credit-poor consumers, providing a much-needed economic lift.
Yet access to credit is not the only element of financial inclusion central to consumers’ financial well-being. Other facets of financial access, such as effective savings products and retirement assets, are arguably more important than creating debt alone. AI-enabled products are making inroads in these market segments as well.
Personalized portfolio management can play a powerful role in helping marginalized and low-income consumers develop some agency in their financial lives. Applications can be used to design intelligent financial products that suit consumers’ financial behavioral biometric profiles, helping them avoid debt traps fueled by late fees and inflexible payment relationships. Incorporating these solutions into financial products could prove transformative for vulnerable consumers.