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The tech nudge

Technology is reshaping the world – and not always for the better.

Moneysoft’s Peter Malekas considers a new international report about the impact digital technology is having on consumers and the important role that advisers can play. When it comes to money, it’s often a case of out of sight, out of mind. The further away it is in time (superannuation is a long way off for many people) or space (mobile payments mean we can pay without ever touching our wallets), the less attention we pay. Technology often exacerbates the divide but it can also bridge it, according to a new international report from the OECD International Network on Financial Education. Digital innovation may have spurred new market driven, regulatory and consumer driven risks, but it has also created “several options and tools to help consumers better manage their personal finances and to possibly overcome some of their inherent personal biases”. It all comes down to how we use technology.

Risks and opportunities

Many of us recognise the upside of technology in our day-to-day lives. For example, one in five mobile bank customers in Europe say they have not missed a payment since using mobile banking, according to an ING survey. In the United States, almost two in three mobile banking users have checked their account balance on their smart phone before making a large purchase – this prompted more than half to not purchase the item. But the digital revolution has also made financial markets more connected and complex. Around the world, relatively traditional products such as savings accounts, loans, and money transfers now have digital alternatives such as online payday loans, mobile credit, virtual peer-to-peer lending and mobile insurance. Instant access to these products and services, combined with low levels of financial literacy, can create major problems, which unscrupulous providers can exploit. Natural behavioural biases are also exacerbated given complex financial knowledge, such as debt maturity, durations and pay-out options, is needed to compare many of these new products. However, technology can also help shape consumers’ habits for the better and boost their confidence. Allowing them to test financial concepts and products in real time, learn by trial and error, and experience failure through interactive online/mobile games are all part of this, according to the OECD report. Still, behavioural economics research shows that just having information isn’t enough to produce sustained changes to behaviour. That’s why strong engagement is crucial to changing financial behaviour.

Financial advisers can provide the nudge

Tell me and I forget, teach me and I may remember, involve me and I learn. It’s an old saying but it still rings true today. The knowledge and guidance provided by financial planners can multiply the benefits digital tools provide. Importantly, they can also make advice scalable. This is crucial given that only about 20 per cent of Australians current receive financial advice. Changing behaviour is incredibly difficult and takes time but the OECD report highlights the role of digital tools employing nudge theory. People can be influenced to make better decisions by changing the structure of choices or with simple prompts. For example, a recent pilot by a Silicon Valley startup showed that personalised customer communication, created and delivered through an automated algorithm, doubled the intensity with which savers saved (average balances increased by 74 per cent as opposed to 37 per cent in the control group). Similarly digital services that make saving automatic and seamless, while being highly customised to the personal circumstances of individuals, are also gaining traction. These are simple but effective concepts, which a financial planner can help reinforce. Other digital services are pushing the envelope much further and providing a longer-term foundation for financial literacy. Gamification – the process of integrating game-like actions into everyday tasks – is making financial education more accessible and entertaining for all. This is particularly important for millennials who are often more digitally perceptive than financially literate. Digital financial services are quickly evolving. A core task of the newly created International Network on Financial Education Working Group on digitalisation and financial literacy will be to evaluate their use and impact on consumers. The ultimate impact of digital technology lies in the way it’s used, and how it changes our lives, our relationships, and our behaviour – and advisers are perfectly placed to evaluate and use the best to change the lives of their clients.   This article was originally published in the Professional Planner on Wednesday 31st May, 2017.