time-to-warn-your-clients-about-fintech-dangers

Financial technology (FinTech)—which delivers innovations in banking, investing, and insurance—has had a large impact on America’s financial-services consumers. But it is also posing risks to the public, especially to millennial consumers, according to a new survey of securities regulators from the North American Securities Administrators Association (NASAA).

NASAA’s recent Pulse Survey of state and provincial regulators in the United States, Canada, and Mexico revealed that one-third (34 percent) believed the rapid development of financial technology is a positive development for investors. However, 20 percent expressed concern over the potential negative impact on investors.

Roughly one-half (46 percent) of regulators said it was too early to know for sure, but cited benefits such as lower costs and greater accessibility to investments among clients not previously accessed via traditional methods. Still, they believed it was crucial to have strong investor protections in place so that greater access does generate greater fraud risks.

According to Investopedia, the FinTech landscape is especially wide-ranging. It includes:

  • Cryptocurrencies and digital cash.
  • Distributed ledger technologies (blockchain).
  • Smart contracts (using computers to automate contracts between buyers and sellers).
  • Open banking (joining banks to third-party providers such as Mint).
  • InsurTech (streamlining the insurance industry).
  • RegTech (applying technology to regulatory compliance).
  • Robo-advising (using algorithms to deliver investment advice without face-to-face human involvement.
  • Unbanked/underbanked (providing financial access to populations that traditional banks and insurers ignore).
  • Cybersecurity (assuring that fintech applications and data are protected against cyber-criminals.

Other findings from the NASAA survey are as follows:

  • Millenials have the greatest risk of fraud. The regulators viewed Millennials (consumers reaching young adulthood in the early 21st century) as the most likely consumer group to use FinTech products (84 percent). But they also believed they are the most likely to become  fraud victims (41 percent). Meanwhile, Baby Boomers were seen as the least likely to use FinTech, but the second most likely to become victims (37 percent).
  • Some FinTech is riskier than others. Regulators viewed financial technology as having a high (28 percent) or moderate (72 percent) chance of fraud. But risks were perceived to be high for specific applications, including initial coin offerings (ICOs) and cryptocurrencies (94 percent) and low for others (3 percent for robo-advising).
  • Fraudsters have the edge. Not surprisingly, more than half of regulators (56 percent) said fraudsters were the most knowledgeable about FinTech and that consumers were the least knowledgeable (94 percent).
  • Regulators and law enforcement have their work cut out for them. Three-fours of survey respondents (75 percent) said they believe preventing FinTech fraud is getting more difficult.

“The survey results show that our members are focused on the potential for fraud when it comes to new technologies and products,” said Joseph P. Borg, NASAA President and Alabama Securities Commission Director. “But the results also reflect recognition that these innovations may benefit investors, which makes appropriate regulation and investor education critical.”

Are your customers heavy or light users of FinTech? In either case, now may be a good time to warn them about the dangers of using such tools without sufficient understanding of the risks involved.

For complete survey results, go here.


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