In 2007, Steve Jobs stood on stage and said Apple were introducing three new innovative products - a wide screen iPod, a revolutionary mobile phone and a breakthrough internet connection device. Of course, Jobs, the master of Purple Cow marketing was referring to one single device - the iPhone. What no one predicted was how the iPhone would create a platform for growth and innovation, fundamentally changing how we engage with products and services - through an app.
As the new wave of apps reached financial services, it offered the potential for change. A market dominated by established financial service brands that build tech were to be challenged by technology providers building financial services. A better, more convenient user experience was on offer, as well as the potential for the wider societal benefit of engaging people more actively in their financial wellbeing. The apps arrived positioned as white knights, offering to ‘democratise’ financial services and to improve some key components of the value chain.
I am and will remain a proponent of financial technology but recent events have called into question the benevolent impact of all this new technology. In March, the Financial Conduct Authority released research conducted on their behalf by BritainThinks. The research found a new, younger, more diverse group of consumers getting involved in higher risk investments, prompted by the accessibility offered by new investment apps. However, there is evidence that these higher risk products may not always be suitable for these consumers’ needs and risk profile. The recent Robinhood, Reddit, Gamestop incident created an intriguing case study. The ‘free’ services that are reducing the barriers to entry are, of course, never free and the commercial model facilitating them can often be found to have uncomfortable and nefarious undertones. The fallout, particularly the restrictions imposed on trading, questions whether apps really are a democratising force, or whether the market remains structurally tilted in favour of the establishment.
One of the four drivers of vulnerability according to the work by the Financial Conduct Authority is financial capacity. In plain language, the knowledge, experience and financial literacy that guides our ability to understand the intricacies of a product or service. You could argue that all consumers of financial services are on the spectrum to some extent but given the correlation between age and experience, it does leave younger investors more exposed. But it is a funny word, “experience”. How do you acquire experience? You have to go do it. Yes, sometimes you will have a negative experience but you can move forward positively and better for it.
You have to feel for younger people. They are told ‘you should invest and the earlier the better’ but when they do, the condemnation of ‘no, not like that’ often emerges. They are a generation on lower wages, hit hardest by the pandemic in terms of job losses and struggling to pay rent, or afford a mortgage. The much-publicised advice gap applies keenly to them and financial education is woefully short.
We are dealing with a different generation - digitally native, they are confident information seekers who are accustomed to instant gratification and very different in terms of their media consumption - Instagram, TikTok, YouTube, Influencers etc. Undeniably, some of the higher risk investments are more clued in to exploiting, and aggressive in their use of these channels. Financial education is key but dissuading investors is difficult in an era of young Bitcoin millionaires and Tesla owners promoting cryptocurrency.
Ultimately, investment apps are neither inherently good, nor bad. The white knights are more of a shade of grey. The BritainThinks report did show encouraging trends that younger people, females and people from BAME backgrounds are increasingly investing. Research and column inches will always focus on the extremes but for every cryptocurrency scam, there are open finance, micro-investing and round up apps that young investors are using to save and invest in a manner that is more ‘sensible’. The concern is not the risk nature of an investment but ensuring people understand the risk of their action. There is a role for the regulator to catch up with app business models, the investment providers in validating suitability, the education system and a healthy dose of personal accountability. Sometimes you have to put your hand in the fire to realise it’s hot.