Developments in financial technology such as Open Banking and digital finance apps could open the industry up to greater financial inclusion and consumer choice if widely adopted, according to a discussion paper published by the Financial Conduct Authority (FCA).

The consultation paper issued by the banking regulator is aimed at exploring the changing financial needs and options available to consumers from different age groups.

The FCA said the consultation assessing the industry’s approach to consumers from a range of backgrounds and age profiles, is aimed at starting “a conversation on what it and the financial services industry could do better to meet changing consumer needs.”

The discussion paper highlighted the growing range of digital services available to consumers looking for advice and support in budgeting and managing their money, such as those offered by app-based challenger banks.

“Technology is enabling firms to offer more flexible products, such as ‘income smoothing’ products to help consumers with fluctuating income to budget,” the paper stated.

However, while a small number of digitally-savvy consumers might have been quick to embrace these developments, the FCA noted that among the broader spread of consumers, “the number and take-up of these products is still negligible”.

When it comes to consumer savings and credit products, the rapid spread of online and mobile applications were improving access to financial services offered by a wide range of businesses, the paper explained.

“Technology developments also enable firms to provide increasingly accessible products via online and mobile applications,” it stated.

However, the discussion paper warned of the pitfalls of this availability: “These may be more convenient for consumers and enable online transactions, but they also carry risks - in particular, the speed of transactions and ease of access could cause some consumers to make decisions quickly without fully considering the potential costs and alternatives.”

As a result, the paper also highlighted the need for reliable and accurate comparison services to enable customers to access the best deal and rates for a range of products.

“Consumers, especially the most vulnerable, often find it difficult to compare and choose the credit products that best suit their needs, particularly the actual cost of borrowing for different options.”

The increased adoption of Open Banking and financial data sharing enabled by the EU’s second Payment Services Directive (PDS2) should work to open up the market, the paper suggested.

“We expect technology and regulatory changes such as PSD2 and Open Banking to lower these barriers and help consumers to shop around,” it noted, adding that less digitally skilled consumers, however, may not benefit from this.

The same transition towards digital and app-based services as well as online price comparison tools is also taking hold in the insurance industry, the paper noted.

“The increased use of technology is leading consumers to buy and renew their insurance products online, with high street insurance brokers now less common and with price comparison websites increasingly being used."

However, as with wealth, credit and savings services, this could pose challenges for financial inclusion. “This could mean that insurance products become less visible and accessible for people without access to the internet, such as some older people,” the FCA stated.

On the flip side though, the paper suggested that the increase in financial data available on consumers could also provide a much clearer financial picture for firms and help the most vulnerable customers access credit and financial services which they might have been denied previously.

“The increased use of technology has enabled firms to assess risk at a more granular
level leading to more segmentation of customers and more personalised pricing,” the paper read. “This has the potential to reduce the pooling of risk, making insurance accessible to higher risk consumers."

Christopher Woolard, executive director of strategy and competition at the FCA, said: “From Baby Boomers, to Generation X to Millennials, everyone’s financial needs and circumstances are evolving; it is clear each generation will have its own challenges.

“With this paper, the FCA has a specific focus on the role the regulatory framework plays in reducing barriers to intergenerational engagement with their finances," he continued, adding: “Now is the time to step back, consider and understand how these needs are evolving and challenge assumptions about consumer needs in the context of different intergenerational factors.”

The discussion will be open to FCA-regulated firms and financial institutions, trade bodies, governments, regulators and industry stakeholders to comment. It will close on 1 August.

The FCA will hold a conference on intergenerational differences and their impact on financial services on 2 July this year.

Last month, FStech took a deep dive into how wealth managers are increasingly looking to tech upgrades in order to keep family funds passing down from parents to children.

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