Behavioral and Un-bundling of FinTech

Decision making influenced by behviour and Surroundings:

Behavior and surroundings affect our decision making. We tend to make decisions based more on approximation than logic. Usually, we have a collection of past stories, social warnings and suggestions issued by people in our circles and / or our biases that emanate from our limited experiences. These make a large part of our emotional filters which form the basis of our decision making. We rely heavily on these filters to understand and respond to events in our daily lives. Owing to its genesis, these filters capture part of the ‘whole truth’, and hence are responsible for faulty signals. Any guesses as to what happens to our decisions that are taken based on these erroneous signals? They are almost always wrong.

As is the case in several other contexts, variants of efficient market hypothesis do not work in our real world decision making process: we end up mis-calculating and taking non-rational decisions on a regular basis.

Financial Decision Making:

Let’s focus on financial decision making process. It is one of the means that earns us our bread, butter, and, at times, some cheese. I am limiting my definition of ‘financial decision making’ to decisions we make to transact retail financial products.

Here’s a usual scenario that we are presented with in our daily lives: A financial adviser offers us the choice to buy an equity linked structure that has a history of high ROI, or to sign up for the best fund manager at a star fund house, or to buy a term plan from the most reputed insurance company in the country etc. How would you decide which one to go for? What would form the basis of your decision making in such a situation? How would you get to the ‘whole truth’ about each product and / or an optimal combination of these specific to your needs? Obviously you would go back to behavior and surroundings, approximation and past stories, warnings and suggestions, large sets of data, if any, your own experiences, and so on and so forth before making that crucial decision.

Retail financial companies dependent on our decision making:

On the other hand, note that fortunes of retail financial services companies depend on our decision to agree to transact their products (they take a part of what we transact). Many of these brands including but not limited to bigger banks, mutual fund houses, and insurance companies, particularly monolithic dull-footed financial groups offer their products in cohorts. These financial services companies try their hands at innovation to up-sell their products. Many such stints are legitimate / innovation driven, but a large part of such wooing involves tricking. The bigger monolithic organizations offering bundled financial services have little choice than to offer various ‘schemes’ to customers in absence of which they may not be able to sustain their large overhead costs. This creates a continuous struggle between the two parties: the originators and the buyers. Because of this constant tussle, a vicious circle of ‘they versus us’ begins leading to sub-optimal results for all involved.

As you can make out, a super-set of the ‘whole truth’ will be large in monolithic financial services ecosystem. It will be a huge bucket filled with enormous amount of data some of which will relate to offerings at hand while some to noise from the other side of the table, i.e., ‘schemes’ offered by financial institutions and / or advisers. In fact, in such a scenario there is little chance to discover meaningful information, to arrange such information in an orderly fashion, and to make sense and decision. No prizes then for guessing where on the coordinate you would find yourself w.r.t. your decision in such a situation.

Add to it that our behavior, at times, is irrational. We begin to experience emotions that play negative role in our decision making process. Eg. Index surging upwards pushes us to buy bearish stocks whereas a secular downward trend in the market brings out our fears compelling us to accumulate shorts on bullish stocks. This negative strategy ends up in losses. Therefore, an attempt to oversell host of online financial products as ‘wealth management and personal finance game changers’ has potential to generate negative emotions. As is the case with equity markets, such negative emotion will push users to make wrong decisions, lose money, and eventually quit.

This brings me to the point about simplicity, focus, un-bundling and internet enabled cheaper means of distribution of such retail financial products. Behavioral should form core of such simple online products: online social networks becoming part of our lives, credit worthiness getting calculated based on online footprints, online social connects acting as collateral for buying debt products, discomfort in sharing our debt history, investment plans, portfolio allocation etc. in public over the internet, inclination to follow thought leaders in our network, so on and so forth.

Consideration for sensibilities clubbed with design aesthetics that has alignment with user’s interests and emotions would make such products powerful enough to break human instincts of fear and greed, encourage people to follow a pattern, and, in turn, help users create wealth for themselves.

Specialist internet enabled offerings that are simple to comprehend, easy on pockets, and ones that capture real world behavioral has potential to disrupt status-quo of retail financial services in 2015. Suit-casing financial services for digitally savvy millennials tuned to their sensibilities has begun to make more sense than it ever did. A nuanced balance on availability of sound buying options would go a long way in ascertaining success of an online product.

The secret to building something meaningful in retail FinTech lies closer to our positive emotional response.