Responsible consumption usually stems from a strong awareness of the impact of consumption decisions on consumer health, consumer finances, the local ecosystem, environment, and on society in general.
Responsible financial consumption decisions determine individuals’ overall well-being, for it affects not only their finances but also their emotional well being and societal status. Any hiccup in managing personal finances not only has long-term consequences for the individuals’ concerned, but also the society as a whole. Finance consumption is a double-edged sword. It cannot be allowed to evolve as market mechanism, as many propound. Regulators have to worry about risks to societal framework and financial stability. The world has witnessed sufficient large scale financial issues to have learnt it.
Digital, finance & literacy
Digital technologies are fast evolving and newer disruptive ones are further expected in the digital century we live in. These are rapidly changing the way that financial products or solutions are designed and offered to the consumers. They are also allowing for the possibility of developing “product for one” (unique to every consumer). Digital finance is finance sector, ideally powered by technologies that allow for regulatory compliance, and financial solutions offered with increased access in a fair and personalised way.
The consumers who could not access financial products due to geographic constraints are now able to access formal financial networks through their mobile phones and computers. Of course, as with any new system or channel, it brings its own set of obstacles and challenges to surmount. Mis-selling products not needed or unsuitable for the consumers, product sales with hidden conditions, opaque communication, lack of consumer grievance mechanisms, lack of adequate consumer privacy measures, cyber risks are amongst challenges that need to be addressed.
Responsible financial consumerism is a critical topic, yet not much is debated about it among stakeholders, except financial regulators. With every financial crisis, regulators globally have adopted newer learnings from those events and tightened their regulations and supervision of financial entities.
Yet with every newer set of economic prosperity boom, it increases the greed of consumers in wanting ‘more’. It also makes economically weaker aspire for better conditions and seek financial recourse for better lives; many of these products are not necessarily suited for their financial access. Consumer biases, like the desire for instant gratification, often win out against financial prudence when one takes financial decisions. In this process, the dark characters offer products that hurt such consumers, and yet which those entities profit from. The challenge is to catch those, during the event.
Hence it is necessary to increase digital literacy, along with financial literacy. This would allow the citizens to understand their right to recourse, in event of financial concerns. They also have to be imparted the idea of responsible financial behaviour.
Fintechs - A journey ahead
With the advent of democratising finance and opening up quicker and cheaper ways to distribute financial products, fintechs come into focus. Due to disruptive nature of emerging digital technologies and the laissez faire style adopted by conventional players of these licensed sectors, the entire financial services sector is set for newer business models.
Providing accurate and timely granular information about financial products, before consumers choose the products that best serve their needs is a necessity, and hopefully made into a norm. The key to scaled financial inclusion is deeper data collation. And more importantly how that data is used, protected and safeguarded is critical. After all, a nation’s consumer financial data is a national strategic importance and hence protecting it is a strategic criticality.
Formal financialisation of assets
With increasing formal financial asset adoption by consumers in India, we have to increase consumer protection ambit. This necessitates the industry building trust quotient and generating respect. Many regulatory changes have been added to act as building pillars to enable these.
For financial service providers, across the gamut of lending, insurance and asset management, embracing responsible finance means improving their long-term relationship with their clients, having the ability to attract and profitably retain a customer base, commanding respect, increasing business efficiencies with appropriately designed risk management systems, and accessing diversified sources of funds.
In current domestic market in India, the non-banks (NBFCs) and fintechs are still dependent on their lending-competitor — the banks — for much of their borrowing. Globally corporates and large projects depend on bond markets for their financing, while banks lend to retail segment. In India, banks’ exposure to corporate is skewed to large proportion in almost-absence of the bond market. The market penetration of insurance and asset management activities are low that justifies growth potential of those entities over next many years ahead. The challenge is if those products offered would be the relevant and appropriate ones.
Dynamic regulatory shifts
Responsible finance consumerism, in short, is stakeholders of financial services acting in an ethical, accountable, and transparent manner. If we bring the onus of the primary responsibility on the financial services providers, we need to look at having basic minimum standards of their processes and practices, what they do or don’t do. To extend this philosophy, we also need to engage with users (clients) of these products and services to improve their awareness of their capacity to access and use such financial products, and importantly the negative outcomes of such a non-behaviour.
The role of regulators has become even more a hot bed, and the pressure is on them to evolve consumer protection standards, faster than emergent technologies or the negative non-state actors. With private participation almost non-existent in the closed regulatory hierarchies, capacity building and unlearning to expand newer skill sets become challenges too. Yet they are expected to:
Design a framework for how newer and trustworthy participants can provide financial services
Develop a network of systems that can offer anti-AML tiered KYC processes to manage risks
Build consumer protection without affecting the ease and speed of onboarding and customer experience
Offer a consumer grievance mechanism that can address any commercial implications quickly
Build regulations that help promote financial solutions and yet provide avoidance of over-indebtedness
To build inclusive, healthy and responsible finance, financial service providers should meet higher requirements to help consumers improve their habits for consumption. They should also build consumers awareness about financial wellness, and to manage finances within means.
Nations and markets that balance the attraction of financial inclusion by data-led financial entities, along with apt privacy laws and consumer protection act, will be able to achieve responsible financial consumerism. If all the stakeholders in the industry adopt the prudence of responsible finance and ensure that the development of consumer finance abides by higher standards, they will be able to achieve the major goals of financial inclusion, namely extending the coverage of financial services and increasing the accessibility of and satisfaction with financial services.
Consumption has to be responsible. Consumers cannot cry foul for their greed or rash decisions.
Lending or insuring or selling investment products have to be transparent and responsible, and aimed at profit-booking with utmost consumer protection measures.
Regulation has to be dynamic and cautious, yet encouraging of innovation.
Supervision has to be proactive and in real time.
It is in this journey, that India needs to bring in such an Act. And to have accountability framework for every stakeholder group.
(Srinath Sridharan is a corporate advisor, while Ram Rastogi is a digital evangelist. Authors' views are personal and should not be attributed to organisations they serve officially.)