Managing Money in the Digital Era

The accelerated growth of financial technology (FinTech) in the digital era has reshaped banking services.

According to the International Monetary Fund’s Global Financial Stability Report in April 2022, Fintech firms are growing in systemic importance as they reach out across many financial services such as lending, payments, insurance and asset management.

FinTech firms have the potential to transform the provision of financial services and improve the lives of households.

In their operations, FinTech firms work virtually and rely on non-traditional metrics (such as mobile footprints). Consequently, they enjoy lower cost and are more agile and quick in providing their services.

By obtaining more information of households through non-traditional means, this reduces information frictions in banking, allowing fintech companies to broaden access and reach out to the underserved population.

With tangible benefits from FinTech, traditional banks have also embraced FinTech in their operations and delivery of financial services.

As consumers, borrowers, and investors, households can benefit in different ways.

Why should individuals take advantage of FinTech?

First, the digital era has led to growing adoption of digital payments and digital wallets. ?

With digital wallets, households can make payments electronically and transfer funds between different accounts.

As there are lower overheads involved for the retailer, digital wallets offer greater convenience at a lower cost for the consumer.

Individuals should take advantage of digital wallets as they are more secure than cash, as well as credit cards and debit cards.

Unlike cash, they can be tracked, reducing the probability of theft. Unlike credit cards and debit cards, the data stored in digital wallets is encrypted.

By using their mobile devices to make payments, mobile wallets also provide opportunities for the unbanked and underbanked households to access financial services that they did not have previously.

For borrowers, FinTech lending has resulted in cost savings and increased in convenience for borrowers.

Research have highlighted that FinTech provides multiple benefits to borrowers.

In a 2019 Review of Financial Studies Article by Andreas Fuster, Matthew Plosser, Philipp Schnabl and James Vickery, it has been highlighted that FinTech lender process mortgage applications faster than other firms. They are also more responsive to changes in demand shocks.

Furthermore, households can turn to marketplace lending whereby individuals can obtain loans from other individuals directly.

In the digital era, this is done through lending platforms, providing individuals the opportunity to borrow without any financial intermediaries.

With better access to financing, individuals can better take advantage of the opportunities that are made available to them.

Finally, FinTech have reduced the barriers of entry of investing. As the apps in FinTech require a lower minimum sum for investment and provide better liquidity, it is now more accessible for individuals to invest.

FinTech have also democratized the use of financial service advisors. Robo-advisors are a case in point.

Through the use of digital advisory platforms, artificial intelligence is able to recommend investment portfolios based on individuals’ preferences and risk appetites.

How should individuals use FinTech to reach their goals?

The use of FinTech seeks to transform how households manage their finances by giving them real-time control of their consumption, savings and investments.

With information of their financial position at their fingertips, they can work towards the targets that they set for themselves. These include goal-based savings and goal-based investing.

Research have shown that goal-setting is an important tool to increase self-motivation of individuals. As they have a clear target such as buying a home or paying off debt, it will increase the purpose of saving and investing.

Through regular milestone checks, digital tools can be useful in helping households overcome several behavioral biases.

For instance, goal-based savings and goal-based investing help households to overcome inertia. This also allows them to avoid their own behavioral biases by having a clear and systematic rule.

One behavioral bias that households have is the status quo bias. Households might stick to choices in the past due to information and cognitive limitations. This could be driven by uncertainty in the decisions that individuals need to make.

In the digital era, individuals would be provided with the necessary information, allaying their fears of making wrong decisions.

This will also help them reduce another bias that they rely in investing, loss aversion. According to the prospect theory developed from Daniel Kahneman, the 2002 recipient of the Nobel Memorial Prize in Economic Sciences, and Amos Tversky, individuals value gains and differently.

Hence, investors end up selling their winners and holding on to losers in their financial portfolio. With a structured approach in investing and being cognizant of their biases, individuals could leverage on the information provided by digital advisors.

Moreover, it reduces the ambiguity of savings. As humans are mostly averse to ambiguity, having a clear objective will increase individuals’ willingness to save.

Final thoughts

In sum, households are empowered to manage their finances in the digital era. FinTech has the given the power back to individuals.?

Nonetheless, as a superhero once says, “With great power comes great responsibility.” It is important that households harness the potential of FinTech to improve their lives.

As we have highlighted in our previous column (Link to Op-Ed #7), individuals might end up overspending in the digital era as digital payments are less salient than cash.

One way is to use financial aggregators that collects an individual’s financial information in one place. By consolidating their balance sheets, income and spending for a comprehensive view of their financial portfolio, they can make better decisions. ?