The GameStop / Robinhood saga has dominated the news over recent weeks and provoked some strong reactions across the industry. For FinTech as a whole, the scandal raised some intriguing questions the industry might have to address in the future. In this post, we explore some of the perks and dangers of the democratisation of finance.
The “democratisation” of finance
The FinTech industry is often characterised as disruptive, fast moving, providing innovative solutions and allowing easy access to financial services for consumers as well as businesses. Popular banking apps such as Chime and Monzo have allowed individuals to access a range of banking solutions through a simple click of a button. We have also seen the world of investment and trading opening up to the general public thanks to an array of players such as Revolut, SoFi or Ally Invest. Previously inaccessible financial markets and investment options are now attainable by just about anyone thanks to FinTech.
Companies in this space pride themselves on offering a tailored, personalised and convenient customer experience to users. MoneyFarm, for instance, pledges to “handcraft” investments for its customers, creating a unique profile per investor, customised based on individual investment goals and risk appetite, all the while claiming low fees and adequate protection.
The dangers of inadequate education
The GameStop / Robinhood saga showed us that the “democratisation” of investments through FinTech is not without its share of risk and implications. Opening such nuanced and often risky endeavours to the general public can prove catastrophic if not executed with the adequate knowledge and understanding it requires.
A chilling reminder of the dangers of reckless investment is demonstrated in an advert for online trading platform XTB. While the face of the brand, world-renowned football coach Jose Mourinho showcases the opportunities of online trading with XTB, the small print at the bottom of the screen warns that “79% of retail investor accounts lose money when trading CFDs with this provider”.
One example of the volatility of online trading is the case of high-tech vehicle brand Nikola. Following the hype that was going to make Nikola “the next Tesla”, the start-up’s value more than quadrupled within a couple of months last summer, only to lose most of its value by the end of the year. In this case, the power of internet and social media enabled inexperienced investors to help the company reach spectacular highs as well as lows.
The gamification of investing
In recent years, investment platforms and FinTechs have also increasingly presented customers with a gamified user experience. Interestingly, academics have found that the simplified user interfaces employed by popular “millennial investment apps” could easily compare to those seen in a game, and that users can have a game-like psychological experience when interacting with them.
In Robinhood’s case, a top layer of the app showing strongly performing stocks could entice customers to invest in them who otherwise may not have done so. Not only is investing becoming more “fun” and accessible, but it may also be becoming somewhat addictive for a portion of investors. The recent events surrounding the GameStop stock have illustrated the impact the influx of retail investors who have been attracted to this gamified experience can have on global stock markets.
Reddit’s /r/wallstreetbets community has for several years explicitly promoted treating options trading like a casino, recommending platforms such as Robinhood as an easy and fun way to gamble on the markets. The highs and lows of the GameStop story have likely encouraged many more people to try out investment apps for the first time, and it remains to be seen whether these new investors will fully embrace the riskier elements of /r/wallstreetbets-style day trading. The extent to which these newer customers fully understand that mistakes in this complex environment can have real world financial implications certainly remains unclear.
Striking a difficult balance
Despite the obvious risks involved and amidst the GameStop controversy, Robinhood reiterates its stance towards its principles of laissez faire investment. Its ad at this year’s Super Bowl confirmed to the audience that “we are all investors”, marching on in its quest for new customers. Web communities of the likes of Reddit encouraging group action via slogans such as “underdogs can accomplish just about anything” will have prompted many to get on board.
Amongst the more responsible investment platforms, eToro offers a comprehensive ‘Education’ section on its website, ranging from financial markets guides to blogs, podcasts and tutorials. This education piece is crucial in helping narrow the knowledge gap between Wall Street / City professionals and hobby investors. The option of setting up virtual accounts for users new to try the world of investing is another method of demonstrating the ins and outs of the industry. However, despite some investment platforms also caveating the risks, the emphasis very much remains on the opportunities investing can provide.
As FinTech continues to evolve it will continue to look for the right balance between the opportunities and risks it provides to its customers. The amount of new customers investment platforms continue to attract seems to suggest that they are satisfying a clear demand for such products. However, at the same time, setting up the right guardrails and offering adequate education and support to customers is increasingly important as these FinTech services move from niche to mainstream.