Danger mouse: the opportunities and risks of digital distribution
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Advancing economics in business
April 2021
The risksmouse:
Danger of using algorithms
the opportunities and
in business:
risks demystifying
of digital distribution AI
Danger mouse: the opportunities and risks of digital distribution
For example, consumers trust providers
are formed through consumer experiences
Contact to keep their data secure (indeed, one
of using digital in financial services and other
Tim Hogg international survey in 2020 found that
sectors.
Senior Consultant consumers were more likely to trust banks
and other financial services providers with
What’s different about their personal data than other types of
organisation).3
digital? A behavioural
economics perspective Consumers may also expect providers
to interpret their data and suggest only
First, digital channels lack the traditional products that are suitable for them. For
Digital channels create new one-to-one or face-to-face interaction example, a consumer may expect their
commercial opportunities and conduct between consumers and providers. This provider to send them sales information
risks (as well as commercial risks) means that providers cannot address via digital channels about products that
for providers of financial services. conduct risk through in-branch staff are affordable for them (using data about
There are important questions about interpreting visual or verbal clues about their financial situation). As stated by the
the extent of provider responsibility consumers’ level of understanding or FCA, ‘consumers expect firms to take into
and the nature of liability in a digital strength of intention. For example, in-branch account their preferences when engaging
environment. But what is different staff may be able to gauge when a consumer with them’.4 In addition, a consumer may
about conduct risk in this context?And does not fully understand the obligations expect their provider to flag if they are
how should digital conduct risks be associated with a mortgage, and can adjust making a payment to an account number
managed? In our experience, providers the sales process accordingly. In some that is known to be associated with
can manage these risks effectively circumstances, staff may be able to exercise suspicious activity.
using a new toolkit of data science and their judgement over whether a consumer is
behavioural economics. vulnerable. Third, consumer behaviour is susceptible
to influence via digital channels in different
Consumers often have difficulties ways to mediated channels. The choice
The transition towards digital across understanding retail financial products. architecture of digital channels—the way
the economy is increasingly influencing For example, research has shown that in which choices and options are framed—
retail banking, with greater use of digital consumers can struggle to correctly compute has been shown to be highly influential in
channels (online, app) and the growth of compound percentages.2 In mediated affecting decisions (for example, in terms
fintech. Digital channels are important at channels, any lack of understanding can be of ‘dark patterns’ or ‘sludges’).5
many stages of the consumer journey and addressed immediately by staff. However,
the whole product lifecycle, including the in a digital environment, consumers may These differences result in new
point of sale and ongoing product usage. not have such easy access to assistance, opportunities and new challenges from
Moreover, as shown in Figure 1 below, and may take decisions based on a conduct risk perspective (see Figure 2
COVID-19 has further accelerated the trend miscomprehension. overleaf).
towards digital channels.
This is not to say that traditional face-to-face
Digital practice is evolving rapidly, and channels are without their challenges. For
New opportunities?
the UK Financial Conduct Authority (FCA) example, while sales advisers are trained,
Digital channels present providers with a
expects providers of financial services given appropriate scripts, and monitored,
number of commercial opportunities, as
to remain at (or near) the forefront of the human element will naturally result in
follows.
good practice.1 The FCA’s expectations variation in how they speak and behave.
cover more than just the point of sale.
• Reduced distribution costs,
Providers may be required to assess the Second, the provision of digital services
unlocking greater profitability and
digital consumer journey and product gives providers access to new, more
cheaper products for consumers.
lifecycle at each consumer touchpoint, detailed real-time data on consumers.
Estimates of cost efficiencies offered
with a detailed understanding of typical Consumers may be unaware of how
by digital channels (compared with
customer behaviour and biases. The much big data is collected or used by
the alternatives) vary according to
FCA’s expectations also reflect consumer their providers, and may have certain
the level of efficiency of the branch
expectations over digital channels, which expectations about how their data is used.
network or call centre operations,
and the level of efficiency of the new
digital channel. These will depend on
economies of scale (i.e. on how many
customers use the digital channel).
One study estimated that the online
cost per transaction could be up to
95% lower than the in-branch cost per
transaction.6 The methodology behind
this estimate is unclear, but the cost
savings from digital channels are
likely to be significant. The extent of
pass-on to consumers will depend on
the nature of the costs (e.g. variable,
fixed), and the market structure (e.g.
perfect competition, oligopoly or
monopoly).
Figure 1 The impact of COVID-19 on digital access to retail banking
services
Source: Financial Conduct Authority (2021), ‘Financial Lives 2020 survey: the impact of coronavirus’, 11 February, https://bit.ly/2Qz77nh.
April 2021 1
Danger mouse: the opportunities and risks of digital distribution
who overestimate the degree of
personalisation may interpret
sales suggestions as personally
recommended for them, and
therefore suitable for their needs
and circumstances (when they
may not be); and (ii) consumers
who underestimate the degree of
personalisation may lose trust in their
provider when they realise that their
personal data is being used to target
communications or tailor product
design.
• ‘Sludges’ or ‘dark patterns’.
Behavioural economics tells us that
Figure 2 New opportunities and risks the way in which information and
Source: Oxera. choices are presented can have a
significant impact on the decisions
• Increased access to financial example, while consumers have to
taken by consumers—there is no
services and utility of the products, click to indicate that they have read a
such thing as a neutral choice
through expanding the reach of set of terms and conditions, they may
architecture. Small changes in the
products (e.g. reaching new customers, spend very little time on the page.
choice architecture can have a big
and reaching existing customers with Indeed, a particular screen may never
(intended or unintended) impact
new products). One such example is result in a good enough understanding
on outcomes. A lot of ‘rational’ or
that of robo-advice increasing access to of some complex products. This means
‘irrational’ consumer behaviour can
wealth management advice. One study that it may not be appropriate for some
be predicted in advance, as shown by
found that, assuming that offering robo- products to be sold via digital channels.
empirical evidence in the behavioural
advice increases upfront fixed costs
economics literature. Further, since
(the cost of programming the robo- • Insufficient friction to test consumer
outcomes can be tested, providers
adviser), but reduces per-customer intentions. A frictionless consumer
would be expected to understand the
costs (i.e. there are greater returns to journey may not adequately prompt
impact of their choice architecture
scale than in traditional advice), robo- consumers to consider their purchase
on behaviour and be able to justify
advice increases access to advice for decision—consumers need to consider
their design of choice architecture.
lower-income consumers.7 Further, their rights and obligations under
For example, using anchors in the
digital access increases the consumer any product.8 For example, the FCA
presentation of choices for credit
value provided by some products—for has highlighted these risks regarding
products can influence consumers
instance, when someone monitors their younger retail investors who are using
(see Figure 3 below).10
current account balance via an app digital channels to make high-risk
rather than through monthly statements investments (e.g. in cryptocurrencies or
• Inconsistency between different
in the post. foreign exchange).9
sales channels. Providers are
required to manage which products
• Information about customer • Too much, or insufficient,
are available to which consumers via
behaviour. The data generated by personalisation. If consumers’
digital channels. Digital distribution
digital channels gives providers new expectations over the degree of
channels may not be appropriate
insights into the preferences and personalisation are incorrect,
for all products, and each product
choices of consumers, and what drives there is a potential for conduct
requires a well-defined target market.11
these choices. In this respect, ‘know risks. For example: (i) consumers
In practice, customers may start the
your customer’ has never been easier.
There are also opportunities for the
removal of friction in the customer
journey, increasing providers’ ability
to make sales; and the monitoring of
consumer outcomes in real time,
allowing providers to intervene immediately
if certain patterns in behaviour emerge
(e.g. suspicious transactions).
New risks?
However, there are also risks with digital
channels.
• Reduced consumer understanding.
A frictionless consumer journey may
not adequately prompt consumers to
take time to understand the product,
and providers may be unaware of the Figure 3 Use of anchors at the point of sale in consumer credit
level of consumer understanding. For Source: Oxera.
April 2021 2Danger mouse: the opportunities and risks of digital distribution
customer journey on one channel, and products and sales information on their Implications going
complete it on another channel. For digital channels. Ensuring separation forward?
example, a customer might start by between information and sales could
using online banking, encounter an mitigate the risk of consumers not Digital channels present providers with
issue and so use an app chat function, understanding that they are purchasing a number of commercial opportunities,
and finally complete the process by a new product, or being pushed into including reduced distribution costs,
telephoning the bank. This raises purchasing new products. increased access to financial services and
the possibility that customers do not utility of the products, and greater learning
receive all the required information Setting out clear design principles would about customer behaviour.
through one channel or receive also help to address governance risks
inconsistent information, and the through accompanying clear frameworks of While digital channels come with conduct
provider may struggle to track the governance and accountability. It would then risks for providers—such as reduced
journey from end to end. be clear who holds the duty to consider and consumer understanding and insufficient
challenge any potential disconnects that friction to test consumer intentions—these
Other risks include misuse of personal could exist between the design principles can be efficiently managed and monitored
data, financial crime, operational resilience, and practical design choices, risk appetite, using behavioural economics and data
data security and cybersecurity issues. or management capability. science. Investing in these two capabilities
Providers need to demonstrate how they may be the best step that an organisation
will protect themselves and consumers Further, existing practices may need to be can take to balance the management
from these threats. Lastly, as highlighted by strengthened: of digital conduct risk with the ability
the European Insurance and Occupational to capitalise on digital commercial
Pensions Authority (EIOPA) Discussion • operating a robust testing procedure opportunities.
Paper on open insurance,12 there is a risk and audit trail, such as experimenting
of financial exclusion for customers who do with changes to digital channels to
not use digital channels. understand the impact of the choice Contact
architecture on consumer behaviour
Mitigating the risks (e.g. A/B testing). Such testing is part of
tim.hogg@oxera.com
good-practice digital design;
Providers face a vast array of design options Tim Hogg
over digital channels. In our experience, • auditing and monitoring of digital
reinder@oxera.com
providers find it helpful to set out their high- channels from a behavioural
level design principles for these channels. economics perspective to ensure Reinder Van Dijk
These principles would cover what the that digital choice architecture does
provider does (and does not) design its not trigger a conduct risk (e.g. play on
digital channels to achieve, and how the behavioural biases). The FCA may
provider uses (and does not use) consumer conduct similar exercises in the future,
data. and providers may find it useful to have 1
Financial Conduct Authority (2019), ‘Regulation in a changing
documentation showing that their digital world’, speech by Christopher Woolard, Executive Director of
Practical design choices would flow from channels strike the appropriate balance Strategy and Competition at the FCA, 21 October, https://bit.
ly/3eMz6Z5; Financial Conduct Authority (2015), ‘Social media
the digital design principles. These could between selling products and offering and customer communications: the FCA’s supervisory approach
to financial promotions in social media’, FG 15/4, March,
include: clear and fair choices; https://bit.ly/2R33YvO.
2
See Oxera and the Nuffield Centre for Experimental Social
• empowering consumers by giving • measurement and monitoring of Sciences (2017), ‘Annex 5: Identifying metrics to aid consumer
them choice over the level of consumer outcomes on an ongoing choice in the income drawdown market’, prepared for the FCA,
March, https://bit.ly/3aDSFRK.
control. Consumers may wish to opt basis, so that any variations in
into (or out of) control over how they outcomes are detected and understood. 3
Genesys (2020), ‘Survey Shows Banks, Healthcare Providers,
and Government Remain Most Trusted by Consumers, Despite
use products. Some consumers may These include both financial and non- Lack of Transparency and Data Security Breaches’, PR Newswire,
prefer assistance, while others may find financial outcomes, which may indicate 11 June, https://prn.to/32OuN9R.
it overbearing. This might be analogous that a product is being used as intended 4
Financial Conduct Authority (2016), ‘Smarter Consumer
to choices over parental control for (or otherwise), or whether consumers Communications’, Feedback Statement FS16/10, October,
para. 2.33, https://bit.ly/3noFeuj.
Internet use, which can be changed by are reading the terms and conditions
consumers at a later date; (which many consumers do not).13 5
Authority for Consumers and Markets (2019), ‘Protection of the
online consumer: boundaries of online persuasion’, Guidelines,
Appropriate consumer segmentation is Draft consultation document, https://bit.ly/3dRZdyp.
• monitoring patterns and spotting important in the monitoring of consumer 6
McKinsey & Company (2017), ‘The Winning Formula for
anomalies. Greater data about outcomes, and digital outcomes can Omnichannel Banking in North America’, Retail Banking Insights
consumer behaviour may enable be benchmarked against outcomes 9, January, https://mck.co/3aFFDU4.
providers to identify behavioural of consumers using other channels 7
Philippon, T. (2019), ‘On Fintech and Financial Inclusion’,
National Bureau of Economic Research, Working paper 26330,
anomalies (compared with a (controlling for the fact that consumers https://bit.ly/3t1LfOV.
consumer’s fitted profile). This may self-select into different channels);
8
Financial Conduct Authority (2016), ‘Business Plan 2016/17’,
allow providers to step in and check p. 19: ‘The growth of mobile and digital channels offered by firms
that consumers are acting in their own • facilitating digital feedback and has been supported by the creation and take-up of supportive
technology, from mobile payment and digital wallet services, such
best interests, or have not been victims monitoring complaints data. It may as Apple Pay, to integrated billing. […] [T]he limited information
of fraud. For example, a provider be appropriate for consumers to be able and the speed of action consumers experience could lead to
inappropriate decision making’, https://bit.ly/3dOFYWq.
could check that a consumer has not to register complaints and feedback
mistyped when making a payment for through the digital channels, and such 9
Financial Conduct Authority (2021), ‘FCA warns that younger
investors are taking on big financial risks’, Press Release,
an unusually large amount of money feedback must be monitored. The use of 23 March, https://bit.ly/3sSmGUu.
via an app; ‘live chat’ functions is an important way 10
See Financial Conduct Authority (2017), ‘From advert to action:
for providers to ensure that consumers behavioural insights into the advertising of financial products’,
• differentiating between digital can easily reach out if they do not Occasional Paper 26, April, https://bit.ly/3xjUeyd.
information and sales. Some understand something. Financial Conduct Authority (2018), ‘FCA Handbook’, PROD 3.2
11
providers combine information about Manufacture of products, https://bit.ly/2R34M3O.
April 2021 3Danger mouse: the opportunities and risks of digital distribution
12
EIOPA (2021), ‘Open insurance: accessing and sharing insurance-related data’, Discussion Paper, https://bit.ly/3xAF8EG. See also, for example, Financial Conduct Authority (2018), ‘FCA Mission: Approach
to Consumers’, p. 31: ‘Technological innovation and change is transforming the financial services market for consumers. For example, increasing numbers of consumers can access services through mobile and
digital devices which bring convenience and choice but can leave some consumers excluded’, https://bit.ly/3xjUrS1. See also Financial Conduct Authority (2018), ‘Business Plan 2018/19’, p. 27: ‘The increased
use of big data also has the potential to cause harm. There is a risk that if technology and innovation move too quickly, the more vulnerable in society could be at a disadvantage’, https://bit.ly/3xrvJPp.
Bakos, Y., Marotta-Wurgler, F. and Trossen, D.R. (2013), ‘Does Anyone Read the Fine Print? Consumer Attention to Standard Form Contracts’, New York University Law and Economics Working Papers,
13
March.
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