Responsible consumption generally stems from a strong awareness of the impact of consumption decisions on consumer health, consumer finances, the local ecosystem, the environment, and society in general.
Responsible financial consumption decisions determine the general well-being of people, since it affects not only their finances but also their emotional well-being and social status. Any stumble in the management of personal finances not only has long-term consequences for the people affected, but also for society as a whole. Financing consumption is a double-edged sword. It cannot be allowed to evolve as a market mechanism, as many propose. Regulators need to be concerned about risks to the social framework and financial stability. The world has seen enough large-scale financial problems to have learned this.
Digital, finance and literacy
Digital technologies are rapidly evolving and more new and disruptive ones are expected in the digital century we live in. These are rapidly changing the way financial products or solutions are designed and offered to consumers. They are also allowing the possibility of developing “product for one” (unique for each consumer). Digital finance is a financial sector, ideally driven by technologies that enable regulatory compliance and financial solutions that are offered with greater access in a fair and personalized way.
Consumers who were unable to access financial products due to geographic restrictions can now 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 overcome. Misleading sale of unnecessary or inappropriate products to consumers, sale of products with hidden conditions, opaque communication, lack of consumer complaint mechanisms, lack of adequate consumer privacy measures, and cyber risks are some of the the challenges that need to be addressed.
Responsible financial consumption is a critical issue, but there is not much discussion about it among stakeholders, except financial regulators. With each financial crisis, regulators worldwide have adopted new learnings from those events and have tightened their regulations and supervision of financial institutions.
However, with each new boom in economic prosperity, consumers’ greed for ‘more’ increases. It also makes the economically weakest aspire to better conditions and seek financial resources to live better; Many of these products are not necessarily suitable for your financial access. Consumer biases, such as the desire for instant gratification, often trump financial prudence when making financial decisions. In this process, shadowy characters offer products that harm said consumers and yet benefit those entities. The challenge is to catch them during the event.
Therefore, it is necessary to increase digital literacy, along with financial literacy. This would allow citizens to understand their right to appeal, in case of financial problems. You also have to instill in them the idea of responsible financial behavior.
Fintechs – A journey ahead
With the advent of the democratization of finance and the opening of faster and cheaper ways of distributing financial products, fintechs are gaining relevance. Due to the disruptive nature of emerging digital technologies and the laissez faire style adopted by mainstream players in these licensed sectors, the entire financial services sector is poised for newer business models.
Providing accurate and timely granular information on financial products, before consumers choose the products that best fit their needs, is a necessity and hopefully becomes the norm. The key to financial inclusion at scale is deeper data collection. And more importantly, how that data is used, protected and safeguarded is critical. After all, a nation’s consumer financial data is of national strategic importance, and therefore protecting it is strategically critical.
Formal financialization of assets
With the increasing adoption of formal financial assets by consumers in India, we need to increase the scope of consumer protection. This requires the industry to build a trust quotient and build respect. Many regulatory changes have been added to act as building blocks to allow them.
For financial service providers, across the range of lending, insurance and asset management, embracing responsible finance means enhancing their long-term relationship with their customers, being able to profitably attract and retain a customer base, inspiring respect, increase commercial efficiency by designing risk management systems and accessing diversified sources of funds.
In India’s current domestic market, non-banks (NBFCs) and fintechs still rely on their lending competitor, banks, for much of their lending. Globally, companies and large projects rely on bond markets for financing, while banks lend to the retail segment. In India, banks’ exposure to corporates is heavily skewed in the near absence of the bond market. Market penetration of insurance and asset management activities is low, which justifies the growth potential of these entities in the coming years. The challenge is whether those products offered would be the relevant and appropriate ones.
Dynamic regulatory changes
Responsible financial consumerism, in short, is financial services stakeholders acting in an ethical, responsible and transparent manner. If we bring the burden of primary responsibility onto financial service providers, we need to consider having basic minimum standards of their processes and practices, what they do or don’t do. To further this philosophy, we must also engage with users (customers) of these products and services to enhance their awareness of their ability to access and use such financial products and, more importantly, the negative results of such misconduct.
The role of regulators has become even more of a hotbed, and the pressure is on them to develop consumer protection standards faster than emerging technologies or negative non-state actors. With private participation almost non-existent in closed regulatory hierarchies, capacity building and unlearning to expand new skill sets also become challenges. However, it is expected that:
Design a framework for how newer and more reliable entrants can provide financial services
Develop a network of systems that can offer tiered anti-AML KYC processes to manage risks
Build consumer protection without affecting the ease and speed of onboarding and the customer experience
Offer a consumer complaints mechanism that can quickly address any business implications
Develop regulations that help promote financial solutions and, at the same time, avoid over-indebtedness.
To build inclusive, healthy and responsible finance, financial service providers must meet higher requirements to help consumers improve their consumption habits. They must also raise consumer awareness of financial wellness and manage finances within the media.
Nations and markets that balance the attraction of financial inclusion by data-driven financial institutions, along with adequate privacy laws and consumer protection law, will be able to achieve responsible financial consumption. If all industry players adopt the prudence of responsible finance and ensure that the development of consumer finance meets higher standards, they will be able to achieve the main goals of financial inclusion, namely expanding the coverage of financial services and increase accessibility and satisfaction with financial services.
Consumption has to be responsible. Consumers can’t complain about their greed or rash decisions.
Lending, insuring or selling investment products must be transparent and responsible, and be oriented towards obtaining profits with the maximum measures of consumer protection.
Regulation has to be dynamic and cautious, but at the same time fostering innovation.
Supervision has to be proactive and in real time.
It is on this journey that India needs to introduce such a law. And have an accountability framework for each stakeholder group.
(Srinath Sridharan is a corporate consultant, while Ram Rastogi is a digital evangelist. The opinions of the authors are personal and should not be attributed to the organizations they officially serve.)