From Dollars to Data: Consumer Finance Goes Digital
The consumer finance industry always lags slightly behind the technological curve. Consumer confidence, which is understandably fickle, requires banks and related institutions to only adopt technologies that are tested and found to be secure and reliable. Trust of that technology is built over years and can be lost in a second. It is for this reason that consumer banks have, until recently, continued to operate largely under the same protocols as they have for the last century. While financial institutions continue to provide more access to their services online, the technology is, to date, little more than online duplication of brick-and-mortar banking services. Customers transfer money, issue digital checks, and make credit card payments online. But at root, the transaction is little different from in-person commerce used throughout the 20th Century. As we look towards the middle of the next century though, this traditional model will necessarily and radically evolve, and it is important for consumers and banks to be prepared for what some of those changes might be.
Online lending has become a dominant trend in the consumer finance industry over the last decade. Rather than obtaining a consumer loan or auto loan from community banks, or indirectly via the dealer or merchant, consumers are using online portals operated by financial service companies, often based in another state, to receive quick loan approval and subsequent deposits into their bank accounts. Often, these online loans are used to pay off prior-existing debt incurred via traditional sources of credit, including in large share credit cards. The ease with which these loans are acquired far outpace standard bank loans. Borrowers seeking these loans should be aware that certain online lending platforms may not be subject to the same privacy and lending obligations as a more established financial institution. That trade off may not be worth the convenience of quick money. Traditional banks, on the other hand, must create new products that match the convenience of online loans while still satisfying their obligations under consumer lender regulations.
Digital or cryptocurrencies, such as Bitcoin, have also moved out of the “techie” niche and into the more mainstream consumer market such that both banks and even their most traditional customers should pay attention. While uses of the technology have been predominately focused in the electronic payments and cross-border remittance markets, in recent years cryptocurrencies have also been viewed as a low-cost speculative investment by consumers and even as an accessible store of wealth, functioning as an equivalent to a traditional bank account or even holding of precious metals. Given the recent action the price of the major digital currencies, digital currencies will continue to experience volatility, but will not be going away anytime soon. From the consumer’s perspective, digital currencies now present a viable potential for personal wealth investment. Meanwhile, banks and wealth planners must evolve to provide their customers opportunities to pursue investment vehicles rooted in cryptocurrency.
Blockchain of Title
The same underlying technology that powers cryptocurrencies, commonly referred to as “Blockchain” technology, is being developed for use in other financial transactions that potentially could see a cost reduction from the automatic and decentralized clearing and settlement of the transactions. While investment banks have already been exploiting this technology in commodity trading and “smart contracts”, the greater impact will be in the consumer realm. Blockchain can be used to digitally track the chain of title for real property and vehicles, both at the local country records level and also internally among financial institutions to track sales of secured loans and the underlying collateral documents to those transactions. Adoption of this technology will likely be uneven in the coming years, but the economics and eventual convenience of Blockchain-driven property records may soon become the norm across the country. Banks should exploit this approach as soon as they are able because a digital chain of custody, once sufficiently validated by Courts, could eliminate billions of dollars in unnecessary litigation related to a financial institution’s standing to enforce loan documents. Customers, as a result, need to familiarize themselves with the medium as well once it becomes the norm.
These technologies will not replace lending, currency and contracts, respectively, overnight. But as new tech tends to proliferate exponentially rather than linearly, they could easily be common practice before unprepared consumers or banks are ready for them.
Brendan I. Herbert, Casey B. Howard and John Viskocil are partners at Locke Lord, LLP.