Jane is considering getting a new credit card.  She currently holds three cards.  Mostly she remembers to pay her bills on time, but every so often she incurs a late fee.  On average, she carries a balance of $1,000, nowhere near her credit limit.  She is contemplating moving this balance to her new card.  She has three kids and lives in the suburbs, so she shops a lot at Macy’s, and fills her gas tank several times each month.  The choice of the optimal card for Jane is quite complex.  It entails assessing various features of each card, such as introductory and ongoing interest rates, annual fees, cash-back rewards, and late fees.  These need to be calculated given Jane’s specific expected behavior and where she shops, how much she makes, and the likelihood of her forgetting to pay on time, as well as the chance that a card will be approved given her credit score.  It is quite possible that in theory Jane would be better off getting two or three different cards and using each one for different purposes or getting one card for a year and then switching to a different card.  Such a complex decision is nearly impossible for Jane.  But it is trivial for an intelligent algorithm.  Choosing and signing up to the optimal card, picking which card to use for every purchase (as well as where to make that purchase and which coupons to utilize), alerting Jane to make a payment, or even making that payment for her while transferring funds from savings accounts to avoid an overdraft, are just a few of the functions modern technology could undertake for Jane quite seamlessly.

But it does not.  Despite the high expectations of technology to come to consumers’ aid, detailed by academics, technological experts, and government officials, the largest Fintech¹ companies that address these issues have made only limited progress in resolving market failures that are derived from consumers’ bounded rationality, information, and attention.  Despite the availability of relevant technologies and information, Fintech intermediaries simply do not take on such roles, and in some cases, the design of these products even exacerbates existing market failures.  Although technological innovations could change market dynamics and improve consumers’ decision making, such products are not coming into fruition.

There are several possible explanations for why such services, despite their potential benefits, are not appearing as significant participants in financial markets.  First and foremost, just as bounded rationality² distorts consumers’ demand for financial products, it also limits their ability to assess the benefits of products offered to resolve such failures.  While consumers may be somewhat sophisticated with regard to their limited attention and costs of gathering information, their ability to demand products that highlight the costs of non-salient features is limited.  Second, since consumers are sensitive to the upfront costs of such products, they prefer to receive free services, which often entail lowering the quality of the services they receive, while forcing companies to profit from back-end services, often to the detriment of consumers.³  Thus, since consumers do not pay for comparison websites’ services, such sites often receive payments from credit card companies and banks, distorting the way information is presented to consumers and limiting such companies’ incentives to optimize consumers’ choices.  Consumers’ sensitivity to the price of the services they receive,⁴ increases the benefit of companies design of their business model as a two-sided platform, in which they underprice the services offered to consumers, often providing them for free, while transferring such costs to other participants on the platform, such as retail businesses or credit card companies.⁵  These, in turn, transfer the costs back to consumers through the prices of the services they provide.⁶  Third, when financial service providers price their products with excessive margins, such platforms may try to capture these margins, instead of minimizing them.  Finally, another factor influencing the design of such Fintech products may be the power and influence of existing incumbents, specifically banks and credit card networks.  These incumbents can invest or buy out nascent competition, create barriers to entry through dependency on their approval for certain services, as well as strong financial incentives for Fintech companies to align their services in a way that preserves and enhances the networks’ profits.

Despite these challenges, there are several ways that markets can develop to fulfill the potential for enhanced products that resolve behavioral market failures.  Policy interventions that look to antitrust and competition considerations, as well as the imposition of existing fiduciary duties or regulations promoting fairness and prohibiting misleading practices, can go a long way in driving out certain problematic practices.  Additionally, market actors whose interests are aligned with those of consumers, such as employers and wealth managers, can help create the market demand needed to fund such services.

Part II will discuss some existing market failures, while presenting the potential of technological innovation in resolving such failures.  Part III will present the realized potential of such innovative products, analyzing the design of credit card comparison websites, financial management tools, and mobile wallets.⁷  I will demonstrate the significant benefits of such products, and yet the limited realization of the potential advantages of such services.  Part IV will present several explanations for why such potential is not being fully realized.  These explanations may also shed light on what may hinder such solutions from coming about in the future, highlighting the point that markets and technological innovation may not be expected to resolve many of the problems in existing financial markets.  Part V will discuss several solutions for such problems, including regulatory intervention and market-based solutions.