As money—and how we interact with it—moves increasingly online, consumer trust in digital financial services will play a key role in determining what technologies become mainstream. Let’s examine how consumer trust is built and the ways fintech has been successful—and unsuccessful—in doing it.
The Oxford Dictionary defines trust as “firm belief in the reliability, truth, or ability of someone or something.” This can be taken one step further to include the concepts of risk and uncertainty, in that trust exists when this firm belief holds under a state of uncertainty. From the inverse perspective, a person will typically shy away from the unknown unless they have trust that the unknown in question will not do them harm.
As we’ve moved from local to institutional models of commerce and finance, and more specifically from offline to online, the command of trust has also evolved. Rachel Botsman writes about the “trust stack” in her book Who Can You Trust?, which refers to the levels of trust someone must progress through in order to adopt a technology.
The foundation of this stack is trust in the idea. Let’s take online lending as an example. Trust in the idea of lending has been established for thousands of years, resulting in one fewer ‘trust leap’ a consumer needs to take before agreeing to a loan online.
The next layer is trust in the platform. In the case of online lending, the platform is the company behind the loan, and trust applies to users on both sides. For example, for a peer-to-peer platform company like Lending Club, there must be trust from both sides of the platform. Borrowers, must trust that Lending Club will protect their personal data and abide by the same regulations as traditional lenders (i.e. reporting loan payments to credit bureaus, not practicing unfair discrimination in underwriting, etc.). Lenders, on the other hand, must trust that Lending Club won’t lose their money. This applies to not only consumers who look to Lending Club to provide a return on their spare cash, but also the institutional investors providing lending capital through the platform.
Still, with platforms involving peer-to-peer interactions, trust in the idea and platform aren’t enough. Users must trust that the person they’re paying will uphold their end of the deal. For instance, if you pay a friend for a concert ticket through Venmo you trust that they’ll use that money to buy the ticket on your behalf rather than spending it on themselves.
As the world moved from bartering to physical currency, and will (in theory) move from digital payments to digital currency, users must take a ‘trust leap’ the with the unknown risk of trusting next step in the evolution of money.
Fintech’s successes and shortfalls
As new players begin to compete with established institutions, consumers must take a number of trust leaps before committing to a new way of moving, borrowing, or storing wealth. Given inherent sensitivity and protectiveness over one’s own money, fintech has in many ways led the pack when it comes to online trust.
A decade before the rise of peer-to-peer services such as Airbnb and Uber, PayPal enabled the transfer of money between mobile devices and via email—and shortly thereafter, to settle payments between strangers on eBay. As with many payments innovations, it was perhaps the acute need (eBay payments were previously settled via check or money order) that exceeded any distrust of the technology enough to accelerate its adoption.
Twenty years later, peer-to-peer payment apps are being used to pay for everything from coffee to rent, from Venmo to Square Cash, between friends and strangers alike. And while slower adopters of technology might balk at the idea of sending thousands of dollars through the internet, these apps are no longer niche payment solutions. The most recent statistics on rental payments found that 15% were made through electronic methods in 2014, and chances are that number has since increased.
The significant amounts of trust placed in these apps—and their ease of use—sometimes results in harm to users on the platform. In 2017, one scammer exploited a fund reversal loophole in Venmo’s system to con a number of unsuspecting individuals out of $125,000 worth of merchandise. Zelle, the payment app launched by a consortium of U.S. banks, is said to have experienced high rates of fraud, not to mention dozens of customers who have lost money to scammers due to the way the system works. From a trust perspective, these companies would be wise to closely monitor for undesirable activity, as consumers had to take a trust leap to use the service in the first place means that they’ll be that much more likely to take back their trust and look towards other methods of paying.
Peer-to-peer lending took trust requirements to an even greater level. While peer-to-peer payments represent one-off transactions, lending your own money through an online platform requires not only trust in the platform’s security, but also trust that the individual you lend to will return your capital. Despite this, the total value of personal loans made on marketplace lending platforms surpassed $1B in 2018, and is expected to more than double in just four years.
Despite the trust gaps that have already been traversed to get fintech to where it is today, there is still significant room to improve. While consumers are increasingly open to digital-only solutions to money management, many still look to established banks to hold the majority of their wealth. For example, challenger banks are gaining significant traction—particularly in Europe—with many consumers (many of them millennials) switching their daily spending onto a challenger bank card and corresponding mobile app. However, these accounts on average have low balances, indicating that consumers are still trusting their savings to traditional institutions—and making it challenging for these challengers to make money.
The move from institutional to distributed trust is already underway, but it still has a long way to go. The 2008 financial crisis in many ways marked a turning point, after which consumers started questioning the banking institutions that served them—and many for the first time. While centralized systems leave a lot to be desired (as demonstrated by the proliferation of data breaches in recent years), the mainstream consumer isn’t yet ready to trust their wealth to an unregulated system of computers. In the meantime, it’s up to digital players to build consumer trust in the ideas, platforms, and individuals that power the future of financial services—whether those players are banks, startups, or distributed systems.