By Federal Financial Analytics
FedFin has just released a new policy paper laying out how emerging risks in unregulated tech-based financial products may threaten U.S. economic inequality. It’s not that regulated institutions have always done that much better, but rather that the power of big data, predictive modeling, and far-flung commercial interests combines with tech-firm culture in still more dangerous ways far outside the reach of effective controls or meaningful enforcement.
As seems always the case, the most vulnerable households are at the greatest risk. Our goal: get the U.S. Congress quickly to recognize these equality risks as it turns to big-tech privacy, security, antitrust, and political-integrity threats. Waiting for later to deal with financial risks means exposing households to harm no subsequent remedies can erase.
This paper differentiates these equality risks into what we call micro- and macro-threats. Micro threats apply to households; macro ones build on these to threaten market integrity, social welfare, and financial-market stability.
The report assesses the following micro risks:
- Bias: An array of controls – e.g., mandatory adverse-action notices – apply to regulated loan-underwriting and product-pricing decisions. Financial-technology firms are governed by only some of these requirements and are subject to enforcement under very few, if any, of them.
- Algorithmic Determinism: AI and machine learning retain decision criteria that achieve primary goals – e.g., low default rates – no matter the cost to secondary outcomes – e.g., safety-and-soundness or discrimination. Determinism also derives from filter bubbles that cause products only to be offered to households that express certain likes or that demonstrate certain characteristics – that is, the more you buy, the more credit you get.
- Unanticipated Risk: Individuals are unlikely to understand the sharply different risks they run when dealing with an unregulated consumer-finance provider. Consumers generally expect that safeguards – e.g., FDIC insurance, loss limits – apply regardless of provider, but no current disclosure requirements clearly address risk when they are absent. Unregulated companies also need not back their products with the capital or liquidity necessary to ensure they can stand behind their offerings and remain in a market under stress.
- Cross-Selling and Self-Dealing: Technology-based providers are likely to use household income, wealth, transaction volume, and other data to cross-sell products within their commercial, advertising, and information-service empires. Unlike banks, no inter-affiliate, anti-tying, or vendor-control provisions apply.
Macro risks include:
- “Surveillance Capitalism:” An important book coins this term that describes how personal data are now the coin of the capitalist realm. Finance thus could be little more than code to monetize in opaque, biased, self-interested, and/or misleading ways.
- Concentrated Markets: The FTC is considering whether its longstanding antitrust standards should now consider economic-equality effects. However, the outcome of this effort is uncertain and is in any case focused on large transactions. Smaller ones that create significant concentration in equality-critical services also warrant scrutiny.
- Financial Crises: The more inequality, the greater the financial-crisis risk. While all of the problems above pose a particularly worrisome macro risk – nothing spells inequality like financial crisis given the ability of the wealthiest households to emerge largely unscathed after a bit of stress.