Introduction

The financial services industry has experienced significant disruptions in recent years due to the rise of FinTech and robo-advice. These technological advancements have revolutionized the way financial institutions operate and how people manage their finances. According to a report by the World Economic Forum, the FinTech industry is growing at an unprecedented rate and is expected to continue doing so in the coming years (World Economic Forum, 2019).

The impact of these disruptions is immense and does not go unnoticed. Traditional financial institutions are facing increasing competition from FinTech start-ups that are able to provide innovative and personalized services at lower costs. At the same time, customers are increasingly turning to digital channels for their financial needs, resulting in a shift away from traditional institutions. The potential for further disruption is enormous, as new technologies continue to emerge, and customer expectations continue to evolve.

This report seeks to investigate these contemporary financial services disruptions while critically evaluating the issues that arise, particularly those related to ethics, sustainability, and social responsibility. This report will explore these issues in-depth, providing a comprehensive analysis of the contemporary disruptions in financial services, as well as recommendations for how to address the challenges posed by these changes.

Disruptions in Financial Services

One of the most significant changes in the financial industry has been the rise of FinTech and the increasing use of robo-advice. FinTech also known as financial technology is defined by Moorad (2018), as the application of technology to financial services, including banking, insurance, and investment to provide services more effectively a. It encompasses a wide range of service offerings including, mobile payments, peer-to-peer lending, digital currencies and block chain technology. Robo-advice, on the other hand, is a form of financial advice that is provided by algorithms rather than human financial advisors. It involves the use of artificial intelligence and machine learning to analyse customer data and provide personalized investment advice.

A major disruption caused by FinTech is the democratization of financial services. According to Njenga & Muturi (2020) democratization of financial services has enabled the provision of financial services to a wider audience, especially those who were previously excluded from accessing these services. This is achieved through the use of mobile technology, which enables customers to access financial services from anywhere at any time. This has led to increased financial inclusion and improved financial literacy, especially in developing countries.

Another significant disruption is the increasing use of mobile and digital payments. With the growth of e-commerce and the use of smartphones, consumers can now easily make payments through mobile apps and digital wallets. This has reduced the need for physical cash and checks, making transactions faster and more convenient (Deloitte, 2019).

Block chain technology has also disrupted the financial services industry. Block chain is a decentralized digital ledger that records transactions, making them transparent and secure. According to Capgemini (2020), block chain has the potential to reduce costs and increase transparency in financial services, making it an attractive technology for financial institutions.

The use of big data and artificial intelligence (AI) has also transformed financial services. According to Capgemini (2020), financial institutions can now use data analytics to understand consumer behaviour and provide personalized financial services. AI has also been used to develop chatbots and virtual assistants, improving customer service and reducing costs.

Alternative lending platforms and crowdfunding platforms have also increased in the recent past. These platforms connect borrowers with investors, bypassing traditional financial institutions (Deloitte, 2019). This has increased access to financing for individuals and small businesses that may have been previously overlooked by traditional financial institutions.

The application of these technologies is disrupting financial services by offering convenience, accessibility, faster and more efficient services to clients, at a lower cost (Moorad, 2018). FinTech companies are leveraging technology to create new products and services, while robo-advisors are offering a lower-cost alternative to traditional financial advisors (Brynjolfsson & McAfee, 2014). These changes are altering the way financial services are delivered, and are forcing traditional financial institutions to adapt to new market dynamics.

FinTech and robo-advice have transformed the financial services industry by enabling greater access to financial services and products for customers, reducing the need for human intermediaries, and increasing the efficiency and speed of financial transactions. These changes have however also brought ethical, social, and sustainability challenges, such as concerns over data privacy, financial exclusion, and the impact of technology on the workforce (Moorad, 2018).

 Impact of these disruptions on traditional financial institutions, customers, and the overall economy

The impact of FinTech and robo-advice on the traditional financial services industry has been significant, affecting both financial institutions and customers. Traditional banks and financial institutions are facing increased competition from FinTech companies, which offer more convenient, accessible, and cost-effective financial services. As a result, these institutions are being forced to innovate and adapt to stay relevant.

Customers are also benefiting from the disruption caused by FinTech and robo-advice, as they now have greater access to financial services and products, and can manage their finances more easily and efficiently. In particular, robo-advice has made investment advice more accessible and affordable, allowing more people to invest their money and build their wealth (Brynjolfsson & McAfee, 2014).

Economies are not left unaffected as impacts of these disruptions lead to both positive and negative effects. On one hand, the growth of the FinTech sector has created jobs, stimulated innovation, and increased competition, which benefits the economy as a whole. On the other hand, the rise of FinTech and robo-advice may also contribute to economic inequality, by increasing the concentration of wealth and increasing financial exclusion (Moorad, 2018).

Despite these challenges, FinTech and robo-advice have also led to the emergence of innovative products and services that have transformed the financial services industry. For example, digital wallets, mobile payments, and peer-to-peer lending platforms have made financial transactions more efficient and accessible (Moorad, 2018). Robo-advisors have also enabled personalized investment advice that is tailored to customers’ specific needs and goals.

Ethical Issues in Personal Finance

Ethical concerns arising from the changes brought about by FinTech and robo-advice have significant implications for individuals and society as a whole. The use of technology in the financial services industry raises several ethical questions, including privacy and data protection, algorithmic bias, and accountability. These issues affect both financial institutions and customers.

One of the main concerns is privacy and data protection. As FinTech companies gather large amounts of personal and financial data to provide personalized services, the risk of data breaches and unauthorized access (Davenport, 2019) increases. This raises questions about the responsibility of these companies to protect their customers’ data and the ethical implications of data usage.

Another ethical issue is the potential for bias in decision-making algorithms, as the algorithms are only as unbiased as the data used to train them. These algorithms are designed to provide personalized recommendations and advice based on the user’s data, but there is a risk that they may extend existing biases or discriminate against certain groups (Madden & Rainie, 2019). This could have significant ethical implications, particularly in areas such as lending and insurance.

Increased use of technology in financial services also raises the risk of fraud and cybercrime. As customers move towards digital platforms and online transactions, they become vulnerable to cyber-attacks and identity theft. This highlights the need for robust security measures and ethical considerations in the development and implementation of financial technology.

Accountability is another ethical critical issue, as financial institutions may not be transparent about the algorithms and models they use. This lack of transparency may lead to unjust outcomes, particularly for vulnerable groups such as those with limited financial literacy.

These ethical issues have significant implications for both individuals and society. They could result in a lack of trust in financial institutions, leading to decreased usage of financial services and increased financial exclusion for certain groups.

Possible solutions to mitigate the ethical issues

It is crucial for financial institutions to address the ethical issues arising as a result of the disruptions issues and ensure that their use of technology aligns with ethical principles and social responsibility .Stiglitz (2019), proposes the following possible solutions to curtail the ethical issues caused as a result of the disruptions:

• Strengthening regulations – financial regulatory bodies should develop and enforce strict regulations on data protection, algorithmic bias, and cybercrime prevention. For instance, financial institutions could be required to comply with data protection regulations such as the General Data Protection Regulation (GDPR) to safeguard consumers’ privacy.
• Encouraging transparency – financial institutions could increase transparency in their operations to build trust with customers. This includes disclosing information about the algorithms used to make investment decisions and ensuring that customers have access to clear and concise information about the products and services offered.
• Educating consumers – consumers need to be educated on the risks and benefits of using FinTech and robo-advisors, as well as how to protect themselves from cybercrime and fraud. Financial institutions could provide educational resources on their websites or through other channels to help consumers make informed decisions.
• Collaborating with other stakeholders – financial institutions could work with regulators, academics, and other stakeholders to develop best practices for responsible use of FinTech and robo-advisors. This collaboration could also involve sharing information on cybersecurity threats and developing strategies to mitigate them.

Sustainability and Social Responsibility in Personal Finance

Sustainability and social responsibility are increasingly becoming essential considerations in personal finance. In recent years, there has been a growing awareness of the impact of financial decisions on the environment, society, and the economy.

The concept of sustainability in personal finance involves making financial decisions that take into account the long-term impact on the environment, society, and the economy. It involves considering the social, environmental, and economic implications of financial decisions. Social responsibility, on the other hand, involves taking into account the impact of financial decisions on society. It involves considering the welfare of employees, consumers, and the community.

Sustainability and social responsibility issues surrounding personal finance include:

• The increasing use of algorithms and artificial intelligence in financial decision-making raises questions about bias and social responsibility. As noted by Anderson and Kudrna (2018), algorithms can perpetuate social inequalities if they are trained on biased data or if the underlying decision-making criteria are discriminatory. Additionally, there are concerns about the use of personal data and the potential for surveillance and privacy violations.
• The disruption of traditional financial institutions could have a significant impact on the economy, particularly in terms of employment and income inequality. According to O’Sullivan (2019), the increasing automation of financial services could lead to job losses in the industry, while also concentrating wealth in the hands of a few large technology firms. (O’Sullivan, 2019) issues have arisen in the context of sustainability and social responsibility in personal finance.
• The lack of transparency in sustainable investing. It can be difficult for individuals to determine if companies are truly adhering to ESG principles, and there is a lack of standardization in reporting on sustainability performance. As a result, individuals may unknowingly invest in companies that do not align with their values. There have been recent concerns about the impact of sustainable finance on financial performance. It has also been argued that investing in sustainable companies may result in lower returns although no evidence has been found to support this theory.
• Potential for greenwashing, which refers to companies misrepresenting their environmental credentials to appear more sustainable than they are. This can mislead individuals and make it difficult to identify truly sustainable investment opportunities.
• Limited access to sustainable financial products and services, particularly for developing and marginalized communities.

The integration of sustainability and social responsibility into personal finance strategies is critical for the following reasons:

• It promotes responsible investing and decision-making. By investing in sustainable and socially responsible companies, individuals can support the transition to a more sustainable future.
• It helps to mitigate risks associated with unsustainable practices. Investing in companies that are environmentally and socially responsible can reduce the risk of investing in companies that may be subject to legal or reputational risks.
• It aligns personal values with financial decision-making, promoting personal fulfilment and satisfaction.

Sustainability and Social responsibility can be incorporated into personal finance strategies as follows

• Consideration to investing in socially responsible investment (SRI) funds or impact investing. These investment vehicles are designed to support companies that prioritize environmental, social, and governance (ESG) factors in their operations. (Clark, et al., 2015)
• To mitigate the potential negative impact of these disruptions on the environment, society, and the economy, it is essential for financial service providers to prioritize sustainability and social responsibility in their business practices. This could involve investing in environmentally friendly technologies, adopting ethical principles in the development and deployment of algorithms, and ensuring that personal data is protected and not misused.
• Financial institutions should incorporate ESG factors into their risk management and lending decisions. This can help incentivize companies to improve their sustainability and social responsibility practices and reduce their negative impact on the environment and society.
• Investing in companies that promote sustainability and social responsibility. Sustainable investing involves investing in companies that adhere to environmental, social, and governance (ESG) principles. These principles consider a range of issues, including a company’s impact on the environment, labor practices, human rights, community relations, and corporate governance. By investing in companies that are committed to these principles, individuals can support businesses that prioritize sustainability and social responsibility, while potentially earning competitive financial returns.
• Investing in green bonds, which are debt securities that finance environmentally sustainable projects. Green bonds have become increasingly popular in recent years, as investors seek to support initiatives that address climate change and other environmental concerns. These bonds may fund projects such as renewable energy, sustainable agriculture, clean transportation, and energy-efficient buildings. By investing in green bonds, individuals can contribute to the growth of sustainable initiatives.
• Individuals can choose to invest in community development financial institutions (CDFIs), which provide access to financial services and support underserved communities. CDFIs are non-profit organizations that serve low-income communities and other groups that may have limited access to traditional financial institutions. They offer a range of financial products and services, such as loans, savings accounts, and financial education programs. By investing in CDFIs, individuals can support organizations that promote financial inclusion and economic empowerment in underserved communities.

Conclusion

The financial services industry is undergoing significant disruptions through the emergence of FinTech and robo-advice, which have brought about various ethical, social, and sustainability issues. The potential impacts of these disruptions on traditional financial institutions, customers, and the overall economy are issues that are acquiring greater interest by the day. These impacts should be addressed and acknowledged so as to find solutions for the negative disruptions before they can cause great harm in the future.

To mitigate these issues, financial institutions and policymakers ought to implement transparent and robust data protection policies and ensure that decision-making algorithms are free from bias. Additionally, innovative financial products and services should be designed with sustainability and social responsibility in mind. Efforts should be made towards integrating sustainability and social responsibility into personal finance strategies and financial products and services.