[American Banker] Consumer Reports will give financial apps same scrutiny it gives appliances

Originally posted on American Banker

By Mariam Cross

Consumer Reports is preparing to test consumer finance apps with the same rigor it applies to its evaluations of washing machines and mattresses.

In September, the nonprofit announced that it had received a $1.5 million grant from Flourish Ventures, a venture capital firm that focuses on financial health innovations. The purpose of the grant is to strengthen the consumer organization’s assessments of digital finance services, from conducting surveys to testing products to advocating for protections based on its findings. Consumer Reports will look at fintech apps and other digital tools that let users spend, save, borrow or invest their money.

Although the benefits for consumers are clear — this project aims to help consumers navigate the digital finance marketplace, uncover potential harms in the industry and press policymakers and companies for solutions — the findings could have ripple effects on banks and fintechs as well.

“If fintech is held to a higher standard as a result of this work, banks might have to respond accordingly, since they are direct competitors,” said Chuck Bell, advocacy program director for Consumer Reports. The research could inform how banks assess potential partnerships or acquisitions and lead to safer fintech services reaching bank customers, he added.

Consumer Reports has assessed financial services products before, Kabir Kumar, a director at Flourish Ventures, noted.

In 2018, the organization investigated peer-to-peer payment services. It found that the standalone Zelle app lacked a safeguard for users that would prevent them from accidentally sending money to the wrong person. According to Consumer Reports, when the group asked Early Warning (the company that operates the Zelle network) about this, the payments company said it would soon start asking senders to confirm recipients before transferring the money — and did so a few months later.

“That simple fix helps a lot of people,” said Kumar.

This initiative comes at a time when consumers are managing relationships with a plethora of bank and nonbank services. In its 2022 Digital Banking Trend and Predictions report, Javelin Strategy & Research found that 52% of financial relationships for all consumers were with nonbank providers, including neobanks, peer-to-peer payment platforms, mobile wallets and more. For Generation Z, the figure is 69%.

“This isn’t a trend,” said Mark Schwanhausser, director of digital banking at Javelin. “It’s a tectonic shift that underscores the daunting challenges facing consumers.”

Ben Moskowitz, director of Consumer Reports’ Digital Lab, which tests software and connected devices, says the organization has been working on aspects of fair finance for decades. In September, for example, it dug into apps such as Credit Karma and Credit Sesame that provide access to credit scores. The report concluded that many are embedded with unnecessary costs and privacy risks.

“This project is about going really deep into the future of how consumers will experience finance,” he said.

That could include scrutiny of apps and services that do not fall under the protections of traditional banking regulations. Moskowitz emphasizes that the digital finance initiative is in the early stages, but potential areas of interest include neobanks; cryptocurrency; buy now/pay later; robo advisors and the question of their fiduciary duty; and dark patterns, or deceptive design practices, in e-brokerages.

Besides researching, testing and comparing products, Consumer Reports’ advocacy arm will push for transparency and safety around the services it is examining.

“Through the process of evaluation, we may identify areas where regulatory frameworks are not where they need to be,” said Moskowitz. “Or maybe in certain categories you have many entries that are adopting certain pro-consumer practices while some are not, so in that case we can put pressure and try to get those companies up to that bar.”

Consumer Reports is currently hiring staff to fill positions such as director of financial fairness advocacy and digital finance test engineer.

Flourish began discussions with Consumer Reports in late 2020 about ways they could work together. Kumar says he hopes to see reviews of both fintechs and bank apps, and that consumers will feel better equipped to make financial decisions.

“Independence is very important. That’s why we funded this project,” Kumar said. “We don’t want them to go down the tricky path of a referral business model where they are fueled by ad dollars.”

He recalls seeing chatter on Reddit where people wished Consumer Reports offered more financial advice because they considered it a trustworthy source.

“Consumer Reports has been reviewing cars for decades,” said Kumar. “There is a symbiotic and partnership-oriented link between the car industry and Consumer Reports without Consumer Reports losing neutrality and without us getting a less-than-trustworthy analysis of what is going on. I’m hoping that will be the case in the financial industry — industry actors will look at these reviews and improve the way they handle data, communicate pricing, and help consumers experience their products.”

Timothy Flacke, co-founder and executive director of Commonwealth, a nonprofit that aims to build financial security for financially vulnerable people, echoes similar sentiments.

“We’re pleased to see a trusted, widely known name in consumer advocacy joining the push for a fair and inclusive fintech marketplace,” he said by email. “We hope this new work will provide objective recognition for fintechs and banks whose products truly deliver for underserved consumers, at a time when fintech continues to explode in popularity.”