It's been a little more than a year since the SEC first called out gamification in financial apps . Since then, we've seen bad behavior and outcomes in other technology-driven financial applications, such as UST and FTX. And in November, the CFA Institute released a report with recommendations for regulators and the investment industry to maximize the benefits and mitigate the risks from the rising trend of investment gamification. Given these events, it's reasonable to assume that the SEC will offer guidance on gamification as well as other technology-driven financial applications.
As CEO of a firm that makes a finance app, I'll state that gamification, essentially a digital activity tied to a real-word outcome, does have a place in the financial services industry and should not be banned outright . As with most things in the world of finance, it all depends on the design of the product and its suitability for an intended audience.
Gamification is everywhere: from the Apple Watch's three exercise rings to Duolingo's language-learning games to meditation apps to the world of financial planning and investing. Not long after last year's Gamestop trading debacle , the SEC put financial apps employing gamification — also called digital engagement practices or DEPs — on notice. In short, the regulator is wary of how gamification could "induce trading that is more frequent or higher-risk than an investor would choose for herself in the absence of DEPs," as investor advocate Rick Fleming said at SEC Speaks last October .
There's no denying that gamification has made trading easier and faster. Not too long ago, investors had to interact with another human being to buy and sell stock; now, they can just press a button. On its face, that seems like great news — nothing short of the democratization of investing. But as the SEC points out, increased accessibility is not necessarily always a good thing.
When apps deliver simple, instantaneous — and free — trades, consumers trade as often as they wish, which most of the time amounts to day trading, an activity with a success rate somewhere around 10% — with success defined as making any money at all. That means roughly 90% of those who use free trading apps lose some amount of money. While these trading apps may look like a game, losing money has real-life , often severe, consequences.
The more time users spend on the apps the greater the likelihood that they will lose money, but it's a good thing for the creators either way. Their goal is to keep users engaged so they can make money off of margin accounts and selling trade flows. As pretty much any advisor will tell you, trading should be kept to a minimum, and then only after careful consideration of a consumer's goals. When users are encouraged to trade on these apps, it is clearly not for their benefit .
If our industry is to use gamification responsibly, it must be directed toward a specific purpose with the intention of benefitting the end user as well as the businesses behind the app. Think about a fitness app like Strava, where users can track their runs, earn trophies and share their activity with friends. When the goal of the "game" is to get in shape, any activity in the app is good activity.
The difference between a fitness app and a trading app? It's simple: an alignment of goals between the app's creators and its users: the creators want people to use their app as much as possible and the more people use it the more likely they are to live a healthier lifestyle. Regardless of how a user engages with these apps, they will always see a benefit that reflects the size of their commitment. It's win-win.
With free trading apps, by contrast, the more users trade, the greater the likelihood they will lose money, creating a win-lose scenario where the app creators make money but the users don't. No matter how badly things go for the people making the trades, the app always makes money off of them. It's baked into the business model.
Gamification makes it easier to get to any outcome, so the question to ask is whether the outcome is beneficial. Responsible gamification should have one result: the more you play it, the better your chances of a desirable outcome. Look at the popular app Acorns, which gamifies savings by incrementally "rolling up" dollar amounts associated with everyday purchases into a savings account. Savings are beneficial, so gamifying them helps serve the best interest of the end user as they increase their financial stability and, ideally, financial literacy.
Gamification can be used to help increase users' understanding of financial planning as well as the benefits of working with a financial advisor . In my firm's app, consumers earn points by building financial plans to accomplish their goals and sharing those plans with financial advisors. The more users "play" Lasso, the closer they get to having a real-life financial plan and a real-life relationship with a real-life advisor.
As gamification techniques become more commonplace, our ask of the industry — and regulators in particular — is to make a distinction regarding the goal of the game. As the SEC digs into if and how DEPs should be regulated, the difference between responsible and irresponsible gamification should become clearer and clearer. If you are looking at leveraging gamification with your clients or in your own software, it's worth asking: Which outcome is more likely for my users, win-win or win-lose?