As the digital lending sector grows rapidly, financial inclusion practitioners see huge potential in fintech for inclusive growth while at the same time becoming aware of emerging risks to new consumers of digital financial services.
As digital lending models are going to market, there’s a window of opportunity to build trust with new consumers of financial services at the bottom of the pyramid. In response to both the opportunity and the need, the Smart Campaign is developing standards for digital credit to support financial services providers with a roadmap for putting responsible digital finance into practice.
The standards for digital credit—which will be released for public comment in February—incorporate the Campaign’s expertise in consumer protection, field research by the Campaign and others, collaboration with digital financial service providers through the Fintech Protects Community of Practice and pilot assessments with digital credit companies.
Tala, a leading consumer lending app with operations in Kenya, Tanzania, the Philippines, and Mexico, recently partnered with the Campaign on a pilot assessment in Kenya to test the emerging standards. The Campaign sat down with Tala’s Rose Muturi, East Africa Manager, and Ian Parrish, Director of Data Science, to discuss why Tala volunteered to participate in the assessment and the future of responsible digital credit.
Can you briefly describe Tala’s business model? Who’s your customer?
Rose Muturi (RM): Tala’s mission is to create financial access, choice, and control for the underserved globally. Our business model is based on our principal value of radical trust. Through the use of alternative data and our proprietary credit models, we generate credit scores which enable us to underwrite and disburse loans to our customers in under 10 minutes via mobile money.
Currently, anyone with a smartphone that uses the Android operating system can apply for a Tala loan. Our data shows that 65 percent of Tala borrowers use their loans to either start or grow a small business.
What was your motivation for joining Fintech Protects and inviting the Smart Campaign to work with Tala in a field assessment of responsible practices?
Ian Parrish (IP): Tala is using new techniques to provide financial access to customers that otherwise don’t have access to capital. Because we’re using brand new techniques, I think it’s our responsibility to make sure we’re providing our services as fairly and ethically as possible. The assessment confirmed that we’ve actually gone above and beyond what’s legally required for data ethics.
RM: The motivation for engaging in the field assessment was to underscore our emphasis on treating customers fairly, ensuring we have very high standards of handling consumer data, and ensuring that the customers have trust in us regarding their financial access.
The assessment confirmed that the best practices we’ve implemented in customer service – transparency and data privacy – are bearing fruit. We work to improve customer experience, and I was pleasantly surprised by the progress we’ve made so far, because in our day-to-day, we try to continuously improve the way we work. We hardly take a step back to look and appreciate the success.
Kenya’s received a lot of attention recently for the rapid growth of its digital lending sector. What’s Tala doing to understand and mitigate the risk of over-indebtedness in this market and others?
IP: Over-indebtedness is a major concern for us, especially with many new digital lenders entering the market. In our credit modeling, we take as many signals as we can to have a picture of a customer’s debt capacity. This gives us the ability to tailor our loan terms to each customer’s risk profile, which is good for both Tala and our customers. As we’ve gotten more experience lending in Kenya, our ability to assess risk has markedly improved. Lower interest rates save customers money, so that our loans provide more value directly for their business or personal needs.
We’re also working with other digital lenders to advocate for more holistic credit reporting, as is the case in mature credit markets, so that at time of application we’ll have a full and accurate picture of our customers’ debt.
We’re also working with other digital lenders to advocate for more holistic credit reporting.
RM: I’d also add that providing education and creating more awareness about over-indebtedness amongst our customers is aligned with our greater mission. Through educational in-app messaging on healthy debt, online financial advice forums and contests, and financial education campaigns, we work to provide our customers with the tools they need to make informed financial decisions. Also, we actively and voluntarily participate in data sharing with credit bureaus.
How do the client protection standards provide value to Tala as a business?
RM: Customer protections standards provide tremendous value to us. A customer may not be inclined to repeat a service if they felt it was not working in their favor and protecting their privacy. Our customers know through their interactions with us that we have very high standards of consumer confidentiality and data protection, which builds trust in us as a company and in our offering. This is evident from our number of repeat users, which is in the range of 95 percent.
IP: Our customers have a choice in financial partners, and the company that offers them fair terms and protects their data is going to lead.
Additionally, Tala’s employees joined our company explicitly to do something good in the world. It’s important, for attracting and retaining talented employees worldwide, to make sure we offer socially responsible products.
Of all the areas that the Client Protection Principles cover, what do you think will be the single most important issue digital lenders must contend with over the next five years?
IP: Advances in data science algorithms have revolutionized the ability of financial service providers to reach the unbanked and underbanked population. One promise of algorithmic loan decisions is fairness, by leaving the inherently biased opinions of human loan officers behind. I think this point will be a major and evolving issue that all digital lenders will need to address in the next five years. Algorithms aren’t inherently fairer unless we’re diligent about governing them. In that sense, fairness isn’t a given just because we’ve removed human bias from the decision making process; it’s something we have to continually work toward.
RM: Data protection for customers will continue to be important. In the technology world, and fintech specifically, there is a need to collaborate with other providers to feed innovation. This means understanding customer behavior and sometimes creating a product in partnership with another company. Data sharing is often part of that collaboration, which needs to be designed with protecting the privacy of customers in mind. Balancing business goals with protecting customers, particularly around data sharing, is a conversation that should be ongoing across our industry. Enabling innovation requires an amount of data sharing to understand various patterns, so issues like data ownership and the customer’s right to be forgotten will continue to affect digital lenders.