<p>John Owens is an attorney and senior advisor who has provided technical advisory services, training, and research as well as managed several international development efforts focused on digital financial services, digital payments, financial inclusion, and agent networks for more than 25 years. John has also worked with regulators and policy makers across Latin America and the Caribbean as well as Asia and the Pacific, Africa, China, Eastern Europe, Russia, and the Middle East. He holds a JD in Law from Notre Dame Law School.</p>


Independent Consultant

Alexandra (Alex) Rizzi

John Owens

Watch Webinar

Event

Join us on for a <a href="https://register.gotowebinar.com/register/6920166048121739778">virtual event</a> on responsible digital credit and what providers need to do to ensure that their customers are protected and empowered. This webinar will feature CFI Fellow <a href="programs-a-projects/cfi-fellows-program/783#JohnBio">John Owens</a> and Smart Campaign Senior Director <a href="about/staff/125-alexandra-rizzi">Alex Rizzi</a>. Our conversation will highlight the risks that digital credit consumers face, using the Smart Campaign <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> as an organizing framework; identify existing best practices and standards for responsible digital credit; and provide recommendations on how to best navigate the intersection of digital financial services and consumer protection issues.

In his <a href="programs-a-projects/cfi-fellows-program/783">research</a>, John details the vast landscape of digital credit providers and lending models, noting the challenges that providers and policymakers face in agreeing upon and applying consistent standards in both advanced and emerging markets. However, this <a href="storage/Responsible_Digital_Credit_FINAL_2018.07.18.pdf">report</a> finds that technology can be harnessed to quickly address consumer complaints and aid regulators in their supervisory duties of digital credit providers. Ultimately, it will take a village to ensure that digital credit clients are protected, but John posits that this can be achieved through the collaborative implementation of locally-customized approaches by governments, regulators, industry players, consumer protection advocates and consumers alike.

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Responsible Digital Credit Webinar

Webinar

This webinar features CFI Fellow John Owens and Smart Campaign Senior Director Alex Rizzi. This conversation highlights the risks that consumers of digital credit face, using the Smart Campaign Client Protection Principles as an organizing framework, identify existing best practices and standards for responsible digital credit, and provide relevant recommendations for stakeholders seeking guidance on how to best navigate the intersection of digital financial services and consumer protection issues.

<em>This report is published jointly with the Smart Campaign and was made possible by support from Mastercard Foundation and other partners.</em>

Webinar: Responsible Digital Credit

What does responsible digital credit look like?

Report

All over the world, small loans to individuals and very small businesses are increasingly made using digital channels, whether online, via a mobile device or through an agent. However, trust, confidence and responsible lending practices need to be in place to ensure this industry is successful and its customers are protected and empowered.

In <a href="storage/Responsible_Digital_Credit_FINAL_2018.07.18.pdf"><em>Responsible Digital Credit</em></a>, CFI Fellow John Owens outlines the digital credit landscape and the risks customers face, and examines the best practices, standards and initiatives that exist or should be implemented to improve consumer protection in digital lending. Ultimately, John argues, it will take a village to ensure that digital credit clients are protected<span style="font-size: 11pt; font-family: 'Calibri', sans-serif;">—</span>including govenrments, regulators, industry players, advocates and consumers themsleves. He sees three key activities: 1) industry self-regulation, 2) certification of digital credit providers, and 3) directly empowering consumers, as key to the future of what responsible digital credit looks like.

This report is published jointly with the <a href="http://www.smartcampaign.org/">Smart Campaign</a> and was made possible by support from Mastercard Foundation and other partners.

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Responsible Digital Credit

In the era of digital credit, we need not just new laws, but also new mental models for responsible digital credit provision.

Blog Post

As digital credit providers have grown exponentially over the past few years, and as digital products and models have proliferated, so too have concerns around consumer protection. In the recently published report, <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/1036-responsible-digital-credit">Responsible Digital Credit</a>, I argue that ensuring that digital credit customers receive responsible treatment requires more than enhanced consumer protection laws and regulations. It also requires strong commitment from the digital credit industry. Finally, it needs consumers who are empowered to play a more proactive role in managing their digital credit responsibly.

Over the past year, I have interviewed digital credit industry associations, credit providers and their third-party data analytic providers, regulators, policy makers, and various consumer protection leaders. Many of these groups are working to develop responsible digital lending principles. With their input, my report proposes a guiding framework for responsible digital lending.  The framework uses the Smart Campaign <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> as a basis for grouping the issues. In addition, I propose an eighth principle: security and fraud protection.

Digital credit, and especially the use of mobile phones, significantly alters interactions between borrowers and lenders. Lenders utilizing the mobile channel to advertise, acquire and transact with customers must pay particular attention to the limitations of mobile interaction with customers and follow industry <a href="http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf">mobile best practices</a>. While many of the standard consumer protection practices continue to apply, new concerns, or more accurately, new faces on older concerns, have emerged. In this post, I want to highlight several of the considerations I found most important and relevant for the digital lending industry.
<h2><strong>Responsible Algorithms</strong></h2>
Many digital credit models rely on algorithms to process data about clients and make credit decisions. Because most lenders consider their algorithms proprietary, it is difficult for observers to know on what basis credit decisions are actually made. This opaque situation raises the spectre of discrimination. Attributes that are considered inappropriate bases for differentiation, such as religion, language, gender, or ethnic origin, are areas of particular concern with regard to algorithm-based lending practices. As highlighted by a Smart Campaign <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">report</a>, while credit offers may differ based on risk analysis, such differentiation should be consistently applied, stated in advance, and made with the goal of benefitting clients. To prevent discriminatory digital credit practices, some recommendations include:
<ul>
 	<li><a href="https://www.whitecase.com/publications/insight/algorithms-and-bias-what-lenders-need-know"><strong>Pretest, test and retest for potential bias</strong></a><strong>.</strong> Digital credit providers and third-party data analytics providers should continuously monitor the outcomes of their algorithmic programs to identify potential problems. Such testing could involve running scenarios to identify unwanted outcomes and developing and building controls that prevent adverse outcomes.</li>
 	<li><a href="http://www.ijmo.org/papers/43-A10212.pdf"><strong>Document the rationale for algorithmic features</strong></a><strong>.</strong> Digital credit providers should be able to provide visualization and a decision tree for the factors their algorithms analyze, as well as the justification for relying on these factors. The rationale should address how borrower debt capacity is assessed, given the importance of this concept in traditional underwriting.</li>
 	<li><strong>Independent review</strong> of companies' proposed data sets and/or algorithms.</li>
</ul>
A self-regulatory approach could be used to develop best practices guidelines for data inputs and the development of nondiscriminatory artificial intelligence systems, following the model that has been successful for the Payment Card Industry Security Standards Council.
<h2><strong>Indebtedness Monitoring</strong></h2>
Because digital lending is often based on non-traditional underwriting criteria, to prevent over-indebtedness among digital borrowers it may be relatively more important to monitor outcomes at the portfolio level. Some of the ways to do this include:
<ul>
 	<li><strong>Avoidance of debt traps</strong> by ensuring that clients are not forced into automated repeat loans.</li>
 	<li><strong><a href="http://www.responsiblebusinesslending.org/">Responsible credit reporting</a></strong> – Better compliance with reporting strengthens markets and leads to better client protection practices.</li>
 	<li><strong><a href="http://www.centerforfinancialinclusion.org/storage/documents/Smart_Brief_Tiny_Loans_Big_Questions_Final_092617.pdf">Monitoring digital credit provider’s portfolio quality</a></strong> – Industry benchmarks for portfolio quality can help to advance the understanding of risks and avoid business models that rely for their success on high default rates.</li>
</ul>
<h2><strong>Digital Transparency </strong></h2>
Digital credit platforms allow for 24/7 communications with clients that, if harnessed properly, can assist them with immediate technical support, remind them about upcoming payments and even identify counselors or resources for clients in financial stress. However, when communication is totally digital, there are heightened concerns about ensuring that clients really know what they are signing up for. Disclosure must lead to client understanding. Borrower disclosure standards should address:
<ul>
 	<li>Standards for <strong>honest advertising</strong> and penalties for misleading marketing materials of credit products. Furthermore, providers should advertise the name of the financial regulator they report to in all advertising materials.</li>
 	<li><strong>Readability</strong> and format – Disclosures need to be easy to comprehend, available in the customer’s local language, and provided in print and digital formats.</li>
 	<li><strong>Comparative tools</strong> – Standard summary disclosure documents would allow borrowers to compare credit offers, both digital and traditional.</li>
 	<li><strong>Adequate notice periods</strong> – Consumers should be notified in advance of changes to interest rates, fees or terms and conditions.</li>
</ul>
A somewhat different but related and relevant concern, often overlooked in this context, is the vulnerability of individual investors who put their money into pure peer-to-peer (P2P) lending platforms. Protections need to be extended to them as well, with a focus on ensuring that they receive the information they need to evaluate risks and that they have recourse channels when something goes amiss.
<h2><strong>Data Privacy and Usage Standards</strong></h2>
While many regulators and most industry groups agree that it is important to protect the confidentiality and security of customers’ information, data use and the level of disclosure about its use are challenging topics. In the <a href="http://ec.europa.eu/justice/data-protection/reform/index_en.htm">EU</a> and in countries such as <a href="https://www.pc.gov.au/inquiries/completed/data-access/thedraft">Australia</a>, regulators are enacting rules mandating that individuals be notified about the use of their personal data and allowed to opt out. Opt-out rules should be considered as a potential requirement for all digital credit providers, especially in markets where mobile push-marketing has become problematic.

Over the next several years it will be important for laws or regulations to be put in place to protect consumer data privacy and guide information sharing. The rules need to:
<ul>
 	<li>Provide for informed consent, such that customers explicitly permit electronic data collection prior to its collection and use, and are given the option to consent or not.</li>
 	<li>Require providers to have a clear data collection and handling policy which limits the amount of data collected as well as the timeframe it is stored.</li>
 	<li>Inform clients about their data trails and credit histories, including the ability to ensure accuracy and correct for any errors or discrepancies.</li>
 	<li>Give regulators the power to discipline providers who repeatedly allow personal data to be misused.</li>
</ul>
<h2><strong>Fraud Prevention and Security </strong></h2>
New security vulnerabilities arising from digital credit strongly point to fraud and cyber-security as consumer protection concerns. It is increasingly urgent for digital credit providers to adopt standard security compliance measures and then to regularly test and update them. Providers must also be responsible for ensuring that the third-parties they use, including lead generators, brokers, agents, and data analytics providers, also have adequate security in place. Ultimately, providers need to be responsible for the actions of their third-parties (e.g., agents, contractors, lead generators, brokers and collectors).

Consumers should be made aware of the potential for fraud and encouraged to report suspected fraud cases or security breaches. Consumer awareness campaigns on the most common incidents of fraud (via the internet, SMS alerts, signage at agent kiosks, etc.) can help with this.

While the recommendations just listed do not apply in all markets, they do point to the urgent need for regulators, industry bodies, individual providers and consumers to work together to construct the ground rules for responsible digital credit that will ensure that consumers are adequately protected.

<em>Editor's Note: This research was made possible by support from Mastercard Foundation and other partners.</em>

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A Framework for Responsible Digital Credit

Research Overview Presentation

John Owens offers an overview of his research project with the CFI Research Fellows Program.

<h2><b>Background &amp; Research Questions</b></h2>
More and more online credit providers have started to offer loans to not only consumers but also to SMEs around the world.

Outside of digital banking platforms, new alternative online and digital platforms that target consumers and small SMEs include:
<ul>
 	<li>Peer-to-peer (P2P) SME lenders</li>
 	<li>Online balance sheet lenders</li>
 	<li>Loan aggregator portals</li>
 	<li>Tech and e-commerce giants</li>
 	<li>Mobile data-based lending models</li>
</ul>
While the rise of alternative data-based lending has opened new and innovative credit opportunities for individuals and SMEs, these new technologies and providers also come with several consumer protection challenges. These can be categorized into seven main areas:
<ul>
 	<li>Data privacy and opt-in vs. opt-out challenges</li>
 	<li>Underwriting practices</li>
 	<li>Potential for exclusion of certain categories of clients</li>
 	<li>Cyber security and individual data protection</li>
 	<li>Clear and effective disclosure over pricing and terms</li>
 	<li>Customer recourse, complaint management and dispute resolution</li>
 	<li>Collection practices</li>
</ul>
To address these issues, both regulators and online lenders are analyzing various actions and standards to better protect online borrowers. In the U.S., the Department of Treasury, the Small Business Administration, the Federal Reserve Bank, and the Consumer Financial Protection Bureau have all started to focus on consumer protection issues related to online lending providers.

While online lenders targeting consumers are regulated to a certain extent by U.S. consumer financial protection practices, this is not the case for those targeting SMEs. To address some of these concerns, online and alternative lenders have started to develop consumer protection principles for small businesses under the <a href="http://www.responsiblefinance.com/code-of-ethics-and-best-practices/">Coalition for Responsible Business Finance (CRBF)</a>. In addition, they have supported a proactive <a href="http://www.responsiblebusinesslending.org/">Small Business Borrowers’ Bill of Rights</a> focused on transparent pricing and terms, non-abusive products, responsible underwriting, fair treatment from brokers, inclusive credit access, and fair collection practices, suggesting this can be done without adding undue burden or cost to this emerging industry. Other groups and alliances have also formed with various different competing versions of responsible online lending including the Innovate Lending Platform Association and its <a href="http://innovativelending.org/smart-box-model-disclosure-depth/">Smart Box Capital Comparison Tool</a>. In addition, the Online Lenders Alliance has also issued their <a href="http://onlinelendersalliance.org/wp-content/uploads/2016/04/Best-Practices-2016.pdf">Best Practice</a> guidelines.

Outside of the U.S., regulators and online lenders in jurisdictions like the U.K. and Singapore are proactively engaging with each other to discuss new consumer protection standards. Based on challenges within the growing P2P lending industry, Chinese regulators are now <a href="http://www.wsj.com/articles/chinas-online-lenders-face-peer-to-peer-pressure-1472123683">implementing strict guidelines</a> while Indonesia’s financial regulator is just releasing new c<a href="https://e27.co/level-playing-field-consumer-protection-to-be-the-center-of-upcoming-fintech-industry-guideline-indonesias-ojk-20160824/">onsumer protection guidelines</a> to address P2P lending practices. On the other hand, in most other markets, online lenders outside of the banks are lightly regulated or not regulated at all. International organizations like the World Bank, the Consultative Group to Assist the Poor (CGAP), the Alliance for Financial Inclusion (AFI), the G20, and groups like Consumer International have all proposed various consumer protection principles which apply to online lenders. While online lenders are still outside of most regulatory and supervisory frameworks in many emerging markets, there are proactive approaches and standards that can be proposed.
<h2><b>Overall Objective &amp; Hypotheses</b></h2>
Online lending for consumers and especially SMEs is highly relevant and important to expand access to finance and overall financial inclusion. However, trust, confidence and responsible lending practices need to be in place in order to ensure that this industry is able to continue to offer access to credit. Under a research grant from the Center for Financial Inclusion at Accion's <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program">Fellows Program</a>, this study will examine the various customer risks proposed by online lenders, what standards and practices are being proposed in some key jurisdictions, both by industry groups as well as regulators/policymakers, and what best practices can be recommended for setting consumer protection and risk mitigation standards for the emerging online financial services industry.
<h2><b>Study Design &amp; Methodological Approach</b></h2>
The research study design will follow a systematic review of literature on the topic of responsible online lending practices including research studies, guidelines, policy notes, as well as standards that are being used to address consumer protection and risk mitigation practices in online lending across various jurisdictions. The study will especially focus on online lending practices not only of supervised financial service providers but also of new financial service providers, which may be lightly regulated or not regulated at all. Interviews with financial consumer protection agencies/associations, regulators and online credit industry players from several key markets, as well as discussions with key researchers and thought leaders from this industry will also be conducted.

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John Owens

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