Can We Move from Debate to Consensus on Responsible Mobile Credit?

> Posted by Alexandra Rizzi, Senior Director, the Smart Campaign

The merits and pitfalls of mobile credit continue to be debated hotly in financial inclusion circles. Mobile products are making credit more accessible through branchless banking and alternative underwriting and business models. But experimenting with new ways of lending when your borrowers include those at the base of the pyramid brings steep risks and some models can be downright reckless. Which side of the fence are you on?

The Smart Campaign is seeking to assist the sector to develop a consensus about responsible online credit practice, and the good news is that these questions have recently become top-of-mind for a range of stakeholders. Quona’s Johan Bosini and Positive Planet’s Bezant Chongo gamely volunteered for an Oxford-style debate on whether mobile credit is good for its clients at the 4th Annual Mondato Summit in Johannesburg back in May.

The convenience and ease-of-access of mobile credit products are immensely beneficial to the unbanked, according to Bosini, speaking for the pro side. When juxtaposed to traditional lending products that take, for instance, in Benin, an average of almost 5 weeks to access (involving multiple trips), mobile credit seems supersonic, he emphasized. Using alternative data and analytics, mobile credit unlocks access for individuals without credit history. The reality for the poor, as elucidated by the Financial Diaries and other research, is that incomes fluctuate widely. Now with mobile credit, a person in a pinch can help smooth the inevitable bumps in income with a few clicks on the phone.

But maybe speed is not such a good idea, argued Bezant, taking the anti position. Roadside signs remind us that “speed kills.” While convenience is important, such quick and easy access to credit could lead to overindebtedness. And defaults, even for small loans, can have outsized consequences. In Kenya, for example, hundreds of thousands of customers were blacklisted through the country’s credit reference bureaus for outstanding mobile loans of less than Sh200 (approximately $2). Concerns remain, including the difficulty of conducting an assessment of a potential borrowers’ capacity to repay using alternative data, the challenge of effectively conveying terms and conditions over a mobile interface, and worries about whether clients’ data is secure and whether clients understand how it’s being used.

As with many debates, in this case both sides are right. The challenge is ensure that mobile credit can bring its great benefits while maintaining adequate protections – in other words, for mobile credit providers to be able to act responsibly within a secure ecosystem. Forging the appropriate path forward will require a wide range of input, not just from those who stand to profit from providing mobile credit or from those who might see business model innovation as a regulatory fire to put out. And we are witnessing such input in this space, from fintech providers themselves, to researchers (see here, here and here), regulators and investors. That kind of momentum creates an environment for consensus-building on responsible (and irresponsible) practices.  And at the Smart Campaign, that is music to our ears!

If we think back to the early days of the Smart Campaign and the microfinance industry, there was a considerable amount of consensus-building needed around consumer harms and mitigating practices before the Client Protection Standards were finalized. We hosted many debates ourselves. What, exactly, was an effective grievance redressal mechanism (beyond a complaints box)? What elements were appropriate in a privacy policy? How do you measure responsible pricing for microcredit? Through these debates, by individuals and organizations with the good will and commitment to advancing the microfinance industry, we ultimately arrived at a point of clear, definable standards.

Thus it’s with a sense of déjà vu that we dive into the conversations and debates on mobile credit. The Campaign intends to support and contribute research, create public goods like tools and briefs, and facilitate a community of practice for providers. Rather than a yay or nay for mobile credit, our motto is “Work in Progress.” We hope you’ll join us!

Image credit: FSD Kenya

Have you read?

Modelo Peru: What’s Next for the Groundbreaking Mobile Money Platform?

Mobile Money in Myanmar: Going Directly from Cash to Digital

Kopo Kopo: Building on the Rails of Mobile Money in Kenya