The following is part of the Smart Campaign’s #FintechProtects mini campaign. We’re raising awareness about responsible digital financial services, spotlighting work from the Smart Campaign and others, and engaging with industry actors on how fintech can move forward in a way that’s best for clients. For more information on #FintechProtects, and to get involved, click here.
Digital credit is growing fast in developing markets, particularly in Sub-Saharan Africa. Lenders such as M-Shwari, Jumo, M-Pawa, Eazzy Loan, Branch, EcoCashLoan, Timiza, KCG M-Pesa and others are attracting interest and investment. They are seen as having the potential to improve financial access and to make banking with poor clients more feasible and sustainable through technology that reduces underwriting and infrastructure costs. They offer small or nano loans starting as low as $5 or $10 dollars, make use of simple mobile user interfaces, and provide funds in real-time.
The Smart Campaign and others such as CGAP have been carefully looking at client protection risks in the burgeoning digital credit space, particularly in relation to transparency and informed consent. Other potential consumer protection issues include the implications of data analytics rather than traditional repayment capacity analysis as a basis for underwriting, high interest rates, and lack of rigorous regulation in many markets. The Smart Campaign is conducting small research projects to identify consumer protection concerns and good practices for mitigating them. Ultimately, we would like to see standards of care developed for digital credit products.
Using the Client Protection Principles as a framework, we have identified several consumer risks where deeper research, industry discussions, and consensus-building are needed.
- Appropriate Product Design and Delivery: “Pushy” Sales and Marketing: The sales and promotion strategies used by mobile lenders include “push” marketing methods such as bulk SMS messages. In more developed markets, our Client Voice research identified pushy unsolicited offers as a tactic that customers dislike, but more important (and especially for clients new to formal credit), unsolicited offers can lead clients to over-borrow. We wonder whether customers’ should have opt-out options to avoid such offers. The Smart Campaign is interested in working to better define “aggressive sales” and “deceptive marketing” in the context of digital credit.
- Avoiding Over-Indebtedness: Damaging Credit Scores for Early Adopters: In the early stages of a digital credit roll-out, the lender is often still tweaking its underwriting algorithms. In the process, early adopter clients who are not good credit bets may be approved, and then punished through blacklisting with credit bureaus when they cannot repay. We see an example of this in Kenya where hundreds of thousands of Kenyans have been blacklisted through the country’s credit reference bureaus for outstanding mobile loans of less than Sh200 (approximately $2). The credit bureaus charge about $20 for clients to clear their names. The Smart Campaign is interested in exploring guidelines to prevent adverse reporting to credit bureaus for clients that fail to repay due to inadequate appraisal.
- Fair and Respectful Treatment: Big Data and Potential Discrimination: The use of big data and alternative data in credit underwriting may be helpful for increasing financial access to thin file customers, but there are also concerns about potential discrimination arising from these proprietary algorithms. Digital lenders use predictive models based on demographics, web presence, mobile activity, and other similar variables. These models often rely on automated software algorithms that are learning as they process more data. Discrimination may arise through this complex, rapidly evolving process. If a variable is predictive, the algorithm will incorporate it. This raises the possibility of discrimination based on ethnicity, religion, political affiliation, age, etc. The Smart Campaign is interested in learning more about how data analytics firms are building in protections against discrimination on such characteristics.
One broad concern cuts across all the Client Protection Principles: With digital, who is responsible for the client? The degree and direction of influence between digital lenders and their partners can create client protection gray areas. Should the digital lender be required to ensure that the mobile network operator (MNO) or other partner improves transparency, responsible pricing, or protection of client data? A particular focus area concerns who ensures fair dealing and appropriate behavior from banking agents? Who is ultimately responsible for securing and protecting against the unauthorized spread of client data? Do the service level agreements that guide roles and responsibilities in a partnership between a lender and an MNO, clarify responsibilities and requirements to ensure that end clients are treated fairly? The Smart Campaign is interested in exploring the levers that can be used in such relationships to influence adherence to consumer protection responsibilities.
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