> Posted by Alexandra Rizzi and Sonia Arenaza, Deputy Director of the Smart Campaign and Director of Accion Channels and Technology
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This is the first of two blog posts about responsible digital financial services, on the occasion of the Responsible Finance Forum in Perth, Australia.
The Smart Campaign has watched with excitement as new forms of digital financial services (DFS) stand poised to bring financial access to millions of lower-income households previously excluded from the financial system. The potential benefits of this new ecosystem are enormous and include an array of positive outcomes ranging from lowered transaction costs to consumption-smoothing, among many others. Nevertheless, the excitement over new possibilities must not obscure the need to evaluate and respond to new risks to clients.
In an ongoing mapping exercise conducted by the Smart Campaign and Accion’s Channels and Technology team, we identified various things that can go wrong for clients of DFS, such as:
- Clients lose their funds after an agent fails to take proper security measures or after a service outage
- Agents charge unauthorized fees for transactions under guise of complicated pricing and fees
- Clients lack or are not offered adequate customer care channels
- Lack of data privacy due to clients not being informed or misinformed on how their data and history is being used or shared
- Agents lacking liquidity serve only their favored clients
While these risks are grounded in anecdotes from the field, there is still much more evidence needed on the consumer harms that actually happen, including where they happen and how often. The Responsible Finance Forum in Perth will host several sessions that present demand-side evidence to help identify high priority risks.
But, what then? Once risks are known, how best to try to minimize them?
The Smart Campaign has worked for over five years to mitigate against and minimize client harm in the microfinance industry. Our technical foundation is the framing of consumer protection risks using the seven Client Protection Principles (CPPs). The CPPs reflect a widespread common agreement of what constitutes fair treatment and reflect observed incidence and risk of harm for microcredit borrowers, and the standards for implementing them have evolved over five years through thousands of data-points. These inputs include observations of practices at financial institutions (through the Beyond Codes project and later assessments, self-assessments, and certification exercises) and through client research. The seven CPPs have been endorsed by over 4,000 individuals worldwide including over 1,400 MFIs.
While we expect that many readers of this blog know the CPPs by heart, it never hurts to repeat them. The seven Client Protection Principles are:
- Appropriate Product Design and Delivery
- Prevention of Overindebtedness
- Responsible Pricing
- Fair and Respectful Treatment of Clients
- Privacy of Client Data
- Mechanisms for Complaint Resolution
Going one level deeper, each of the seven principles has a set of standards and indicators that operationalize where the industry sets the bar in terms of what clients should expect from their financial service providers. The 30 standards and 95 indicators specify what “doing no harm” must entail in practice.
While its origins were in microfinance, the seven principles are a robust framework that can cover the emerging risks in digital financial services. The examples cited earlier fall cleanly into one or even more of the principles:
- Clients lose their funds after an agent fails to take proper security measures or after a service outage (Appropriate Product Design and Delivery Channels; Privacy of Client Data)
- Agents charge unauthorized fees for transactions under guise of complicated pricing and fees (Transparency; Fair Treatment)
- Clients lack or are not offered adequate customer care channels (Appropriate Product Design and Delivery Channels; Mechanisms for Complaint Resolution)
- Lack of data privacy due to clients not being informed or misinformed on how their data and history is being used or shared (Privacy of Client Data)
- Agents lacking liquidity serve only their favored clients (Fair Treatment)
As mentioned earlier, as part of the ongoing work to keep the guidance related to the CPPs up to date, the Smart Campaign secretariat is working with the Channels and Technology team at Accion to map the emerging risks to clients using digital financial services, particularly when microfinance providers are offering such services. This inquiry will lead to an initial set of recommendations on how to build out the guidance and standards related to DFS for each CPP.
The Campaign is excited to apply the industry’s framework of the CPPs to digital finance. The more actors frame issues in a common and clear way, the easier action and mobilization will be, which ultimately will lead to better protected clients.
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