Emerging Themes in Responsible Digital Finance

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

Close to Washington, D.C.’s antipode in Perth, Australia I attended the Fifth Annual Responsible Finance Forum, which this year focused on responsible digital finance. The organizers assembled an impressive mix of representatives from all three legs of the responsible finance stool – industry, regulators, and consumers. A number of familiar risk areas were examined during the two great days of presentations, debate, and discussion, and three prominent themes emerged for me: the centrality of the service agent, the increasing importance of financial education, and considering responsible finance at the ecosystem level.

The first day of the forum focused on the identification of risks to consumers from digital financial services (DFS) and the second day was framed around how to mitigate and minimize those risks. An online “Global Pulse Survey” that CGAP conducted as well as some demand-side research conducted by MicroSave and Bankable Frontier Associates (BFA) brought both the practitioner and consumer perspectives on DFS risks to the forefront. The MicroSave and BFA research canvassed nearly 700 DFS users and 50 non-users through focus groups in Colombia, Bangladesh, the Philippines, and Uganda. While respondents of the survey and focus groups identified a wide variety of harms or worries, some common items emerged, listed in the table below. Though preliminary, this data is extremely important in helping us frame the areas where stakeholders could focus to mitigate against client harm and risk. These risks fall squarely into the framework of the Smart Campaign’s seven Client Protection Principles, furthering our belief that a principles framework can carry forward into digital financial services.

The Centrality of the Agent

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(click to enlarge)

Most of the risks to clients mentioned during the conference stem from behaviors or practices by an agent of a mobile money or branchless banking network. Agents, typically operators of retail outlets or small kiosks, occupy a murky position that is not well understood by customers or even the agents themselves. They are representatives of services, like MTN or Easypaisa, but are not employees. Yet many customers interact only or primarily with agents, never coming in contact with full-time staff members of a DFS service. In these cases, agent behavior colors the perception of the entire service. MicroSave spoke of extremely high turnover in agents, particularly in Uganda, and others discussed lack of training and incentives for agents to treat clients well. There were some positive examples, such as those presented by Oxigen, India’s largest money transfer service provider, but the centrality of the agent to client protection concerns was clear. While some forward-thinking participants in the conference envisioned a system that bypassed the agent and was completely mobile, most agreed that for the near-term agents are here to stay and are an integral part of the DFS ecosystem. There is a need for more thinking around the incentives, training, and practices that could help to minimize the risk of agent harm to clients.

Financial Education

Another common refrain was the need for strong financial education for clients to support the increasing complexity of DFS, to help clients “self-protect” and minimize their own risk. While the need for financial education is huge, evidence to support its effectiveness is slim. With each clarion call sounded at the conference for large financial education efforts, I pondered the cost-effectiveness of investing a small percentage of programmatic money into rigorous evaluations. Folks like Innovations for Poverty Action, ideas42, and Microfinance Opportunities are on the cutting edge of understanding the evidence on what works in financial education, particularly regarding the use of behavioral psychology insights to shape design and delivery, and technology as a delivery channel. Of course implementation should not cease completely until all the evidence emerges, but given the importance put upon financial education, and the money likely to be spent on financial education programs, there should be more attention to experimentation and evidence.

Responsible Ecosystem

While the framing of the forum was around the client protection risks to consumers, there were consistent calls for a responsible DFS ecosystem that involved interoperability, processing systems that allow for maximum usage and reduction of costs to consumers. Participants cited the emergence of SWIFT, which established common standards for financial transactions and data processing in the mid-1970s in the hopes that analogous systems could be developed and deployed for financial inclusion. Ripple, an open payment protocol that simplifies interbank payments and makes them faster, and Klickex, a currency exchange service, were held up as potential examples. While further removed from the treatment of a client by a financial institution, progress on these issues would certainly yield benefits to clients in terms of reduction of costs and increase of value.

Looking back on the two productive days in Perth, and still fighting off jet lag after safely circumnavigating the globe, I’m encouraged by the enthusiasm and attention demonstrated for responsible digital finance. With the rapid expansion of technology-enabled services, action in this area from all stakeholders will be needed to ensure that clients are adequately protected.

Have you read?

eCPPs: How a Principles Approach to Client Protection is Built for the Digital Age

What is It Like to be a ‘Digital Immigrant’ in a Developing Country?

The Kenyan Journey to Digital Financial Inclusion

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