A keynote speaker at a recent conference I attended described consumer protection as “incredibly important,” before adding that it was also “boring.” Palpable excitement buzzes around new products or technologies, but consumer protection can be a real buzzkill. After all, it is often viewed as a dry, bureaucratic subject, costly for providers, and entailing barriers to pace of change and convenience.
As the Smart Campaign’s Africa team lead, I’m excited about client protection! And that’s not because it’s my purview. First, I think that client protection should not be seen as pumping the breaks on financial inclusion’s momentum. Rather, it guarantees a longer, more enjoyable ride. Secondly, client protection need not be a dull compliance exercise. It too can crowdsource, beta-test, gamify, and so forth to hack innovative, agile, disruptive approaches. But seriously, as an industry we can consider and engage in client protection practices that are data-driven, and that use behavioral economics, human-centered design, fintech, and other disciplines to not only ensure fair consumer treatment but strengthen financial bottom lines.
At the Smart Campaign, we see this need in our work concentrating on consumer protection for digital credit. Digital lending has unique characteristics that present both opportunities and risks. Digital credit can reach previously excluded borrowers, and it can make the borrowing process much quicker and easier. However, its new methods, such as loan underwriting based on proprietary algorithms, bring new risks. For example, digital financial products may pose the potential for premature client blacklisting, as high default rates on initial loans are often built into the customer acquisition process. Algorithms start by offering loans relatively indiscriminately and refining criteria as time helps identify better client profiles. If early defaulters are reported to credit bureaus, they may have a hard time qualifying for credit in the future. Or consider that digital credit has no waiting or “cooling off” periods which allow customers to re-consider their decisions to borrow, and this can be dangerous when combined with “push” marketing and unsolicited offers. We also see that proprietary algorithms have the potential to discriminate in ways that we might otherwise find unacceptable (e.g. gender, ethnicity, etc.). Finally, the expansion of digitization and data creates a plethora of risks surrounding data security and fraud. The list could go on.
With credit now literally in the palm of a customer’s hand, and immediately available, how will this change behavior? If providers are going to instill adequate client protection practices, they’re going to have to harness innovative thinking across areas like behavioral economics, human-centered design, user experience (UX), data science, and fintech. And yes, it’s the provider’s responsibility. No doubt consumer protection requires an ecosystem of actors, but it is those digital credit providers who must figure out the client protection measures that will be successful in the long run.
Using insights from behavioral economics and processes from human-centered design. Eldar Sharif, co-author of Scarcity, has become a common name in financial inclusion spheres through his applications of behavioral economics to look inside the mind of a client and understand how the scarcity of mental bandwidth affects behaviors. Cognitive abilities can be weakened by stress and juggling priorities. Human-centered design is a tool that should inform the crafting of product disclosures and transparency in a digital landscape where customers are being inundated with information and credit offers.
Linking consumer protection to user experience (UX). Clients who believe their providers are enabling them to benefit from their services, and are not trying to dupe them, are more likely to be longstanding customers. For new digital credit users, especially those who were previously unbanked, comfort with digital models will depend on customer trust and confidence. Consumer trust can be a stronger framing than client protection for practices that create customer lifetime value, build partnerships, expand new services and providers, and raise digital usage. Inadequate data security, for example, can compromise trust and buy-in from clients, not to mention partner organizations, and regulators as well.
In this increasingly competitive industry space, providers need to recognize the appeal of consumer protection. We who promote consumer protection need to leverage the language of and emphasis on innovation, incubation, and acceleration so popular in the world of investment and business development. And if helpful, these efforts should be reframed to place greater emphasis on tenets more often linked to financials, like client trust. After all, client protection in digital credit is innovative, and good business.
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