The Smart Campaign recently released a paper by digital financial inclusion expert and CFI Fellow John Owens: Responsible Digital Credit: What does it look like? The paper lays out the variety of digital credit models and, using the Client Protection Principles (CPPs) as a framework, enumerates emerging risks and suggests good practices and mitigating steps that providers, regulators and even clients can take.
The paper is a helpful addition to the Smart Campaign’s work on a number of fronts. First, it has sharpened our ability to distinguish various digital credit models. “Digital credit” has become a hot topic in financial inclusion, but the term is often used without understanding the diversity of credit providers. The paper defines digital credit as “loans that are accessed via a digital channel either online, via a mobile device or via a third-party agent that facilitates digital credit processing remotely.” John provides a helpful taxonomy of the types of providers, ranging from non-bank marketplace P2P lenders, to fintechs that provide tiny mobile loans; to tech giants leveraging their massive data streams to offer consumer loans; and platforms that support SME financing through purchase orders, invoices, receivables, and processes between buyers and sellers along the supply chain. The paper presents the client protection risks inherent in all these digital credit products.
It is important to understand the differences among the business models to be able to identify the best ways for providers to mitigate the risks. For example, responsible underwriting might need to look very different at an e-commerce tech giant like Alibaba versus a mobile loan provider like M-Shwari. The two businesses use different kinds of customer data, have different pre-existing relationships with customers, interface with customers differently, and operate in markets with different levels of development (for example, whether credit bureaus can be relied on). As the Smart Campaign seeks to develop practical guidance for digital credit, this diversity presents a challenge.
The paper was also helpful in validating the seven CPPs as a framework for identifying and pin-pointing client protection risks in a digital world. John proposes one significant change. He writes, “To this list, however, we add an eighth concept: security and fraud protection, which is especially salient for digital financial services.” While on the one hand, the concepts of security and fraud could be housed under the existing Principles “Privacy of Client Data” and “Fair and Respectful Treatment,” given the importance of data security and fraud protection in a digital world, the Smart Campaign will consider it as a potential addition.
The paper takes the conversation about responsible digital credit an important step forward. So far, much of industry discussion has been about enumerating risks through research. Now the time is ripe for recommending practices that can be applied in real time by providers, regulators, industry and even clients. Moving from risk identification to practical guidance is an absolutely necessary next step in making responsible digital credit a reality. Actually, this process has already begun, in various places. John cites examples of guidance from existing industry associations and regulator groups, as well as the many solutions proposed by CGAP. For example, the Online Lenders Association in the United States has requirements for its members in the areas of advertising and marketing. One such requirement is for disclosure of conditions whenever “trigger” terms such as down payment, APR, variable interest rate, and the like appear. Overall, however John’s paper notes that implementation is still at a nascent stage.
At the end of the paper, John makes recommendations, including a few specific ones for the Smart Campaign. He strongly endorses the development and implementation of standards of practice that adapt the Client Protection Principles for digital credit. Through the Fintech Protects Community of Practice, the Smart Campaign and a group of enthusiastic digital lenders are working towards that end. The community of practice includes both mobile credit providers and tech-enabled financial institutions.
John also notes the value of recognition and certification programs for digital credit providers that meet these standards. The Smart Campaign’s Certification Program, which has certified over 100 financial service providers serving more than 42 million clients worldwide, is being extended to recognize client protection achievement for mobile credit providers, with an expected debut in 2019.
John is personally excited about the potential of new communications technologies such as chatbots to improve consumer protection in digital settings where face-to-face interactions with customers are infrequent or non-existent. He recommends this approach in the paper, and he is developing opportunities to apply digital communication tools. This is promising not only for providers, but also for regulators wishing to strengthen complaint resolution procedures or monitor a market.
As John writes, it will take a village to ensure that digital credit clients are protected with providers, consumer advocates, regulators, donors and investors all working together. The Smart Campaign is delighted to contribute to this effort.