WASHINGTON, DC, August 27, 2019 – The Center for Financial Inclusion at Accion (CFI) has launched an executive education program for financial service providers serving low-income communities in emerging markets. Through peer learning and exchange, the <a href="/about/what-we-do/board-leadership-for-impact-program">Board Leadership for Impact Program</a> will empower executives and board members to foster client centricity, lead digital transformation, sustain business growth and drive social impact. In partnership with the <a href="https://www.citigroup.com/citi/foundation/">Citi Foundation</a> and <a href="https://www.fmo.nl/">FMO</a>, the Dutch development bank, supporting program implementation and participant scholarships, the Board Leadership for Impact Program will offer multiple in-person workshops per year coupled with a robust virtual portal.

Derived from CFI’s five-year <a href="https://content.centerforfinancialinclusion.org/about/what-we-do/africa-board-fellowship-program/">Africa Board Fellowship Program</a>, which fostered the growth and development of more than 300 executives and board members of financial service providers serving more than 10 million clients in Africa, the Board Leadership for Impact Program will now expand to include early stage to mature companies offering financial services to underserved customers that operate in emerging markets around the world.

“Our experience with leadership development through peer exchange will inform our efforts through this new program to cultivate a community of leaders who have the skills and the network to help their organizations thrive,“ said <a href="/bio/deborah-drake">Deborah Drake</a>, Vice President, Center for Financial Inclusion at Accion. “Tackling challenges like achieving sustainable growth or pursuing digital transformation, particularly as a mission-driven organization, takes strategic leadership at the board level.”

Through role play, simulations and facilitated discussion, participants will gain new perspectives, skills, and knowledge on topics critical to social enterprise growth and impact, including risk management, board dynamics, digital transformation and inclusive digital finance. They will join an active community of alumni of the Center for Financial Inclusion at Accion’s <a href="https://www.centerforfinancialinclusion.org/get-involved#fellow-exec-ed">executive education programs</a>.

“By developing and strengthening leadership skills that drive business growth and social impact, our partnership with the Center for Financial Inclusion at Accion will help accelerate financial inclusion and economic progress around the world,” said Florencia Spangaro, Director of Programs, Citi Foundation.

“FMO is a proud partner of Accion for over a decade and we realize that creating a lasting impact starts in the board room. Strengthening the management of financial service providers and enterprises will help ensure business longevity and commitment to underserved customers,” said Gerbrich Salverda, Capacity Development Officer at FMO.
###
About the Center for Financial Inclusion at Accion

The Center for Financial Inclusion at Accion (CFI) is an action-oriented think tank that engages and challenges the industry to better serve, protect, and empower clients. We develop insights, advocate on behalf of clients, and collaborate with stakeholders to achieve a comprehensive vision for financial inclusion. We are dedicated to enabling 3 billion people who are left out of – or poorly served by – the financial sector to improve their lives.
<a href="http://www.centerforfinancialinclusion.org/">www.centerforfinancialinclusion.org</a>
<a href="https://twitter.com/CFI_Accion">@CFI_Accion</a>
###
MEDIA CONTACT

Center for Financial Inclusion at Accion
<a href="/bio/virginia-moore">Virginia Moore</a>
<a href="mailto:vmoore@accion.org">vmoore@accion.org</a>
+1 202.393.5113

The Center for Financial Inclusion at Accion Launches Executive Education Program for Financial Service Providers to Enable Business Growth and Social Impact

Mobile phones and networks are transforming the world of finance, creating opportunities  for widespread financial inclusion, especially among neglected regions and groups. Security and privacy should be among the most important considerations when building digital finance systems.
Credit decisions are often based on sensitive information and online finance offerings are no exception. The sensitivity of this information gives rise to a series of critical questions for customers:
<ul>
 	<li>To whom am I giving my data? And who else do they allow to access it? For what purposes?</li>
 	<li>How do the companies protect data so that people who do not have legitimate access cannot use or steal it?</li>
 	<li>What rights and options do I have if something does go wrong?</li>
</ul>
The goal of this research, conducted by CFI Fellow Patrick Traynor, is to examine how well digital lenders are responding to these questions.

&nbsp;

&nbsp;

&nbsp;

Digital Finance and Data Security

The volume of data in the digital universe doubles in size roughly every two years, <a href="https://insidebigdata.com/2017/02/16/the-exponential-growth-of-data/">estimates indicate</a>. The phrase “data rich” has become common business parlance. In the financial inclusion sector, big data is revolutionizing credit underwriting, product development, client segmentation, financial capability-building, and more. But how is this revolution actually happening? For many banks, it’s through partnerships with fintechs. Ujjivan, one of the largest microfinance institutions in India, recently chartered as a small finance bank, had until recently a limited portfolio at the SME level, which was hindered by high operating costs. This changed thanks to a partnership with the Bangalore-based fintech Artoo.

This partnership is described in CFI’s new joint-report with the Institute of International Finance (IIF), <a href="http://bit.ly/2uWXvFQ">How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines</a>. We discovered dozens of partnerships between mainstream financial institutions and fintechs in emerging markets, and we detailed the workings of 14 of them. The partnership between Ujjivan and Artoo is just one example among many of how financial institutions are increasingly turning to fintechs to improve how they effectively collect, use, and manage data.
<h1>The Value of Better Data Management</h1>
Traditionally, banks collected a great deal of information on loan applicants, but much of it remained in paper form, in loan folders stacked high in offices. With the advent of core banking systems, banks spent a great deal of time transferring data from paper to computer. And once on the computer, much of the richness of the data has gone unused. Largely the data has not been leveraged effectively due to siloed digital infrastructure, inefficient legacy systems, and restrictive or uncertain regulatory requirements. More useful data management relies on the ability to efficiently obtain, store, retrieve, structure, clean, and analyze large bodies of data. This is a monumental task, and best practices and requirements are rapidly changing. Therefore, partnerships with fintechs to help improve data management across an organization can be of tremendous value, helping financial institutions lower costs, identify customer potential, reduce fraud, increase cross-selling opportunities, and expand their customer base.
<h1>The Partnership Between Ujjivan and Artoo</h1>
Beginning in 2012, the partnership with Artoo provides Ujjiva with a digital field application, which is a cloud-based platform that digitizes the entire credit process, including loan generation and underwriting so that field officers enter customer data directly into the system via phones or tablets. As part of this work, Artoo supports Ujjivan’s data management. The platform deepens Ujjivan’s ability to track sales and portfolio performance. Artoo allows agents to capture more data points and consequentially creates more quality data for the bank to use in credit decisions. Data is captured on the Artoo platform, but is still owned by the bank.

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/ujjivan-and-artoo.jpg"><img class="wp-image-24076 aligncenter" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/ujjivan-and-artoo.jpg" alt="" width="620" height="560" /></a>

Artoo’s platform has led to a 40 percent decrease in loan-processing time and a 50 percent rise in the number of loans processed per agent. The boost in efficiency resulting from the partnership with Artoo has enabled Ujjivan to expand its SME customer base from 60,000 to 200,000 clients in three to four years, an increase of over 230 percent. Following a pilot where the companies split costs, Ujjivan now pays Artoo a subscription fee for the functions it uses.
<h1>Regulatory Challenges for Data Management</h1>
All the financial institutions we spoke with that were creating partnerships in this area faced regulatory challenges surrounding the movement and use of data. For Ujjivan, regulations required that all customer data be stored on servers in India. Artoo had to switch its system from Amazon Cloud Services, with servers housed in the U.S., to a local Microsoft-based cloud service provider.

Meanwhile, in the case of partnerships between banks and fintechs that provide alternative credit scoring capabilities, we saw regulation limiting the flow of data from the banking institution to the alternative risk modeler, and vice versa. This is indeed a point of much contention in many markets and creates some tension in partnerships. Banks seek to maintain control over customer financial data, fearing that fintechs that gain access to data will use it for their own business purposes.

For more on bank-fintech partnerships, including other standout examples, read the report: <a href="http://bit.ly/2uWXvFQ">How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines.</a>

Have you read?

<a href="https://cfi-blog.org/2017/07/31/how-financial-institutions-and-fintechs-are-partnering-for-inclusion-lessons-from-the-frontlines/">How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines</a>

<a href="https://cfi-blog.org/2016/07/21/new-cfi-and-iif-report-reveals-banks-are-leading-financial-inclusion/">New CFI and IIF Report Reveals Banks Are Leading on Financial Inclusion</a>

<a href="https://cfi-blog.org/2017/08/23/juntos-harnesses-artificial-intelligence-to-improve-customer-engagement-for-bbva-bancomer-and-bancolombia/">Juntos Harnesses Artificial Intelligence to Improve Customer Engagement for BBVA Bancomer and Bancolombia</a>

How Artoo Helped Ujjivan Unlock the Power of Data

&gt; Posted by Kimberly Lei Pang, Digital Learning Specialist, UNICEF

<a href="https://www.flickr.com/photos/58571789@N00/6991751189/"><img class="alignright wp-image-23671" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/05/6991751189_f0fc74a58e_z.jpg" alt="" width="325" height="217" /></a>In the story of Ali Baba and the 40 Thieves, the magical word “sesame” was used to open the seal of a cave where Ali Baba found hidden treasure. In China today, the same word is connected to another kind of magic, one that reveals hidden identities of the socially and economically disadvantaged. Sesame Credit (“芝麻信用” in Mandarin) is a product launched by <a href="https://www.forbes.com/companies/alibaba/">Alibaba</a> that pulls from transaction records on e-commerce platforms to understand a person or company’s creditworthiness. Such innovation in credit scoring is part of the “social credit system” that the Chinese government is building to make up for the longstanding shortage of credit data.

Access to credit, a major indicator of financial inclusion, has gained increasing attention from Chinese policymakers in recent years. For a country experiencing an economic slowdown and widening income gap between the rich and the poor, credit accessibility has the potential to spur growth and level the playing field for the poor. However, despite China’s efforts to improve financial access, a large portion of its population neither uses nor has access to credit. Data from the World Bank’s Global Findex study showed that Chinese people (aged 15+) have relatively high levels of formal bank account ownership (<a href="http://databank.worldbank.org/data/reports.aspx?source=1228">79 percent</a>, 2014) but low levels of credit usage (<a href="http://databank.worldbank.org/data/reports.aspx?source=1228">14 percent</a>, 2014). In fact, China’s formal credit use is the <a href="https://helda.helsinki.fi/bof/bitstream/handle/123456789/12748/173611.pdf?sequence=1">lowest among the five BRICS economies</a>. Aside from the rigidity and costliness of financial institutions, a significant barrier to borrowing is the lack of reliable credit scoring in China. Established just 11 years ago, China’s credit bureau CCRC covers credit profiles for only <a href="https://www.fitchratings.com/site/pr/997017">a quarter of China's 1.4 billion population</a> and shares that information only with selected banks. Lenders thus often have no access to borrowers’ financial histories and tend to make rather arbitrary decisions on borrowers’ creditworthiness. As a result, many individuals and microenterprises find it difficult to get a loan, as steady employment and collateral assets are commonly required for formal credit.

In order to fill the gap in credit scoring, <a href="https://www.bloomberg.com/news/articles/2015-07-02/china-credit-scores-come-to-a-debt-leery-culture">a few non-banking institutions</a> in China were awarded licenses by the central bank to seek innovative solutions to collect data and create credit profiles for people who would otherwise have no credit scores. One of the solutions is Sesame Credit. Although alternative credit scoring is nothing new in the financial inclusion space, what sets Sesame Credit apart is its direct access to a unique database of consumer information: <a href="http://www.alizila.com/alibaba-group-reports-quarterly-and-fy2016-results/">400 million annual active users</a> on Alibaba’s e-commerce and payment platform, which includes purchasing volume, payment histories, personal information, and social networks. Having a “Sesame Score” is suddenly equivalent to a new identity for China’s credit invisibles, including students and migrant workers. Depending on their scores, they can now take out loans, pay mortgages, find better jobs, and even <a href="http://www.bbc.com/news/world-asia-china-34592186">step up their dating game</a>.

While Sesame Credit has shown some early success in expanding access to credit for underserved consumers, it also comes with inherent drawbacks that present problems for potential borrowers.

First, Sesame Credit is tied to the ownership of a smartphone or computer. China’s rural areas, where <a href="http://data.worldbank.org/indicator/SP.RUR.TOTL.ZS?locations=CN">44 percent</a> of China’s total population resides, have a smartphone penetration rate of only <a href="http://www.nielsen.com/cn/en/press-room/2015/Nielsen-Chinese-Smartphone-Market-Now-Driven-by-Upgrading-EN.html">32 percent</a> (2015). Internet users in rural areas only account for <a href="https://www.chinainternetwatch.com/19697/top-stats-2017/">27 percent</a> of all of China’s internet users (2017). Therefore, rural residents who need access to credit the most may still be left out.

In addition, Sesame Credit has not explained how exactly it calculates its credit scores, besides saying that it is a "complex algorithm". This lack of transparency causes information privacy and protection concerns. Consumers do not have the opportunity to check the accuracy of the underlying data or know how to make improvements.

Last but not least, as part of the country’s social credit system pilot, Sesame Credit also takes into account a diversity of nonfinancial factors and behaviors when assigning users credit ratings. It is suspected that a minor traffic violation can also determine a consumer’s ability to pay back a loan. One can easily argue that a nonfinancial factor like <a href="https://cfi-blog.org/2017/01/05/the-news-from-china-can-a-speeding-ticket-hurt-your-credit-score/">a minor traffic violation</a> shouldn’t negatively impact one’s ability to access credit.

All told, it’s great to see that, in its efforts to promote a more financially inclusive economy, China is encouraging credit underwriting innovations such as Sesame Credit to improve access to financial services and foster experiences with formal financial services among the unbanked. Yet, it’s still too early to tell if Sesame Credit has the potential to effectively reach critical mass as well as provide reliable insight into consumers’ credit worthiness. What is clear is Chinese policymakers and regulators must strike a balance between the space for innovation and the need for greater transparency and consumer protection. A social credit system may indeed work as intended if the system holds both consumers and financial service providers accountable.

Kimberly Lei Pang is a Digital Learning Specialist in the Digital Strategy Section, Division of Communications, UNICEF NYHQ. She is also an Executive MPA candidate at Columbia University’s School of International and Public Affairs.

Image credit: <a href="https://www.flickr.com/photos/58571789@N00/6991751189/">Jens Schott Knudsen / flickr / CC BY 2.0</a>

Have you read?

<a href="https://cfi-blog.org/2017/01/05/the-news-from-china-can-a-speeding-ticket-hurt-your-credit-score/">The News from China: Can a Speeding Ticket Hurt Your Credit Score?</a>

<a href="https://cfi-blog.org/2016/04/05/improving-access-and-usage-of-financial-products-and-services-in-china/">Improving Access and Usage of Financial Products and Services in China</a>

<a href="https://cfi-blog.org/2016/05/11/financial-education-in-china-challenges-and-lessons-in-an-embedded-model/">Financial Education in China: Challenges and Lessons in an Embedded Model</a>

&nbsp;

Open Sesame! Give Me Some Credit

<a href="http://www.centerforfinancialinclusion.org/business-of-financial-inclusion"><img class="alignright wp-image-21554" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/07/cover-photo.png" width="280" height="363" /></a>When it comes to financial inclusion, as is true in many sectors these days, sexy start-ups and disruptive innovators often occupy the spotlight. But away from the glare, traditional banks are getting on with the work and making an enormous difference. In <a href="http://www.centerforfinancialinclusion.org/business-of-financial-inclusion">The Business of Financial Inclusion: Insights from Banks in Emerging Markets</a>, produced in a partnership between the Institute of International Finance (IIF) and CFI, we explore how banks are innovating to include new customers.

Given the headlines, it may be a surprise to hear that even today the overwhelming majority of new accounts are opened at formal financial institutions, not mobile money outlets. Thanks to the Global Findex, we know that over 720 million adults accessed formal financial services for the first time between 2011 and 2014, 90 percent of these new accounts were opened at formal financial institutions. Of the 720 million total new accounts, only 54 million used mobile money as their primary account.
<h3>How are banks expanding customer outreach?</h3>
Through in-depth interviews, leaders from 24 national, regional, and global banks told us about the opportunities and challenges they face while reaching the unbanked and underbanked. Each bank has its own particular story. In the aggregate, their stories give insight into how banks are evolving to meet people where they are and serve population segments that have been traditionally excluded.

Some banks have inclusion in their DNA. Turkey’s Isbank was created during the birth of the nation in 1924 to support Turkish business owners and the young national economy, and Standard Bank in South Africa led the charge to end financial apartheid following the end of official apartheid in 1994. For these banks, financial inclusion is simply a new name for a longstanding commitment – bolstered by new technologies that make outreach easier. On the other hand, some banks must challenge their dominant organizational norms and change course to reach the currently un-reached.

[caption id="attachment_21561" align="alignright" width="301"]<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/07/circle-graphic_3.png"><img class="wp-image-21561" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/07/circle-graphic_3.png" width="301" height="188" /></a> (click to enlarge)[/caption]

When they decide to pursue financial inclusion, banks also choose from a number of paths. We identified four broad strategies: corporate social responsibility (CSR); investments in microfinance institutions; niche market activities within a broader commercial strategy; and market-motivated efforts with aggressive growth plans. Within this range of strategies is also a range of viability, with CSR efforts aiming at social impact and commercial efforts aiming at profit. Some banks pursue several of these strategies at once. Most of the banks that we talked to intend to make money from financial inclusion activities, and many have either reached or will soon reach a clear break-even point during which the gains from new customers surpass the upfront costs of acquiring and serving them.

Whatever their motivations and expectations, all the banks we spoke to are using technology-enabled channels to bring in new customers. Banks are evolving alongside, often with and sometimes beyond, financial technology start-ups and telecos. Communications technology enables a wider ecosystem of customer service touchpoints and data analysis helps providers fine-tune these touchpoints.

We find, not unexpectedly, that digital payments are the leading edge of new customer outreach. Many banks are leveraging government-to-person (G2P) and business-to-person (B2P) payments to acquire customers at the base of the pyramid. Once a G2P or P2P payer has put money into an account, the bank seeks to engage the customer fully with services such as bill payment, e-commerce, and even transportation payments. From payments, banks then aim to gradually cross-sell other financial products: savings, credit and insurance.

[caption id="attachment_21564" align="alignright" width="300"]<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2016/07/drivers-graphic.png"><img class="wp-image-21564" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/07/drivers-graphic.png" width="300" height="222" /></a> (click to enlarge)[/caption]

Agent banking has become a critical aspect of low-income customer acquisition and service. Almost every bank interviewed has established a vast agent network. Many banking agents can carry out a full suite of transactions, enabled by biometric national ID systems for simplified identity verification and backed by increasingly robust data analytics programs. Agent banking has its challenges, however, as interviewees were quick to point out. Many banks struggle to make their agent operations work well, with issues such as agent churn, agent liquidity management, quality of information agents provide, and ensuring that customers trust agents.

In nearly all cases we identified, banks find it necessary or advantageous to partner with other organizations that bring specialized capabilities into the business. Partnerships may be at the front or back end of operations, and can support a variety of functions, allowing for enhanced product offerings, financial risk management, greater customer engagement, and more. We saw partnerships with microfinance institutions, fintech start-ups, solar energy companies, and agent network managers, to name only a few. These partnerships put banks at the center of their own financial ecosystems.

For as much opportunity as banks have, their expansion to reach the unbanked is not without challenges. The banks we spoke with highlighted a number of challenges, often unique to their organizational and country context. Customer-related barriers included lack of new consumer trust in banks and unfamiliarity with digital and agent banking, together with low financial capability and digital literacy. These issues lead to low uptake and usage. Banks are struggling to manage and take advantage of quickly-growing amounts of customer data. Broader infrastructure deficits, especially in connectivity, limited the reach of digital banking and increased the cost. Finally, many banks highlighted regulatory issues, especially regarding pricing, capacity, and Know Your Customer requirements.

Despite these challenges, all 24 interviewed banks presented bold goals and evidenced the enthusiasm to reach them. The expansion of financial technology is not leaving them behind, but is driving their efforts. <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/748">The report</a> offers a profile of the inclusion strategies each bank employs. A scan of these pages takes us to the front lines, where banks are creating a genuinely inclusive financial sector.

Have you read?

<a href="https://cfi-blog.org/2015/08/20/accelerating-agent-banking-in-kenya/">Accelerating Agent Banking in Kenya: Part One</a>

<a href="https://cfi-blog.org/2013/02/27/microfinance-vs-financial-inclusion-whats-the-difference/">Microfinance vs. Financial Inclusion: What's the Difference?</a>

<a href="https://cfi-blog.org/2015/07/22/it-all-comes-down-to-knowledge-akibas-mobile-banking-experience/">"It All Comes Down to Knowledge" - Akiba's Mobile Banking Experience</a>

The Business of Financial Inclusion: Insights from Emerging Market Banks

&gt; Posted by Jeffrey Riecke, Communications Specialist, CFI

<img class="alignright size-full wp-image-21507" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/06/pay-bills.png" alt="" width="300" height="150" />This morning I had the luxury of splitting an Uber with my girlfriend for our to-work transportation. Neither she nor I are affluent by United States standards, but I would say we’re relatively financially healthy. Most months, our expenses like rent, food, medical bills, and student loans are low enough compared to our incomes that we have money left over for things like Uber rides, dinners out, and the occasional vacation. We have formal financial products and understand them well. Financial health for us means the combination of our financial flows and our financial products positions us for financial stability in the immediate and long-term, even as we grow older and our financial demands dramatically change.

Building financial health, for me, requires attention to my day-to-day financial activities that help build my resilience and allow me to take advantage of opportunities. It’s having savings quietly accumulating for a rainy day or for that bicycle purchase. It’s having access to loans that help if I want to go back to school, buy a house, or start a business. It’s the ability to pay up when an emergency visit to the hospital is necessary, and it’s the confidence that if my house is broken into I can replace my possessions.

My own financial health is very much related to the unique day-to-day financial needs, opportunities, and emergencies that exist in my life. Someone who is unemployed, or older, or supporting a child, or enrolled in school would have a much different assessment of their own health. Similarly, someone in a low or middle income country—where the Center for Financial Inclusion focuses most of its attention—would have different financial needs and therefore different financial health. Despite these differences, however, the thing I’ve noticed is that many of the big financial issues around the world are the same. As part of the Center for Financial Service Innovation’s (CFSI) <a href="http://www.cfsinnovation.com/finhealthmatters/">financial health blog contest</a>, I wanted to offer some observations along these lines.

Whether you’re in the United States or elsewhere, being financially healthy means having credit options that don’t carry scarily big strings attached. This is something I see in my own neighborhood. In the United States, most households have a bank account, but roughly <a href="https://www.whitehouse.gov/sites/default/files/docs/20160610_financial_inclusion_cea_issue_brief.pdf">20 percent</a> of these households are underbanked, meaning they have to resort to informal financial services for some of their needs. The payday loan industry in the United States, for example, has <a href="https://cfi-blog.org/2016/06/02/critical-regulation-the-consumer-financial-protection-bureaus-new-rules-on-payday-loans-and-short-term-credit/">grown robustly</a> in recent years, and is known for high interest rates and fees that trap borrowers into cycles of debt.

As an American, I’m constantly exposed to a barrage of advertisements for financial service providers including payday lenders and alternative financers. In that Uber ride this morning my girlfriend and I heard an ad on the radio for a rapidly-issued loan product. This spurred a conversation between she and I on the prominent U.S. mortgage lending company Quicken Loans. If their name isn’t enough to give you pause, I’m sure their <a href="https://www.youtube.com/watch?v=QlRm6Y5iVfw">Super Bowl spot</a> this past January is. <a href="http://blogs.accion.org/features/6433/">In the words</a> of Accion Venture Lab’s Amee Patel and Paul Breloff, “this ad basically turned the biggest household financial decision – i.e., whether to get a mortgage or home equity line of credit – into a Pavlovian-style autonomic response: ‘Push Button. Get Mortgage.’”

One might posit that this is an ill-conceived though not problematic advertisement as the country has surely wised up since the 2008 global financial crisis, but as only <a href="http://www.wsj.com/articles/get-ready-to-be-told-you-dont-know-money-1457321010#livefyre-comment">57 percent</a> of Americans are able to pass a basic financial literacy test, and the <a href="https://cfi-blog.org/2015/02/04/keeping-score-the-client-protection-principles-vs-the-u-s-subprime-auto-loan-market/">U.S. sub-prime auto loan market</a> is looking dangerously familiar to the pre-’08 mortgage market, it’s hard to feel comfortable with the fact that Quicken Loans is the name of the <a href="http://www.theqarena.com/">arena</a> where the recently crowned Cleveland Cavaliers NBA team plays, if not for Quiken Loans practices then for the flippancy in which they discuss mortgages.

On the whole, the average American household has <a href="https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/">over $15,000</a> in credit card debt.

In the United States and around the world, financial health means being able to make informed decisions to effectively navigate the financial services landscape and maintain an appropriate level of debt.

But I’d love to hear – what does financial health mean to you? Let us know in the comments.

Have you read?

<a href="https://cfi-blog.org/2016/04/12/a-change-in-behavior-innovations-in-financial-capability/">A Change in Behavior: Innovations in Financial Capability</a>

<a href="https://cfi-blog.org/2016/06/02/critical-regulation-the-consumer-financial-protection-bureaus-new-rules-on-payday-loans-and-short-term-credit/">Critical Regulation: The Consumer Financial Protection Bureau's New Rules on Payday Loans and Short-Term Credit</a>

<a href="https://cfi-blog.org/2015/06/09/considerations-for-the-pursuit-of-financial-inclusion/">Considerations for the Pursuit of Financial Inclusion - Beyond Account Access</a>

What Financial Health Means to Me

“Would you like to save $10 today?” In the United States, it seems you can’t shop anywhere these days without hearing this question at the checkout counter. According to <a href="http://www.cardhub.com/store-credit-cards/">Card Hub</a>, there are at least 134 large retailers in the U.S. offering credit cards. And of course, these offers usually sound great. Who wouldn’t want to save money on purchases? All you have to do is fill out a short form on the spot… It’s easy.

These savings can come at a price. Here are a few of my concerns about credit cards offered by the likes of Target, Macys, Sears, TJ Maxx, and others.
<ul>
 	<li>Confusion between Rewards and Credit Cards – Many retailers provide rewards or loyalty card programs. For instance, you can earn points at CVS with a card or get gas reward points at Stop and Shop. These rewards and loyalty cards are often similar to retail credit cards in that they are offered at the register, you fill out a short form to join, and you present the cards when checking out. For customers with limited financial literacy or limited English language skills, the difference between reward/loyalty cards and retail credit cards can be very confusing. It’s blurred even more by the fact that most credit cards also offer rewards – like cash back or bonus air miles. Of course, there are big differences between a card that one swipes to simply “earn points” and a card that allows one to make purchases on credit.</li>
</ul>

<ul>
 	<li>Negative Impact on Credit Scores – Credit scores are extremely important for anyone wanting to get a loan, or buy a car or a home. Though how they’re calculated is based on complex and opaque calculations. However, just having a wallet full of retail credit cards can still negatively affect your credit score. You may be judged a higher credit risk if you have signed up for many retail credit cards – even if you don’t use them – because you have the ability to go on a huge spending spree. What’s more, just having your credit score checked, which happens when you sign up for a card, may negatively affect your credit score.</li>
</ul>
<ul>
 	<li>Cashiers Are Not Bankers – If you apply for a credit card with a financial institution, the setting itself prompts many people to ask about and make comparisons on things like interest rates, credit limits, and repayment terms. In fact, there are many websites (see <a href="http://www.creditcards.com/">here</a> and <a href="https://www.nerdwallet.com/">here</a>) to help consumers evaluate financial credit cards. The idea behind retail credit cards, however, is to attract decisions based on just one thing: saving money right away at the checkout counter. Obtaining retail credit cards are mostly impulse decisions, and little is done to disclose their terms and conditions. Moreover, if you do have questions about the terms and conditions of a retail credit card, the person you are asking is a store clerk, not a banker.</li>
</ul>
<ul>
 	<li>Over-Indebtedness – Despite the sophisticated credit bureau system in the U.S., <a href="https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/">over-indebtedness is an issue</a>, especially among lower-income populations. Retail credit cards contribute to the problem of over-indebtedness in a number of ways:
<ul>
 	<li>They are ubiquitous – Everywhere you shop, every time you take a flight, a retail credit card is being offered at checkout or over a loud speaker, with incentives advertised front-and-center.</li>
 	<li>They have high APRs – The average APR on credit cards offered from America’s big retailers is <a href="http://www.creditcards.com/credit-card-news/retail_card-stores-survey-apr_2014-1276.php">23 percent</a> – a number that has recently gone up by more than 2 percentage points. For comparison, the country’s average for general purpose credit cards is about 15 percent.</li>
 	<li>They are inconvenient to pay – There is a movement to use technology to make paying bills easier. Yet, the industry lags, with retailers often mailing bills, which can get lost in the shuffle.</li>
</ul>
</li>
</ul>
Are all retail credit cards a bad idea, and should you never enroll for one? Of course not. But next time you shop you might want to think twice about saving those $10 at the checkout counter. From a client protection perspective, and given that this retail credit trend doesn’t appear to be going away, it’s essential that this corner of the industry puts equal emphasis on fair and responsible practices. For their own institutional sustainability and for their clients’ well-being, retail credit providers -- like all credit providers -- should incorporate the Smart Campaign’s <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">client protection principles</a> throughout their operations, especially including mechanisms for complaint resolution, transparency, prevention of over-indebtedness, and responsible pricing.

Have you read?

<a href="http://cfi-blog.org/2015/08/26/investing-in-native-american-communities/">Investing in Native American Communities</a>

<a href="http://cfi-blog.org/2015/09/24/discrimination-and-credit-underwriting-in-the-age-of-social-media/">Discrimination and Credit Underwriting in the Age of Social Media</a>

<a href="http://cfi-blog.org/2016/03/04/fintech-goes-to-the-festival/">FinTech Goes to the Festival</a>

The Trouble with Retail Credit Cards

&gt; Posted by Susy Cheston, Senior Advisor, CFI

<img class="alignright wp-image-18318" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/06/thumb_819d117b7e674def88fe59653e42a808.jpg" alt="" width="331" height="210" />Almost three decades ago, I walked into a meeting with a loan officer at a major bank in Boston. I was running a not-for-profit dance company that was well-respected, had good governance, and had a decent business plan—but hey, it was a not-for-profit dance company with no endowment and no certainty of surviving beyond its next show. We were not a good risk on paper. My job was to persuade the loan officer to give us an unsecured line of credit based solely on our business plan and his judgment of our ability to execute against that plan. He looked at our financials, but he also sized me up. This was not data analytics, this was the old-time community bank model of a decision based on a hand shake and a relationship, a sense of trust. Truth be told, the loan officer was biased in our favor. He really loved our work and believed in what we did. That plus a few well-placed board members had gotten me in the door where a company with a similar balance sheet and risk profile would have been left out in the cold.

A few years later, I landed in El Salvador where I formed lending groups among poor, illiterate women in the relatively early days of microfinance. “Ella es buena paga” was the phrase the women used to identify someone who was known as good for paying her debts. It meant that when a vendor in the marketplace or the owner of a corner store let a customer buy something on credit, she was good for it. On the basis of a reputation as “buena paga,” the lending group would allow a woman to join them. Needless to say, those who were known as “mala paga” would be blacklisted and not permitted to join the group.

Perhaps the greatest microcredit miracle of the last century was that, thanks to these lending groups, poor women who were credit invisible were revealed as credit worthy, identified as such through social relationships and their standing in the community. It was the kind of relationship-based credit decision that I and our dance company had benefited from in Boston, but that people at the base of the pyramid had always been excluded from.

Back in the 1860s in the United States, local merchants had their own version of “buena paga” and “mala paga.” They would keep lists of their customers who didn’t pay their debts. After a while, they started sharing those lists with each other. It was a pretty simple risk management system -- a basic list of people they considered to be poor credit risks. Soon enough, someone started providing the service of collecting that information from merchants and sharing it with others—but only at a local level. People still knew each other.

By 1899, the Retail Credit Company (RCC) was founded to provide that service of sharing information about who was “buena paga” and who was “mala paga.” They grew quickly, and by the 1920s, they had offices all over the United States. By the time the 1960s arrived, RCC had credit information and files on millions of Americans and would <a href="http://archive.wired.com/wired/archive/3.09/equifax_pr.html">share it with just about anyone</a> who paid them for it. The game had moved from relationships to data.

But credit bureaus didn’t only collect information on who paid off their loans. They collected data on people’s health, personal habits, morals, use of vehicles, and finances. <a href="http://archive.wired.com/wired/archive/3.09/equifax_pr.html">According to Professor Alan Westin</a> writing in The New York Times in 1970, Retail Credit collected "...facts, statistics, inaccuracies and rumors… about virtually every phase of a person's life; his marital troubles, jobs, school history, childhood, sex life, and political activities." The company was also alleged to reward its employees for collecting negative information on consumers.

When I worked in El Salvador in the 1990s, a woman could be ostracized and left out of a lending group due to a feud or some kind of unfair discrimination—something that had nothing to do with her ability and willingness to pay off her loan. As an outsider to the community, I did not know enough to be able to intervene in those cases, nor would I have. Since the women were guaranteeing each other’s loans, they needed to have a high level of trust in each other. It was a relationship-based model.

Nevertheless, one potential downside of that group lending model was that a woman could be outcast and become even more excluded by being left out of the group. In the 1960s in the United States, that outcast effect was magnified many times over if a consumer had the bad luck to have Retail Credit come across negative information of any kind. If you were blacklisted, the game was over.

This brings us back to <a href="http://en.wikipedia.org/wiki/Alan_Westin">Alan Westin</a>, who was a real hero of credit reporting. A professor at Columbia University in the 1960s, Westin conducted some of the first significant work on consumer data privacy and data protection. His major books on privacy – Privacy and Freedom (1967) and Databanks in a Free Society (1972) – shaped the conversation, prompting U.S. privacy legislation and supporting the launch of many privacy movements globally in the 1960s and 70s. According to Westin, privacy is defined as an individual’s right “to control, edit, manage, and delete information about them[selves] and decide when, how, and to what extent information is communicated to others.”

Thanks in part to Professor Westin’s advocacy, those Wild West days of credit reporting in the United States were significantly cleaned up when the <a href="http://en.wikipedia.org/wiki/Fair_Credit_Reporting_Act">Fair Credit Reporting Act</a> was passed in 1970, establishing limits on what information credit bureaus could share, and with whom.

Retail Credit Company not only responded to its tainted image by changing its name to Equifax, but it also significantly cleaned up its act. In 1989—the same year I was approaching my nice Boston loan officer for a line of credit—Jack Rogers took over as CEO of Equifax. Rogers made a number of changes, including reorienting the company toward providing tailored risk management for its customers; taking the company international; and, in a major break from its recent practices, setting a vision of becoming the gold standard of the industry with respect to personal privacy. He did something pretty revolutionary, inviting the company’s chief critic, none other than Alan Westin, to work with the company to transform its privacy policies and practices. Westin did exactly that, and today on its corporate website, Equifax proclaims: “We are committed to a well-established set of principles that address consumer privacy issues, and we take pride in being a trusted steward of consumer information….” The commitment seems to be real, and there is a strong corporate culture built around protecting those privacy principles.

Today, credit bureaus process billions of points of data every month and monitor activity on at least a billion credit cards in the United States. In addition to the U.S., Equifax works in 18 other countries (it’s the market leading credit bureau in all but a few of them), generating <a href="http://www.equifax.com/about-equifax/company-profile">158 billion credit score updates</a> per month. Based on the myriad of data Equifax and other credit bureaus collect they make decisions about the credit-worthiness of individuals and assign them credit scores, determining if someone is “buena paga” or “mala paga.” They have immense power that is fueled by spectacular access to data and sophisticated models of data analytics. With new technologies, new abuses also become possible, making it more important than ever to focus on people and to protect their privacy. While the old days are blessedly gone—no longer is someone denied a loan because of marital troubles or political activities—still, there are people today in the United States whose credit score unfairly and unjustly prevents them from receiving a loan, effectively giving them a bad name. Sometimes the reason is the most faceless of all--simply a data entry error on the part of the credit bureau.

The fight for consumers to have some control over their own data—and their reputations -- continues on. It’s part of the balancing act of businesses managing risk through some combination of relationships and data, with credit reporting ever evolving. On May 20, <a href="http://www.usnews.com/news/business/articles/2015/05/20/31-state-deal-should-make-credit-report-errors-easier-to-fix">new regulations</a> were agreed to that should make it easier for customers in the United States to correct inaccuracies in their credit reports. And on June 1, Equifax settled a lawsuit against the company by a man whose first name is God. Equifax had refused to recognize God Gazarov’s name as legitimate, and had effectively cast him out of the financial system. Now, Equifax has <a href="http://wina.com/news/030030-equifax-settles-lawsuit-with-man-named-god/">restored its relationship with God</a>. We’ll hope that is a sign of good things to come.

Image credit: Accion

Have you read?

<a href="http://cfi-blog.org/2014/01/07/ratings-to-loosen-the-regulatory-noose-on-chinas-microcredit-companies/" target="_blank">Ratings to Loosen the Regulatory Noose on China’s Microcredit Companies</a>

<a href="http://cfi-blog.org/2013/02/14/how-client-protection-certification-and-ratings-work-together/" target="_blank">How Client Protection and Ratings Work Together</a>

<a href="http://cfi-blog.org/2014/05/05/the-future-of-creditworthiness/">The Future of Creditworthiness</a>

Buena Paga, Mala Paga: An Incomplete and Personal History of Credit Reporting

&gt; Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign

[getty src="88296524?et=pxV2UUN-RYlp2TGlyrr4jw&amp;sig=-oPzph0UiMCwOf1MA0qCeQoeyOqXpsHUUbcE6iYj98c=" width="507" height="338"]

The risks associated with the recent U.S. boom in subprime auto loans for the working poor are compounding, a <a href="http://dealbook.nytimes.com/2015/01/26/investment-riches-built-on-auto-loans-to-poor/?hp&amp;action=click&amp;pgtype=Homepage&amp;module=first-column-region&amp;region=top-news&amp;WT.nav=top-news&amp;_r=1">series of articles</a> recently published by The New York Times indicates. The articles report on the Times’ extensive investigation on the subject, which included the examination of over 100 bankruptcy cases, dozens of civil lawsuits against lenders, and hundreds of loan documents. The series draws attention to companies lending to those on the financial margins who often have questionable or missing credit histories and who are purchasing typically pretty old, low-quality cars. Lenders have lowered credit standards to widen their pool of borrowers, a risky practice incentivized by an influx of money from investors looking for a hot market and keen to securitize. Subprime auto loans have increased by 130 percent in recent years, and in 2014 they accounted for one in four auto loans.

In addition to viewing this through our did-we-learn-nothing-from-the-subprime-mortgage-crisis?! glasses and seeing potential systemic repercussions, one can take the consumer rights vantage point and see the scary picture of a world in which the underbanked or financially excluded are given two kinds of options: bad and really bad. We decided to score the features of this market against the seven <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> of the Smart Campaign. Since the Client Protection Principles are a do-no-harm standard, we expect markets to meet seven out of seven principles to earn our endorsement. Let’s see how subprime auto loans stack up.

First, as the articles highlight, customers in this market often find themselves very quickly, severely in debt and thus the principle of Prevention of Over-Indebtedness is not being met. These lenders bypass even basic repayment capacity analysis, and apply lax credit standards. In some cases, consumers who are bankrupt, without jobs, and even living on social welfare programs receive loans they cannot afford– as their employment information is <a href="http://dealbook.nytimes.com/2014/10/01/loan-fraud-inquiry-said-to-focus-on-used-car-dealers/">falsified</a> by car salesmen. Score: standard not met.

The principle of Appropriate Product Design and Delivery Channels is also missing in action. Some of these loan products are designed such that the loan size for a run-down used car – whose defects are also not adequately disclosed to the consumer – is greater than the value of the car. In The New York Times’ examination, it was found that the size of the loan was typically more than twice the value of the car. Buyers drive off the lot and straight underwater. In the case of the title loan market, used by <a href="https://www.fdic.gov/householdsurvey/">1.1 million households in 2013</a> to obtain fast cash in exchange for their car titles, inability to keep up with repayments, quickly leads to repossession of the car. Because the cars resell for an amount smaller than the loan principal, the now carless borrower may still be paying off the debt years later. Score: standard not met.

Recent press describes many cases where the principle of Transparency in this subprime auto loan market is not being met. I’m curious to see a deeper exploration of disclosure mechanisms, but the Times’ series documents instances of purposefully murky communication, linguistic barriers, misunderstood contracts, and customers who do not feel comfortable asking questions. With these auto loans, car dealers are in effect the agents of the finance company that extends the loans. Given their incentives – to sell more cars – and their training – focused on automobiles, not financial services – they are not reliable sources of information. Score: standard not met.

On Responsible Pricing, the series devotes an <a href="http://dealbook.nytimes.com/2014/09/24/miss-a-payment-good-luck-moving-that-car/">article</a> to the high interest rates charged. For some of the loans inspected, interest rates were as high as 29 percent, with the occasional incidence of excessive fees and add-on products required for loan purchase such as high-cost insurance policies. Score: we can’t judge without knowing more about the costs of making such loans, but we do know that prime customers receive significantly lower rates.

The series' articles also expose how the principle of Fair and Respectful Treatment of Clients is infringed by lenders using devices that can remotely disable a car’s ignition the minute a borrower misses a payment. One of the articles quotes Robert Swearingen, a lawyer with Legal Services of Eastern Missouri, in St. Louis, who says: “No middle-class person would ever be hounded for being a day late. But for poor people, there is a debt collector right there in the car with them.”

Along with falsifying employment activity, lenders and car dealers in this market have been found to use aggressive sales techniques and poorly treat desperate clients who absolutely need cars to get to their jobs. For instance, the Times recounts lenders misleading borrowers on their loan qualification such that they will jump on whatever is offered, even if the terms are contrary to their interests. Score: below standard. 

With tie-ins to the Campaign’s Client Protection Principle of Privacy of Client Data, these devices point to the double-edged sword of big data. While such surveillance and personal data gathering can be troubling, lenders are also framing such technologies as a way of understanding and evaluating customers who have no credit history, thus allowing them to serve the underserved. Score: questionable.

Finally, if a borrower wants to argue about falsified information, repossession, or another grievance, they by and large do not have any mechanisms for complaints resolution – the final Client Protection Principle. When a borrower goes to the bank for recourse, the reporting shows, the bank tells them this is a problem for the dealer, who then sends them back to the bank. Score: standard not met.

In summary, the U.S. subprime auto loan market fails to live up to every one of the Client Protection Principles. There is something seriously wrong here. It is no surprise that the auto loan industry negotiated an exception for itself from the consumer protection provisions of the Dodd-Frank reforms. Hopefully, these issues will continue to be examined in the news and by consumer advocates. In the meantime, these consumer violations of the Client Protection Principles provide another example of <a href="http://www.theatlantic.com/business/archive/2014/01/it-is-expensive-to-be-poor/282979/">the high cost of being poor</a>. Financial inclusion cannot be a matter of including the poor only in so far as they are willing to receive bad treatment, higher fees, and be left carless and in debt.

Have you read?

<a href="http://cfi-blog.org/2015/01/29/book-review-stress-test-by-timothy-geithner/" target="_blank">Book Review: 'Stress Test' by Timothy Geithner</a>

<a href="http://cfi-blog.org/2014/08/14/spent-finding-change-in-the-u-s-financial-system/" target="_blank">‘Spent’ – Finding Change in the United States Financial System</a>

<a href="http://cfi-blog.org/2014/08/26/ecpps-how-a-principles-approach-to-client-protection-is-built-for-the-digital-age/" target="_blank">eCPPs: How a Principles Approach to Client Protection is Built for the Digital Age</a>

Keeping Score: The Client Protection Principles vs. the U.S. Subprime Auto Loan Market

&gt; Posted by Claudio Storm Quinteros, Director Ejecutivo, Fondo de Solidaridad e Inversion Social de Chile

<a href="http://cfi-blog.org/category/financial-inclusion-2020/" target="_blank" rel="noopener"><img class="alignright" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/12/blogseries.jpg?w=300&amp;h=66&amp;h=66" alt="" width="300" height="66" /></a>The <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020" target="_blank" rel="noopener">Financial Inclusion 2020</a> project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”

Imagine your refrigerator breaking down. The mechanic says it can’t be fixed. You don’t have a bank account, you don’t have a high paying job, and while you have saved a bit of cash in your home, it’s certainly not enough to purchase a new appliance. You later wander into a department store on your way home from work, and see it: a brand new refrigerator, on sale today only. You ask what the price is, and it is well beyond your savings. “Do you want to purchase it on credit?” the clerk asks.

Of course you do.

In Chile, about 58 percent of adults are financially excluded, if a bank account is the metric of inclusion (according to the World Bank Global Findex). But many people get their start with financial services through a different route. Retailers have moved into the financial services space and offer the ability to purchase many household items on credit. The product is even available for – perhaps especially aimed at – people whose incomes are low.

This is the population that my agency serves—those who are low income and trying to make ends meet. When serving this population, we address the root causes of poverty through a range of social and economic development activities. When we consider our financial inclusion programs targeting this population, we have to think about how people living in poverty use the financial services available to them—especially the consumer credit to which they have easy access.

Falabella department stores pioneered the practice of consumer credit for retail goods, offering a card that gave middle and lower-middle class shoppers – including those without bank accounts – the opportunity to buy televisions and refrigerators on credit installments. Customers of the department stores make two out of every three purchases on these cards, according to the <a href="http://www.ft.com/cms/s/0/18974980-b480-11e1-bb2e-00144feabdc0.html#axzz2XQS0dNqn" target="_blank" rel="noopener">Financial Times</a>. Loyalty is high, and Falabella has built its brand on the cards. So have a number of other Chilean department stores.

In fact, when American retailer JCPenney tried to enter the Chilean market in the mid 1990s, it could not compete. When Walmart bought food retailer D&amp;S, it kept the D&amp;S brand name, forgoing the opportunity to extend its own name into Chile.

<a href="http://centerforfinancialinclusionblog.files.wordpress.com/2013/07/cartoon.jpg" target="_blank" rel="noopener"><img class="wp-image-11881 alignright" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/07/cartoon.jpg" alt="" width="350" height="313" /></a>

When we think about financial inclusion in Chile, therefore, we have to think about consumer credit.

While readily available credit can be a very good thing, there is the concern that without much competition, department stores can charge high interest rates to customers. A few years ago, it was found that retailer La Polar <a href="http://www.nytimes.com/2011/07/24/business/global/abuses-by-credit-issuers-in-chile-and-brazil-snare-consumers.html?pagewanted=all&amp;_r=0" target="_blank" rel="noopener">had extended loan terms</a> without customer knowledge, extending a vicious cycle of debt for users.

In Chile, the household debt-to-income level rose by about 254 percent between 2001 and 2008, prior to the global economic crisis. In 2010 debt-to-income was reported to have been above 70 percent, according to the Banco Central de Chile (or $70 in debt for every $100 in income). For a country whose statistics may be interpreted as showing less than 50 percent financial inclusion, therefore, Chile already has regulatory challenges in financial inclusion.

What is to be done?

My agency relies on partnerships with other agencies to address the issue of over-indebtedness and to protect consumers. Since over-borrowing is a multi-dimensional problem, it requires a multi-dimensional solution. It is critical for consumers to be able to interpret interest rates, understand terms and conditions, and manage their repayment process.

Consumer protection regulation is one essential response to the challenge, as <a href="http://www.sernac.cl/" target="_blank" rel="noopener">Sernac</a> is well aware. So is the need for greater financial capability among consumers. To this end, Sernac hears complaints from consumers and works directly with institutions and organizations to resolve disputes. It has also worked to mandate the clarification of loan terms in contracts and communication with customers.

Financial capability among consumers is an issue that we are tackling in my agency, <a href="http://www.fosis.cl/" target="_blank" rel="noopener">FOSIS</a>. We address this problem of over-indebtedness among the most vulnerable by holding targeted workshops on how to understand loan terms, creating games to address financial education in the most vulnerable schools, and distributing informative materials (including comics, shown above) at critical times in the year—when debt is easiest to accumulate.

Finally, there are a number of underlying systemic factors, especially prevalent among low- and middle-income consumers, that are strongly linked to over-indebtedness. For example, we see people come out of poverty only to fall back into it because of debt. For these people, we try to teach underlying principles of saving, earning, and investing.

Consumer credit for retail goods has the potential to be a good thing—to provide people with the financing they need for major purchases and to help people to develop a credit history. But to ensure it indeed is used in a positive way, these client protection measures have become important to our national financial inclusion strategy.

For more information on Financial Inclusion 2020, <a href="http://bit.ly/FI2020signup" target="_blank" rel="noopener">sign up for project updates</a>.

<a href="http://www.fosis.cl/index.php/estructura/director-ejecutivo" target="_blank" rel="attachment noopener wp-att-11887"><img class="alignleft wp-image-11887" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/07/de_cstorm_140.jpg" alt="" width="100" /></a>Claudio Storm Quinteros is Director Ejecutivo of Fondo de Solidaridad e Inversion Social de Chile (FOSIS), part of the Chilean government's Ministerio de Desarrollo Social.

Image credit: <a href="http://centerforfinancialinclusionblog.files.wordpress.com/2013/07/cartoon.jpg" target="_blank" rel="noopener">FOSIS</a><a href="http://www.un.org/disabilities/default.asp?navid=14&amp;pid=150" target="_blank" rel="noopener">
</a>

Have you read?

<a href="http://cfi-blog.org/2013/05/29/your-neighborhood-bank-walmart/" target="_blank" rel="noopener">Your Neighborhood Bank, Walmart?</a>

<a href="http://cfi-blog.org/2012/04/10/new-credit-risk-models-for-the-unbanked/" target="_blank" rel="noopener">New Credit-Risk Models for the Unbanked</a>

<a href="http://cfi-blog.org/2010/10/05/word-of-the-week-consumer-credit/" target="_blank" rel="noopener">Word of the Week: Consumer Credit</a>

Retail Credit in Chile: Scourge or Solution?

Patrick Traynor

Allyse McGrath

Elisabeth Rhyne

Amelia Kuklewicz

Danielle Piskadlo

Susy Cheston

Claudio Storm

China

South Africa

Turkey

El Salvador

Chile

Agricultural and Rural Finance

Banks

Consumer Credit

Credit

Customer Centricity

Delivery Channels

Digital Credit

Digital Financial Services

Education Finance

Energy Finance

Financial Service Providers

Fintechs

Governance

Housing Finance

Informal Credit

Insurance Companies

Microfinance

Microfinance Institutions

Neobanks

Partnerships

Risk Management

Underserved Groups

Consumer Protection

Nano Loans

Privacy

Agent Banking

Alternative Data

Financial Technology

Social Performance

Financial Capability

Financial Health

Credit/Debit Cards

Over-indebtedness

Saving

Mobile Banking

Policy, Regulation and Government Initiatives

Press Release

Report

Blog Post

China’s economy has experienced tremendous growth in recent years, with a booming micro, small, and medium enterprise (MSME) market. There are over 50 million MSMEs in China that collectively account for over 60% of China’s GDP and over 50% of the government’s tax income. These businesses create 80% of total employment in China’s urban areas.

Despite China’s overall economic growth, the need to foster full financial inclusion is still imperative. In 2010, 38 million MSMEs lacked access to formal financial services, forcing them to borrow informally from friends, family, and moneylenders.

South Africa is a global hub for fintech innovation. Accion supports and advises South African innovators using technology to help entrepreneurs expand their businesses and families protect their homes around the world.

&gt; Posted by Elisabeth Rhyne, Managing Director, CFI

I don’t know how they will do it. Bank regulators, that is. How will they cope with the challenges coming their way throughout this decade of rapid financial sector change?

In the good old days, if there were such days, bank regulators operated inside their comfort zones in a world with known risks. A standard set of skills and knowledge saw them through. If I may indulge in stereotype (without being entirely unfair), the profile a bank supervisor needed was: good with numbers, cautious, a stickler for details, dedicated, often courageous, and having a strong sense of right and wrong. These are all wonderful qualities, and for prudential supervision of banks, there was a good fit between the task and this personal profile. Just as important, the bodies of knowledge regulators and supervisors needed was well understood.

Not today. The post-financial crisis world deeply challenges the comfort zone for banking authorities. In specific, I want to focus here on how financial inclusion challenges it. Changes associated with financial inclusion require banking authorities to move beyond their zones and develop a broader range of skills and qualities in at least three ways.

1. Adapting to continual technology change. Regulators around the globe are struggling today to create regulations that will bring the wonders of mobile money into their countries. But mobile money is only the technology du jour. Just as regulators get mobile money squared away, new technologies and business models are bound to appear and render regulations on the previous model outdated. I suspect, for example, that the spread of smartphones will upend SMS-based mobile money models, forcing regulators to shift focus from telecoms operators to cyber-security. Each new technology brings different players, new business models, and its own set of stresses on regulatory boundaries. While there are many with deep technical expertise among bank regulators, the pace of change is daunting, especially for organizations that must work within or seek to change legislative and regulatory constraints.

2. New mandates for consumer protection, especially at the base of the pyramid. Bank regulation is built around a time-honored and economic-theory-backed justification that includes financial system stability, and in many cases depositor protection, but not what we know as consumer protection (transparency, product suitability, fair treatment, recourse). Regulators now need to view consumer protection supervision as an equal and necessary compliment to prudential supervision. But legislative mandates for consumer protection are new and still incomplete, organizational structures are often missing or overlapping, and the body of knowledge that supports consumer protection regulation is still quite young. Prudential supervision is still seen as the "hard science" by numbers-driven supervisors, while consumer protection may be viewed as nice but not really essential. Very few countries currently have consumer protection regimes that are mature and successful enough to serve as models.

3. Perhaps most importantly, financial inclusion is bringing an enormous influx of new customers and providers. Regulators must come to understand these new customers and connect with these new providers. The customers differ significantly from the middle-class consumers who have been banking customers for decades. They are economically vulnerable, with relatively low levels of education, and they may be far more comfortable operating in the informal sector. These customers’ first use of formal financial services often occurs with providers outside the traditional commercial banking sector. In Latin America, for example, store credit is a rapidly growing segment of the consumer credit market, especially for lower income clients. Regulators may lack the tools to monitor and influence this market if their mandate is limited to formally regulated institutions. At a recent CGAP/IDB/ASBA-sponsored gathering of Latin American supervisors on consumer credit, regulators expressed frustration over their lack of tools even for gathering information on non-bank providers. And regulators would generally prefer to focus on a manageable number of larger institutions than a proliferation of small providers.

This changing scene calls for regulators – and regulatory agencies – that can be flexible, creative, and open-minded, in addition to retaining all their old virtues. It calls for new skills to be brought into regulatory agencies (such as how to collect and interpret demand-side information) and new bodies of knowledge to be mastered, from new business models to technologies to client protection. It may require a change of mindset from a preoccupation with squeezing risk out of a system to a recognition that the task is to manage a continually shifting set of risks.

It will take significant investment, by both national and global entities, to equip regulatory authorities for these challenges. Investment is needed in both overall institution-building and in training for regulatory and supervisory personnel. Existing efforts, such as the Alliance for Financial Inclusion, the alliance between CGAP and the Toronto Centre, and others, offer high-quality support. Given the pace and magnitude of change that regulators must come to terms with, these efforts need to be stepped up dramatically.

Have you read?

<a href="http://cfi-blog.org/2012/11/28/our-woman-in-milan-observations-on-the-intersection-of-mobile-money-and-regulation/" target="_blank">Our Woman in Milan: Observations on the Intersection of Mobile Money and Regulation</a>

<a href="http://cfi-blog.org/2013/03/07/connecting-the-pillars-of-client-protection/" target="_blank">Connecting the Three Pillars of Client Protection</a>

<a href="http://cfi-blog.org/2013/01/14/new-microfinance-regulation-in-nigeria/" target="_blank">New Microfinance Regulation in Nigeria</a>

Three Ways Financial Inclusion Makes Life Harder for Regulators