It was a scorching hot February afternoon in Sempegua village in Colombia’s Zapatosa Marsh. Merciless rays of sunshine beat down as temperatures soared to 100 degrees Fahrenheit (38 degrees Celsius). Tired, skinny cows with ribs and hipbones jutting out foraged the dry pastures in search of feed. A group of cattle ranchers took a respite from the sweltering heat and sipped juice made from uvita de playa, a local Caribbean fruit, under the shade of a tree while recounting the good times when there was plenty for everyone. “Things are much worse than what they were 30 years ago. The government does not care. We are barely surviving, and on some days, we have no hope. All we have is the community for support,” said a cattle rancher.
<blockquote class="pullquote--left">A group of cattle ranchers took a respite from the sweltering heat and sipped juice made from uvita de playa under the shade of a tree while recounting the good times when there was plenty for everyone.</blockquote>
The men and women from the villages of Sempegua and La Mata in the Magdalena floodplains of Colombia -- <a href="https://www.dw.com/en/in-colombia-locals-fight-to-save-a-unique-disappearing-habitat/a-47300190" target="_blank" rel="noopener noreferrer">home to 32.5 million people</a> -- shared their experiences with me during a visit earlier this year. The Center for Financial Inclusion (CFI), along with <a href="https://www.nature.org/en-us/" target="_blank" rel="noopener noreferrer">The Nature Conservancy</a> and Accion, visited the Magdalena floodplains to understand how financial services can help community members manage the impact of climate change. CFI’s Green Inclusive Finance research team is working with climate NGOs and financial service providers in Colombia to uncover evidence and test promising solutions that help communities in the Magdalena floodplains develop resilience and adapt to climate change.

Livelihoods in this region are precarious, and the villages are wracked by climate shocks all year round. Summers are dry with long heat spells. Water levels recede, and there are fewer fish, a primary source of food. Community members must rise earlier and venture deeper into the wetlands to fish. The pastures become dry, leaving very little for cattle to forage on, and many ranchers are forced to sell their animals to survive. And when it rains, the Magdalena River overflows and inundates the villages, causing enormous damage to life, livestock, and livelihoods. The devastating floods caused by <a href="https://www.nature.org/en-us/about-us/where-we-work/latin-america/colombia/stories-in-colombia/climate-change-adaptation-for-communities-in-the-wetlands-of-the/" target="_blank" rel="noopener noreferrer">La Niña</a> in 2010 and 2011, impacting over 2.2 million households, are a case in point. According to <a href="https://www.strausscenter.org/wp-content/uploads/Country-Brief-Fragility-and-Climate-Risks-in-Colombia-2019.pdf" target="_blank" rel="noopener noreferrer">USAID</a> estimates, in the years between 2000 and 2016, Colombia experienced at least 56 climate-related disasters, including devastating floods.
<h1>Diversifying Livelihoods</h1>
Given the fragility of the traditional occupations of fishing and cattle ranching, community members have had to diversify their livelihoods by collecting local fruits, managing nurseries and community gardens, and selling local snacks and alcohol. Nearly everyone we spoke to was engaged in fishing, but it was no longer the preferred livelihood choice, given the rising expenses and the risk of being attacked by stingrays or crocodiles. Cattle ranching, the other traditional occupation, was also becoming more unpredictable. Ranchers mentioned having to sell livestock, challenges finding fertile lands for grazing, and conflict with an industrial farming operation, which was increasingly encroaching on the grounds where the cattle grazed.

But these means of supplementing their livelihoods are proving equally precarious. The forest where the fruits grow is replete with venomous snakes. Furthermore, the industrial farming operation owns much of the land, and the women picking fruits have no choice but to trespass. Despite the hardships, community members said they prefer living in the village where they can lean on one another for support. “Finding a well-paying job in cities is hard,” explained a man who had recently moved back from the city of Barranquilla. “We need land to do some productive activity, earn money, and pay off our debts.”

Several people said they have access to bank accounts but rarely use them beyond accessing conditional cash transfers via the government-run <a href="https://prosperidadsocial.gov.co/sgpp/transferencias/familias-en-accion/" target="_blank" rel="noopener noreferrer">Familias en Accion</a> program. The few salaried people used their accounts to receive their pay. We probed deeper to understand why existing financial systems do not work for the vulnerable and what needs to be changed.

Our discussions revealed three key areas where appropriately designed financial services could help:
<h1>1. Financial Services Must be Tailored to Needs</h1>
Several people we spoke with had taken loans from banks and microfinance institutions. However, the experience was often stressful. The loans had high interest rates, and when crops failed because of climate change, banks rarely provided flexibility on the loan terms. This rigidity made it difficult for farmers to meet their loan obligations, and they reported needing to leave their children behind in the village to work in the cities so they could repay their debts. According to them, financial institutions did not understand their predicament or provide any support to reduce the pressure. Consequently, many preferred the convenience and flexibility local moneylenders (gota gotas) offered, even though they were more dangerous and expensive. The gota gotas visited the villages daily and were willing to adjust the repayment schedule when customers with good repayment records faced challenges.
<blockquote class="pullquote--right">While community members desperately need financial services that allow them to save safely, conduct transactions, and access credit for their livelihoods, existing offerings do not meet their specific needs.</blockquote>
Despite their small and unpredictable incomes, community members said they dream of rebuilding or renovating their houses or sending their children to college, and they try saving whenever possible. However, most people prefer storing their money at home, despite the risks of floods or termite infestations that have destroyed their savings. Some women expressed a desire to learn more about saving in a more disciplined manner, and a community-based organization and partner of TNC called <a href="https://www.fundacionalma.org/" target="_blank" rel="noopener noreferrer">Fundacion Alma</a> responded by helping these women form their own savings group.

While community members were familiar with mobile money, not everyone owned mobile phones, and household members often shared phones. Even when they had phones, remembering passwords was a challenge. Furthermore, they frequently changed SIM cards to take advantage of promotions and offers from mobile companies, which required them to open new mobile money accounts. When they needed to withdraw or send money, they would travel to the nearest town and rely on an agent – who required a fee -- to facilitate transactions.

These anecdotes illustrate that while community members desperately need financial services that allow them to save safely, conduct transactions, and access credit for their livelihoods, existing offerings do not meet their specific needs.

Financial services could help residents of the Zapatosa Marsh transition to more climate-resilient livelihoods if the financial service providers were to adapt their offerings to better meet the needs and vulnerabilities of the communities, as CFI has outlined in its <a href="https://www.centerforfinancialinclusion.org/research/financial-services-to-mitigate-and-adapt-to-climate-risks">Green Inclusive Finance taxonomy</a>. The taxonomy lays out the various impact pathways through which financial services can help: mitigation, resilience, adaptation, and transition.
<h1>2. Financial Services and Skills-Building Can Multiply Impact</h1>
Even when community members had access to financial services, they had a minimal understanding of the features and terms associated with a product. For example, one woman mistakenly assumed that the credit life insurance covering her loan in the event of death would also cover loan defaults. Consequently, she was very disappointed when it did not help cover late payments related to the credit she used to buy her boat.

Most community members were skeptical about the utility of financial capability-building programs and felt these initiatives would have limited relevance given their volatile incomes. One exception was a salaried teacher who mentioned attending a financial education program offered by a bank that helped him learn how to budget and save money. However, community members were eager to participate in training that would equip them with skills to provide value-added services, such as making fruit juice or wine and accessing new markets.

While most people were familiar with WhatsApp and Facebook, they remained cautious about digital apps and preferred in-person programs where they would have opportunities to ask questions. By offering digital and financial education and supporting community members to start small businesses and access markets, there is a more significant opportunity to strengthen resilience and improve livelihood outcomes.
<h1>3. Consumer Protection is a Priority</h1>
“My husband and I took a home improvement loan. Since our earnings from fishing and collecting uvita de playa were insufficient, I moved to Valledupar and worked as a maid for a year to pay off the loan. But even after all our efforts, the loan still appears as red [unpaid] on the [credit] bureau,” explained one woman. Another person reported having a credit bureau record for a loan he never applied for or received. Others reported instances where they had to pay additional installments or fees or were victims of identity theft.

When asked about available recourse channels, most community members said it cost them too much time and money to travel to the bank in the city to sort out these problems, so they left them unresolved. Instead, they relied on gota gotas when they needed credit.

As weather patterns change, consumers face risks from newer sources that impact their financial lives at any stage of their interaction with financial services. <a href="https://www.centerforfinancialinclusion.org/research/consumer-protection">Consumer protection</a> is integral to building customer trust and is a cornerstone of a stable financial system.
<blockquote>Systemic changes are needed for financial services to support low-income, vulnerable communities in preparing for, responding to, and recovering from climate shocks while protecting them from additional harm.</blockquote>
Our visit to the Zapatosa Marsh exemplifies the area’s high vulnerability to climate change, which is already forcing the community to seek new livelihoods. These changes will only become more acute. Droughts and extreme floods in the region are expected to <a href="https://www.climatechangenews.com/2021/12/30/colombian-fishers-fighting-rights-protection-vital-wetlands/" target="_blank" rel="noopener noreferrer">intensify</a>. Entire villages risk being eliminated should there be <a href="https://www.reuters.com/business/environment/us-forecaster-says-el-nino-could-arrive-by-summer-2023-2023-03-09/#:~:text=March%209%20(Reuters)%20%2D%20La,and%20persisting%20through%20the%20fall." target="_blank" rel="noopener noreferrer">another El Niño</a>, which weather forecasters predict this year. With annual temperatures projected to rise by 1-1.5 degrees and precipitation to increase by <a href="http://documentacion.ideam.gov.co/openbiblio/bvirtual/019711/preliminares.pdf" target="_blank" rel="noopener noreferrer">5-15% by 2040</a>, the climate crisis is becoming increasingly real and urgent. Systemic changes are needed to enable the financial services sector to support low-income, vulnerable communities in preparing for, responding to, and recovering from climate shocks while protecting them from additional harm.

Acknowledging the urgent requirement for contextually relevant and responsible financial services in communities like the Zapatosa Marsh is vital. This situation provides a significant opportunity for organizations specializing in climate and inclusive finance to collaborate, acquire evidence, and test solutions to safeguard vulnerable communities from unintended adverse effects.

Colombian Wetlands Hard Hit by Climate Shocks - What Role for Financial Services?

A decade ago, <a href="https://www.cgap.org/topics/collections/digital-credit" target="_blank" rel="noopener noreferrer">digital credit models</a> that catered to low-income consumers were relatively unknown and untested. A lot has changed since then. Data from the <a href="https://ccaf.io/" target="_blank" rel="noopener noreferrer">Cambridge Center for Alternative Finance</a> shows that between 2011 and 2021, the number of digital lenders -- including those catering to low-income consumers -- has grown nearly ten-fold globally. <a href="https://www.imf.org/en/Publications/WP/Issues/2021/03/19/Digital-Financial-Inclusion-in-Emerging-and-Developing-Economies-A-New-Index-50271" target="_blank" rel="noopener noreferrer">Economies in Africa and Asia</a> have significantly driven this growth within the emerging market context. This rapid growth has been accompanied by a rise in consumer protection challenges, which have been studied and <a href="https://www.cgap.org/topics/collections/digital-credit" target="_blank" rel="noopener noreferrer">reported extensively in the East African context</a>.  

Catalytic capital — debt, equity, guarantee, or other instruments that assume disproportionate risk to return — is often seen as an important signaling device to attract further, timely investment in the target. As such, it can facilitate innovation and help organizations and companies build a track record in underserved markets. 
<blockquote class="pullquote--right">Catalytic capital has spurred rapid growth in digital credit, but at the same time, digital credit has created significant concerns over consumer protection.</blockquote>
However, the role of catalytic capital in influencing market-level incentives for digital credit has been less studied. In multiple markets, catalytic capital has spurred rapid growth in digital credit, resulting in an influx of investment. At the same time, digital credit has created significant concerns over consumer protection, and the supervisory capacity of local regulators has failed to keep pace with the risks emerging from the rapid growth of digital credit.  

In our research, we focus on the role of catalytic capital in shaping market incentives as they attract capital to digital credit models. We conclude that the role played by catalytic capital differs depending on the stage of market development. At an early stage, catalytic capital investments can help prove business models, expand services to newer consumer segments, and/or attract capital to underserved geographies. As the supply of capital increases, markets shift to a growth stage. Catalytic capital investors, who are more impact-oriented, need to shift their roles as markets grow to one that addresses consumer risks that accompany an increased supply of capital.  
<h1>A helpful case study: Kenya -- the birthplace of digital credit  </h1>
Our research traces the role played by catalytic capital investments, mapping consumer risks that evolved to missed signals that catalytic capital investors could have used to build guardrails. We hope other markets on a similar growth path as Kenya can use this guidance. 

Consumer risks rising from digital credit can be influenced through investor incentives, and they fall into three broad categories: 
<h3>High interest rates, indebtedness, and default risks</h3>
Financial service providers often cite the high cost of funds in emerging markets as the underlying driver for high interest rates. Catalytic capital investors can play a crucial role in reducing the cost of funds by deepening domestic capital markets. As one positive example, Lendable and other funders, including FSD Africa, set up a fund offering a first-loss default guarantee. This structure mobilizes domestic debt investors, increases transparency, and reduces the cost of funds for end borrowers as the supply of on-lending funds in emerging markets becomes less constrained. 
<h3>Aggressive sales practices, exploitative terms and conditions, and deceptive fees</h3>
As investments in digital credit models rise, there is a need to establish responsible market practices. Catalytic capital providers can play a role in working with industry associations and regulators to establish responsible market practices, and advocacy is one of the most powerful tools they can use. For example, community Investment Management (CIM) is an institutional impact manager that began operations in mature markets and is now expanding to emerging markets. CIM co-founded <a href="http://www.borrowersbillofrights.org/bill-of-rights.html" target="_blank" rel="noopener noreferrer">the Small Business Borrowers’ Bill of Rights</a>, identifying six fundamental financing rights of all businesses. The Small Business Borrowers’ Bill of Rights has now been adopted by the <a href="https://www.aspeninstitute.org/programs/business-ownership-initiative/small-business-borrowers-bill-rights/#:~:text=The%20Small%20Business%20Borrowers%E2%80%99%20Bill%20of%20Rights%20identifies,in%20order%20to%20uphold%20and%20protect%20those%20rights." target="_blank" rel="noopener noreferrer">Responsible Business Lending Coalition,</a> a network of for-profit and non-profit lenders, brokers, and small business advocates. 
<h3>Data privacy issues</h3>
With the emergence of technology-driven business models, using data to innovate is a crucial part of the DNA of digital financial services. Catalytic capital providers have a role in ensuring that companies respect data privacy without constraining innovation. 
<h1>Complementing catalytic capital investments for responsible market development </h1>
While catalytic capital is crucial for innovations and expanding access, not everything is attributable to catalytic capital investors. While catalytic capital may enable market development, as the case of digital credit demonstrates, responsible market development does not automatically follow. Several other factors must be supported to complement investor incentives for responsible market development. Responsible market development needs investments beyond the firm level to enable market information, consumer awareness and capability, regulatory and supervisory capacity, and various other measures that can serve as checks and balances on firm behavior.  

While investors can conduct firm-level due diligence to ensure client protection principles are respected, two of the three legs of the consumer protection stool require grant funding: regulation/supervision and building consumer awareness. Market actors need access to timely information and market research that informs them about potential market risks and which consumer segments might be particularly vulnerable. In addition, market conduct supervision that facilitates consumer protection needs investment that allows actors to test and invest in new tools that can capture consumer risks as they evolve. Therefore, traditional grant funding is needed to support responsible market development along with catalytic capital investments. 

As a complement to catalytic capital investments, our research highlights six key lessons that can help support responsible market development: 
<h3>1. Recognize market growth indicators.</h3>
This requires infrastructure investments that can contribute to responsible market development. Catalytic capital investors face four strategic decisions that will shift their role as the market develops: when to exit an investment, who would replace them, how will the investee company continue responsible behavior post-exit, and how to balance financial and social returns at the time of exit. Answers to these questions require agreement on a common set of indicators for market growth. 
<h3>2. Support initiatives that can help source market-level data.</h3>
Surveys that provide information on trends in funding and areas of concentration are crucial to support funding decisions for underserved areas. We need investments in sector-level evidence gap maps and systematic data on the volume of investments made in digital credit by funders and instruments.  
<h3>3. Design Digital Public Infrastructure (DPI) that respects users’ privacy and security.</h3>
This will have a cascading effect on newer business models because those using digital rails tend to build on existing infrastructure. Responsible market development can result from investing in the inclusive design of public infrastructure, respecting users’ privacy and security, and supporting regulations that ensure accountability. 
<h3>4. Invest in industry associations and networks to complement regulatory capacity.</h3>
Industry associations and networks can play the role of effective shadow regulators, often with the ability to monitor and identify emerging risks with market development. However, building this ecosystem requires investments beyond catalytic capital. 
<h3>5. Build regulatory/supervisory capacity.</h3>
Expanding new models requires testing tools that can detect new risks and initiatives that can bring together regulators to learn from “sister” networks in other markets. These initiatives can help augment the capabilities of market conduct supervisors but require traditional grant funding.  
<h3>6. Invest in mechanisms enabling consumer awareness.</h3>
Consumer awareness is crucial to reinforce consumer protection, but extant investment instruments may lack the incentives to support such initiatives. 

The detailed report can be accessed <a href="https://www.centerforfinancialinclusion.org/the-role-of-catalytic-capital-in-digital-markets-successes-pitfalls-and-lessons-learned">here</a>, and a discussion on the role of catalytic capital in digital credit at Financial Inclusion Week can be <a href="https://www.youtube.com/watch?v=7y8x44tLk2I&amp;list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY&amp;index=5&amp;t=5s" target="_blank" rel="noopener noreferrer">accessed here.</a>

Catalytic Capital and Its Role in Digital Credit

<h3>“My husband wanted to start a small business but he could not get a big enough loan from the cooperative and did not qualify for a bank loan. The coyote, however, had no problem giving him a large loan to take him to America. My husband sends me money every month and I take the cash to the coyote to repay the loan.”</h3>
<h4 style="text-align: right;">– Anonymous woman from Santa Apolonia, Guatemala</h4>
Immigration to the United States from Guatemala is motivated by a myriad of factors, including rising rates of local violence and climate-change induced impacts on agriculture, but the main accelerant is extreme poverty without prospects for economic mobility. Guatemalans view the enormous potential for economic opportunity abroad as a pull factor, especially in contrast to the limited financial prospects that they face at home. This presents the financial sector in Guatemala with both the opportunity and imperative to support Guatemalans hoping to build and maintain wealth in their home country. This blog shares how the <a href="https://www.usaid.gov/" target="_blank" rel="noopener noreferrer">United States Agency for International Development (USAID)</a> is helping deepen financial access and usage among low-income and marginalized Guatemalans to create more economic opportunities within their communities.

Guatemala has the largest economy in Central America, an achievement fueled primarily by agricultural production, as the nation produces and exports some of the highest quality coffee and spices in the world. Guatemala also has rich cultural diversity, with a <a href="https://www.macrotrends.net/countries/GTM/guatemala/population" target="_blank" rel="noopener noreferrer">population of over 18 million</a>, over 40 percent of whom identify as one of the country’s more than 20 <a href="https://www.pionerophilanthropy.org/guatemalas-indigenous-community-a-struggle-against-poverty-racism-and-exclusion/" target="_blank" rel="noopener noreferrer">Indigenous communities</a>.
<blockquote class="pullquote--right">The financial sector in Guatemala has the opportunity and imperative to support Guatemalans hoping to build and maintain wealth in their home country.</blockquote>
Despite its rich culture and economic standing in the region, Guatemala has high social inequity, including a <a href="https://www.worldbank.org/en/country/guatemala/overview" target="_blank" rel="noopener noreferrer">poverty rate of 52.4 percent</a>, which has been further exacerbated by factors such as climate change and COVID-19-induced economic shocks. The country’s economy benefits from significant remittance inflows—which make up <a href="https://country.eiu.com/article.aspx?articleid=221764805&amp;Country=Guatemala&amp;topic=Economy&amp;subtopic=Forecast&amp;subsubtopic=Economic+growth" target="_blank" rel="noopener noreferrer">18 percent of the country’s GDP</a>—but this has yet to translate into significant reductions in poverty. In terms of financial access, according to the <a href="https://www.worldbank.org/en/publication/globalfindex" target="_blank" rel="noopener noreferrer">latest Findex Data from 2022</a>, only 35 percent of adults have access to formal bank accounts, down nine percent from 2017 when 44 percent of adults had an account. The gender gap is six percent: 34 percent of women had an account in 2022 versus 40 percent of men, a one percent increase in the gender gap from 2017 when it was five percent. Many do not rely on formal lending sources, with only 11 percent of adults borrowing from a financial institution last year. The Center for Financial Inclusion wrote about<a href="https://www.centerforfinancialinclusion.org/rural-poor-and-pressured-by-climate-change-migration-and-financial-inclusion-in-guatemalas-western-highlands"> the potential for financial services to support rural opportunities in Guatemala</a>.

To break the poverty cycle in Guatemala, low-income families need access to financial services that will build and protect their wealth, enabling them to be more resilient in the face of climate-induced economic shocks and other unanticipated crises. Presently, low-income earners primarily interact with formal financial service providers, including banks, in an over-the-counter (OTC) manner, to cash out remittances without accessing the full suite of benefits that digital financial services can offer such as lower costs, higher speed, and security, as well as building a credit history to access loans.

As smartphone ownership rises in countries around the world, digital financial services (DFS) are a more efficient way to support low-income earners in wealth creation and management by offering convenience, cost savings, economic security, and broad accessibility—and removing the need to go to a physical bank or financial institution. Unfortunately, these service offerings are nascent in Guatemala—and even more so in the country’s rural areas. For example, according to the latest Findex, just 26 percent of adults made or received a digital payment in the last year—a low rate even in comparison to neighboring countries such as El Salvador (28%) and Honduras (32%). While DFS are gaining traction in Guatemala, more work needs to be done to make them accessible, practical, and useful to a broader consumer group.
<blockquote>While DFS are gaining traction in Guatemala, more work needs to be done to make them accessible, practical, and useful to a broader consumer group.</blockquote>
In partnership with DAI’s Digital Frontiers and ConsumerCentrix, USAID recently conducted qualitative customer market research to offer the Guatemalan financial sector concrete recommendations on how it might leverage DFS to positively impact the financial security of low-income and marginalized populations in Guatemala. This research, conducted with 112 participants in Guatemala City, Quiché, and Chimaltenango, identified clear segments and sustainable commercial potential, debunking common misunderstandings about the needs and demands of financially underserved Guatemalans. 

Here are a few key findings: 
<h2>While low-income communities are among the clientele of established providers, banks tend not to treat these communities as strategically critical customer segments deserving of tailored services.</h2>
Most banks mainly offer OTC services to low-income populations, failing to transition these customers to full account holders. The few banks that dominate the financial sector provide bank accounts to only four million people out of the country’s over 18 million population. They offer banking OTC to about five million remittance receivers and one million government-to-person (G2P) and humanitarian aid recipients. Tigo Money, the mobile money provider, offers OTC services to about 700,000 people. The main financial account providers are rural cooperatives, which have about three million clients, and microfinance institutions, which serve about half a million primarily urban clients. 
<h2>A widely-held assumption among financial institutions—that low confidence and limited education are the main barriers to access and use among low-income individuals—is not backed by evidence.</h2>
Providers name literacy, confidence, and aversion to formal financial services as the primary reasons why low-income earners are not formally banked. Yet this study demonstrated that poor customer service, including non-transparent banking fees, which is closely related to low trust in the financial sector, is a major issue alongside stringent requirements for accessing credit—a need among those looking to build a better future for themselves. 
<h2>Latent demand for formal finance exists, and there is awareness of and openness to using digital channels for financial transactions.</h2>
Research participants across all age groups and localities have smartphones and sufficient network connectivity to access DFS. Research found that digital financial literacy is present, particularly among younger segments, and that these segments can and are willing to support their older relatives in using technology. While concerns exist around protecting their security and making mistakes online, there is a shared understanding among participants that DFS is the future, and they are open to using DFS where it can save time and money. Most existing users have prior experiences with bank and cooperative mobile banking applications, generally as complementary to an account. There is little to no awareness of other DFS solutions or even how mobile banking applications could be used more broadly—representing a real opportunity for the financial sector.
<blockquote class="pullquote--left">There is little to no awareness of other DFS solutions or even how mobile banking applications could be used more broadly—representing a real opportunity for the financial sector.</blockquote>
Considering the nascent status of digital finance in Guatemala, financial service providers can start by tailoring products to the most viable segments to first create a critical mass before reaching out to those most in need: the lowest income and most rural consumers. Using criteria around population size, aggregation potential, income regularity, and digital readiness, the research identified two consumer segments with the strongest opportunities for DFS with the most potential use cases, regular income flows, and capacity for aggregation: 1) domestic remittance senders (such as domestic workers) and their recipients, and 2) international remittance recipients. 

Research showed opportunities in digitizing domestic remittance transfers and receipt of international remittances to an account that can be used for a broader set of financial needs including utility payments, savings, and credit facilities based on remittance flows to be used for a microbusiness or household needs. 

Low-income and vulnerable Guatemalans need financial products that help them manage their variable cash flows and to manage risks, including those arising from climate change, and to help them access more economic opportunities. Prototype testing of a potential solution is underway, and the team will produce a full Digital Financial Services Market Assessment Report that outlines these DFS opportunities in greater detail. Stay tuned for the full report—expected in spring 2023.

Letting the Consumer Speak: The Reality of Access to Finance in Guatemala

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Over the last ten years, catalytic capital — investment capital that is patient, risk-tolerant, concessionary, and adaptable — has played an increasingly important role in filling the gaps left by the rapidly expanding and diversifying field of impact investing and serves to attract more conventional investors to sectors with high development potential. While we do not know the volume of catalytic capital investments in inclusive finance, we know that investments in inclusive finance continue to be a top category of growth.

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This report focuses on the role of catalytic capital in the digital credit industry and highlights the limitations of a framework that does not consider broader market-level consequences of such investments. The rapid growth of digital credit has resulted in an influx of investment but also created significant concerns over consumer protection, and the supervisory capacity of local regulators has failed to keep pace with the risks. The report draws lessons from how digital credit markets have evolved and highlights guardrails needed at the market level to ensure that growth is responsible, impactful, and leads to inclusive market development.

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The Role of Catalytic Capital in Digital Markets: Successes, Pitfalls, and Lessons Learned

In 2022, advances in artificial intelligence captured our collective imaginations in unprecedented ways. Whether it was the artistic text-to-image renderings of <a href="https://openai.com/dall-e-2/" target="_blank" rel="noopener noreferrer">Dall-E2</a> shown in this blog post or in-depth conversations with <a href="https://openai.com/blog/chatgpt/" target="_blank" rel="noopener noreferrer">ChatGPT</a>, the implications of data advances in analysis, prediction, and generation became clearer than ever to the “non-techy” public. Last year, governments around the world raced to stay on top of data advances through various data governance approaches, such as <a href="https://www.dlapiperdataprotection.com/" target="_blank" rel="noopener noreferrer">data protection legislation</a>, or draft approaches to regulating AI including the <a href="https://www.whitehouse.gov/ostp/ai-bill-of-rights/" target="_blank" rel="noopener noreferrer">White House’s AI Bill of Rights</a> and the <a href="https://artificialintelligenceact.eu/" target="_blank" rel="noopener noreferrer">EU’s AI Act</a>. What has become very clear is that there is both tremendous excitement at the promise of these advances, as well as significant concern.

Several sessions at <a href="https://financialinclusionweek.org/" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a> (FIW) 2022 focused on data-driven advances in inclusive finance that grappled with the duality of exciting opportunity and concerning risk – particularly with regards to low-income and vulnerable consumers, like female-owned MSEs and migrants.
<h1>Data Opportunities</h1>
A few sessions shared how customer data is helping to shape product design for traditionally underserved consumers. The UN Capital Development Fund hosted a session on <a href="https://www.youtube.com/watch?v=g15noAC2vWU&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=5" target="_blank" rel="noopener noreferrer">Driving Women’s Financial Inclusion and Resilience</a>, with a focus on how consumer data, whether administrative or survey based, can drive innovative financial products for women. In this session, a speaker from <a href="https://imeremit.com.np/" target="_blank" rel="noopener noreferrer">IME Nepal</a> talked about how the company is leveraging remittance transaction data during COVID to better understand consumers and expand its digital offerings, including a wallet. UNCDF highlighted demand-side research that showed the challenges women face in onboarding to digital remittance services. My colleague <a href="https://www.centerforfinancialinclusion.org/bio/anindita-chakraborty">Anindita Chakraborty</a> contributed to the discussion with insights from CFI’s research on the difficulties <a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">female-led MSEs</a> faced during the pandemic, and how that data should inform products to help MSEs be more resilient in future shocks.
<blockquote>Customer data is helping to shape product design for traditionally underserved consumers.</blockquote>
In addition to leveraging consumer data, looking at data on a larger scale can have significant benefits. In a <a href="https://www.youtube.com/watch?v=F0aZV-Zfzd0&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=5" target="_blank" rel="noopener noreferrer">short session by Principal Financial Group</a>, the Principal team shared the launch of the Global Financial Inclusion Index, a ranking of 42 markets based on what governments, financial systems, and businesses are doing to advance financial inclusion for their populations. This index aims to give investors insights into the strength and resilience of these markets.

Several fintechs and providers shared insights on their data-driven business models. A <a href="https://www.youtube.com/watch?v=WwecOBYOyi4&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=6" target="_blank" rel="noopener noreferrer">session</a> hosted by Korean fintech giant <a href="https://www.sentbe.com/" target="_blank" rel="noopener noreferrer">SentBe</a> presented how its cross-border money transfer services leverage data on traditionally underserved consumers – including migrants from Bangladesh and Cambodia working in Korea – to provide customer-centric receipt options. Senegalese fintech <a href="https://www.lebfay.com/" target="_blank" rel="noopener noreferrer">LebFay</a> presented <a href="https://www.youtube.com/watch?v=DA8wqNKl2f4&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=7" target="_blank" rel="noopener noreferrer">its business model</a> that uses an app and artificial intelligence-driven scoring model to lend to traditionally underserved MSEs and tradesmen. And, <a href="http://imbita.org/" target="_blank" rel="noopener noreferrer">Imbita Swaziland Women’s Finance Trust</a> spoke about the digitalization journey in offering its savings and credit cooperative society (SACCO) members a USSD-based platform to save, borrow, and make mobile payments.
<h1>Data Risks</h1>
<blockquote class="pullquote--right">Challenges, including privacy, bias, and other human rights issues, can stem from the exponential growth of digital lending.</blockquote>
At the same time, several sessions highlighted the risks around data-driven innovation and what inclusive finance stakeholders need to do about it. <a href="https://aapti.in/" target="_blank" rel="noopener noreferrer">Aapti Institute</a>, an India-based think-tank that conducts research at the intersection of technology and digital rights, hosted a session <a href="https://www.youtube.com/watch?v=lXLY7BsG_fg&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=3" target="_blank" rel="noopener noreferrer">on AI and Financial Inclusion</a>, discussing risks and opportunities for risk mitigation with representatives from <a href="https://www.dvara.com/research/" target="_blank" rel="noopener noreferrer">Dvara</a>, <a href="https://rbihub.in/" target="_blank" rel="noopener noreferrer">RBI Innovation Hub</a>, and <a href="https://www.undp.org/india" target="_blank" rel="noopener noreferrer">UNDP</a>. This session raised challenges, including privacy, bias, and other human rights issues, that could stem from the exponential growth of <a href="https://www.centerforfinancialinclusion.org/digital-credit-algorithms-in-india-expanding-access-or-cementing-exclusion">digital lending in India</a>. I was honored to moderate a session on the <a href="https://www.youtube.com/watch?v=J0QaPM6sDDk&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=2" target="_blank" rel="noopener noreferrer">Potential of Privacy by Design for Inclusive Finance</a> with inputs from <a href="https://www.paypal.com/us/home" target="_blank" rel="noopener noreferrer">PayPal</a>, <a href="https://foundation.mozilla.org/en/" target="_blank" rel="noopener noreferrer">Mozilla Foundation</a>, and the <a href="https://www.dlak.co.ke/" target="_blank" rel="noopener noreferrer">Digital Financial Services Association of Kenya</a>. Representatives from PayPal and Mozilla discussed how Privacy by Design has been implemented in their business models, and Kevin Mutiso of DFSAK shared how startup fintechs can integrate and benefit from strong privacy practices.
<h1>Looking Ahead</h1>
As we look ahead to 2023, CFI will be monitoring how advances in AI are integrated into the inclusive finance space. Will there be chatbots or financial capability curricula that use ChatGPT? We’ll also be watching for countries to codify the use of AI and enforce data protection legislation. With so much happening in this space at the moment, there is a lot to pay attention to as we continue to grapple with the duality of data opportunities and risks.

View the full <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb" target="_blank" rel="noopener noreferrer">Data Risks &amp; Opportunities</a> Playlist from FIW 2022.

Financial Inclusion Week 2022 had over 3,300 registered participants from 2,000 organizations across 148 countries. With almost 400 speakers and 125 sessions, FIW 2022 was the largest event to date. All sessions from FIW 2022 can be viewed here.

And be sure to save the date for FIW 2023 which will take place October 16-19, 2023.

FIW Recap: Grappling with Data Opportunities and Risks in Inclusive Finance

Each year, World Consumer Rights Day is celebrated on March 15 as a means of raising global awareness about consumer rights and needs. To join in spreading the awareness, this post outlines current risks and opportunities emerging in the field of consumer protection.

By October 2022, when <a href="https://financialinclusionweek.org/" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a> (FIW) was held, the world was beginning to emerge from more than two years of pandemic lockdowns and accelerated digitalization. The Global Findex 2021 showed that the share of adults in developing economies making or receiving digital payments <a href="https://www.worldbank.org/en/publication/globalfindex" target="_blank" rel="noopener noreferrer">grew from 35 percent in 2014 to 57 percent in 2021</a>, with over one-third of adults paying their utility bills digitally for the first time during COVID. In addition, growth in digital lending <a href="https://www.jbs.cam.ac.uk/wp-content/uploads/2021/03/2020-ccaf-global-covid-fintech-market-rapid-assessment-study-v2.pdf" target="_blank" rel="noopener noreferrer">dropped by 8 percent</a> in the first two quarters of 2020 but showed a <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/36883/9781464817304_Ch04.pdf" target="_blank" rel="noopener noreferrer">strong recovery when lockdowns eased</a>.

While these numbers reveal opportunities to use digital financial services to drive financial inclusion, there is also evidence of rising risks that can increase vulnerabilities among newly included consumers. CGAP’s research found that the frequency, breadth, and complexity of risks <a href="https://www.cgap.org/research/reading-deck/evolution-of-nature-and-scale-of-dfs-consumer-risks-review-of-evidence" target="_blank" rel="noopener noreferrer">have increased since 2017</a>. The <a href="https://finaccess.knbs.or.ke/reports-and-datasets" target="_blank" rel="noopener noreferrer">2021 FinAccess Survey</a> found that 47 percent of Kenyans using mobile money have lost funds, a sharp increase from the 8 percent who had cited the same problem in 2019. Digitalization has rapidly increased identity theft, fraud, and mobile money scams.

The impact of these risks is not experienced uniformly by all consumer segments. This indicates that our approach to consumer protection needs a more nuanced, segmented approach to address vulnerabilities. Data from the United Nation’s 2022 <a href="https://www.unwomen.org/sites/default/files/2022-09/Progress-on-the-sustainable-development-goals-the-gender-snapshot-2022-en_0.pdf" target="_blank" rel="noopener noreferrer">Progress on the Sustainable Development Goals</a> report is not encouraging. According to the report, it will take us approximately 300 years to address discriminatory laws and close prevailing gaps in legal protection for women. In addition to issues of fraud and financial losses that all consumers experience, women are also subject to greater harassment due to breaches of privacy and online harassment.
<h1>Consumer Protection was a Clear Focal Point at FIW 2022</h1>
This rise in consumer risks has not gone unnoticed by the inclusive finance community. The urgency to address these risks, particularly before consumer trust in digital financial services is eroded, was a leitmotif across many of the sessions at Financial Inclusion Week 2022. For example, in <a href="https://www.youtube.com/watch?v=J0QaPM6sDDk&amp;list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY&amp;index=1&amp;t=11s" target="_blank" rel="noopener noreferrer">CFI’s global plenary</a>, we discussed the need to embed privacy into the design and delivery of financial services, and expert panelists highlighted international examples to illustrate how this might be done.
<blockquote class="pullquote--right">The urgency to address these risks, particularly before consumer trust in digital financial services is eroded, was a leitmotif across many of the sessions at Financial Inclusion Week 2022.</blockquote>
Digitalization tends to exacerbate existing risks and introduces new risks that must also be detected and addressed. Standards such as the <a href="https://www.ada-microfinance.org/en/toolbox/social-and-environmental-performance#:~:text=The%20Universal%20Standards%20for%20Social%20and%20Environmental%20Performance,Universal%20Standards%20take%20into%20account%20seven%20fundamental%20dimensions%3A" target="_blank" rel="noopener noreferrer">Universal Standards for Social and Environmental Performance Management</a>, SPTF’s <a href="https://cerise-sptf.org/digital-financial-services/" target="_blank" rel="noopener noreferrer">Standards for Responsible Digital Financial Services</a>, and others emerged as important tools to address existing risks. In a session <a href="https://www.youtube.com/watch?v=CJ9_P7bGOvA&amp;list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY&amp;index=4&amp;t=2540s" target="_blank" rel="noopener noreferrer">hosted by SPTF</a>, there was agreement among discussants that standards provide a guideline for best practices for known risks. However, these guidelines may need to be adapted to specific contexts and may not reflect emerging risks or be sufficient to address them.

A <a href="https://www.youtube.com/watch?v=kYmfrSk094w&amp;list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY&amp;index=3&amp;t=8s" target="_blank" rel="noopener noreferrer">session by Incofin</a> highlighted investors as an important stakeholder group to enforce best practices through due diligence and monitoring. And in <a href="https://www.youtube.com/watch?v=7y8x44tLk2I&amp;list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY&amp;index=6" target="_blank" rel="noopener noreferrer">CFI’s on-demand session</a>, we also spoke to investors about how they shape market-level incentives through advocacy and catalytic capital investments. Catalytic capital investors can spur lending in underdeveloped markets while extending a stamp of responsible lending to companies they invest in at an early stage.
<h1>The Way Forward</h1>
As technology increasingly affects inclusive financial services, consumer protection risks are beginning to arise from areas outside the remit of traditional financial sector regulation. In addition, consumers must face risks from newer sources, which impact their financial lives. These new sources of risk include climate shocks, changes in weather patterns, the evolving nature of work, and factors like changing societal structures and norms. These risks can cause vulnerabilities in consumers’ lives at any stage of their interaction with financial services.

Consumer research, policy advocacy, and legislation must adapt to this new normal to take a different lens on identifying and addressing these challenges. By doing so, the industry can help low-income consumers achieve the goals of financial resilience and well-being. CFI’s consumer protection strategy addresses this by using a <a href="https://www.strivecommunity.org/insights/financial-services/consumer-protection" target="_blank" rel="noopener noreferrer">vulnerability framework</a> that identifies where consumer vulnerability is liable to exist in financial services. Identifying causes of vulnerability at any point in the consumer’s life captures moments where consumer resilience can be eroded and thus requires action by various stakeholder groups – investors, regulators, supervisors, and policymakers.
<blockquote>Identifying causes of vulnerability at any point in the consumer’s life requires action by various stakeholder groups – investors, regulators, supervisors, and policymakers.</blockquote>
CFI also convenes the <a href="https://globalrff.org" target="_blank" rel="noopener noreferrer">Responsible Finance Forum</a> (RFF), a global platform for dialogue and knowledge sharing on responsible inclusive finance and consumer protection. The RFF aims to confront the changing nature of consumer risks and collectively arrive at solutions that the inclusive finance industry can adopt to deliver financial services responsibly.

View the full <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY" target="_blank" rel="noopener noreferrer">Consumer Protection playlist</a> from FIW 2022.

Financial Inclusion Week 2022 had over 3,300 registered participants from 2,000 organizations across 148 countries. With almost 400 speakers and 125 sessions, FIW 2022 was the largest event to date. All sessions from FIW 2022 can be viewed <a href="https://financialinclusionweek.org/2022-event" target="_blank" rel="noopener noreferrer">here</a>.

And be sure to save the date for FIW 2023, which will take place October 16-19, 2023.

FIW Recap: Consumer Protection – Crucial to Driving the Inclusive Finance Agenda

The impacts of climate change are diverse and wide-ranging. Its most immediate manifestations, such as natural catastrophes and extreme weather events, sea level rise, damage to biodiversity, and communicable diseases, amplify the hardships on developing economies which are often more vulnerable to damage and have fewer resources available to support the recovery. The <a class="Hyperlink SCXW263472838 BCX0" href="https://globalrff.org/december-2022" target="_blank" rel="noreferrer noopener">December 2022 RFF</a> discussions explored the links between responsible finance and the challenges posed by climate change.
<h1>Preparedness, Risk Management, and Insurance</h1>
Along the lines of the three key themes of the December 2022 RFF convening – consumer protection, the role of stakeholders, and the path forward in the face of climate change – insurance has an important role. Insurance can strengthen the resilience of vulnerable communities and help them adapt to the climatic changes impacting their lives. If leveraged systematically for both transition and physical risks, it can contribute to the health of the entire financial sector.
<blockquote class="pullquote--left">If leveraged systematically for both transition and physical risks, insurance can contribute to the health of the entire financial sector.</blockquote>
The role of insurance supervision in this extraordinarily complex challenge is far-reaching and multifaceted. As the guardians of consumer protection and financial stability, enablers of innovation and market development, and policy influencers, supervisors are in a position to contribute to financial literacy efforts, establish standards and expectations for financial institutions, remove regulatory barriers for new or innovative solutions, assess risk management practices, support the efforts of the government bodies, and convene forward-looking multistakeholder initiatives. <a href="https://a2ii.org/en/home" target="_blank" rel="noopener noreferrer">Access to Insurance Initiative (A2ii)</a> has supported insurance supervisors in promoting the development of inclusive insurance markets in low- and middle-income countries, in the context of climate and disaster risk, among other key focus areas.

But strengthening the financial system’s resilience in the face of climate change requires systemic solutions and a comprehensive disaster risk management strategy. This can only be achieved through collaboration and innovative approaches from various stakeholders. Supervisory engagement with the industry players, for instance, develops an understanding of the practical challenges and regulatory barriers that providers face in bringing new products to consumers.
<h1>A2ii’s Work on Climate and Disaster Risk</h1>
In recognition of this, the A2ii launched the third <a href="https://a2ii.org/en/iii-lab" target="_blank" rel="noopener noreferrer">Inclusive Insurance Innovation Lab</a> on climate – the first lab with a thematic focus. As part of the project, regulators and other key stakeholders of the insurance space (i.e., government representatives, the industry, distribution, and the nonprofit sector) convened in a year-long process of finding innovative approaches to closing the protection gap against climate change headwinds.

The selected country teams of Costa Rica, Grenada, Zambia, and Zimbabwe emerged from the lab process with the following:
<ol>
 	<li data-leveltext="%1." data-font="Calibri" data-listid="12" data-list-defn-props="{&quot;335552541&quot;:0,&quot;335559684&quot;:-1,&quot;335559685&quot;:1080,&quot;335559991&quot;:720,&quot;469769242&quot;:[65533,2],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">A web-based platform for small hoteliers providing risk assessments and sustainable solutions (Costa Rica)</li>
 	<li data-leveltext="%1." data-font="Calibri" data-listid="12" data-list-defn-props="{&quot;335552541&quot;:0,&quot;335559684&quot;:-1,&quot;335559685&quot;:1080,&quot;335559991&quot;:720,&quot;469769242&quot;:[65533,2],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">A mutual risk pool providing direct relief to farmers and fisherfolk after a climate-related disaster (Grenada)</li>
 	<li data-leveltext="%1." data-font="Calibri" data-listid="12" data-list-defn-props="{&quot;335552541&quot;:0,&quot;335559684&quot;:-1,&quot;335559685&quot;:1080,&quot;335559991&quot;:720,&quot;469769242&quot;:[65533,2],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">An awareness-raising campaign for agriculture stakeholders jointly with community champions (Zambia)</li>
 	<li data-leveltext="%1." data-font="Calibri" data-listid="12" data-list-defn-props="{&quot;335552541&quot;:0,&quot;335559684&quot;:-1,&quot;335559685&quot;:1080,&quot;335559991&quot;:720,&quot;469769242&quot;:[65533,2],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">A bundled product – the Farmer’s Basket – offering Affordable Area Yield Index Insurance with inputs like pesticides, fertilizers, and irrigation equipment (Zimbabwe)</li>
</ol>
On the capacity-building side, <a href="https://connect.a2ii.org/" target="_blank" rel="noopener noreferrer">Connect.A2ii</a>, A2ii’s learning and exchange platform for supervisors, offers trainings on the topic.
<ul>
 	<li data-leveltext="" data-font="Symbol" data-listid="11" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">The <a href="https://connect.a2ii.org/supervision-of-climate-related-risks-in-the-insurance-sector" target="_blank" rel="noopener noreferrer">Supervision of Climate-Related Risks in the Insurance Sector</a> training is based on the <a href="https://www.sustainableinsuranceforum.org/publication/application-paper-on-the-supervision-of-climate-related-risks-in-the-insurance-sector/" target="_blank" rel="noopener noreferrer">joint IAIS-SIF Application Paper</a>. The training module includes recommendations for supervisors on five key areas: i. supervisory review and reporting; ii. corporate governance, risk management and internal controls; iii. enterprise risk management for solvency purposes; iv. investments; and v. disclosures.</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="11" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="2" data-aria-level="1"><a href="https://a2ii.org/en/event/inclusive-insurance-training" target="_blank" rel="noopener noreferrer">The Inclusive Insurance Training</a> is delivered multiple times per year in English, Spanish, and French and features an important foundational climate and environmental risk module. The module is designed to provide insight into the nature and effects of climate risks on insurers, economies, and consumers, with a focus on inclusive insurance markets. It also explores the role of financial institutions and the role of the supervisor.</li>
</ul>
Index insurance is undoubtedly on the path forward in the face of climate change. However, in emerging markets globally, regulatory frameworks are adapting cautiously with solutions coming from the industry. Supervisory capacity-building, information, and peer exchange on how to regulate and encourage the development of responsible and sustainable index-based solutions are critical.
<blockquote class="pullquote--right">Supervisory capacity-building, information, and peer exchange on how to regulate and encourage the development of responsible and sustainable index-based solutions are critical.</blockquote>
Looking to support supervisors in understanding the mechanics of index insurance, A2ii has recently partnered with the UNCDF Pacific Insurance and Climate Adaptation Programme (PICAP) to publish a <a href="https://a2ii.org/en/knowledge-center/index-insurance/joint-publication-on-index-insurance-best-practices-for-insurance-regulators-and-practitioners-in-the-pacific-island-countries" target="_blank" rel="noopener noreferrer">best practices report on index insurance</a>, sourcing from the Pacific Island countries. The publication provides valuable insight for the region and beyond and guidance on enabling regulatory frameworks to develop index insurance.

Additionally, the upcoming <a href="https://a2ii.org/en/event/public-dialogues/index-insurance-public-dialogue" target="_blank" rel="noopener noreferrer">A2ii-IAIS Public Dialogue – Index Insurance Best Practices</a> will provide a platform to meet and discuss key insights from the report, including regulatory guidelines for index insurance solutions.

In conclusion, supervisors are increasingly recognizing the importance of addressing climate change impacts as well as the emerging opportunities arising from the challenge. Doing things differently will require building new partnerships for novel products and business models, aligning regulation and technology to be hand-in-hand. The goal is to build more robust insurance value chain ecosystems and resilient communities. A2ii is committed to accompanying supervisors on this learning journey through future capacity building, multistakeholder initiatives, knowledge generation, and dialogue.

&nbsp;

A2ii is a unique global partnership working to ensure that the excluded and underserved have access to insurance, allowing them to take control of their lives and reduce their vulnerability against risks. A2ii supports insurance supervisors and regulators in creating the conditions necessary for an inclusive insurance market to grow.

A2ii is the 'implementation arm' of the International Association of Insurance Supervisors (IAIS) on Inclusive Insurance.

Envisioning Responsible Finance in the Context of Climate Change – the Role of Insurance Supervision

Privacy choices are inherently <a href="https://www.ariewaldman.com/book-industry-unbound" target="_blank" rel="noopener noreferrer">contextual</a>, and individuals make different privacy calculi from one situation to another, deciding each time what and how much to share. The boundaries we negotiate depend on our expectations of what will happen to our information in each situation and how much we trust the recipient. For instance, you probably wouldn’t share the same information about your financial status with an acquaintance at work as you would with your tax advisor.
<blockquote class="pullquote--right">Negotiating privacy boundaries in the digital world, including inclusive finance, has become increasingly difficult.</blockquote>
The trouble is that negotiating privacy boundaries in the digital world, including inclusive finance, has become increasingly difficult. <a href="https://www.ipsos.com/en-us/news-polls/trust-in-the-internet-2022" target="_blank" rel="noopener noreferrer">Trust in digital providers</a> has dropped amidst well-documented data breaches and abuses. Trust is also challenged by consumers’ <a href="https://www.youtube.com/watch?v=lXLY7BsG_fg&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=3" target="_blank" rel="noopener noreferrer">surprise</a> over what data is collected about them. CFI’s <a href="https://www.centerforfinancialinclusion.org/trust-of-data-usage-sources-and-decisioning-perspectives-from-rwandan-mobile-money-users">research in Rwanda</a> found that mobile money users who had applied for digital credit were upset that inputs such as airtime top-ups might be used as part of the underwriting process.

All of this is why, in honor of Data Privacy Week, which is celebrated every year in late January, we’re calling for the inclusive finance field to rethink privacy – specifically to shift it to the left.  Shifting privacy left means bringing up privacy considerations early on in the product lifecycle and paying attention to privacy concerns from the outset, rather than just a final box to check for compliance once a product is already created.
<h1>Focus on Privacy by Design</h1>
One of the ways that people are rethinking privacy in inclusive finance is through an approach called Privacy by Design (PbD). The premise behind PbD is that because privacy is a core property of an IT system, it should influence the underlying system design, rather than be bolted on as an afterthought. In PbD, privacy considerations must therefore start at the ideation phase and be maintained throughout the product lifecycle. This stands in contrast to the compliance-driven approach that typically brings privacy into the discussion after all major design decisions have been made. Popularized by Dr. Ann Cavoukian in 2009, Privacy by Design is most notably mentioned in <a href="https://gdpr-info.eu/art-25-gdpr/" target="_blank" rel="noopener noreferrer">Article 25 in the GDPR</a>.

Despite enthusiasm for the approach and privacy as a value-proposition to consumers, there are limited resources to operationalize Privacy by Design, particularly for organizations like inclusive finance fintechs operating in emerging markets and serving low-income consumers. Last year, CFI conducted a literature review to better understand how PbD has been implemented and its potential for inclusive finance. The results, shared in a report entitled <a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/12/Potential-of-Privacy-by-Design-in-Inclusive-Finance-3.pdf">Embedding Trust: The Potential of Privacy by Design in Inclusive Finance</a>, landscape the various approaches to PbD in the legal, engineering, UX/UI, and academic fields. While each of the approaches, outlined in the graphic below, provided valuable tools, there were few examples of holistic approaches that product teams could use to embed privacy throughout the design and development processes.

<img class="wp-image-45694 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/02/Screenshot-2023-02-02-at-9.19.21-AM.png" alt="" width="904" height="570" />

&nbsp;

CFI believes that five key considerations should guide any applications of PbD in inclusive finance:
<h3>1. PbD should be positioned as business-enhancing.
</h3>
Because privacy has historically been seen as a compliance-related cost, to encourage private companies and fintechs to employ PbD techniques, PbD needs to be presented as a business-enhancing design benefit.
<h3>2. PbD needs to be adapted to work for resource-constrained companies and emerging markets. </h3>
Because PbD has been developed and largely implemented in developed countries, little work has been done to date to make PbD approachable and operational outside of those contexts.
<h3>3. PbD should incorporate low-income and vulnerable consumers’ offline privacy needs in addition to privacy for their digital data.</h3>
In considering the user and his/her privacy capacities and needs, PbD can bring customer-centricity into the data-intensive aspects of digital financial products.
<h3>4. PbD must balance consumer privacy preferences with companies’ needs.</h3>
When implementing PbD, it will be important to consider both the information that companies must collect to be able to perform their work, as well as the privacy preferences of consumers. A balance must be found to ensure that a product will function without compromising consumer privacy.
<h3>5. PbD must articulate privacy responsibilities across disaggregated value chain and partnerships.</h3>
Consumer data can sit and be shared across multiple organizations in today’s modularized fintech ecosystem, and not all actors in the value chain have equal power and influence.

&nbsp;

Moving forward, CFI is working to create a PbD playbook for fintech product teams to embed and position privacy as a core value proposition to consumers. The playbook aims to help product managers – in their role of facilitating product development by technical staff (data scientists, engineers, UX/UI, etc.) -- define the user journey and set metrics for product success, and ultimately present a strong opportunity to embed privacy. While product teams are key to executing Privacy by Design, a fintech’s executives and leadership must also recognize the business value of investing in privacy for it to succeed. Similarly, investors and funders need to prioritize privacy and realize the value of embedding privacy into design from the outset, not only because it is the right thing to do for consumers, but also because it is increasingly important to their bottom lines. By increasing awareness of Privacy by Design in the inclusive finance space, we can make strides in ensuring that consumers are protected and help build trust in digital finance.

In Honor of Data Privacy Week, Let’s Rethink Privacy in Inclusive Finance

The theme for Financial Inclusion Week (FIW) 2022 was “Inclusive Growth in a Digital Era.” For years, financial products and services have been moving digital, and the pandemic further accelerated the trend toward digitalization. As digital becomes the new norm, we must ensure that these services are safe and inclusive of all people and do not exacerbate the exclusion of marginalized and vulnerable groups. FIW 2022 explored how the global financial inclusion community can harness digital innovation to expand inclusive financial services for all people across the globe, ensuring that products meet customer needs, have appropriate safeguards in place, and contribute to inclusive economic growth.

FIW 2022 hosted 125 live and on-demand sessions, featuring nearly 400 speakers from around the world. With over 3,330 registered participants from 2,000 organizations and 146 countries, FIW 2022 was the largest event to date.

To capture the learnings and key takeaways from the many Financial Inclusion Week 2022 sessions, CFI is compiling short summaries that highlight content and ideas from FIW 2022 sessions on select topics.

FIW 2022 Recap

The pandemic <a href="https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments" target="_blank" rel="noopener noreferrer">accelerated the adoption of digital financial services</a>, especially in emerging economies, largely due to the number of people who <a href="https://www.un.org/sustainabledevelopment/blog/2021/12/as-internet-user-numbers-swell-due-to-pandemic-un-forum-discusses-measures-to-improve-safety-of-cyberspace/" target="_blank" rel="noopener noreferrer">began using the internet for the first time</a>. The <a href="https://www.worldbank.org/en/publication/globalfindex" target="_blank" rel="noopener noreferrer">Global Findex 2021</a> found that of the adults in developing countries who paid utility bills directly from an account, one-third did so for the first time during the pandemic. In India, more than 80 million adults made their <a href="https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments" target="_blank" rel="noopener noreferrer">first digital merchant payment</a> after the start of the pandemic; in China, over 100 million adults did the same. However, the Findex 2021 data also showed a rise in consumer protection risks and cautioned that less experienced financial consumers were more vulnerable to such risks.

As digital financial services proliferate, new risks emerge. One of these risks is known as <a href="https://www.deceptive.design/" target="_blank" rel="noopener noreferrer">deceptive designs</a>, which are tricks used by companies when designing user interfaces that have the effect – either deliberately or otherwise – of obscuring, subverting, or impairing consumer autonomy, decision making, or choice. In other words, deceptive designs are used to manipulate people into making decisions that may not be in their best interest. Deceptive design is all around us and is increasing with rapid digitalization.

Those most vulnerable to deceptive designs are consumers with low digital capability, low financial means, or are those who are vulnerable because of life events or mental health issues. The use of deceptive designs in financial services, especially when catering to low-income and vulnerable consumers, can cause harm such as loss of agency and risks of data privacy, and can extend to financial losses that increase vulnerabilities and erode trust in the usage of digital financial services.

While the implications of deceptive designs on user privacy and data protection are beginning to be discussed among regulators, consumer protection concerns have yet to be addressed. This is partly because design is hard to regulate, and manipulative design can exploit existing laws and legal loopholes.
<h1>Deceptive Design Patterns Are Ubiquitous</h1>
In the last week, how often have you used an app on your smartphone or a website to order groceries? To shop for clothes? Or logged in to read online news? Chances are at least once. It is also likely that you encountered several deceptive designs during that time. Harry Brignull, who raised awareness of deceptive design, features nearly <a href="https://www.deceptive.design/hall-of-shame/all" target="_blank" rel="noopener noreferrer">400 examples of deceptive design practices</a> on his website. The New York Times, a publication that was one of the earliest to speak about deceptive designs, uses deceptive designs to make their paywall “smarter” and <a href="https://www.techdirt.com/2022/08/19/when-tech-companies-do-it-the-ny-times-calls-it-dark-patterns-when-the-ny-times-does-it-its-called-being-smart/" target="_blank" rel="noopener noreferrer">make it difficult to cancel subscriptions</a>.

In Kenya and Tanzania, <a href="https://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf" target="_blank" rel="noopener noreferrer">CGAP’s research</a> found several challenges with how digital lenders disclose actual pricing to consumers, using monthly or weekly interest rate figures instead of a standardized calculation like an annualized percentage rate (APR). <a href="https://wiredspace.wits.ac.za/server/api/core/bitstreams/d6e32783-24e7-4e50-8bcf-8c58f84bd872/content" target="_blank" rel="noopener noreferrer">Research by Mazer and Rowan (2016)</a> also found that some digital lenders only disclosed the price after consumers clicked the “I accept” button and the loan was executed. Insurance, a financial product that often is accused of mis-sale, can also use deceptive designs when sold online. In the UK, Currys, a well-known retailer, <a href="https://twitter.com/darkpatterns/status/1561031067334844418" target="_blank" rel="noopener noreferrer">nudges online shoppers during check out</a> by preventing them from moving forward unless they choose to buy insurance. In India, until laws changed recently to prevent the mis-sale of travel insurance, it was common to see travel portals use <a href="http://rsrr.in/wp-content/uploads/2021/04/UNPACKING-DARK-PATTERNS-UNDERSTANDING-DARK.pdf" target="_blank" rel="noopener noreferrer">pre-checked buttons to bundle travel insurance</a> with ticket purchase.
<h1>Focus on Consumer Protection by Design</h1>
The nature of these emergent risks requires new partners to work together – including designers, researchers, technologists, civil society actors, and lawyers who work on consumer rights, along with regulators, supervisors, investors, financial service providers, and tech-based providers. To kick off this work, CFI and <a href="https://www.credit-suisse.com/us/en.html" target="_blank" rel="noopener noreferrer">Credit Suisse</a> are partnering to leverage the diverse talent and expertise of Credit Suisse employees through the Innovation for Impact series, a spinoff of the bank’s <a href="https://www.credit-suisse.com/careers-news/en/articles/careers/spark-ideas-explore-new-trails-202012.html" target="_blank" rel="noopener noreferrer">Future of Banking Hackathon</a>. Applying Credit Suisse’s Fresh Perspectives! Framework, the bank’s innovation lifecycle approach, teams of Credit Suisse employees will be guided through addressing the challenges that low-income consumers can face from the use of deceptive designs in financial services. The teams will work together to generate novel ideas, and rapidly test, learn, and adapt their solutions to address the presented challenges.

Through its <a href="https://www.credit-suisse.com/about-us/en/our-company/corporate-responsibility/economy-society/financial-inclusion.html" target="_blank" rel="noopener noreferrer">Financial Inclusion Initiative</a> (FII), Credit Suisse has partnered with Accion for over a decade, including as a founding supporter of CFI. Through the FII, Credit Suisse aims to support the availability of innovative and financially inclusive solutions to help advance progress towards the UN Sustainable Development Goals (SDGs) by providing both financial as well as human resources. The Innovation for Impact series provides a win-win opportunity for Credit Suisse employees to leverage and develop their expertise and innovation capabilities while at the same time contributing to an important challenge facing the inclusive finance sector.

The partnership between Credit Suisse and CFI is a way to begin generating awareness of deceptive designs with investors and financial service providers, and the harms they can cause to low-income consumers. The work on deceptive designs is part of a larger body of work that CFI is developing that looks at how to embed consumer protection by design for systemic change to create digital, inclusive financial systems that are more equitable, less discriminatory, and more empowering.

CFI is launching a strategic area of work around ‘Consumer Protection by Design’ to identify and address newer risks that emerge as inclusive finance is digitalized. This area of work will define the term consumer protection by design, identify newer risks (including deceptive designs), and assess whether these risks tend to be prevalent in specific geographies, industries, and company stages, and if they target specific user groups that are more susceptible. CFI will also conduct a landscape analysis of the specific harms posed to vulnerable consumers with a focus on identifying market monitoring tools and regulatory solutions that can be used to mitigate these harms.

The Hidden Traps of Deceptive Design: Embedding Consumer Protection into DFS

Appropriate Product Design and Delivery

Client Treatment

Over-indebtedness

Privacy

Product Pricing

Responsible Digital Finance

Smart Certification

Social Performance

Transparency

Jayshree Venkatesan

Senior Research Director

Anindita Chakraborty

Diana Boncheva-Gooley

Veronica Karpoich

Alexandra (Alex) Rizzi

Dunja Latinovic

Sugandh Saxena

Howard Miller

Lakshmi Krishnan

Lucciana Alvarez Ruiz

Mayada El-Zoghbi

Leora Klapper

Pia  Roman Tayag

Colombia

Latin America and The Caribbean

Kenya

Sub-Saharan Africa

Guatemala

India

South Asia

Consumer Protection

Financial Capability

Financial Health

Financial Service Providers

Resilience

Credit

Credit Provision

Default

Digital Credit

Interest Rates

Access Usage Gap

Banks

Delivery Channels

Digital Financial Services

Enabling Environment

Impact Investing

Responsible Investing

Alternative Data

Data Analytics

Financial Technology

Fraud

Mobile Banking

Payments

Index Insurance

Insurance

Risk Management

Blockchain and Cryptocurrency

Challenges and Crises

Entrepreneurs of MSMEs

Underserved Groups

Women

Fintechs

Policy, Regulation and Government Initiatives

PayGo

Remittances

Saving

Complaint Resolution

Blog Post

Report

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

India’s fintech lending industry has grown rapidly since 2014, with the evolution of new models and approaches to lending. This rapid growth offers the potential for many upsides in the form of <a href="https://www.cgap.org/blog/indian-start-for-digital-credit" target="_blank" rel="noopener noreferrer">easier access to much needed credit and including hitherto excluded consumer segments</a> who may not have the ability to prove their ‘creditworthiness’. In India, as in other parts of the world, the growth in digital lending has been accompanied by a variety of risks. Some of these risks – such as over-indebtedness, poor market practices of aggressive marketing and collection, and pricing – have long been associated with lenders and need to be addressed as a market conduct issue. However, the digital nature of fintech lending poses several new risks that, combined with traditionally known risks, create an environment of poor consumer outcomes and mistrust of the industry.
<h1>Fintech Risk Barometer Study</h1>
While there has been extensive media coverage around several of the fintech lending risks, these cases tend to be anecdotal and do not provide a sense of which risks are highest priority as the industry evolves. To better understand the multitude of risks the Indian fintech lending industry faces, the <a href="https://faceofindia.org/" target="_blank" rel="noopener noreferrer">Fintech Association for Consumer Empowerment</a> (FACE) and CFI partnered to conduct a risk barometer study. The resulting <a href="https://www.centerforfinancialinclusion.org/fintech-lending-risk-barometer-2022-2023">fintech lending barometer report</a> is the first attempt at identifying how risks are perceived by various stakeholders associated with the fintech lending industry in India and is a crucial first step to documenting how risks evolve.

For fintech lenders, this report presents an opportunity to understand the landscape, identify the opportunities and dangers, and plan or correct their course of action. For regulators, supervisors, and policymakers, the survey findings signal what areas within the Indian fintech industry need to be more closely examined and addressed with urgency.

The fintech lending barometer study followed a mixed methods approach. First, a survey was used to gather initial perceptions of risks, which then was followed by a series of qualitative interviews with select respondents to further understand how emerging risks impact consumer lives. For each risk, the survey asked participants to rank 23 risks on a scale of 1-7, with one being the lowest severity risk and seven being the highest. The survey also captured comments and feedback from survey participants on these risks and the top three opportunities.

Top 10 Risks Identified by Survey Respondents

<img class="alignnone wp-image-45643" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/01/Screenshot-2023-01-13-at-2.02.11-PM.png" alt="" width="666" height="775" />

The top three risks identified were unscrupulous fintech lenders, rising cyber fraud and crime, and issues around data privacy. The report is being released at the <a href="https://inclusivefinanceindia.org/" target="_blank" rel="noopener noreferrer">Inclusive Finance India Forum 2023</a> and can be accessed <a href="https://www.centerforfinancialinclusion.org/fintech-lending-risk-barometer-2022-2023">here</a>.
<h1>Consumer Protection Implications</h1>
<blockquote class="pullquote--right">Industry associations have an inherent advantage in gathering early insights on consumer complaints and experiences from their members and in getting inputs on market trends.</blockquote>
Kate McKee, former senior policy advisor at CGAP, who pioneered thinking on consumer protection for inclusive finance, often referred to the three legs of the ‘<a href="https://www.mfw4a.org/sites/default/files/resources/Kate_McKee_english.pdf" target="_blank" rel="noopener noreferrer">consumer protection stool’</a> –  regulation, market monitoring and self-regulation, and building consumer awareness – where each of the three legs must be stable in order to responsibly and reliably provide for consumers. While the Reserve Bank of India has been proactive as a regulator in issuing guidelines on digital lending, there is a role to be played by industry associations like FACE and others in enabling market monitoring. Industry associations have an inherent advantage in gathering early insights on consumer complaints and experiences from their members and in getting inputs on market trends. For instance, they may hear about specific instances of fraud from their members which can erode the reputation of the industry in general. This provides associations with a unique opportunity to identify emerging risks and either escalate them to supervisors or establish responsible market conduct. This in turn can boost trust in businesses and offer long term value. For supervisors, this interaction with industry associations can help them stay abreast of market developments and assists with considerations for investing in appropriate suptech tools depending on the nature of risk identified.

A host of market monitoring tools exist and several are summarized in <a href="https://www.cgap.org/topics/collections/market-monitoring-tools" target="_blank" rel="noopener noreferrer">this toolkit</a> by CGAP. However, effective market conduct supervision depends on timely identification of market risks and reviewing how these risks evolve with market growth. CFI’s consumer protection strategy focuses on strengthening market conduct supervision by researching emerging risks and working with partners who can elevate these risks to supervisors. This partnership with FACE is a step towards this goal and offers insights for industry associations of digital lenders in other markets.

Matters of Urgency: Insights From a Fintech Risk Barometer Study

India has seen a rapid rise in fintech lending since 2014 and the industry continues to evolve with the launch of new models and approaches to lending. Yet, as the industry has scaled and diversified, so have the risks.

The Center for Financial Inclusion (CFI) and the Fintech Association for Consumer Empowerment (FACE) are pleased to partner on this risk barometer study that aims to create a systematic baseline of emerging risks in order to help observe how risks change as the industry matures. The study is part of a market monitoring exercise to understand the range of risks and how they are perceived by multiple stakeholders in the Indian fintech lending sector and this report intends to contribute to the fintech lending industry as it evolves to maturity, combining innovation, inclusion, and impact.

Fintech Lending Risk Barometer 2022-2023

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As climate change-induced events increase in frequency, unpredictability, and severity, the people most impacted by such events are those least responsible for historic carbon emissions. The poorest 50 percent of the world’s population produces half the emissions of the richest 1 percent. Inclusive financial services can have a significant impact on how vulnerable populations respond to climate risks and challenges, but the inclusive finance community lacks an overarching framework for understanding and explaining the critical ways in which financial services can support improved outcomes for low-income and vulnerable people in the context of climate threats.

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The Center for Financial Inclusion (CFI), in consultation with industry stakeholders, has created a holistic framework to help fill that gap. This report considers evidence on how inclusive financial services can help vulnerable populations respond to climate change and uses the framework to understand the various impact pathways through which financial services can help: mitigation, resilience, adaptation, and transition.

Green Inclusive Finance: A Framework for Understanding How Financial Services Can Help Low-Income and Vulnerable People Respond to Climate Change

As each year comes to a close, it’s natural to reflect on the key moments and events that shaped the year. Beyond the political and economic events and trends – the war in Ukraine, the rise in inflation globally, the floods in Pakistan, and COP27 – the field of inclusive finance itself is reshaping its contours to meet the moment. We saw this very visibly in this year’s <a href="https://financialinclusionweek.org/">Financial Inclusion Week (FIW)</a>, the largest event we have hosted to date – with virtual participants from 2,000 organizations across 146 countries. The topics covered reflect the priorities of global actors in inclusive finance, pointing to the direction the field is going.

<img class="wp-image-45545 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/12/Screenshot-2022-12-12-at-11.27.19-AM.png" alt="" width="967" height="429" />

To me, the scale of this year’s FIW and the coming together of the minds of stakeholders worldwide during this difficult time signals an urgent need and momentum to accelerate our understanding of how inclusive finance must evolve to address global challenges. With over <a href="https://financialinclusionweek.org/2022" target="_blank" rel="noopener noreferrer">50 hours of live content and 70 on-demand sessions</a>, FIW has something for everyone. While it would be amazing to watch the hours of rich live and on-demand content oneself, we know few people have this luxury. We have been reflecting on this at CFI and will launch a blog series that highlights takeaways on key topics covered during FIW 2022.

<img class="wp-image-45546 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/12/4_Closing_Plenary-2-1.jpg" alt="" width="960" height="761" />

FIW 2022 left me with several reflections on the state of the inclusive finance sector and what needs to be prioritized. While FIW covered many sub-topics, the overall theme for the week was “Inclusive Growth in a Digital Era,” exploring how our community can harness digital innovation to expand inclusive financial services and contribute to inclusive economic growth.

In hindsight, as I reflect on the content, I would revise the theme and say that this year’s FIW was really about: “How we can create shared prosperity in our digital era.” Many of the sessions at FIW highlighted that, despite digital financial services’ promise to create inclusive solutions, there are serious shortfalls in how the digital economy is evolving, and new risks and gaps are emerging. We learned that while access and usage continue to rise, indicators linked to resilience have worsened. Even more concerningly, numerous examples of fraud and online harassment were spotlighted during the sessions indicating that the digital economy has yet to pan out as the equalizer that we thought it would be.

Some key messages I took away from FIW 2022 include:
<h3>The future of micro and small enterprises (MSE) on digital platforms needs attention.</h3>
In a joint <a href="https://www.youtube.com/watch?v=0FCpTM0TAac" target="_blank" rel="noopener noreferrer">session</a> hosted by CFI and Mastercard Center for Inclusive Growth, panelists discussed the status quo – where platforms retain substantial bargaining power and most MSEs lack the skills or power to benefit fully from the economies of scale offered through platforms. While alternative business models, such as platform cooperatives or open networks, may be options worth exploring, integrating elements of these emerging models into today’s established business models is likely to produce the greatest benefits to MSEs and platforms alike. Sessions by CGAP on <a href="https://www.youtube.com/watch?v=8VlU8U3DOdI" target="_blank" rel="noopener noreferrer">digital platforms</a> and <a href="https://www.youtube.com/watch?v=iGzlBKRK-PU" target="_blank" rel="noopener noreferrer">fintechs</a> surfaced regulatory fragmentation, payment rails, and e-KYC norms as pressing issues limiting workers and MSEs from fully benefitting from the digital economy. Regulators, donors, investors, and other industry stakeholders should invest more explicitly to enable a rebalancing of power to favor MSEs.
<h3>Trust needs to be earned; regulators, providers, and consumer organizations each have a role in making that happen.</h3>
A <a href="https://www.youtube.com/watch?v=yXw-r70lLXc" target="_blank" rel="noopener noreferrer">session by Consumers International</a> shared evidence on both existing and emerging consumer risks. These included significant increases in consumer complaints in Fiji and major issues around trust in digital finance in India, where 60 percent of digital finance users surveyed stated that they stopped usage because of trust issues. While several digital financial services users sought redressal through customer care channels, 20 percent of respondents in India never had their issue resolved.

Regulators can play a critical role in shaping market conduct. Another <a href="https://www.youtube.com/watch?v=CJ9_P7bGOvA" target="_blank" rel="noopener noreferrer">session hosted by SPTF</a> provided compelling evidence of fraud and abuse in markets like Kenya and discussed what provider practices could help mitigate these risks. Fair Finance’s session brought up an example of how a regulator can step in to enable greater trust in the financial system for low-income consumers and businesses: they mentioned the Central Bank of Rwanda's approach, where they are working to build trust via a consumer protection law, retaining oversight of financial consumer protection, creating tools to compare providers, and establishing instant complaints systems that allow consumers to submit complaints through email and social media.

These sessions reinforced the need for rigorous research, progressive regulation, and market conduct supervision that incentivize providers to be responsible and strong consumer organizations who can advocate on behalf of the silent majority in most developing markets. Donors and investors working to support market development must ensure that these fundamental guardrails are in place before they scale innovations.
<h3>Regulation and regulators are important in addressing gender inequity and creating trust.</h3>
Gender inequity is perhaps the gap that received the greatest attention during FIW 2022. Toronto Centre’s panel on <a href="https://www.youtube.com/watch?v=ISoRGWNdaQQ&amp;list=PL30fMMRd3G_7IGUKLWAQm_Z3zDVIu6LCB&amp;index=28" target="_blank" rel="noopener noreferrer">Advancing Cybersecurity and Financial Inclusion</a> highlighted the large gender gaps – such as access to technology – and the greater vulnerability, whether harassment, gender-based violence, or outright discrimination, and looked at what regulators are doing to counterbalance the system that is stacked against women.

<a href="https://www.youtube.com/watch?v=FFIFIvuVo0U" target="_blank" rel="noopener noreferrer">CFI’s Edoardo Totolo</a> delivered one of the four keynotes and highlighted both the opportunities and the risks posed by new embedded finance players. He emphasized the increasingly important role unregulated non-financial actors play in the design and delivery of financial services and the regulatory ambiguity around who is responsible for what. His keynote ends with a cautionary note to regulators and policymakers to clearly define the regulatory perimeters, articulate the role of third-party actors, promote interoperability and open architecture, and above all, create a level playing field.
<h3>One-size fits all solutions are insufficient; segmentation is necessary.</h3>
Several panelists emphasized that low-income customers are not a monolith and recognized that low-income consumers occupy different societal groups, each with its unique strengths, challenges, and starting points. A key takeaway from these sessions is that when we design without understanding the specific segment we are trying to reach, we will de facto design products and services for men. Instead, we must be intentional and create solutions that address specific consumer needs.

<a href="https://www.youtube.com/watch?v=-jz8tnEuAIQ" target="_blank" rel="noopener noreferrer">AXA’s session</a> on developed markets, including Japan, the US, and France, provided a unique look at excluded segments and approaches providers were taking to be inclusive in these highly competitive and highly regulated markets. For example, French provider <a href="https://nickel.eu/fr" target="_blank" rel="noopener noreferrer">Nickel</a> noted their rapid trajectory of delivering a simple product with very clear and fair terms and relying on distribution systems that leverage existing points of sale used by low-income consumers. In another <a href="https://www.youtube.com/watch?v=jC2AmET0HXI" target="_blank" rel="noopener noreferrer">session by Mastercard Strive</a>, a panelist from <a href="https://www.withboost.co/" target="_blank" rel="noopener noreferrer">Boost</a> Nigeria noted that women-owned small businesses are not a homogenous retail segment. Recognizing that women business owners had varying levels of digital and financial capabilities, Boost adopted a range of strategies that tried to meet women where they were in their journeys. A <a href="https://www.youtube.com/watch?v=Yp5yhELqTqI&amp;t=12s" target="_blank" rel="noopener noreferrer">session hosted by the Kashf Foundation</a> noted that despite the progress prompted by the pandemic, the digital divide is a nuanced issue that merits attention. Affordability to broadband is perhaps the next frontier, particularly when women don’t always have full control of household income or phone ownership.
<h3>We need to focus on climate adaptation; prioritizing mitigation is not enough.</h3>
In his keynote, USAID’s <a href="https://www.youtube.com/watch?v=_hUipQztGXs" target="_blank" rel="noopener noreferrer">Songabae Lee</a> provided a realistic and sobering view of the limitations of development finance, noting that mobilizing capital is the current priority at the global level. Recognizing that private sector capital is best geared toward mitigation, while adaptation still requires grant funding, Lee urges the audience to take advantage of what’s currently open rather than beating on a closed door. The open door is to start by leveraging capital for mitigation and then work to advocate for and shift attention to adaptation.

A <a href="https://www.youtube.com/watch?v=IyUlwUPPY40" target="_blank" rel="noopener noreferrer">session hosted by BFA Global</a> on the business case for climate resilience adopts a more optimistic lens, where investors start recognizing the need to move faster toward adaptation. The session delved into the experiences of multilateral development banks (MDBs) in financing climate initiatives that can be leveraged for earlier-stage ventures, highlighted the creation of the <a href="https://gca.org/news/collaborating-to-accelerate-investment-in-climate-adaptation-and-resilience/" target="_blank" rel="noopener noreferrer">adaptation and resilience collaboration</a> with 18 organizations, and the importance of data and measurement to help move this agenda forward. The urgency of scaling climate adaptation finance was also highlighted in a <a href="https://www.youtube.com/watch?v=2qENaGgm_4k&amp;t=1s" target="_blank" rel="noopener noreferrer">session</a> organized by CFI, where panelists from SEWA, FSD Mozambique, and UNHCR unequivocally emphasized the threats and income shocks low-income communities and refugees were exposed to in the absence of solutions tailored to support adaptation and resilience building at the community level.

My colleagues will go deeper into some of these messages in the blogs to follow in this series. If you are interested in revisiting the recordings, all sessions from FIW 2022 are available online. Check out the full playlist <a href="https://financialinclusionweek.org/2022" target="_blank" rel="noopener noreferrer">here</a>.

For curated session lists by topic, please see the links below for the playlists we’ve developed thus far.
<ul>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_7YYIjKT10xi4v5vjOKbuLl" target="_blank" rel="noopener noreferrer">Women’s financial inclusion</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY" target="_blank" rel="noopener noreferrer">Consumer protection</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_434ImijU6wxmZro4JHG7vu" target="_blank" rel="noopener noreferrer">Climate and inclusive finance</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_5l8T1UH24TIm7H-EM7gydP" target="_blank" rel="noopener noreferrer">Micro and small enterprises</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_5Mn-Gm3O2hgxyaSo9ajB7a" target="_blank" rel="noopener noreferrer">Digital assets and digital currencies</a></li>
 	<li><a href="https://www.youtube.com/watch?v=-jz8tnEuAIQ" target="_blank" rel="noopener noreferrer">Developed markets and inclusive finance</a></li>
 	<li><a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_4yq2Ugx050YBIt4wwN5rMs" target="_blank" rel="noopener noreferrer">Impact measurement</a></li>
</ul>

End-of-Year Reflections

Consumer privacy risks have proliferated in the last decade in parallel with the increased adoption of digital technologies and the availability of consumer data. The great onboarding onto digital finance necessitated by COVID-19 also opened up vulnerable consumers to data misuse through scams in markets like the Philippines, Kenya, and India, among many others. Privacy violations can also have serious long-term consequences for financial inclusion and, even as access has improved, trust remains a critical ingredient in translating that progress into sustainable gains for consumers.

Evidence shows that when consumers fall prey to privacy-related harms, the loss of trust dissuades them from the opportunities afforded by digital finance. Privacy implications not only affect consumers but also impact businesses. While compliance with new data protection regulations has brought stronger safeguards, the rapid speed at which consumer data is collected, used, and shared in digital finance has far outpaced consumers’ understanding. For low-income digital financial consumers, the limits of informed consent and choice are even starker.

This report is intended to be an introduction to Privacy by Design (PbD) and to review the main PbD approaches in literature and wider market practice for their potential applications in the inclusive finance sector. The analysis is based on a literature review and key informant interviews with privacy and inclusive finance experts conducted by the Center for Financial Inclusion (CFI) between May and August 2022. The paper groups findings into four approaches to PbD, each of which attempts to embed privacy through different means, often by combining various tools, methods, and areas of application. The paper also identifies a series of gaps and barriers that limit the potential of PbD, particularly in emerging markets and developing economies. The report closes with considerations for the adaption of PbD for fintechs working with low-income and vulnerable consumers. CFI aims to build off this initial report to develop practical guidance on PbD for fintech product teams.

Embedding Trust: The Potential of Privacy by Design for Inclusive Finance

Global development has not just stalled. <a class="Hyperlink SCXW87520962 BCX0" href="https://www.undp.org/papua-new-guinea/blog/human-development-index-reverse-why-are-we-ignoring-world-breaking-point" target="_blank" rel="noreferrer noopener">UNDP’s Human Development Report 2022</a> showed that the global Human Development Index (HDI), which measures three dimensions of human development (life expectancy, access to education, and standard of living), has been falling since 2020 for the first time since 1991. The <a class="Hyperlink SCXW87520962 BCX0" href="https://www.climate.gov/news-features/understanding-climate/climate-change-probably-increasing-intensity-tropical-cyclones" target="_blank" rel="noreferrer noopener">increasing frequency and intensity</a> of climate shocks and changing weather patterns are a key driver for this negative HDI trend. We know that the world’s developing countries and lowest-income people face the highest risks and vulnerabilities due to climate change. At CFI, we have developed a <a class="Hyperlink SCXW87520962 BCX0" href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-people-weather-climate-related-risks" rel="noreferrer noopener">framework for Green Inclusive Finance</a> to help understand the role of inclusive finance in building resilience by helping people reduce their vulnerability and increase their ability to respond to climatic shocks and stresses.
<h4>"I had nearly Rs100,000 [about $1,176] in cash buried in an earthen jar under the mud floor of my home. There was confusion as we fled and I thought my wife had retrieved it. But we both failed to do so, and now the money has gone." – <a href="https://reliefweb.int/report/pakistan/pakistan-flood-survivors-savings-washed-away" target="_blank" rel="noopener noreferrer">Pakistani flood survivor, 2010</a></h4>
Ensuring that vulnerable consumers are protected and treated fairly and with dignity is a crucial but overlooked aspect of resilience. Financial products such as insurance, savings, and payments can play a very important role in building household resilience before, during, and after climate shocks. However, there are challenges with financial products and services related to climate change. Insurance policies can be slow to pay out, and the money often is not accessible when people need it most. Viable models of weather-indexed insurance for low-income and vulnerable communities have also been difficult to develop, and <a href="https://www.theguardian.com/environment/2019/mar/21/climate-change-could-make-insurance-too-expensive-for-ordinary-people-report" target="_blank" rel="noopener noreferrer">climate change will only make such policies more expensive</a>. Savings held informally risk being destroyed. For instance, during the major floods in Pakistan in 2010, there were reports of <a href="https://reliefweb.int/report/pakistan/pakistan-flood-survivors-savings-washed-away" target="_blank" rel="noopener noreferrer">hundred-rupee notes carried downstream</a> with the floodwaters; families’ savings lost forever.
<blockquote class="pullquote--right">Is mobile money any more useful with mobile networks down, absent agents, and nowhere to charge your phone?</blockquote>
There are challenges with savings held in formal accounts as well. We know from the <a href="https://www.worldbank.org/en/publication/globalfindex" target="_blank" rel="noopener noreferrer">2021 Global Findex</a>, that the proportion of Pakistanis with any form of financial account increased from 10 percent in 2011 to 21 percent in 2021. In the latest devastating floods to hit the country, more people will have their savings at a financial institution. But with power infrastructure out, ATMs flooded, <a href="https://www.telegraphindia.com/world/pakistans-flood-victims-forced-to-put-rebuilding-on-hold/cid/1893463" target="_blank" rel="noopener noreferrer">bank branches shut down</a>, how accessible is that money? Is mobile money any more useful with mobile networks down, absent agents, and nowhere to charge your phone? To help respond, the Pakistan government has established “<a href="https://www.bisp.gov.pk/Detail/NDhjOWU5ZmQtZTNiMi00OWJiLTlhMmEtZjhlYTU0MDMzNWZh" target="_blank" rel="noopener noreferrer">payment campsites</a>”, where Rs. 25,000 (approximately $112) in cash are distributed to families in affected provinces as part of the Benazir Income Support Program (BISP). But people need more than emergency relief. After floods devastated a region in Australia earlier this year, a group of five local credit unions <a href="https://www.afr.com/companies/financial-services/choppers-fly-cash-in-to-devastated-lismore-flood-zone-20220307-p5a2i5" target="_blank" rel="noopener noreferrer">helicoptered in cash and an ATM</a> to help savers access their money, but with natural disasters occurring <a href="https://news.un.org/en/story/2021/03/1087702" target="_blank" rel="noopener noreferrer">three times more often than 50 years ago</a>, and affecting developing countries the most, such solutions may be out of reach for low- and middle-income countries.

Social networks and remittances are valuable tools for resilience and there is plenty of evidence that friends and family are critical sources of emergency funds. <a href="https://www.cgap.org/blog/era-urgent-climate-risk-does-financial-inclusion-matter" target="_blank" rel="noopener noreferrer">CGAP documented</a> how mobile money transfers in Mozambique spiked after the floods in January 2013. However, the covariant nature of climatic risks means that if you are impacted, there’s a good chance that everyone around you is as well. This diminishes the value of social networks that act as a proxy insurance. <a href="https://fordschool.umich.edu/rsie/workingpapers/Papers526-550/r535.pdf" target="_blank" rel="noopener noreferrer">Evidence from the Philippines</a> found that remittances served as effective insurance to a rainfall shock only for households that had a family member overseas who was not affected by the shock.

There is good evidence that formal financial services can help improve people’s resilience when faced with shocks. However, the issue of consumer protection in light of weather events is less researched.

Consumer protection risks arise due to vulnerabilities caused by:
<ol>
 	<li>The inability to access financial services in a climate emergency</li>
 	<li>The inability to negotiate fair terms for products and services</li>
</ol>
Each of these factors is also interrelated and can exacerbate consumer stress.
<h1>Consumer Protection Risks Arising from the Inability to Access Financial Services</h1>
<h4>“Hurricane Jeanne took all that I had…my job and my home are gone. I used to have food: Now I beg in the market.” – <a href="https://sarpn.org/documents/d0002915/5-HDR_2007-2008.pdf" target="_blank" rel="noopener noreferrer">Consumer in Haiti, 2005</a></h4>
This quote from an individual in Haiti in 2005 is eerily similar to <a href="https://karandaazmain.wpenginepowered.com/wp-content/uploads/2022/09/Flood-Report-2.pdf" target="_blank" rel="noopener noreferrer">stories from Pakistan</a> in the aftermath of the July 2022 floods. Even when it is possible to access formal financial services, disruptions can take place due to failure in infrastructure or lack of physical access to banks, agents, and ATMs, which in turn impacts liquidity of these channels as well as the ability to serve consumers. The inability to access up-to-date information, and the absence of channels that could provide this information, paves the path for exploitation.

In our interviews with stakeholders from Pakistan, anecdotes emerged about middlemen who charged a higher fee to enable access to government-to-person (G2P) payments. Government response to deliver emergency relief through G2P payments can be disrupted unless telecom operators and financial service providers have business continuity plans to deal with climate shocks. And, as with most emergencies, targeting can be an issue. Experiences from the <a href="https://odihpn.org/publication/are-cash-transfers-the-%c2%91new-normal%c2%92-in-the-philippines-challenges-and-opportunities-from-typhoon-haiyan/" target="_blank" rel="noopener noreferrer">Philippines in the aftermath of Typhoon Haiyan</a> show that standardized indicators may not reflect the nuances of debt and vulnerabilities. For instance, a community member in the Philippines was excluded from benefits since she had used credit to buy fish cages before the Typhoon struck. However, the typhoon had destroyed her boat, leaving her to deal with income loss and the need to service debt, and she was excluded from relief funding. Finally, women tend to be disproportionately impacted due to information gaps. <a href="https://vidhilegalpolicy.in/research/financial-inclusion-of-women-during-the-pandemic-the-role-of-jan-dhan-accounts-and-cash-transfers/" target="_blank" rel="noopener noreferrer">Evidence from India during the COVID-19 pandemic</a> showed that women are impacted more by information gaps. This can be even worse during a climate-induced disaster.

Some solutions have emerged to mitigate the information gap challenge. In floods that impacted both Chennai and <a href="https://www.bbc.co.uk/news/world-asia-india-45218556" target="_blank" rel="noopener noreferrer">Kerala</a>, social media has emerged as a crucial tool for coordination between citizens and civil society organizations to inform affected people about which ATMs have cash and other critical information. However, ensuring that this information is accessed by low-income households, and women within these households can still be a challenge. The National Payments Corporation of India (NPCI) is <a href="https://www.cioinsiderindia.com/news/npci-tests-a-solution-to-allow-payment-without-internet-nwid-3696.html" target="_blank" rel="noopener noreferrer">testing solutions</a> that allow Unified Payments Interface (UPI)-based digital payments without active internet connections. This can allow G2P payments even when infrastructure is disrupted in the immediate aftermath of a climate shock.
<h1>Consumer Protection Risks Arising from the Inability to Negotiate Fair Terms</h1>
<h4>“During those days (with the Brahmaputra floods), my husband goes to Dhaka to work as a rickshaw puller and we struggle. To start cultivating again after the floods we would borrow from a mohajon (local money lender).” – <a href="https://www.brac.net/program/finance-for-flood-hit-families-reducing-risk-and-raising-resilience/" target="_blank" rel="noopener noreferrer">BRAC customer</a></h4>
It is common to see a rise in informal borrowing at high interest rates as a response to cope with climate disasters. Desperate times and the lack of formal channels make it hard for people to negotiate fair terms, which often leads to overindebtedness. Recent reports from the <a href="https://tribune.com.pk/story/2381326/rights-activists-fear-spike-in-bonded-labour" target="_blank" rel="noopener noreferrer">flood hit province of Sindh</a> in Pakistan speak of informal loan agreements in exchange for work, resulting in debt bondage.

Those with access to formal loans can also be impacted adversely. For instance, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3934688" target="_blank" rel="noopener noreferrer">a study in Mexico</a> found that exposure to extreme temperatures even for a day can increase delinquency rates of small business borrowers by 0.012 percentage points.
<blockquote class="pullquote--left">Desperate times and the lack of formal channels make it hard for people to negotiate fair terms, which often leads to overindebtedness.</blockquote>
Agent fraud or charging excessive fees are common complaints when consumers are desperate for access to relief. In Pakistan, we heard anecdotes of <a href="https://www.biometricupdate.com/202209/pakistan-arrests-suspects-over-digital-id-fraud-in-floods-cash-relief-program" target="_blank" rel="noopener noreferrer">agents charging between $4 – $12 for cash withdrawal,</a> a steep premium over the usual fees of $0.10. With increasing digital financial services, there are also reports of <a href="https://www.biometricupdate.com/202209/pakistan-arrests-suspects-over-digital-id-fraud-in-floods-cash-relief-program" target="_blank" rel="noopener noreferrer">cyber frauds</a> in Pakistan. The lack of complaint mechanisms makes grievance redressal difficult. Credit reporting mechanisms and the absence of policies that allow formal financial institutions to restructure these loans can result in further exclusion of consumers. Our research revealed that people who are unable to repay their loans in the aftermath of floods and other climate shocks in Nepal get blacklisted.

Providing emergency loans to people in areas that are prone to climate risks can help address the challenge of overindebtedness and informal borrowing at high interest rates. BRAC piloted an <a href="https://www.brac.net/program/finance-for-flood-hit-families-reducing-risk-and-raising-resilience/" target="_blank" rel="noopener noreferrer">emergency loan product</a> in partnership with the University of California, Berkeley and found a much lower incidence of missed payments among those who took the emergency loan. BRAC also observed a 5 percent increase in savings deposits among the emergency loan borrowers, compared to just 1 percent for non-borrowers. In southern Nepal, a region prone to floods, the World Food Programme (WFP) distributes <a href="https://www.wfp.org/stories/nepal-wfp-un-climate-summit-cas-2021-floods-monsoon" target="_blank" rel="noopener noreferrer">cash support</a> in anticipation of floods. Forecast-based financing (FbF) uses early warning forecasts to catalyze early actions and humanitarian funding ahead of an extreme weather event. Funds are distributed in the short window between the forecast trigger and the disaster and must give sufficient time to people to use the funds for evacuation, fortifying their houses, purchasing necessary materials, and other mitigation measures.
<h1>Call to Action</h1>
Policy responses are emerging to help financial institutions and consumers deal with emergency crisis situations. In the United States, the President can declare supervisory guidance during a disaster or emergency, which includes climate disasters. Some of these responses include waiving ATM fees, increasing ATM withdrawal limits, waiving penalties on early withdrawal of time deposits, expanding the availability of short-term unsecured credit, and offering payment accommodations. However, these measures, while useful, must be systematically embedded into the business continuity plans of financial institutions to ensure low-income consumers do not bear these event costs.

The intersection of consumer protection and climate is a relatively new area of research and brings together two of CFI’s key research themes. Consumer protection risks in the context of climate change presents a <a href="https://www.stonybrook.edu/commcms/wicked-problem/about/What-is-a-wicked-problem" target="_blank" rel="noopener noreferrer">wicked problem</a> and cannot be addressed without the effort and collaboration of multiple stakeholder groups. Our hope is that by exploring this intersection, and how low-income and vulnerable people can be effectively protected in the context of climatic risks, we can contribute towards a new perspective on responsible finance – one that looks ahead to emerging challenges with the needs of customers at its core.

&nbsp;

Special thanks to colleagues from <a href="https://karandaaz.com.pk/" target="_blank" rel="noopener noreferrer">Karandaaz, Pakistan</a>, <a href="https://www.dvarakgfs.com/" target="_blank" rel="noopener noreferrer">Dvara KGFS India</a>, and <a href="https://www.nabilbank.com/individual" target="_blank" rel="noopener noreferrer">Nabil Bank, Nepal</a> for their support with this blog post.

Climate Change and Rising Consumer Risks: The two go hand-in-hand

The recent results from the <a href="https://worldbankgroup-my.sharepoint.com/personal/sansar1_worldbank_org/Documents/Findex%20report%202021/Dissemination/globalfindex.worldbank.org" target="_blank" rel="noopener noreferrer">Global Findex 2021</a> show global gains in account ownership and in account usage in 2017—good news given the widespread financial impact of the pandemic. Today, 71 percent of adults in developing economies have a financial account. Yet the findings on financial well-being show that there is more work to do. 
<blockquote class="pullquote--left">71% of adults in developing economies have a financial account, yet the findings on financial well-being show that there is more work to do. </blockquote>
As the type of risks facing low-income consumers evolve, including rising food and fuel prices, and climate shocks increasing in frequency and intensity, we need an expanded definition of responsible finance in which all stakeholders – providers, policymakers, investors, donors, and more – are not just reacting to client protection risks but also anticipate and proactively work to build resilience, mitigate risks, and improve the financial well-being of consumers for the long term. 

Improving how we measure consumer outcomes is critical for an expanded definition of responsible finance. A sway of new research – recently discussed in the <a href="https://globalrff.org/events/june-2022" target="_blank" rel="noopener noreferrer">Responsible Finance Forum</a> – has shown that while access to finance is growing globally, financial health and well-being are stagnating or even declining.   

The Global Findex 2021 introduced a new set of metrics on <a href="https://www.worldbank.org/en/publication/globalfindex/brief/the-global-findex-database-2021-chapter-3-financial-resilience" target="_blank" rel="noopener noreferrer">financial well-being</a>. The data measures three dimensions of financial well-being: (a) managing unexpected financial events (financial resilience); (b) experiencing limited financial stress; and (c) having the confidence and capability to independently use financial products. The data suggests that while there have been gains in account ownership and in account usage since 2017, there is a need for more emphasis on all three components.  
<h1 aria-level="2">55 Percent of Adults in Developing Economies Are Resilient to Financial Shocks </h1>
The Global Findex survey measures “resilience” as the ability to access money equal to 5 percent of gross national income—or about $3500 in the US and 350 Rupees in India-- within 30 days without much difficulty when faced with an unexpected expense. In developing economies, only 55 percent of adults could do so. For comparison, that share is 79 percent in high-income economies. Resilience is an increasingly important dimension of responsible finance as extreme natural disasters are estimated to <a href="https://www.worldbank.org/en/news/press-release/2016/11/14/natural-disasters-force-26-million-people-into-poverty-and-cost-520bn-in-losses-every-year-new-world-bank-analysis-finds" target="_blank" rel="noopener noreferrer">push 26 million people into poverty</a> each year, and the financial sector industry has a role to play in promoting <a href="https://www.centerforfinancialinclusion.org/green-inclusive-finance-a-framework-for-understanding-how-financial-services-can-help-low-income-people-weather-climate-related-risks">adaptation, resilience,  mitigation, and transition</a> of livelihoods affected by climate change.  
<blockquote class="pullquote--right">Women and the poor are less likely than men and richer individuals to be resilient.</blockquote>
Women and the poor are less likely than men and richer individuals to be resilient. One reason is that both women and adults living in poorer households are more likely to rely on family/friends as their front-line source of emergency money. Yet friends and family are among the least reliable sources of money in every developing economy region. There are a number of reasons for this. One is that family and friends may be confronting the same sources of financial stress at the same time, as is the case during the COVID-19 pandemic, or with a natural disaster such as a drought, flood, fire, or earthquake, or in a systemic economic downturn. In contrast, the Global Findex finds that <a href="https://www.weforum.org/agenda/2022/07/financial-resilience-promote-savings/" target="_blank" rel="noopener noreferrer">personal savings</a> are the most reliable source of emergency money. 

&nbsp;
<h4>Adults in developing countries identifying the source of, and assessing how difficult it would be to access, emergency money (%), 2021</h4>
&nbsp;

<img class="size-full wp-image-45211 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/10/Findex-blog-pic1.png" alt="" width="744" height="396" /> 

&nbsp;
<h1 aria-level="2">The Majority of Adults in Developing Economies Worry About Finances </h1>
The objective reality of not having enough money—or not being able to obtain necessary funds in time to address emergencies—contributes to the more subjective sense of feeling financially worried. In developing economies, more than two-thirds of adults say they are very worried about one or more common sources of financial stress: living expenses for old age; medical costs from a serious illness/accident; monthly bills and expenses; and school or education fees. Twenty-two percent of developing economy adults are very worried about all four of the specified issues.  

In high-income economies, in contrast, only a fifth of adults say they are very worried about one of those four issues, and the share of adults who are very worried about all four is only 4 percent.  

Medical expenses were the biggest financial worry for both men and women in every world region. The financial impacts of COVID-19 likewise register as a significant source of worry, particularly in low- and low-middle-income economies. 
<h1 aria-level="2">Limited Financial Experience and Ability Can Expose Consumers to Financial Abuse </h1>
Beyond resilience and stress, low financial ability makes it difficult for adults to navigate the marketplace for retail financial services. Both account holders and the unbanked display low ability in certain markets. The Global Findex 2021 found, for example, that 31 percent of mobile money account owners in Sub-Saharan Africa couldn’t use their account without help from a family member or a mobile money agent. About two-thirds of unbanked adults similarly said that if they opened an account (excluding mobile money) at a financial institution, they could not use it without help. This lack of financial ability makes current and prospective account holders vulnerable to bad information and to exploitation.  
<blockquote>Low financial ability makes current and prospective account holders vulnerable to bad information and to exploitation.  </blockquote>
Financial service providers can exacerbate that challenge—sometimes unintentionally—when their fees or terms of service are unclear; when they use aggressive marketing; and when they have poor dispute resolution processes.  

One way in which low financial ability can affect account holders can be seen in the Global Findex 2021 finding that about 20 percent of wage recipients in developing economies paid higher fees than expected in order to receive wages directly into their account. In certain economies, that share is as high as 40 percent of wage recipients. We cannot know if the account holder simply didn’t understand the disclosed fee schedule, or if the fee terms were never disclosed. Either way, the fact that account holders are paying more than they expect to use services offers one example of how having an account and using it do not inevitably lead to well-being.  
<h1>Encouraging Responsible Finance and Improving Financial Well-being </h1>
Economies tend to put the burden of financial well-being on the consumers themselves. Making progress will require instead that policymakers and the financial sector industry treat consumer well-being as a shared responsibility. The policy environment also needs to prioritize both consumer protection and attention to the shifting nature of consumer risks. As the nature of these risks evolve, responsible finance has an important role to play in improving resilience and reducing financial stress. This includes, for example:  
<ul>
 	<li data-leveltext="" data-font="Symbol" data-listid="1" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">Encourage the design of high-quality products that help consumers build resilience and their capacity to prepare for, navigate through, and recover from financial shocks.  </li>
 	<li data-leveltext="" data-font="Symbol" data-listid="1" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="2" data-aria-level="1"><a href="https://www.unsgsa.org/publications/measuring-financial-health-concepts-and-considerations" target="_blank" rel="noopener noreferrer">Measure</a> and evaluate how these solutions are resulting in changes in well-being. </li>
 	<li data-leveltext="" data-font="Symbol" data-listid="1" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="3" data-aria-level="1">Ensure financial service providers clearly disclose product features and fees so that consumers understand what products are most suited for their needs, how to responsibly use these products, and when and how much they will be charged. </li>
 	<li data-leveltext="" data-font="Symbol" data-listid="1" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="4" data-aria-level="1">Inform consumers about the risks of predatory financial practices and what they look like, in plain language and in a format that users can easily understand.</li>
 	<li data-leveltext="" data-font="Symbol" data-listid="1" data-list-defn-props="{&quot;335552541&quot;:1,&quot;335559684&quot;:-2,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}" aria-setsize="-1" data-aria-posinset="4" data-aria-level="1">Incentivize financial institutions to incorporate <a href="https://www.poverty-action.org/program-area/financial-inclusion/consumer-protection-initiative" target="_blank" rel="noopener noreferrer">behavioral insights</a> and design research into their products and services. For example, product design features that help people act on pre-established intentions (like building savings for an emergency or for a specific goal) </li>
</ul>
The vast progress of the past decade on increasing account ownership should be lauded. But these gains also mean that the remaining unbanked consumers are among the hardest to reach and the most vulnerable to financial exploitation. Taking steps now to reduce the barriers to financial well-being can improve the financial lives of existing account holders and prepare the financial ecosystem to benefit some of the most vulnerable in our economies.

Responsible Finance and its Role in Improving Financial Resilience and Well-Being

On August 10, the Reserve Bank of India (RBI) released their <a class="Hyperlink SCXW9814176 BCX0" href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54187" target="_blank" rel="noreferrer noopener">recommendations on digital lending</a>. This is a significant moment, especially since the Indian government recently withdrew the data protection bill that aimed to protect consumers from the risks of digitalization and data proliferation. The bill, launched in 2019, was designed in light of concerns about data misuse by private players. A new bill is proposed as an alternative. However, while India awaits this, data regulation depends on sectoral regulations. These new recommendations on digital lending will help to regulate the multitude of digital lending apps that have exploded across India, and how they use consumer data.
<h1>Background on India’s Digital Lending Regulations</h1>
In this age of rapid digitalization, innovation opportunities grow as fast as the risks they pose to consumers, making it challenging for regulators to keep abreast of the changes. The RBI Working Group on digital lending reported that the <a class="Hyperlink SCXW115547155 BCX0" href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189#S24" target="_blank" rel="noreferrer noopener">volume of digital credit has grown twelve-fold</a> between 2017 and 2020. <a class="Hyperlink SCXW115547155 BCX0" href="https://www.cgap.org/blog/evolving-nature-and-scale-consumer-risks-digital-finance#:~:text=These%20risks%20include%20mobile%20app,may%20result%20in%20over%2Dindebtedness." target="_blank" rel="noreferrer noopener">CGAP’s research on risks</a> in digital financial services (DFS) reveals that as of 2021 there are over 60 identified consumer risks, compared to only seven risks identified in 2015; and this list only continues to evolve.
<blockquote class="pullquote--left">India has been at the epicenter of DFS growth, but this growth has been accompanied by growing concerns about consumer risks.</blockquote>
India has been at the epicenter of <a href="https://www.imf.org/external/pubs/ft/fandd/2021/07/india-stack-financial-access-and-digital-inclusion.htm" target="_blank" rel="noopener noreferrer">DFS growth</a>, driven by extensive investments by the government in digital infrastructure, <a href="https://indiastack.org/" target="_blank" rel="noopener noreferrer">India Stack</a> – a comprehensive digital identity, payments and data management system, and investments. The <a href="https://www.investindia.gov.in/sector/bfsi-fintech-financial-services#:~:text=The%20digital%20investment%20market%20is,to%20%2410%20tn%20by%202026." target="_blank" rel="noopener noreferrer">digital investment market</a> in India is projected to be worth $14.3 billion in 2025, growing at a 5-year CAGR of 22.4 percent. This growth in DFS has been accompanied by growing concerns about consumer risks, such as <a href="https://themorningcontext.com/internet/why-does-upi-fail-so-often-for-banks-like-sbi" target="_blank" rel="noopener noreferrer">high failure rates in digital payments</a>, fraud, and poor redressal, among other challenges. Digital lending has been leading the charge on both innovations and rising consumer risks and, in response, the Reserve Bank of India (RBI) <a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189#S1" target="_blank" rel="noopener noreferrer">constituted a working group</a> on digital lending in 2021.

This is not the first time the RBI has needed to formulate regulations to protect consumers. The RBI’s past interventions in <a href="https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=20377" target="_blank" rel="noopener noreferrer">microfinance</a> and <a href="https://www.rbi.org.in/Scripts/FS_report.aspx" target="_blank" rel="noopener noreferrer">digital payments</a> have allowed them to balance their conflicting goals of inclusion, consumer protection, stability, and growth-led innovation.

Digitalization and modularization of financial services create new regulatory challenges. Three challenges that stand out in the Indian context are lower entry barriers, India’s complex legal regime, and the absence of guidelines about what consumer data apps can collect.

To allow innovation, entry barriers are low, a concern raised in the<a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189" target="_blank" rel="noopener noreferrer"> working group’s report</a> especially as the market matures – a <a href="https://www.tuko.co.ke/378517-digital-lending-fixing-credit-access-barriers-fostering-growth-smes.html#:~:text=Digital%20lending%20is%20uniquely%20positioned%20to%20fix%20credit,poverty%20reduction%20and%20boosting%20national%20wealth%20and%20development." target="_blank" rel="noopener noreferrer">problem that previously has been seen and addressed</a> by regulators in Kenya. In India, this led to the <a href="https://www.centerforfinancialinclusion.org/combating-the-rise-in-fraudulent-fintech-apps">creation of lending apps, several of which were fraudulent and predatory</a>, and were launched during the pandemic when demand was high due to consumers’ loss or drop in income, loss of jobs, and health shocks.

India’s <a href="https://prsindia.org/files/policy/policy_committee_reports/1370600640_FSLRC%20Report%20Summary.pdf" target="_blank" rel="noopener noreferrer">complex and fragmented regulatory and legal regime</a> has been written about extensively in the past, and was acknowledged as a challenge by the RBI Working Group on digital lending in their recent report. In an era of modularization, where efficiency in delivery of digital credit is driven by partnerships with banks and non-bank finance companies, call centers, collection agents, and others, not all entities are directly regulated by RBI. This adds a layer of complexity to India’s already complex legal system that governs lending.

Earlier this month, India’s government <a href="https://themorningcontext.com/internet/india-withdraws-personal-data-protection-bill?type=short" target="_blank" rel="noopener noreferrer">withdrew the data protection bill</a>, which sought to empower citizens with rights related to their data. The removal of this bill now creates challenges for consumers in India, especially women and minority groups who can be targeted and don’t have control over how their data is used. Recent research in India showed that the very act of going online can <a href="https://www.dai.com/fi-cyber-user-trust.pdf" target="_blank" rel="noopener noreferrer">violate societal expectations of women</a>. Besides the obstacle this creates in narrowing the gender gap in India, the lack of laws and guidelines has led digital lending apps to seek <a href="https://www.cgap.org/blog/digital-consumer-credit-india-time-take-closer-look#:~:text=While%20there%20is%20no%20official%20count%20of%20the,least%20157%20apps%20operating%20as%20of%20July%202021." target="_blank" rel="noopener noreferrer">disproportionate permissions</a>, and then use consumer data to <a href="https://www.ft.com/content/16c86479-e88d-4a28-8fa4-cd72bace5104" target="_blank" rel="noopener noreferrer">“debt shame”</a> consumers who delay repayments. The prospect of social censure can be a powerful barrier for women in adopting DFS.
<blockquote class="pullquote--right">Digital environments exacerbate financial services risks that have existed for a long time.</blockquote>
It is worth repeating that digital environments exacerbate financial services risks that have existed for a long time. There are several ways that we see risks evolve in a digital era. Digital lenders in India communicate about prices in different ways, making it harder for consumers to compare and choose. Digital lenders requested processing fees upfront, regardless of whether or not a loan would be disbursed – a scheme profitable for lenders, but detrimental to consumers. Complaint channels in a digital environment are often non-existent or dehumanized, causing many consumers <a href="https://www.cgap.org/blog/analyzing-social-media-spot-digital-consumer-credit-risks-india" target="_blank" rel="noopener noreferrer">to resort to social media</a> to air their complaints. The absence of well-designed complaint channels can be a barrier to consistent use and can contribute to a lack of trust, especially among women. Finally, credit reporting during the pandemic took a backseat due to loan moratoria, and the modularized nature of digital lending meant that fintech lenders would often not report to credit bureaus, weakening existing credit reporting mechanisms even as the digital lending space evolved.
<h1>Positives of the New Recommendations</h1>
Not all digital lending is bad. We know that <a href="https://www.imf.org/-/media/Files/Publications/covid19-special-notes/en-special-series-on-covid-19-digital-financial-services-and-the-pandemic.ashx" target="_blank" rel="noopener noreferrer">timely access to affordable loans can help smooth cash flows, address emergency liquidity requirements, and offer consumers greater choice</a>. Therefore, the RBI’s recommendations based on the working group’s report are an encouraging first step to addressing consumer risks before trust in digital lending is eroded.

The <a href="https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=54187" target="_blank" rel="noopener noreferrer">recommendations for implementation</a> made by the RBI on August 10, include direct execution of loans, mandates to reveal the annualized percentage rate (APR), and a cooling off period that allows consumers to change their minds.

Now with these recommendations in place, regulated entities – institutions that are directly regulated by the RBI – must disburse directly to borrowers’ bank accounts, except in a narrow set of cases of co-lending transactions. This is a positive step that reduces the bargaining power of intermediaries that may be involved and clearly positions that the risk of lending lies with banks and non-banks and not the originators of loans. Therefore, the onus of consumer protection lies with the institution taking on the risk of lending.

The mandate to reveal the APR creates a standard playing field for all lenders and allows consumers to compare rates – a crucial step. Finally, the cooling off period with loans is an excellent move and sets a positive precedent for regulators in other jurisdictions. While this feature is normally associated with insurance products, the extension to loans provides consumers with choice and the ability to change their minds without facing financial losses. However, the operationalization of this recommendation will require consultation with market players, since it does impact lenders’ cash flows.
<blockquote>Even though these guidelines are not a perfect replacement for a comprehensive data protection bill, they do protect against misuse of consumer data gathered through digital lending apps.</blockquote>
While India awaits a new data protection bill and eventually a new law, individual regulators must safeguard consumers’ data privacy interests. Even though these guidelines are not a perfect replacement for a comprehensive data protection bill, they do protect against misuse of consumer data gathered through digital lending apps. They prevent disproportionate permissions from being sought by lending apps, allow access to camera, microphone, and location data as a one-time event during onboarding or checking KYC, and outline standards to be achieved in case of a security breach.
<h1>Gaps That Still Need to Be Filled</h1>
More is needed to establish a common understanding of consumer protection risks and redress mechanisms among all regulated entities and institutions involved in the delivery of loans.

While being transparent about APR is a positive first step, in a market with hundreds of lending apps and several more that launch daily, consumers must be able to compare lenders. This need presents a market opportunity: while price comparison sites exist for insurance products, it is time to have them for digital loans. Ideally, lenders would compete to provide the best terms to borrowers but we likely will need to wait some time for this advancement.

Complaint channels need to be redesigned to be consumer-friendly and regulators need to use <a href="https://www.cgap.org/topics/collections/market-monitoring/tools">appropriate market monitoring tools</a> to analyze and identify early warnings. This also presents an opportunity to test and evaluate consumer complaint mechanisms that exist – an area of emerging research interest for CFI.

And finally, the RBI proposes that underwriting algorithms used by lenders should be subject to audits. The RBI noted that while this recommendation was accepted in principle, it would require further examination prior to implementation. This is an important first step to ensure that high-stakes algorithms aren’t <a href="https://www.centerforfinancialinclusion.org/digital-credit-algorithms-in-india-expanding-access-or-cementing-exclusion">further cementing</a> financial exclusion. At the same time, algorithmic auditing, particularly by regulators of private sector algorithms, is a nascent field and must balance accountability with a company’s proprietary intellectual property. <a href="https://dai-global-digital.com/how-four-awardees-are-paving-the-way-for-a-more-equitable-ai-powered-future.html">Global research on this topic</a> is just beginning and partnerships with regulators would enable practical action.

It Is the Best of Times, and the Worst of Times: India’s New Digital Lending Recommendations