Discussions about digital credit default rates have critiqued the "how" it gets delivered, but an alternative view is to blame "what" is being offered and conclude that more diverse and useful DFS are needed sooner. The digital credit so far in the form of the uniform, very small amount nanoloans aren’t delivering a strong enough value proposition in meeting specific needs to rank them high in a person’s order of expenses to cover and debts to repay.

How do we know that improving value propositions of DFS hold promise as a solution to defaults? Looking to two markets whose mobile money ecosystems have had more time to develop credit products can provide clues.

In this post, I'll compare digital credit in Kenya and Tanzania. CGAP’s research reveals <a href="https://www.cgap.org/sites/default/files/publications/Working-Paper-A-Digital-Credit-Revolution-Oct-2018.pdf">Tanzania’s default rate is 31 percent, almost 3 times higher than Kenya’s</a>. Why do these neighbors have such drastically different default rates? Apart from other <a href="https://fsdkenya.org/blog/four-differences-and-five-similarities-of-digital-credit-markets-in-kenya-and-tanzania/">distinctions</a>, two differences embedded in the research are:
<ul>
 	<li>Kenya has diversified the range and number of products on the market.</li>
 	<li>Tanzanians consistently preferred to use informal sources rather than digital credit.</li>
</ul>
Compare the data from the graphs below, from "<a href="https://www.cgap.org/sites/default/files/publications/Working-Paper-A-Digital-Credit-Revolution-Oct-2018.pdf">A Digital Credit Revolution: Insights from Borrowers in Kenya and Tanzania</a>," a CGAP/FSD working paper published October 2018.

Diversifying Digital Financial Services: A Way to Tackle Defaults and Over-Indebtedness

Kenya

Sub-Saharan Africa

Tanzania

Consumer Protection

Credit

Delivery Channels

Digital Financial Services

Informal Credit

Nano Loans

Over-indebtedness

Blog Post

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

CFI Research Fellows Program

Consumer Credit

Digital Credit

Financial Service Providers

Fintechs

Privacy

Report

March 15 is <a href="http://consumersinternational.org/what-we-do/world-consumer-rights-day/">World Consumer Rights Day</a> (WCRD), a day marked by the consumer movement each year to raise global awareness about consumer rights and needs. It’s an opportunity to demand that the rights of all consumers are respected and protected, and to protest against market abuses and social injustices which undermine those rights. The Smart Campaign marks this occasion by talking about the importance of transparency and grievance redressal as key tenets of client protection and building consumer trust.

WCRD’s theme this year is “Making Digital Marketplaces Fairer.” With the volume of online transactions increasing, consumers are exposed to new – sometimes not fully understood – risks. For this reason, WCRD 2018 is calling for access to fair and secure internet for all, action against scams and fraud, and better consumer protection online.

According to Consumers International, <a href="http://consumersinternational.org/media/154916/e-commerce-overview-report.pdf">nearly half</a> of consumers that have access to internet but do not shop online cite lack of trust as the reason. Similarly, <a href="http://consumersinternational.org/what-we-do/world-consumer-rights-day/2018-making-digital-marketplaces-fairer/">almost 70 percent</a> of online consumers worry their digital payments are unsafe. What contributes to this lack of trust? The causes vary, but they often hinge on two things: lack of transparency and insufficient grievance redressal mechanisms.
<h3>Transparency</h3>
For the Smart Campaign, transparency means much more than disclosure agreements. Even when these are in place, <a href="http://smartcampaign.org/storage/documents/Synthesis_Report_ENG_FINAL.pdf">research shows</a> that low-income clients rarely fully understand the terms and conditions (T&amp;Cs) of the product they purchased. Many times, when the T&amp;Cs are explained simply and thoroughly, they are <a href="https://www.itu.int/en/ITU-T/focusgroups/dfs/Documents/01_2017/ITU_FGDFS_Report-on-Review-of-DFS-User-Agreements-in-Africa.pdf">often in English</a> instead of in the language of the customer. Sometimes <a href="http://www.cgap.org/sites/default/files/Working-Paper-Competition-in-MFS-Kenya-Tanzania-Jan-2016.pdf">third-party charges or hidden fees</a> aren’t fully disclosed up front, but only after the purchase is finalized. In other cases, the entire price is hidden until <a href="http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf">after the completion of the purchase</a>.

On World Consumer Rights Day, we remind digital financial service providers and online marketplaces to transparently and effectively convey important product information so their customers fully understand. As pointed out in our recent Smart Brief, <a href="http://smartcampaign.org/storage/documents/Smart_Brief_Tiny_Loans_Big_Questions_Final_092617.pdf">“Tiny Loans, Big Questions,”</a> clients should also be able to store and save T&amp;Cs related to their digital purchase or transaction, just as they should for a face-to-face one. If clients are confused or feel misled by the provider, trust is eroded. Alternatively, when providers meet consumers where they are by using their language and being completely transparent about business practices and pricing, they are taking an important step in building customer trust and loyalty.
<h3>Recourse Mechanisms</h3>
<img class="alignright wp-image-25279" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/03/pull-quote-2.png" alt="" width="315" height="207" />Consumers of practically every product or service are bound to have complaints or questions regarding their purchase or transaction. This issue is especially relevant in digital marketplaces, since there tends to be limited human interaction. On top of that, customers who are new to the technology or not familiar with digital interfaces may be confused and are therefore likely to require customer service. <a href="http://smartcampaign.org/storage/documents/Smart_Brief_Tiny_Loans_Big_Questions_Final_092617.pdf">“Tiny Loans, Big Questions”</a> points out that problem resolution can be particularly difficult when clients are using a lending service that involves multiple companies, as in the case of mobile lenders using a mobile network operator’s agent network for cash-in and cash-out payments. Borrowers in this situation are interacting with agents who are not full-time employees and likely do not work for the lender. Although agents offer a human touch, as cash transactions are their primary duty, they may have little ability to field questions or resolve problems related to the loan product.

On World Consumer Rights Day, the Smart Campaign stresses the right of consumers to access simple, fair redress. We know that if customers do not have an easily accessible grievance redressal mechanism when things go wrong, they will be less likely to trust the product or service they’re buying. However, if the customer feels heard and sees that their needs are adequately addressed, trust is strengthened. Fair redress can be achieved by setting up well-staffed call enters or establishing online chats between staffers and customers, for example. <a href="http://www.centerforfinancialinclusion.org/storage/Uniting_TechandTouch_Kenya_FINAL.pdf">CFI Fellow Alexis Beggs Olsen</a> advocates for “centaur solutions” combining digital and human interfaces to best support low-income customers using digital financial services, while improving customer acquisition and retention.
<h3>Moving Forward</h3>
At the Smart Campaign, it’s our job to stay on top of risks to clients around the world and to work with financial service providers and other parties to help mitigate those risks.  While the risks themselves change over time, one thing remains constant: if consumers do not trust the service, product, provider or platform, these entities will struggle to reach their full potential and it will be harder to achieve meaningful financial inclusion.  At the end of the day, customers being heard and respected through grievance redressal channels and transparent business practices are two of the most critical components to building consumer trust. Only when this trust is in place can digital marketplaces and financial services providers do their part in making a <a href="https://twitter.com/search?q=%23BetterDigitalWorld&amp;src=tyah">#BetterDigitalWorld</a>.

Have you read?

<a href="https://cfi-blog.org/2017/06/05/the-smart-campaign-promotes-stronger-client-protection-and-sector-collaboration-in-uganda/">The Smart Campaign Promotes Stronger Client Protection and Sector Collaboration in Uganda</a>

<a href="https://cfi-blog.org/2017/08/03/the-microfinance-ceo-working-group-reports-out-consumer-protection-by-the-millions-and-other-updates/">The Microfinance CEO Working Group Reports Out: Consumer Protection By the Millions and Other Updates</a>

<a href="https://cfi-blog.org/2017/12/19/nigeria-needs-to-include-consumer-protection-in-its-ambitious-financial-inclusion-plans/">Nigeria Needs to Include Consumer Protection in Its Ambitious Financial Inclusion Plans</a>

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This World Consumer Rights Day, Let’s Build Trust

The Smart Campaign

Keeping Clients First

Complaint Resolution

Transparency

Very small instant consumer loans have ballooned from 11 deployments in 2011, to 52 in 2016, with a particular concentration in East Africa. In just a few years, through models such as M-Shwari, M-Pawa, Tala and Airtel Money, tens of millions of people have borrowed tiny amounts over their phones. These services represent an enormous increase in formal financial inclusion. They address a fundamental consumer need previously unavailable to lower income people from the formal financial system: the need for very short term money management tools to cope with income and expense volatility. While they are in many ways a boon, they also contain, and in some cases heighten, risks for their users.

This Brief enumerates and discusses emerging consumer risks posed by these products, using the Client Protection Principles as an organizing framework. We hope this lens will assist the mobile financial sector to articulate and build a consensus about responsible practices in mobile finance.

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Tiny Loans Big Questions: Client Protection in Mobile Consumer Credit

Agence Francaise de Developpement

Mastercard Foundation

Telcos

[caption id="attachment_22204" align="alignright" width="350"]<a href="https://wvi.webex.com/wvi-en/lsr.php?RCID=f74ff90a0c83430a957d5d0c61343f1e"><img class="wp-image-22204" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/10/10-20-pic-1.png" alt="10-20-pic-1" width="350" height="226" /></a> Screenshot from VisionFund International's webinar (click to watch)[/caption]

This post is part of <a href="http://www.fi2020week.org/">Financial Inclusion Week</a>, a week of global conversation on advancing financial inclusion. This year’s theme is keeping clients first in a digital world. Throughout the week participants will share their thoughts in events and webinars, on social media, and through blog posts. Add your voice to the conversation using #FinclusionWeek.

On day three of <a href="http://www.fi2020week.org/">Financial Inclusion Week 2016</a> we were excited to see conversations happen around the world, including in Rwanda, Bangladesh, and Australia. We offer a rundown of these events and the vibrant online conversation below.

The week is nearing a close but there are still plenty of upcoming events and ways to get involved. Be sure to share your thoughts on Twitter with #FinclusionWeek, join tomorrow’s <a href="https://attendee.gotowebinar.com/register/2365627132751821825">webinar</a> with Innovations for Poverty Action, or <a href="https://docs.google.com/forms/d/e/1FAIpQLSf_eMIVRD4fRSSM86Xxde9p_sMObC3pppZ9dlFJpYqn3pEnQg/viewform">submit</a> a client quote and photo to our collection of <a href="http://www.fi2020week.org/page/">client insights</a>.

What’s Happening

VisionFund International hosted a webinar (two webinars, in fact, to accommodate for different timezones) focused on the future of digital financial services. The webinar centered on how VisionFund is using technology to lend to smallholder farmers at the right level, and at the right time. During the webinar, Tom Allen and Justin McAuley, Director of Change and Programs and Director of Global Digital Architecture at VisionFund, highlighted a new application they developed which uses available geographic and market data to better extend their products to smallholder farmers and manage risk. You can watch the full webinar <a href="https://wvi.webex.com/wvi-en/lsr.php?RCID=f74ff90a0c83430a957d5d0c61343f1e">here</a>.


[caption id="attachment_22206" align="aligncenter" width="616"]<img class="wp-image-22206" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/10/10-20-pic-2.jpg" width="616" height="410" /> "Currently there is no national definition of 'financial inclusion' and 'digital financial services' in Bangladesh but we are now actively working to promote banking services for all” – Md. Ashraful Alam, Deputy General Manager, Financial Inclusion Department, Bangladesh Bank[/caption]

In Bangladesh, USAID’s mSTAR project implemented by FHI360 hosted an interactive workshop entitled “Increasing the Uptake of Formal Financial Services through a Client-Centric Approach.” More than 35 representatives from the Central Bank, donor organizations, development organizations, digital financial services providers, banks, and insurance companies participated in the event. The workshop began with a session focused on assessing the current status of financial inclusion in Bangladesh. Participants then moved on to discuss scenarios reflecting existing barriers to accessing formal financial services in the market, including both social and economic obstacles. Finally, participants worked together to explore actions that could be taken by all stakeholders to extend full access. You can read more about this event in <a href="http://print.thefinancialexpress-bd.com/2016/10/20/154516">The Financial Express</a> (a prominent Bangladeshi news outlet).

<img class="alignright wp-image-22209" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/10/10-20-pic-5.png" width="300" height="323" />In Kigali, Rwanda, the Smart Campaign hosted a workshop focused on responsible mobile credit. During the workshop, participants assessed the most pressing consumer risks in mobile credit, with a specific focus on the risks presented by nano-loans. Participants advised that while these burgeoning nano-loans are small, they should not be disbursed carelessly and effective ways to protect clients on a regulatory and provider level should be explored.

Online Conversation

Orb Media held an open Twitter conversation yesterday featuring panelists from Grameen Foundation, Bankable Frontier Associates, Orb Media, and CFI. The conversation focused on a number of questions regarding the world's 2 billion unbanked individuals, the risks and opportunities associated with extending digital financial products to these populations, and the biggest challenges to advancing financial inclusion. Panelists focused on the need for the right tools at the right time for clients, proper regulatory instruments, and provider engagement as a means to empower clients and to lessen industry-level risks such as overindebtedness. You can read the conversation here on <a href="https://twitter.com/OrbTweet">Orb Media’s Twitter profile.</a>

BRAC - <a href="https://www.youtube.com/watch?v=i3TtTHCLDrk">Keeping Clients First Through Digital Microfinance</a>

BRAC shared a new video demonstrating how digitization has helped them keep their clients first in their microfinance work. The video illustrates the benefits of digital and how it's integrated with their services and operations - including through their Smart Collection app, which helps field officers process savings and installments via tablet-based Android devices.

UK Financial Inclusion Commission - <a href="https://www.neyber.co.uk/blog/guest-blog-financial-inclusion-does-it-matter-for-employers?utm_content=buffer18628&amp;utm_medium=social&amp;utm_source=twitter.com&amp;utm_campaign=buffer">Financial Inclusion: Does It Matter for Employers?</a>

A blog post from the UK Financial Inclusion Commission spotlights how financial stress can greatly affect workplace productivity, and the unique position that employers are in to help mitigate or eliminate this, including by improving access to affordable credit like payroll loans.

For more, including the week’s full event list and a curated #FinclusionWeek social media feed, visit the <a href="http://www.fi2020week.org/">Financial Inclusion Week website</a>.

Financial Inclusion Week Round-Up – Day 3

Australia

Bangladesh

Rwanda

Financial Inclusion 2020

Agent Banking

Microfinance Institutions

Mobile Banking

The following is part of the Smart Campaign’s #FintechProtects mini campaign. We’re raising awareness about responsible digital financial services, spotlighting work from the Smart Campaign and others, and engaging with industry actors on how fintech can move forward in a way that’s best for clients. For more information on #FintechProtects, and to get involved, <a href="https://cfi-blog.org/2016/09/14/fintechprotects-keeping-clients-first-in-digital-finance/">click here</a>.

Digital credit is growing fast in developing markets, particularly in Sub-Saharan Africa. Lenders such as <a href="http://www.safaricom.co.ke/personal/m-pesa/do-more-with-m-pesa/m-shwari">M-Shwari</a>, Jumo, M-Pawa, Eazzy Loan, Branch, EcoCashLoan, Timiza, KCG M-Pesa and others are attracting interest and investment. They are seen as having the potential to improve financial access and to make banking with poor clients more feasible and sustainable through technology that reduces underwriting and infrastructure costs. They offer small or nano loans starting as low as $5 or $10 dollars, make use of simple mobile user interfaces, and provide funds in real-time.

The Smart Campaign and others <a href="http://www.cgap.org/publications/doing-digital-finance-right">such as CGAP</a> have been carefully looking at client protection risks in the burgeoning digital credit space, particularly in relation to transparency and informed consent. Other potential consumer protection issues include the implications of data analytics rather than traditional repayment capacity analysis as a basis for underwriting, high interest rates, and lack of rigorous regulation in many markets. The Smart Campaign is conducting small research projects to identify consumer protection concerns and good practices for mitigating them. Ultimately, we would like to see standards of care developed for digital credit products.

Using the <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> as a framework, we have identified several consumer risks where deeper research, industry discussions, and consensus-building are needed.
<ul>
 	<li>Appropriate Product Design and Delivery: “Pushy” Sales and Marketing: The sales and promotion strategies used by mobile lenders include “push” marketing methods such as bulk SMS messages. In more developed markets, our Client Voice research identified pushy unsolicited offers as a tactic that customers dislike, but more important (and especially for clients new to formal credit), unsolicited offers can lead clients to over-borrow. We wonder whether customers’ should have opt-out options to avoid such offers. The Smart Campaign is interested in working to better define “aggressive sales” and “deceptive marketing” in the context of digital credit.</li>
</ul>
<ul>
 	<li>Avoiding Over-Indebtedness: Damaging Credit Scores for Early Adopters: In the early stages of a digital credit roll-out, the lender is often still tweaking its underwriting algorithms. In the process, early adopter clients who are not good credit bets may be approved, and then punished through blacklisting with credit bureaus when they cannot repay. We see <a href="http://www.nation.co.ke/business/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/996-3374952-k2dkdvz/">an example</a> of this in Kenya where hundreds of thousands of Kenyans have been blacklisted through the country’s credit reference bureaus for outstanding mobile loans of less than Sh200 (approximately $2). The credit bureaus charge about $20 for clients to clear their names. The Smart Campaign is interested in exploring guidelines to prevent adverse reporting to credit bureaus for clients that fail to repay due to inadequate appraisal.</li>
</ul>
<ul>
 	<li>Fair and Respectful Treatment: Big Data and Potential Discrimination: The use of big data and alternative data in credit underwriting may be <a href="http://www.nytimes.com/2015/01/19/technology/banking-start-ups-adopt-new-tools-for-lending.html">helpful</a> for increasing financial access to thin file customers, but there are also concerns about potential discrimination arising from these proprietary algorithms. Digital lenders use predictive models based on demographics, web presence, mobile activity, and other similar variables. These models often rely on automated software algorithms that are learning as they process more data. Discrimination may arise through this complex, rapidly evolving process. If a variable is predictive, the algorithm will incorporate it. This raises the possibility of discrimination based on ethnicity, religion, political affiliation, age, etc. The Smart Campaign is interested in learning more about how data analytics firms are building in protections against discrimination on such characteristics.</li>
</ul>
One broad concern cuts across all the Client Protection Principles: With digital, who is responsible for the client? The degree and direction of influence between digital lenders and their partners can create client protection gray areas. Should the digital lender be required to ensure that the mobile network operator (MNO) or other partner improves transparency, responsible pricing, or protection of client data? A particular focus area concerns who ensures fair dealing and appropriate behavior from banking agents? Who is ultimately responsible for securing and protecting against the unauthorized spread of client data? Do the service level agreements that guide roles and responsibilities in a partnership between a lender and an MNO, clarify responsibilities and requirements to ensure that end clients are treated fairly? The Smart Campaign is interested in exploring the levers that can be used in such relationships to influence adherence to consumer protection responsibilities.

Have you read?

<a href="https://cfi-blog.org/2015/02/04/keeping-score-the-client-protection-principles-vs-the-u-s-subprime-auto-loan-market/">Keeping Score: The Client Protection Principles vs. the U.S. Subprime Auto Loan Market</a>

<a href="https://cfi-blog.org/2016/05/31/smes-speak-out-on-online-lending-if-you-build-the-website-they-will-come-but-they-might-be-a-little-confused/">SMEs Speak Out on Online Lending</a>

<a href="https://cfi-blog.org/2016/09/14/fintechprotects-keeping-clients-first-in-digital-finance/">#FintechProtects: Keeping Clients First in Digital Finance</a>

Digital Credit in Africa: Are Nano Loans Safe for Consumers?

Alternative Data

Data Analytics

Alexandra Rizzi

Senior Director, The Smart Campaign 

Chris Wolff

Elisabeth Rhyne

Isabelle Barrès

Nadia van de Walle

Patrick Traynor

Robin Brazier

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.