<em>This post was originally published on the FinDev Gateway <a href="https://www.findevgateway.org/blog">blog</a>.</em>

Last week the <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign">Smart Campaign</a> launched new <a href="http://www.smartcampaign.org/storage/documents/Digital_Credit_Standards_June_2019.pdf">standards</a> and <a href="https://www.smartcampaign.org/storage/documents/2019_06_19_Principles_Guidelines_FINAL2.pdf">guidance</a> covering digital financial services, especially credit. This is a milestone for the Campaign, and a step forward for protecting consumers who are accessing financial services digitally for the first time. We would like the standards to be widely used to guide the practices of both fintechs and traditional financial service providers undergoing digital transformation.

Through the in-depth research, piloting and consultation to prepare these standards, we have developed an approach to consumer protection for digital credit that is in many ways familiar and in other ways brand new. The Client Protection Principles, from transparency to fair and respectful treatment, continue to be the bedrock on which the standards are based, and many of the original standards still apply with few or minor changes.

But there is also big news in these standards. They shift the emphasis in application of consumer protection from staff and operations toward product design and delivery. When services are delivered primarily through front line staff or loan officers, clients are protected by ensuring that staff are well-trained and properly incentivized. With digital services, the consumer experience is embedded in the design of the product and user interfaces – largely in advance. This is a profound shift. To ensure consumer protection, digital financial service providers will need to institute practices in the design process to confirm that consumer risks are mitigated. These practices are only now emerging in the sector.
<blockquote>There's big news in these standards: They shift emphasis in application of consumer protection from staff &amp; operations to product design &amp; delivery.</blockquote>
For example, we propose that to protect clients against over-indebtedness in digital lending, where predictive algorithms substitute for repayment capacity analysis, providers must regularly review the choices embedded in the algorithm and selection of data points (ex ante measures), and they must monitor results in the portfolio and directly with clients (ex post measures).

Similarly, there is a broad shift in emphasis from Client Protection Principle #5, Fair and Respectful Treatment, to an expanded Client Protection Principle #1, reformulated as Design of Products, Services and Delivery Channels. In non-digital models the standards around fair treatment focus on staff behavior toward clients, such as codes of conduct and sanctions for lapses. In the new standards, more attention is given to ensuring that the design process incorporates client input and that predatory or deceptive sales and marketing techniques are not programmed.

Another big change in the standards is the elaboration of the Privacy of Client data principle, which has been reformulated as Privacy, Security and Integrity of Client Data. When the Smart Campaign began, data privacy was often regarded as the least important of the principles, but today it is a major concern, as financial service providers and their partners have, use and share so much more client data. Many providers have not yet determined what privacy policies to follow or how to implement them. Informed consent is a starting point, as the standards state, but we are also looking at ways to bake privacy protections into design. As more data is manipulated, stored and moved from place to place, risks increase for data breaches and misuse, prompting us to also deepen attention to cybersecurity.
<blockquote>As more data is manipulated, stored and moved, risks increase for data breaches &amp; misuse, prompting us to deepen attention to cybersecurity.</blockquote>
A final noteworthy shift is the use of partnerships (including agents) to deliver products, which makes it harder to assign responsibility for client mistreatment. For example, an agent may be managed by a network operator while selling products of a bank or other financial service provider. When something goes amiss, it should be made clear who is responsible to make the client whole. The standards call on providers to discuss relevant practices with partners and secure agreement for partners to meet high standards, wherever possible.

As a first cut at a complete set of consumer protection standards for digital services, we recognize that these standards will need to continue to be tested and refined. An enormous thanks to the organizations who worked with us to develop the standards, particularly the <a href="http://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects</a> community of practice and <a href="https://www.mf-rating.com/">MFR</a> (formerly Microfinanza Rating), as well as to the many people who provided comments and critique. We continue to welcome your feedback. Meanwhile, we call on digital financial service providers around the world to apply the standards so that they and their consumers will face fewer risks and receive the value they seek from using financial services.

Consumer Protection in a Digital Age

The Smart Campaign

Consumer Protection

Responsible Digital Finance

Blog Post

Barres's questions that Libra's developers should consider when innovating for the new cryptocurrency are:
<ul>
 	<li>What would data privacy agreements look like if we wanted them to be understandable, fair and with an option to opt out?</li>
 	<li>How would algorithms that did not discriminate be set up?</li>
 	<li>How might fully transparent, low-cost and high-quality products and services that truly solve problems be brought to bear?</li>
</ul>
Read the <a href="https://www.euromoney.com/article/b1g0hvpnhqmyg0/cryptocurrency-facebook39s-libra-is-this-how-we-get-to-responsible-fintech">full article in Euromoney</a>.

Euromoney: Smart Campaign's Isabelle Barres Poses Questions About Libra

Appropriate Product Design and Delivery

News

This week the <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign/">Smart Campaign</a> is celebrating its 10th anniversary year with a bang by releasing its new standards for digital financial services. These standards represent the opening of a new phase for Smart to meet the growing challenges of the digital age.

The Smart Campaign began in the context of the 2008 global financial crisis. The financial system, and indeed the world economy, had just been brought down by interlocking defects in the financial system, a chain of events triggered by reckless lending in the U.S. mortgage market. A parallel phenomenon was taking place in the microfinance market in countries as diverse as India, Nicaragua and Morocco, with fast growth and commercialization leading to widespread over-indebtedness among customers, and a resulting backlash in public opinion. Customers suffered and providers lost the trust they had enjoyed. No greater object lesson can be imagined for prompting a focus on <a href="https://www.centerforfinancialinclusion.org/topics/consumer-protection">consumer protection</a>.

Smart quickly became a vehicle for the growing community of financial service providers, investors, regulators and support organizations who wanted to embed consumer protections into the microfinance sector. With the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>, the community created a common language and, with detailed guidance, standards and tools, it improved consumer protection and built trust.

Over the past decade, Smart has expanded its reach into the broader financial inclusion sector, and now there are thousands of endorsers and networks of providers and practitioners around the world who are engaged in embedding client protection standards into their products and practices. Today, more than <a href="http://www.smartcampaign.org/certification/certified-organizations">115 financial service providers</a>, serving over 45 million customers, have been awarded the <a href="http://www.smartcampaign.org/certification/all-about-certification">Smart Certification</a> seal, which demonstrates their commitment to treat customers with fairness and respect. <a href="https://www.centerforfinancialinclusion.org/the-business-case-for-smart-certification">Investors have adopted</a> the standards in their due diligence and social impact assessments. Regulators in many countries rely on the principles and the Smart’s research to design policies that balance client risk with provider sustainability, taking the voices of both providers and clients into account. Smart has facilitated the collaboration needed to create a world in which clients can access financial services with confidence.

In recent years, Smart has examined the new risks emerging as financial inclusion goes digital. Digital financial services make access much more available and more convenient for many of the people who were previously excluded, but care is needed to get it right for the vulnerable. After much research and consultation, we've developed practical guidance and standards for digital providers.
<blockquote>After much research and consultation, we've developed practical guidance and standards for digital providers.</blockquote>
As we launch these new standards, we see some parallels with the situation ten years ago, though with different headline risks. In the mainstream economy, concerns over the <a href="https://www.centerforfinancialinclusion.org/financial-inclusion-responds-to-the-zuckerberg-moment">rising power of “big tech”</a> and the appropriate use of personal data are causing widespread anxiety and mistrust. In the financial inclusion sector, data privacy and protection are also <a href="https://www.centerforfinancialinclusion.org/consumer-harm-from-data-breaches-is-a-black-box">central concerns</a>. The Smart Campaign standards address these concerns, as well as more traditional issues like over-indebtedness and transparency, which must be handled differently when digital interfaces replace face-to-face. Smart commends digital financial services for giving more people greater access to powerful financial tools. Our goal is to ensure that the digital revolution develops in a way that is healthy for customers and providers alike.

A heartfelt thank you goes out to all who have been part of this movement. We are thrilled to continue this journey together with many partners who are old friends and many more who are new ones. As we celebrate a decade of practical action to instill good practices, we ask stakeholders across the sector to join us in ensuring that the digital revolution builds trusting relationships and mutual benefits for customers and financial service providers well into the future.

<em>Stay tuned for an upcoming post on the launch of the digital standards, which will provide in-depth discussion of the new standards. For now, this <a href="https://www.centerforfinancialinclusion.org/help-us-shape-standards-for-responsible-digital-lending">post from the standards’ comment period</a> provides more detail on what these standards are.</em>

Smart Campaign’s Next 10 Years to Start With New Digital Standards

<a href="https://libra.org/en-US/">Libra</a>, a new digital currency backed by blockchain technology and introduced today by Facebook, has the potential to reach any consumer with a digital connection. It’s exciting news for the 3 billion people worldwide who are currently unserved or underserved by the world’s financial sector. In addition to leveraging connections between people already on the world’s largest social network, the platform will be leveraged by many innovators -- starting with an impressive <a href="https://mashable.com/article/facebook-libra/">array of founding members</a> -- enabling people across the globe to transact and access new products securely. While this represents a huge opportunity, there’s also a responsibility to ensure that access to the platform and new financial service customers’ data and funds be safeguarded.

The value proposition of a global payment infrastructure has been recognized before, with many innovators moving into this space to launch solutions tailored to the underserved. Yet, the potential scale of Libra, through familiar and popular platforms such as WhatsApp and those of other founding companies, is a potential game changer. Libra has the potential to add a streamlined payment feature in millions of people’s phones – without even requiring that they download a new app.

At the <a href="http://smartcampaign.org/">Smart Campaign</a>, we’re enthusiastic about the potential for partnerships and innovations through Libra, which will be governed by the independent, non-profit Libra Association. Vulnerable unbanked and underbanked populations still face challenges to access high-quality and trustworthy products. Libra will allow a wide range of innovators to develop creative solutions, backed by secure technology.

Ensuring the privacy and security of client data is at the core of building lasting trust in a digital world. Providers can strengthen their privacy and security practices by having:
<ul>
 	<li>Sound data collection and storage policies</li>
 	<li>Clear guidelines about when and with whom to share data</li>
 	<li>Informed consumers who have meaningful choices in regard to the handling of their data</li>
 	<li>Systems to detect and respond to fraud</li>
</ul>
Those are a few of the safeguards that the Smart Campaign promotes with providers and is helping providers to implement. Together, we can ensure that the products and services that are developed to use the Libra platform create trust and value for both providers and customers.

The <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>, which form the cornerstone of the Smart Campaign’s work, provide a framework to anticipate and evaluate the consumer risks introduced by blockchain innovations. We look forward to working with innovators in the Libra community, as we have with our <a href="https://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>. Similar to our work with Fintech Protects, we hope to promote greater awareness and consensus among Libra innovators on consumer risks in digital financial services and how to mitigate them.
<blockquote>We hope to promote greater awareness and consensus among Libra innovators on consumer risks in digital financial services and how to mitigate them.</blockquote>
There will be adoption challenges for any cryptocurrency among low-income consumers. Over a decade of learning about the needs of this customer segment has shown us that appropriate product design requires a feedback loop between consumers and those developing the products. We know that payments can be an on ramp to access, but that <a href="https://www.centerforfinancialinclusion.org/financial-inclusion-hype-vs-reality-deconstructing-the-2017-findex-results/">does not guarantee consumers will make meaningful use</a> of other core financial services, such as credit, savings, or insurance. Thinking through the last mile use cases for Libra, including cash out points and merchant transactions, will be key, as will anticipating the risks that can damage consumer trust. Our goal is to ensure that new financial products aren’t just exciting new innovations, but that they actually deliver quality, appropriate, fair and trusted services.

Libra: With Opportunity Comes Responsibility to Safeguard

Delivery Channels

Digital Financial Services

Payments

The <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign/">Smart Campaign</a>'s senior director discussed the motivation behind the survey and forthcoming report with <a href="https://www.newtimes.co.rw/"><em>The New Times</em></a>, a leading Rwandan news provider.

“We want all stakeholders to understand the actual experiences and concerns of the clients they are serving, protecting or advocating for, because there hasn't been a comprehensive survey underpinning the conduct of this digital financial service before,” <a href="https://content.centerforfinancialinclusion.org/people/alexandra-rizzi/">Rizzi</a> said.

Fraud was a "major problem" for about 40 percent of respondents (with 10 percent falling victim themselves), and while nearly 90 percent trust mobile money services, that trust extends to specific services, namely person-to-person (P2P) transfers. There are approximately 11 million mobile money users in Rwanda.

The report will be available for download on this site in the coming weeks. The results were discussed at a workshop of regulators in the Rwandan capital Kigali in March and will be discussed at the <a href="https://sptf.info/annual-meetings/2019-summit-inclusive-digital-future">Inclusive Digital Future Summit</a> in Nairobi in June 2019.

Read the<a href="https://www.newtimes.co.rw/business/mobile-money-services-enjoy-public-confidence-fraud-remains-threat-survey-reveals"> full article</a> and learn more about the <a href="http://smartcampaign.org/tools-a-resources/1075">Client Voices Project</a>.

&nbsp;

&nbsp;

Smart Campaign's Alex Rizzi Interviewed About Client Voices Project Survey in Rwanda

Rwanda

Sub-Saharan Africa

Client Treatment

Enabling Environment

Fraud

This <a href="https://soundcloud.com/user-273615244/frt-episode-28-digital-customer-journey">episode</a> of the "FRT" podcast focuses on how digital customer journeys are enabling financial institutions to reach underserved segments in a sustainable manner. IIF’s Conan French host Rhyne and Amin Khairy to discuss the upcoming CFI-IIF paper “Charting the Customer Journey in the Digital Age.”

Rhyne discusses the persistent challenges for digital inclusion and the importance of having a “tech-touch” balance at certain stages of the customer journey.

They also discuss the potential gain in operational efficiencies for financial institutions and the positive impact digitization has on unbanked customers and provide real-life examples of digital customer journeys in various stages: pre-onboarding, onboarding and continued use.

"We're finding that the countries that are making it easy to onboard are those with a good national ID program," Rhyne said. "Having a very clear and simple to use national ID that's easily connected electronically is probably the most important thing."

Rhyne also notes that understanding the unique financial lives of lower income segments is crucial to digitization and different from transitioning banked populations from analog to digital.

Browse more <a href="https://www.iif.com/Innovation/FRT-Podcast">FRT podcast episodes</a>.

&nbsp;

IIF Podcast Features Elisabeth Rhyne Discussing the Digital Customer Journey

Human Centered Design

I remember a time, back in the 1990's, when almost everything in my life was computer-less. I didn’t use email or the internet and didn’t own a cell phone. Other than some government, education, medical and financial records that may have been stored electronically, I essentially had no digital footprint. That all changed in 1996 when I subscribed to dial-up internet.

Fast forward to 2019, and we now have the term “data exhaust” to describe how we are constantly generating new data about ourselves as we go about our daily lives. Data has become so fundamental to our existence that a growing number of people, including Satya Nadella and Tim Cook, CEOs of Microsoft and Apple, respectively, have been calling for data privacy to be treated as a human right. But despite all the attention data is getting, there’s tremendous confusion and uncertainty among consumers and businesses alike as to what to do about it.
<h2>Urgency to Act at a Fever Pitch</h2>
In terms of what this means for financial services, we at CFI are living the growing sense of urgency with respect to data use and protection, and we’ve been responding, most recently with the new draft <a href="https://www.centerforfinancialinclusion.org/help-us-shape-standards-for-responsible-digital-lending">standards on responsible digital credit</a> from CFI’s <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign">Smart Campaign</a>.

We’ve also begun to explore more ways in which we can better support financial service providers in getting data right. Last month, we partnered with <a href="https://www.accion.org/how-we-work/invest/accion-venture-lab/">Accion Venture Lab</a>, which has also released a new <a href="https://www.accion.org/data-protection">data protection resource</a> targeted to fintechs, in a convening of about 30 stakeholders with a shared interest in this topic to consider the primary data protection issues financial service providers are grappling with and ways in which we can make progress.

Not surprisingly, there was an ample supply of challenges put forward on issues: from informed consent and data minimization, to regulatory complexity and the limited resources and expertise of smaller providers. There were no easy answers, but about halfway through the discussion, one participant said, “Maybe we need to bring it down a level to basic blocking and tackling. We can’t own the philosophical discussion.”

While the larger questions are important to consider, this served as a reminder that it’s easy to get swept away in the ocean of issues. So the best approach may be to look to players and solutions that already exist to help anchor our efforts around more practical steps.

What this means for us is that while new standards and resources are good first steps, they're stepping stones for establishing good practices and building trust between providers and clients. There’s a need for greater awareness and more concrete guidance and solutions through audiences that can help to maximize influence, such as boards, investors and regulators. Throughout the conversation, the ideas that emerged hinted at a two-part approach:
<ul>
 	<li>working at an ecosystem level to develop principles around data protection, and</li>
 	<li>seeking out existing organizations and resources in adjacent spaces that could be leveraged to develop more practical tools.</li>
</ul>
So how might we go about this? One path could be to try to work with larger technology players to develop high-level principles as a guiding framework. Whether or not there would be an appetite among larger technology players to collaborate on such an undertaking, principles need broad-based buy in to achieve scale.

Martin Tisne, Managing Director at <a href="https://luminategroup.com/about">Luminate</a>, recently made this point in “<a href="https://www.technologyreview.com/s/612588/its-time-for-a-bill-of-data-rights/">It’s Time for a Bill of Data Rights</a>,” published last December in <em>MIT Technology Review</em>. He discussed the importance of data rights, such as the right to be secure against unreasonable surveillance and the right to not be discriminated against. “The details should flow from basic principles, as with America’s existing Bill of Rights. Too often, attempts to enunciate such principles get bogged down in the weeds of things like ‘opt-in consent models,’ which may fast become outdated,” Tisne wrote.
<h2>From Frameworks to Specific Actions</h2>
As for specific actions, another path could be to scan the landscape for existing resources that could be adapted and applied in the financial inclusion space. Some specific organizations mentioned include the <a href="https://www.sifma.org/">Securities Industry and Financial Markets Association</a> (SIFMA) and the <a href="https://www.sei.cmu.edu/about/divisions/cert/">CERT Division</a> of the Software Engineering Institute at Carnegie Mellon. While they don't specifically focus on BOP markets, consulting with these organizations could serve as a good reference point for relevant data protection frameworks and policies, procedures and best practices. They could also provide listings of third parties that specialize in services around data privacy and security, such as audits, penetration testing and threat intelligence.
<blockquote>There’s a need for greater awareness and more concrete guidance and solutions.</blockquote>
CFI’s goal is not to become technical advisors, but rather to provide overall direction and practical tools that are tailored to smaller providers in geographies where assistance of this nature is harder to come by. Despite all the attention that the topic of data has been getting, the level of risks and uncertainties only continues to rise, especially for smaller providers. There's nothing more core to our purpose than to confront these types of emerging challenges head on. We did this in 2009 when we launched the Smart Campaign to take on consumer protection, and we see this new phenomenon of data as being just as pressing.

Please join us in our pursuit of getting data protection right. Leave a comment below and let’s get the discussion going on actionable best steps!

On Data, Let’s Anchor Ourselves in Practicality

You’re invited to join the Smart Campaign on Tuesday, February 26, at 11 am EST for a virtual event to discuss the newly released draft Consumer Protection Standards for Digital Credit. We’ll be talking with the Smart Campaign’s Global Director Isabelle Barres and Senior Director Alexandra Rizzi joined by Lucia Spaggiari, Chiara Pescatori, and Ben Wallingford of MFR about how the digital credit standards were developed and major updates in areas such as transparency, data privacy and security, and algorithm governance.

Based on the latest industry research, field assessments with digital lenders conducted by Smart and MFR, and discussions with the Fintech Protects Community of Practice, the draft standards consolidate what we have learned about good practices for responsible digital credit and provide a starting point for discussion.

This webinar is part of the six-week public comment period on the standards and serves as an opportunity for the industry to ask questions and provide feedback before the standards are finalized.

Webinar: Draft Digital Credit Standards

Webinar

More and more low-income customers around the world have access to digital loans that promise improvements to their lives. At the Smart Campaign, we believe that financial service providers and their customers can both benefit from transparency and fair treatment in financial services. Customers need to be confident that they can trust their provider and its products.

With an emerging consensus around the importance of responsible digital credit, demand is rising for a shared set of criteria to assess the practices of digital lenders. Investors and regulators want a way to evaluate consumer protection practices among the financial service providers they invest in or regulate. Digital financial service providers also want guidance to improve their practices and demonstrate that they are committed to putting responsible finance into action.

This is why the Smart Campaign has been working to develop a revised set of Client Protection Standards that address the risks involved in digital credit. Today we are releasing a set of draft standards that reflect input from consumers, researchers, financial service providers and on-the-ground testing.
<blockquote>We're releasing a set of draft standards that reflect input from consumers, researchers, financial service providers and on-the-ground testing.</blockquote>
To prepare these standards, the Smart Campaign has engaged in research to understand emerging risks to clients (see, for example, "<a href="https://www.centerforfinancialinclusion.org/smart-brief-tiny-loans-big-questions">Tiny Loans, Big Questions</a>") and mapped these risks to the Client Protection Principles through CFI Fellow John Owens’ work on <a href="https://www.centerforfinancialinclusion.org/responsible-digital-credit">responsible digital credit</a>. We have learned about the <a href="https://www.centerforfinancialinclusion.org/digital-finance-and-data-security-2">state of data security</a> through the work of CFI Fellow Patrick Traynor. In collaboration with <a href="https://www.mf-rating.com/2018/10/05/mfr-smart-campaign-and-fintech-protects-pilot-digital-client-protection-assessments/">MFR</a>, the Campaign has worked with providers, including <a href="https://www.centerforfinancialinclusion.org/building-trust-and-growing-digital-financial-services-a-look-at-jumo/">Jumo</a>, <a href="https://www.centerforfinancialinclusion.org/partnering-with-providers-to-set-dfs-standards-for-client-protection">4G Capital</a>, and <a href="https://www.centerforfinancialinclusion.org/app-based-lender-weighs-in-on-standards-for-responsible-digital-credit">Tala</a>, to conduct research and field assessments to ensure that the draft Client Protection Standards for Digital Credit would be practical. We have had extensive discussions with providers who are members of the Fintech Protects community of practice. We have benefitted from and built upon the high quality research produced by institutions including CGAP, GSMA, Microsave, Financial Sector Deepening, and the Better than Cash Alliance.

These draft standards consolidate what we have learned about good practices and where to set the bar. They provide a starting point for further inquiry and discussion across the industry.
<h2>Familiar and New Territory for Financial Consumer Protection</h2>
The Standards for Digital Credit are anchored in the <a href="http://smartcampaign.org/certification/4-demonstrate">Client Protection Principles</a> (CPPs) that serve as the north star of Smart Certification. We found that many of the standards already in place for traditional forms of lending apply equally to digital lending. In other cases, standards remain the same, but practices differ. For example, the principles of transparency have not changed, though in practice standards must be adapted to products that interface digitally with customers. For example, clients must be able to access terms of service agreements and receive provider notifications in a local language whether the channel is a loan officer, an app, or a chat bot.

More important changes involve areas at the heart of digital business models, notably data privacy, data protection and digital underwriting. The sections on these topics have been greatly enlarged, and we are especially eager to receive input on them. For these areas in particular, we recognize there is more to learn to <a href="https://news.un.org/en/story/2019/01/1031092">strike a balance</a> between the benefits and risks of new data-rich business models.
<h2>Comments Please!</h2>
Now, we’d like to hear from you, so we’ve opened this initiative to public comment.

Per <a href="https://www.isealalliance.org/credible-sustainability-standards/iseal-codes-good-practice">ISEAL’s Codes of Good Practice</a> on standard setting, we will collect feedback over the coming six weeks and incorporate these ideas into an updated set of standards. We will host a <a href="https://register.gotowebinar.com/register/8253670247853286401">public webinar</a> to discuss the standards and field questions on Tuesday, February 26, in addition to hosting a <a href="https://www.smartcampaign.org/about/evolution-of-standards/public-comment-2019">feedback form</a> on our website (see "How to Give Feedback" below).

As you comment on the new standards for digital credit, we ask you to approach them as a minimum viable product (MVP). In much in the same way as an MVP is the starting point for product testing, iteration, and improvement, so we expect to iterate these standards quickly to develop standards backed by industry consensus. We are also hopeful that during this public comment period providers will evaluate their own practices against these standards. We would love to hear the results, and we would be even more excited to hear if providers upgrade their policies and procedures to reflect the standards.
<blockquote>We’d like to hear from you, so we’ve opened this initiative to public comment.</blockquote>
Following the public comment period, we will revise the standards based on input received and integrate them into our Smart Certification program as a roadmap for digital lenders. Smart Certification has been a catalyst for improvement of consumer protection practices at more than 110 financial institutions, and we expect to offer <a href="https://www.smartcampaign.org/certification/2-assess">Smart Assessments</a> and <a href="http://smartcampaign.org/certification/all-about-certification">Smart Certification</a> to digital lenders shortly after revised standards are published (exact date TBD). To support providers to implement the standards, we will develop publicly available tools for providers, investors, and others, as well as products for more formal assessments offered through our expert network of trainers and certification bodies.

Ensuring trust in the next generation of digital financial services is an effort that involves all participants in the sector. We can all work together to ensure that clients remain at the center.

Help Us Shape Standards for Responsible Digital Lending

Consumer protection is essential for ensuring that financial inclusion works for consumers and results in a healthy sector. That’s why the <a href="https://www.centerforfinancialinclusion.org/global-microscope-2018">Global Microscope</a> includes indicators on the state of consumer protection regulation in its overall assessment of a country’s enabling environment. The <a href="https://www.smartcampaign.org/">Smart Campaign’s</a> expertise in consumer protection give its team an informed perspective on these issue. We sat down with Isabelle Barrès to get deeper perspectives on this relationship and her general reactions to the Microscope.
<h4>Did the Microscope reveal any surprises from a consumer protection perspective?</h4>
What stood out to me was the way consumer protection cuts across all of the domains in the Microscope framework. Indeed, while specific consumer protection and privacy regulations are key, as I look through the Microscope indicators, I’m struck by how nearly all of them contribute to minimizing consumer harm.

For instance, a favorable environment for consumer protection requires government and policy support and a solid infrastructure. Consumers stand a better chance of being protected if financial literacy programs enable them to make more informed choices and advocate for their rights. Thoughtful product design is critical to mitigate risks – for example in designing a loan product, it’s important to build in restrictions against excessive borrowing. The way agents and outlets are supervised can make a critical difference in the way clients are treated.

This 2018 Microscope has increased its weighting on cybersecurity one of the rising risks to consumers and the industry, which the Smart Campaign is tracking.
<h4>How do you get a robust regulating environment that doesn’t stand in the way of new players? Where’s the balance?</h4>
The Smart Campaign helped draft a <a href="https://responsiblefinancialinclusion.org/?page_id=2353">model legal framework</a> – a guideline for regulators – largely for this purpose. It builds on existing <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/28996/122011-PUBLIC-GoodPractices-WebFinal.pdf?sequence=1&amp;isAllowed=y">guidelines</a>, <a href="https://clmr.unsw.edu.au/sites/default/files/content_files/Regulatory_Diagnostic_Toolkit-June 2018.pdf">tools</a>, and <a href="https://www.itu.int/en/publications/Documents/tsb/2017-DFS-ConsumerExperienceProtection/mobile/index.html#p=1">recommendations</a>, and is drafted in a way that leaves room for regulators to factor in the level of competition in the market, the types of players, the level of maturity, prep regulation to support a balance between regulation and innovation. In developing standards for digital credit providers, we see a number of practices that, if we were looking at a traditional provider, we would have been very critical of (e.g., portfolio quality and pricing). While still very much focused on these issues, we recognize that many of these models are nascent and providers are still refining their models and need time to innovate and adapt. We are therefore providing space for early stage providers to innovate rather than have more stringent guidelines from the get go, as long as risks to clients are mitigated.
<h4>The Microscope states that, "in the best-performing countries, traditional consumer protections are coupled with data privacy and cybersecurity safeguards... strong performance on traditional consumer protection (countries that scored greater than 80) does not necessarily indicate that a country has a sufficient framework for digital consumer protection." What does this mean to you?</h4>
That means that countries have traditional consumer protections in place, but these are not sufficient to deal with newly arising risks. So just because a country has a good consumer protection framework, doesn't mean it's up to date with the emerging digital risks.
<blockquote>Just because a country has a good consumer protection framework, doesn't mean it's up to date with the emerging digital risks.</blockquote>
The main adaptations that we see needed for an adequate framework for consumer protection in a digital world are the need to account for 1) the increased reliance on agent networks for sales and service; 2) the reliance on technology and technical interfaces and the client risks linked to data collection, use and storage; and 3) more complex value chains. These are taken into consideration in the current <a href="https://www.centerforfinancialinclusion.org/partnering-with-providers-to-set-dfs-standards-for-client-protection">update</a> to the Client Protection Standards for digital services.
<h4>Would the countries that have done well in traditional consumer protection be well positioned to adopt digital consumer protection?</h4>
In some ways, yes. Digital consumer protection builds off of traditional consumer protection. The “traditional” consumer protection dimensions (appropriate product and delivery design, prevention of over indebtedness, transparency, responsible pricing, fair treatment, recourse) are still relevant, with adaptations needed for the new risks that come with low touch/ high tech models. The biggest changes from the digital revolution that affect consumer protection are linked to data: data privacy, data security and data use, and the confluence of industries that used to work independently: technology and finance. While data privacy and protection was part of the traditional consumer protection, the extent to which the data protection frameworks need to be extended to cover consumer risks in a digital world is considerable. Countries that have strong data protection policies and enforcement (e.g., The Philippines, Colombia) are getting a head start to address consumer protection issues in a digital world.

The extent to which countries are well positioned to adopt digital consumer protection also depends on the extent to which they embrace innovation, the extent to which non financial digital providers can be integrated to the financial infrastructure, and the extent to which telcos and banking regulators cooperate. As highlighted by the Microscope, The Philippines is a good example of a country making headway in building an effective digital finance ecosystem and increasing the collaboration between regulators and industry. Their work under the <a href="https://www.r2accelerator.org/bsp/">R2A program</a> in developing and testing technology based solutions that can support good consumer protection is an interesting example to follow.
<blockquote>The Philippines is a good example of a country making headway in building an effective digital finance ecosystem and increasing the collaboration between regulators and industry.</blockquote>
<h4>Are there any country-level assessments that especially caught your attention?</h4>
For Cambodia, in terms of key barriers to financial inclusion, the Microscope authors worry about the expansion in the number of MFIs and MBIs, and it does reference the surge of refinanced loans. In our work, we’re seeing self-organization efforts in response to a surge of lending and a fear of over-indebtedness that has been well documented through <a href="https://mimosaindex.org/living-on-the-edge-is-it-worth-it/">Mimosa</a>. We see ongoing efforts from investors to share information on their portfolios. There are industry efforts in the form of lending guidelines that have started. It’s an example of an industry-based initiative that is complementing what regulators are doing.

Kenya is another example. The Microscope highlights the Consumer Protection Act, which aims to protect consumers from aggressive lending. Yet, regulations are not yet going far enough, because of the proliferation of digital lenders that aren’t regulated. It would be great if the Microscope analysis could dig deeper into the institutional landscape.

<em>Read the <a href="https://www.centerforfinancialinclusion.org/global-microscope-2018">Microscope</a> and let us know what you think!</em>

Digital Standards and Nascent Business Models: Smart Campaign Reacts to The Global Microscope

Global Microscope

Policy, Regulation and Government Initiatives

Isabelle Barrès

Vice President, Smart Campaign

Alex Taylor

Alexandra  Wall

Alexandra Rizzi

Alexis Beggs Olsen

Dylan Lennox

Elisabeth Rhyne

Ethan Loufield

Haset Solomon

Ian Parrish

Ignacio Mas

John Owens

Ros Grady

Rose  Muturi

Somen Saha

Wayne Hennessy-Barrett

Azerbaijan

Bosnia and Herzegovina

Europe and Central Asia

Indonesia

Kenya

Latin America and The Caribbean

Nigeria

Serbia

Tajikistan

Tanzania

Agent Banking

Alternative Data

Complaint Resolution

Credit

Credit Provision

Customer Centricity

Data Analytics

Digital Credit

Financial Service Providers

Financial Technology

Fintechs

Human Touch

Mobile Banking

Over-indebtedness

P2P Lending

Privacy

Product Pricing

Smallholder Farmers

Smart Certification

Social Performance

Transparency

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.

As the digital lending sector grows rapidly, financial inclusion practitioners see <a href="https://www.mckinsey.com/~/media/McKinsey/Featured Insights/Employment and Growth/How digital finance could boost growth in emerging economies/MGI-Digital-Finance-For-All-Executive-summary-September-2016.ashx">huge potential in fintech for inclusive growth</a> while at the same time becoming aware of emerging <a href="http://smartcampaign.org/tools-a-resources/1136">risks to new consumers of digital financial services</a>.

As digital lending models are going to market, there’s a window of opportunity to build trust with new consumers of financial services at the bottom of the pyramid. In response to both the opportunity and the need, the <a href="https://www.smartcampaign.org/">Smart Campaign</a> is developing standards for digital credit to support financial services providers with a roadmap for putting responsible digital finance into practice.

The standards for digital credit—which will be released for public comment in February—incorporate the Campaign’s expertise in consumer protection, field research by the Campaign and others, collaboration with digital financial service providers through the <a href="https://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a> and pilot assessments with digital credit companies.

<a href="https://tala.co/">Tala</a>, a leading consumer lending app with operations in Kenya, Tanzania, the Philippines, and Mexico, <a href="https://www.smartcampaign.org/news-a-highlights/whats-happening/70-2014/1190-tala-and-the-smart-campaign-partner-on-digital-client-protection">recently partnered</a> with the Campaign on a pilot assessment in Kenya to test the emerging standards. The Campaign sat down with Tala’s Rose Muturi, East Africa Manager, and Ian Parrish, Director of Data Science, to discuss why Tala volunteered to participate in the assessment and the future of responsible digital credit.
<h4><strong>Can you briefly describe Tala’s business model? Who’s your customer?</strong></h4>
<em>Rose Muturi</em> (RM): Tala’s mission is to create financial access, choice, and control for the underserved globally. Our business model is based on our principal value of radical trust. Through the use of alternative data and our proprietary credit models, we generate credit scores which enable us to underwrite and disburse loans to our customers in under 10 minutes via mobile money.

Currently, anyone with a smartphone that uses the Android operating system can apply for a Tala loan. Our data shows that 65 percent of Tala borrowers use their loans to either start or grow a small business.
<h4><strong>What was your motivation for joining Fintech Protects and inviting the Smart Campaign to work with Tala in a field assessment of responsible practices?</strong></h4>
<em>Ian Parrish</em> (IP): Tala is using new techniques to provide financial access to customers that otherwise don’t have access to capital. Because we’re using brand new techniques, I think it’s our responsibility to make sure we’re providing our services as fairly and ethically as possible. The assessment confirmed that we’ve actually gone above and beyond what’s legally required for data ethics.

RM: The motivation for engaging in the field assessment was to underscore our emphasis on treating customers fairly, ensuring we have very high standards of handling consumer data, and ensuring that the customers have trust in us regarding their financial access.

The assessment confirmed that the best practices we’ve implemented in customer service – transparency and data privacy – are bearing fruit. We work to improve customer experience, and I was pleasantly surprised by the progress we’ve made so far, because in our day-to-day, we try to continuously improve the way we work. We hardly take a step back to look and appreciate the success.
<h4><strong>Kenya’s received a lot of attention recently for the rapid growth of its digital lending sector. What’s Tala doing to understand and mitigate the risk of over-indebtedness in this market and others?</strong></h4>
IP: Over-indebtedness is a major concern for us, especially with many new digital lenders entering the market. In our credit modeling, we take as many signals as we can to have a picture of a customer’s debt capacity. This gives us the ability to tailor our loan terms to each customer’s risk profile, which is good for both Tala and our customers. As we’ve gotten more experience lending in Kenya, our ability to assess risk has markedly improved. Lower interest rates save customers money, so that our loans provide more value directly for their business or personal needs.

We’re also working with other digital lenders to advocate for more holistic credit reporting, as is the case in mature credit markets, so that at time of application we’ll have a full and accurate picture of our customers’ debt.
<blockquote>We’re also working with other digital lenders to advocate for more holistic credit reporting.</blockquote>
RM: I’d also add that providing education and creating more awareness about over-indebtedness amongst our customers is aligned with our greater mission. Through educational in-app messaging on healthy debt, online financial advice forums and contests, and financial education campaigns, we work to provide our customers with the tools they need to make informed financial decisions. Also, we actively and voluntarily participate in data sharing with credit bureaus.
<h4><strong>How do the client protection standards provide value to Tala as a business?</strong></h4>
RM: Customer protections standards provide tremendous value to us. A customer may not be inclined to repeat a service if they felt it was not working in their favor and protecting their privacy. Our customers know through their interactions with us that we have very high standards of consumer confidentiality and data protection, which builds trust in us as a company and in our offering. This is evident from our number of repeat users, which is in the range of 95 percent.

IP: Our customers have a choice in financial partners, and the company that offers them fair terms and protects their data is going to lead.

Additionally, Tala’s employees joined our company explicitly to do something good in the world. It’s important, for attracting and retaining talented employees worldwide, to make sure we offer socially responsible products.
<h4><strong>Of all the areas that the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> cover, what do you think will be the single most important issue digital lenders must contend with over the next five years?</strong></h4>
IP: Advances in data science algorithms have revolutionized the ability of financial service providers to reach the unbanked and underbanked population. One promise of algorithmic loan decisions is fairness, by leaving the inherently biased opinions of human loan officers behind. I think this point will be a major and evolving issue that all digital lenders will need to address in the next five years. Algorithms aren't inherently fairer unless we're diligent about governing them. In that sense, fairness isn't a given just because we've removed human bias from the decision making process; it's something we have to continually work toward.

RM: Data protection for customers will continue to be important. In the technology world, and fintech specifically, there is a need to collaborate with other providers to feed innovation. This means understanding customer behavior and sometimes creating a product in partnership with another company. Data sharing is often part of that collaboration, which needs to be designed with protecting the privacy of customers in mind. Balancing business goals with protecting customers, particularly around data sharing, is a conversation that should be ongoing across our industry. Enabling innovation requires an amount of data sharing to understand various patterns, so issues like data ownership and the customer’s right to be forgotten will continue to affect digital lenders.

App-Based Lender Weighs in on Standards for Responsible Digital Credit

This post is not about imagining a financial inclusion nirvana, that would be far too easy. Instead, it is about the role of imagination in digitizing money, specifically, how people imagine and assign roles to the money in their hands (or digital devices) as a way of negotiating between their current and future selves.

Let´s not fool ourselves: these days we are having great success in digitizing remote payments but not money itself. I say this because most transactions start and end in cash, most digital accounts are empty, and most people only think of digital money services to undertake a limited set of remote transactions, but not their everyday transactions.

While digitizing payments is a matter of moving money around more conveniently and reliably, digitizing money is about preserving a sense of control over one´s money and especially money gaps (money you know you'll need but you don´t yet have). In this case, the core challenge is giving people the tools to manage the trade-off between discipline (preserving saved money, not borrowing when circumstances don´t warrant) and flexibility (being able to access liquidity as needs arise). Digitization that lowers payment frictions and broadens payment acceptance may actually make it harder to make money feel more manageable between payments.

Money management is often seen through the lens of the interaction between a virtuous, future-oriented you (a judgmental voice that strives for discipline), and a venial, present-oriented you (who argues for, and too often succumbs to, flexibility). Digital money solutions are usually conceived to talk to and empower virtuous you: carefully evaluate your options, explicitly state your goals, accept illiquidity. That´s why most money management apps feel so schoolmarmish. They are not for people like venial you, which is what you are most of the time. It´s tiresome to be treated like the angel that you know you are not.

My sense is that money management services need to be much more about venial you. That's the guy who needs most help, and that´s the guy who is making most money decisions anyway. Because the decision to be virtuous and set  money aside is made once, but the decision not to raid that money is made continuously thereafter.
<blockquote>The decision to be virtuous and set  money aside is made once, but the decision not to raid that money is made continuously thereafter.</blockquote>
It is important to understand that virtuous you is not necessarily better than venial you. Venial you is more attuned to the importance of the little rewards that you give yourself to sustain you day-in, day-out; to the value of creating little, spontaneous, memorable family moments; to the resilience of social networks built on showing gratitude and loyalty to friends and neighbors; to the importance of signaling success to those around you. You need both of you, and that´s why evolution put both there.

Understand that when you are poor and face a bleak and uncertain economic outlook, virtuous you locking up liquidity can be seen by venial you as an open act of sabotage. The implication is that money management systems that sell illiquidity will always fail to engage venial you. These money management systems have picked a side. So rather than getting venial you to cede ground to virtuous you, their effect is for venial you to tune out. Send all the SMS reminders you like, venial you is just not listening.

The objective of money management tools has to be to structure a continuous conversation between virtuous you and venial you. And you do that with stories. Help virtuous you and venial you develop and agree to a story for each potential liquidity source (whether entailing dis-saving, borrowing, or reciprocity). That helps, because at any point in time the decision of whether to exercise flexibility or maintain discipline comes down to which of these actions is most consistent with the agreed story.
<blockquote>The objective of money management tools has to be to structure a continuous conversation between virtuous you and venial you. And you do that with stories.</blockquote>
What type of story each type of money gets depends on many factors. First: where did it come from? Money that you worked hard for is not the same as money that you got as a windfall; money that you borrow from your employer is not the same as money you borrow from the moneylender. Second: what is it for? Is it for survival, for the future of my children, for guilty pleasures? And third: where is it stored? It may be deposited in some kind of receptacle, invested in a reciprocal relationship, or supporting an ostentatious display of wealth and success. A good story requires that all these aspects be joined up. That's when the financial service that holds or unlocks the liquidity is consistent with its origin and destination. That´s why you put inheritance moneys in jewelry and not in a jar.

The main heuristic model that people use when deciding whether to call on some liquidity source is then whether the purpose sought for it is consistent with the story developed around it. Yes, I will draw down on the school fees fund to pay for a hospital visit for my child; no I will not use it to have some fun on Friday with my friends. That's why informal money services are so powerful: the liquidity instrument (whether a set of jars, a lock box, a cow, a money guard, the savings group I can borrow from) act out the story of the money they hold within.

Money management is then a morality play between virtuous you and venial you, where the supporting actors are all the different liquidity pools you might access. The morality is not about right and wrong, but rather about consistency with the stories we´d told ourselves prior.

Financial management tools should therefore invite us to spontaneously develop these money stories, to play them out, to interrogate them every time venial you is acting up. You see how this links into imagination. We put order in a chaotic world through our imagination. A vivid imagination is our last remnant of control in a world that we have increasingly come to realize is out of our control.

Digital accounts are story killers. They are empty of emotion, they do not invite our imagination. That´s why the only fallback towards discipline is budgeting. Which, by the way, is a framework of "storifying" money, but a particularly boring one.

Financial Inclusion and Imagination

Digital lending has the potential to close the credit demand gap for unbanked, low-income customers, but the rapid growth of the sector has raised consumer protection concerns.

In Kenya alone, a leading testing ground for the digital credit sector, there are more than 50 providers and an estimated<a href="https://www.cgap.org/blog/kenyas-digital-credit-revolution-five-years"> one in four</a> Kenyans have taken a digital loan. With <a href="https://www.gsma.com/mobileeconomy/wp-content/uploads/2018/05/The-Mobile-Economy-2018.pdf">mobile phone ownership saturating</a> developing markets, we can anticipate similar acceleration in the digital lending space globally.

<a href="https://www.cgap.org/blog/its-time-slow-digital-credits-growth-east-africa">Recent findings</a> have generated debate over whether or not these new products are translating into real benefits for base of the pyramid consumers. Demand is rising from investors, regulators, and providers for ways to demonstrate responsible practices in digital lending.

To fill the gap, the Smart Campaign has undertaken research to better understand risks and benchmarks for responsible digital financials services. In partnership with <a href="https://www.mf-rating.com/">MFR</a>, we’re working with providers to conduct field assessments that identify best practices and help us to determine where to set the bar for responsible behavior. These field assessments, industry research, and engagement with DFS providers in Smart’s <a href="https://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a> will lead to standards for responsible digital credit that are sustainable for the industry while keeping client needs as the central focus.

<a href="http://www.4g-capital.com/">4G Capital</a>, a digital MSME lender in East Africa and a member of Fintech Protects, recently <a href="https://africanbusinessmagazine.com/company-profile/4g-capital/4g-capital-together-with-the-centre-for-financial-inclusion-smart-campaign-defines-standards-for-client-protection/">partnered with the Smart Campaign</a> to conduct a field assessment. We asked 4G Capital CEO Wayne Hennessy-Barrett for his take on responsible digital lending and the value of industry standards for consumer protection.
<h4>Q: Tell us about the origins of 4G Capital and its products.</h4>
WHB: We began operations in Kenya in 2013, starting with microloans for enterprises using only mobile money. As our relationship with our customers grew, we began informal coaching and mentoring of clients to improve their performance. This evolved quite quickly into a program of enterprise-skills trainings packaged with each loan. We now have a number of different working-capital credit products which are the right size and timed according to the specific needs of the business user, and we’re also scaling with partners to reach tens of thousands of new clients each month.
<h4>Q: What was your motivation for joining Fintech Protects and inviting the Smart Campaign to work with 4G in a field assessment of responsible practices?</h4>
WHB: We have always been a mission-driven business. As a fintech lender, Fintech Protects was the perfect forum to share our experiences and learn from others to find ways to close the finance gap, which leaves so many businesses and families excluded.

The field assessment was a rigorous, end-to-end audit of whether we were able to ‘walk the talk.’ It is nearly impossible to self-assess with the right level of accuracy. Either you’re too hard on yourself, or you get distracted by successes and don’t zero in on the things that need to be fixed.
<h4>Q: What did the field assessment confirm about your business? What surprised you?</h4>
WHB: I was delighted, but not surprised, by the level of professionalism and rigor exercised by Smart and MFR. It was encouraging to get positive feedback on the positive customer outcomes we continue to see consistently – that really is the most important thing that we need to reinforce and protect.
<h4>Q: How do you think about scale and growth of your business in the context of a blended high-touch/high-tech model?</h4>
WHB: Accounting for inflation, forex risk and future value of money, this is the $64 Billion Question!

We need to scale to reach more excluded people, catalyze more value chain growth, and, of course, grow our own business. Our transformation program (which is a continuously evolving cycle) sees our AI and technology developing to continue to improve predictive underwriting to further deliver value to our clients as part of supporting their overall financial health. This should free our people to really focus and excel at what they’re good at: relationships, customer care, and contributing their own experience and knowledge to help us evolve with our clients’ needs.
<h4>Q: Of all the areas that the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> cover, what do you think will be the single most important issue digital lenders must contend with over the next five years?</h4>
WHB: It has to be data protection. There are a ton of fintech lenders who are trying to do good things at the moment, but where data can sometimes be gathered in a way clients, if fully aware, would find really intrusive. We need to reset the conversation about data and the way businesses conduct themselves so that even the most remote and excluded have digital self-sovereignty and power over their own data.
<h4>Q: How do the client protection standards provide value to you as a business?</h4>
WHB: Happy clients = happy business. It really is that simple.

Partnering with Providers to Set DFS Standards for Client Protection

<em>This post originally appeared on <a href="https://medium.com/@alexandrawall">Alexandra Wall's Medium site</a>.</em>

In <a href="https://medium.com/@alexandrawall/where-are-we-now-6-years-after-the-first-digital-consumer-credit-product-launched-865a9705d985">Part 1</a> of this blog series we highlighted findings from two nationally representative phone surveys conducted by <a href="https://www.cgap.org/">CGAP</a> and <a href="http://fsdkenya.org/">FSD Kenya</a>. The findings (published in this recent <a href="https://www.cgap.org/sites/default/files/publications/Working-Paper-A-Digital-Credit-Revolution-Oct-2018.pdf">working paper</a>) urge providers, policymakers, investors, and donors to improve transparency and consumer protection measures in order to ensure the responsible growth and expansion of digital credit markets. This post highlights conversations with two Digital Credit Observatory (DCO) Community of Practice members, Stephen Deng and Alex Rizzi, to learn how investors and consumer protection organizations are thinking about consumer risks in the digital credit space.
<h3>Digital Credit Concerns &amp; Fintech Companies</h3>
<a href="http://www.dfslab.net/">Digital Financial Services Lab</a> (DFS Lab), a seed stage accelerator for financial technology (fintech) startups in developing markets, has seen firsthand the consumer risks that exist in this evolving space. “One of our portfolio companies, which connects SMEs to peer-to-peer lending, discovered that loans were being used for sports betting,” shares Stephen Deng, Co-Founder and Investment Officer at DFS Lab. In other words, loans were being used for gambling instead of their intended purpose for productive business investments. “To mitigate this situation, the company started incorporating more financial education into their loan application process.”

While this company took the initiative to implement new measures to reduce consumers’ risky financial behavior, there is an ongoing debate within the consumer credit space about who bears the liability of ensuring responsible lending practices and adequate consumer protection measures. “There’s a fine line between educating potential borrowers and deterring potential borrowers by having too much extra education integrated into the application,” says Deng. “For example, if one or two more menu pages on financial education are added, will that turn some borrowers away?”

For-profit companies, especially as they are just starting out, rely heavily on product uptake to demonstrate demand to investors. As a result, many fintech companies walk the fine line of providing just enough product friction. This includes ensuring that consumers understand the terms and conditions of a financial product and how their data is being used. “It’s not that there’s an assumption that users (of digital financial products) do not care about how their data is being used, but it’s the assumption that there’s no real outside pressure — from users, investors, or regulators — to educate consumers on this topic,” explains Deng.
<h3>Whose responsibility is it to ensure products are designed responsibly and consumers are educated about privacy and protection concerns?</h3>
Some argue this falls on the shoulders of financial providers while others believe the push should come from regulatory and policy-making bodies. The<a href="http://www.smartcampaign.org"> Smart Campaign</a> has established <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">7 Client Protection Principles</a> “to help service providers practice good ethics and smart business.” While these principles are aimed at providers, the Smart Campaign also recognizes that regulators and supervisory bodies need to have strong market conduct tools and the capacity to reinforce.

<a href="https://content.centerforfinancialinclusion.org/people/alexandra-rizzi/">Alex Rizzi</a>, Senior Director at the Smart Campaign, says these principles came about in 2009 through the collective participation of microfinance institutions. “While commercializing microfinance enabled growth and scale, at the time there was also concern that this was happening at the cost of client’s well-being.”<img class="alignright wp-image-34065" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2019/01/smart-campaign-client-protection-principles-list-e1547065960239.png" alt="" width="493" height="254" />

While these principles were established at a time when microfinance was the primary financial product being offered to low-income populations, the Smart Campaign believes these principles can apply to other financial product models, such as digital credit. “The principles are a useful framework for thinking about risks. But the way to mitigate those risks is different in the digital space,” shares Rizzi. “We’re working with (digital credit) providers to understand what systems and policies need to be in place within an organization to meet certain consumer protection standards.”

What incentive do digital credit providers have to abide by client protection principles if little outside pressure is being put on them to do so?

The Smart Campaign has created a <a href="https://www.smartcampaign.org/certification">Certification Program</a> in hopes of providing such an incentive. “For microfinance, the certification has recognized over 100 institutions that serve more than 40 million clients. What has incentivized them has been a mix of pressure from competitors — an institution wants to distinguish itself in the crowded market — as well as demand from investors and donors,” says Rizzi.

This certificate, which is awarded through validation by a third party rating agency, is in the process of being adapted for digital financial service providers. The Smart Campaign promotes certified organizations through media announcements, their <a href="https://www.smartcampaign.org/certification/certified-organizations">website</a>, letters to regulators, and announcements at relevant conferences. How valuable are such certificates to providers? Would it sway investors’ decision to provide capital for certain companies? “Many investors care about certification,” says Rizzi. “Regulators, through encouragement and not formal requirements, have helped incentivize the take-up of this certificate. We’ve pitched it to regulators that this certificate can serve as a good option in markets where capacity for supervision is limited.”

Addressing Digital Credit Risks in Emerging Markets

The <a href="http://www.smartcampaign.org/">Smart Campaign</a> recently released a paper by digital financial inclusion expert and CFI Fellow John Owens: <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/1036-responsible-digital-credit">Responsible Digital Credit: What does it look like?</a> The paper lays out the variety of digital credit models and, using the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> (CPPs) as a framework, enumerates emerging risks and suggests good practices and mitigating steps that providers, regulators and even clients can take.

The paper is a helpful addition to the Smart Campaign’s work on a number of fronts. First, it has sharpened our ability to distinguish various digital credit models. “Digital credit” has become a hot topic in financial inclusion, but the term is often used without understanding the diversity of credit providers. The paper defines digital credit as “loans that are accessed via a digital channel either online, via a mobile device or via a third-party agent that facilitates digital credit processing remotely.” John provides a helpful taxonomy of the types of providers, ranging from non-bank marketplace P2P lenders, to fintechs that provide tiny mobile loans; to tech giants leveraging their massive data streams to offer consumer loans; and platforms that support SME financing through purchase orders, invoices, receivables, and processes between buyers and sellers along the supply chain. The paper presents the client protection risks inherent in all these digital credit products.

It is important to understand the differences among the business models to be able to identify the best ways for providers to mitigate the risks. For example, responsible underwriting might need to look very different at an e-commerce tech giant like Alibaba versus a mobile loan provider like M-Shwari. The two businesses use different kinds of customer data, have different pre-existing relationships with customers, interface with customers differently, and operate in markets with different levels of development (for example, whether credit bureaus can be relied on). As the Smart Campaign seeks to develop practical guidance for digital credit, this diversity presents a challenge.

The paper was also helpful in validating the seven CPPs as a framework for identifying and pin-pointing client protection risks in a digital world. John proposes one significant change. He writes, “To this list, however, we add an eighth concept: security and fraud protection, which is especially salient for digital financial services.” While on the one hand, the concepts of security and fraud could be housed under the existing Principles “Privacy of Client Data” and “Fair and Respectful Treatment,” <strong>given the importance of data security and fraud protection in a digital world, the Smart Campaign will consider it as a potential addition.</strong>

The paper takes the conversation about responsible digital credit an important step forward. So far, much of industry discussion has been about enumerating risks through research. Now the time is ripe for recommending practices that can be applied in real time by providers, regulators, industry and even clients. <strong>Moving from risk identification to practical guidance is an absolutely necessary next step in making responsible digital credit a reality.</strong> Actually, this process has already begun, in various places. John cites examples of guidance from existing industry associations and regulator groups, as well as the many <a href="http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf">solutions proposed by CGAP</a>. For example, the Online Lenders Association in the United States has requirements for its members in the areas of advertising and marketing. One such requirement is for disclosure of conditions whenever “trigger” terms such as down payment, APR, variable interest rate, and the like appear. Overall, however John’s paper notes that implementation is still at a nascent stage.

At the end of the paper, John makes recommendations, including a few specific ones for the Smart Campaign. <strong>He strongly endorses the development and implementation of standards of practice that adapt the Client Protection Principles for digital credit. Through the <a href="http://smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>, the Smart Campaign and a group of enthusiastic digital lenders are working towards that end.</strong> The community of practice includes both mobile credit providers and tech-enabled financial institutions.

John also notes the value of recognition and certification programs for digital credit providers that meet these standards. The Smart Campaign’s <a href="http://smartcampaign.org/certification/all-about-certification">Certification Program</a>, which has certified over 100 financial service providers serving more than 42 million clients worldwide, is <strong>being extended to recognize client protection achievement for mobile credit providers, with an expected debut in 2019</strong>.

John is personally excited about the potential of new communications technologies such as chatbots to improve consumer protection in digital settings where face-to-face interactions with customers are infrequent or non-existent. He recommends this approach in the paper, and he is developing opportunities to apply digital communication tools. This is promising not only for providers, but also for regulators wishing to strengthen complaint resolution procedures or monitor a market.

As John writes, it will take a village to ensure that digital credit clients are protected with providers, consumer advocates, regulators, donors and investors all working together. The Smart Campaign is delighted to contribute to this effort.

<strong><em>Alex and John led a <a href="http://www.centerforfinancialinclusion.org/events-a-presentations/1034-webinar-responsible-digital-credit">webinar</a> in July 2018 about responsible digital credit and what providers need to do to ensure that their customers are protected and empowered—<a href="http://www.centerforfinancialinclusion.org/events-a-presentations/1034-webinar-responsible-digital-credit">check it out</a>. </em> </strong>

&nbsp;

&nbsp;

Roadmap for Responsible Digital Credit—What We're Doing at the Smart Campaign

CFI Research Fellows Program

All over the world, small loans to individuals and very small businesses are increasingly made using digital channels, whether online, via a mobile device or through an agent. However, trust, confidence and responsible lending practices need to be in place to ensure this industry is successful and its customers are protected and empowered.

In <a href="storage/Responsible_Digital_Credit_FINAL_2018.07.18.pdf"><em>Responsible Digital Credit</em></a>, CFI Fellow John Owens outlines the digital credit landscape and the risks customers face, and examines the best practices, standards and initiatives that exist or should be implemented to improve consumer protection in digital lending. Ultimately, John argues, it will take a village to ensure that digital credit clients are protected<span style="font-size: 11pt; font-family: 'Calibri', sans-serif;">—</span>including govenrments, regulators, industry players, advocates and consumers themsleves. He sees three key activities: 1) industry self-regulation, 2) certification of digital credit providers, and 3) directly empowering consumers, as key to the future of what responsible digital credit looks like.

This report is published jointly with the <a href="http://www.smartcampaign.org/">Smart Campaign</a> and was made possible by support from Mastercard Foundation and other partners.

&nbsp;

Responsible Digital Credit

Mastercard Foundation

As digital credit providers have grown exponentially over the past few years, and as digital products and models have proliferated, so too have concerns around consumer protection. In the recently published report, <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/1036-responsible-digital-credit">Responsible Digital Credit</a>, I argue that ensuring that digital credit customers receive responsible treatment requires more than enhanced consumer protection laws and regulations. It also requires strong commitment from the digital credit industry. Finally, it needs consumers who are empowered to play a more proactive role in managing their digital credit responsibly.

Over the past year, I have interviewed digital credit industry associations, credit providers and their third-party data analytic providers, regulators, policy makers, and various consumer protection leaders. Many of these groups are working to develop responsible digital lending principles. With their input, my report proposes a guiding framework for responsible digital lending.  The framework uses the Smart Campaign <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> as a basis for grouping the issues. In addition, I propose an eighth principle: security and fraud protection.

Digital credit, and especially the use of mobile phones, significantly alters interactions between borrowers and lenders. Lenders utilizing the mobile channel to advertise, acquire and transact with customers must pay particular attention to the limitations of mobile interaction with customers and follow industry <a href="http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf">mobile best practices</a>. While many of the standard consumer protection practices continue to apply, new concerns, or more accurately, new faces on older concerns, have emerged. In this post, I want to highlight several of the considerations I found most important and relevant for the digital lending industry.
<h2><strong>Responsible Algorithms</strong></h2>
Many digital credit models rely on algorithms to process data about clients and make credit decisions. Because most lenders consider their algorithms proprietary, it is difficult for observers to know on what basis credit decisions are actually made. This opaque situation raises the spectre of discrimination. Attributes that are considered inappropriate bases for differentiation, such as religion, language, gender, or ethnic origin, are areas of particular concern with regard to algorithm-based lending practices. As highlighted by a Smart Campaign <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">report</a>, while credit offers may differ based on risk analysis, such differentiation should be consistently applied, stated in advance, and made with the goal of benefitting clients. To prevent discriminatory digital credit practices, some recommendations include:
<ul>
 	<li><a href="https://www.whitecase.com/publications/insight/algorithms-and-bias-what-lenders-need-know"><strong>Pretest, test and retest for potential bias</strong></a><strong>.</strong> Digital credit providers and third-party data analytics providers should continuously monitor the outcomes of their algorithmic programs to identify potential problems. Such testing could involve running scenarios to identify unwanted outcomes and developing and building controls that prevent adverse outcomes.</li>
 	<li><a href="http://www.ijmo.org/papers/43-A10212.pdf"><strong>Document the rationale for algorithmic features</strong></a><strong>.</strong> Digital credit providers should be able to provide visualization and a decision tree for the factors their algorithms analyze, as well as the justification for relying on these factors. The rationale should address how borrower debt capacity is assessed, given the importance of this concept in traditional underwriting.</li>
 	<li><strong>Independent review</strong> of companies' proposed data sets and/or algorithms.</li>
</ul>
A self-regulatory approach could be used to develop best practices guidelines for data inputs and the development of nondiscriminatory artificial intelligence systems, following the model that has been successful for the Payment Card Industry Security Standards Council.
<h2><strong>Indebtedness Monitoring</strong></h2>
Because digital lending is often based on non-traditional underwriting criteria, to prevent over-indebtedness among digital borrowers it may be relatively more important to monitor outcomes at the portfolio level. Some of the ways to do this include:
<ul>
 	<li><strong>Avoidance of debt traps</strong> by ensuring that clients are not forced into automated repeat loans.</li>
 	<li><strong><a href="http://www.responsiblebusinesslending.org/">Responsible credit reporting</a></strong> – Better compliance with reporting strengthens markets and leads to better client protection practices.</li>
 	<li><strong><a href="http://www.centerforfinancialinclusion.org/storage/documents/Smart_Brief_Tiny_Loans_Big_Questions_Final_092617.pdf">Monitoring digital credit provider’s portfolio quality</a></strong> – Industry benchmarks for portfolio quality can help to advance the understanding of risks and avoid business models that rely for their success on high default rates.</li>
</ul>
<h2><strong>Digital Transparency </strong></h2>
Digital credit platforms allow for 24/7 communications with clients that, if harnessed properly, can assist them with immediate technical support, remind them about upcoming payments and even identify counselors or resources for clients in financial stress. However, when communication is totally digital, there are heightened concerns about ensuring that clients really know what they are signing up for. Disclosure must lead to client understanding. Borrower disclosure standards should address:
<ul>
 	<li>Standards for <strong>honest advertising</strong> and penalties for misleading marketing materials of credit products. Furthermore, providers should advertise the name of the financial regulator they report to in all advertising materials.</li>
 	<li><strong>Readability</strong> and format – Disclosures need to be easy to comprehend, available in the customer’s local language, and provided in print and digital formats.</li>
 	<li><strong>Comparative tools</strong> – Standard summary disclosure documents would allow borrowers to compare credit offers, both digital and traditional.</li>
 	<li><strong>Adequate notice periods</strong> – Consumers should be notified in advance of changes to interest rates, fees or terms and conditions.</li>
</ul>
A somewhat different but related and relevant concern, often overlooked in this context, is the vulnerability of individual investors who put their money into pure peer-to-peer (P2P) lending platforms. Protections need to be extended to them as well, with a focus on ensuring that they receive the information they need to evaluate risks and that they have recourse channels when something goes amiss.
<h2><strong>Data Privacy and Usage Standards</strong></h2>
While many regulators and most industry groups agree that it is important to protect the confidentiality and security of customers’ information, data use and the level of disclosure about its use are challenging topics. In the <a href="http://ec.europa.eu/justice/data-protection/reform/index_en.htm">EU</a> and in countries such as <a href="https://www.pc.gov.au/inquiries/completed/data-access/thedraft">Australia</a>, regulators are enacting rules mandating that individuals be notified about the use of their personal data and allowed to opt out. Opt-out rules should be considered as a potential requirement for all digital credit providers, especially in markets where mobile push-marketing has become problematic.

Over the next several years it will be important for laws or regulations to be put in place to protect consumer data privacy and guide information sharing. The rules need to:
<ul>
 	<li>Provide for informed consent, such that customers explicitly permit electronic data collection prior to its collection and use, and are given the option to consent or not.</li>
 	<li>Require providers to have a clear data collection and handling policy which limits the amount of data collected as well as the timeframe it is stored.</li>
 	<li>Inform clients about their data trails and credit histories, including the ability to ensure accuracy and correct for any errors or discrepancies.</li>
 	<li>Give regulators the power to discipline providers who repeatedly allow personal data to be misused.</li>
</ul>
<h2><strong>Fraud Prevention and Security </strong></h2>
New security vulnerabilities arising from digital credit strongly point to fraud and cyber-security as consumer protection concerns. It is increasingly urgent for digital credit providers to adopt standard security compliance measures and then to regularly test and update them. Providers must also be responsible for ensuring that the third-parties they use, including lead generators, brokers, agents, and data analytics providers, also have adequate security in place. Ultimately, providers need to be responsible for the actions of their third-parties (e.g., agents, contractors, lead generators, brokers and collectors).

Consumers should be made aware of the potential for fraud and encouraged to report suspected fraud cases or security breaches. Consumer awareness campaigns on the most common incidents of fraud (via the internet, SMS alerts, signage at agent kiosks, etc.) can help with this.

While the recommendations just listed do not apply in all markets, they do point to the urgent need for regulators, industry bodies, individual providers and consumers to work together to construct the ground rules for responsible digital credit that will ensure that consumers are adequately protected.

<em>Editor's Note: This research was made possible by support from Mastercard Foundation and other partners.</em>

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A Framework for Responsible Digital Credit

<em>This is the fourth in a <a href="https://cfi-blog.org/tag/smart-100-blog-series/">series of blog posts</a> exploring the impact of Smart Certification on the financial inclusion industry.</em>

Since launching <a href="http://smartcampaign.org/certification/all-about-certification">Smart Certification</a> in 2013, we’ve witnessed rapid changes in the financial inclusion space driven by digitization of financial services and fragmentation of traditional business models. Nearly <a href="https://newsroom.accenture.com/news/global-venture-capital-investment-in-fintech-industry-set-record-in-2017-driven-by-surge-in-india-us-and-uk-accenture-analysis-finds.htm">$100 billion in investment</a> has flown into the global fintech market since 2010, creating an explosion of digital innovations and provider models. Our <a href="https://cfi-blog.org/2018/05/31/financial-inclusion-hype-vs-reality-deconstructing-the-2017-findex-results/">analysis of the Global Findex data</a> shows that recent gains in inclusion have been largely driven by the rise of mobile money and digital payments.

Digital financial technology is central to making financial products more accessible to underserved people around the world. This is an exciting moment for digital finance, and an equally important for time for client protection. The industry has the opportunity to marry the client-centric approach embraced by so many fintechs and the industry-accepted <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">consumer protection standards</a> to develop quality products, build trust, and encourage usage. The Smart Campaign will leverage its experience to help lead the charge on this.

As we <a href="https://www.youtube.com/watch?v=-gKZ7YIHWHQ&amp;feature=youtu.be">celebrate 100 Smart Certifications</a>, we look forward to the next 100. Looking to the future requires defining responsible practices and standards given the technological advances that allow nearly instant access to credit, payments, savings, and insurance. The standards and the certification program must become more agile, mirroring the fast pace of change. We envision an adaptable approach that takes into consideration the product and client delivery mechanism, as well as the provider’s function in the value chain. The flexibility of this framework could eventually allow any type of provider to seek certification, but the process will begin with a focus on digital lenders and expand to encompass additional business models on a demand-driven basis.

Let’s take a look at credit products to see how both access and the customer experience are changing. Just a few years ago, when a client sought a loan from a financial service provider, the provider would be responsible for all of the functions needed to deliver that loan, starting with design and pricing of credit products, to the determination of creditworthiness, disbursement, collection, and continuing customer service. The model relied heavily on in-person client interactions. Today, a client can take out a micro-loan with a few clicks on a phone, without any human interaction, and without knowing what companies – other than the one they are interfacing with – are involved in making the transaction possible. In some cases, the provider may rely on another company to handle key functions, such as assessing creditworthiness or loan underwriting.

[caption id="attachment_25643" align="aligncenter" width="799"]<img class="aligncenter size-full wp-image-25643" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/06/charactersitics-of-aanalog-vs-digital-credit.png" alt="Charactersitics of Aanalog vs Digital Credit" width="799" height="530" /> Image credit: Center for Financial Inclusion at Accion[/caption]

As the Smart Campaign identified in <a href="http://smartcampaign.org/tools-a-resources/1136"><em>Tiny Loans, Big Questions</em></a>, new models present new potential consumer risks. Mobile loans may unintentionally encourage reckless borrowing due to their near instantaneous speed. And when there are multiple firms involved in the value chain, there can be a lack of clarity over which company is responsible for addressing client complaints. By no means are these the only risks, but a closer look at new lending models in the digital age illustrates that client protection is as important as ever.

The Smart Campaign is conducting targeted research with digital financial service providers to adapt Smart standards in light of the new business models. Before launching Smart Certification five years ago, we collaborated closely with the industry to understand the risks and develop consensus about benchmarks for client protection. We’re replicating this process with digital finance providers, and our engagement with the <a href="http://smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a> will similarly incorporate the industry perspective into more adaptive client protection guidelines and standards.

We have already had a <a href="https://cfi-blog.org/2016/10/25/building-trust-and-growing-digital-financial-services-a-look-at-jumo/">chance to confirm</a> that the Client Protection Principles continue to offer a relevant framework for Smart Certification, whether working with fintechs or MFIs. Consumers have the same interest in transparency, prevention of over-indebtedness, and availability of complaint resolution for a digital provider as they would have for a credit union. Yet, best practices and benchmarks for digital services will differ, just as their product details and client interactions differ from analog financial services.

Many fintechs already adopt a client-centric approach in their business models, but as we’ve seen from working with socially-driven financial institutions over the years, <a href="https://cfi-blog.org/2018/05/30/the-business-case-for-smart-certification/">formalizing client protection practices in an organization’s business operations</a> cements trust between a provider and its customers, and can lead to higher retention and more sustainable portfolios. The path for building trust in this evolving financial services ecosystem is collaborating with digital providers to determine appropriate standards and best practices that protect clients while enabling the industry’s growth. The Smart Campaign invites more of this collaboration with providers as we work together to extend the impact of digital financial services for financial inclusion.

&nbsp;

The Next 100 Smart Certifications

Smart 100 Certifications

<span style="float: none;background-color: transparent;color: #333333;cursor: text;font-family: Georgia,'Times New Roman','Bitstream Charter',Times,serif;font-size: 16px;font-style: normal;font-variant: normal;font-weight: 400;letter-spacing: normal;text-align: left;text-decoration: none;text-indent: 0px">Despite the rise in mobile money in Africa, and globally, the gap between supply and demand for credit in the region remains. Surprisingly, in this milieu, start-ups are at risk of accelerating the pace of over-indebtedness in Africa. The number of start-ups reaching last mile clients is rising. The driver of this is fintechs taking advantage of a business opportunity, and the prospect that if you offer clients much-needed credit at a lower cost than the alternative, they will be better off.</span>

But is this necessarily true? Are these start-ups offering solutions to the credit needs that many small and medium African businesses have, and are clients better off with these solutions? Or is the fintech digital credit hype attracting lenders that offer credit in the wrong places – and for the wrong reasons? What is needed to ensure that digital credit is provided responsibly, for the benefit of clients?
<h4><strong>Start-ups are at risk of accelerating over-indebtedness by supplying credit to clients without conducting appropriate repayment capacity analysis.</strong></h4>
Some estimate that digital technologies have cut the cost of providing financial services by 80-90 percent (<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">McKinsey Global Institute, 2016, PDF</a>). Africa is taking the lead in the rise of mobile technology, and the opportunities are promising. Start-ups in this space are making big strides. Those involved in digital credit either deliver digital credit directly or enable its delivery through downstream product servicing. The number of fintechs – startups offering these services – in Africa is growing daily (<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">Mesropyan, 2016</a>).

Technology well used offers opportunities not previously available. However, two key issues need to be recognized and addressed in order to generate long-term benefits for both clients and providers.
<ol>
 	<li>Provider and client interests must be aligned. If providers profit while clients are experiencing stress in repaying, defaults will catch up with the client or the institution, and the client will no longer be able to borrow. Aligning interests requires providers to think of client benefits as well as their own, from the start.</li>
 	<li>A well-designed loan should match the ability to repay. Well-designed loans are a blessing, for example, helping a small business; yet loans that do not consider clients’ capacity to repay sets them up for failure. Even if they repay in the short term – which is often why default rates stay low – it can be at the cost of extreme hardship, making it a poor predictor of over-indebtedness. It may take some time before the debt stress of clients affects providers.</li>
</ol>
<h3><strong>"Instant": an Opportunity and a Risk for Consumers</strong></h3>
A key attribute digital lenders advertise is speed of access. Where traditional loans could take weeks for approval, with many requirements, this is a plus from the perspective of clients. But the automation and speed raises concerns: are decisions made too quickly, and are risks adequately measured and mitigated, especially from the clients' perspective?

Other aspects of digital credit lead to <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">new risks</a> compared with analog lending: start-to-finish digitization; the move from high to low touch processes; small credit amounts that grow; short-term loans; reliance on alternative data analytics; and decentralized support workforces.
<h3><strong>What Could Go Wrong?</strong></h3>
With analog credit, prevention of over-indebtedness centered on adequate repayment capacity, and on growth not taking place at the expense of quality.

In the digital context, the following major categories of risk have been identified (Center for Financial Inclusion, 2017/2018. See References):
<ul>
 	<li>Limited – if any – debt capacity analysis</li>
 	<li>Products that do not match client needs</li>
 	<li>Lack of credit reporting</li>
 	<li>Automatic renewals</li>
 	<li>Aggressive sales and marketing</li>
 	<li>Disproportionate consequences of late payments that lead to a cycle of debt.</li>
</ul>
<h4><strong>Algorithms are institution centric, not client centric. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting.</strong></h4>
Alternative credit scoring methods – often using elaborate algorithms that predict the probability of repayment – help to include people who have thin credit files and who would otherwise have been excluded. However, these models are a poor replacement for the repayment capacity analysis previously conducted by lenders serving vulnerable excluded populations. While the algorithm may predict whether or not an institution will be repaid, it does not consider clients' situations and needs, and therefore, the sacrifices that clients might have to make in order to repay. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting. Algorithms are institution centric, not client centric. They are meant to learn over time, becoming refined and better predictors; yet they do so at the expense of early clients who enabled the algorithm to become better fine-tuned, as they have a higher probability of defaulting and suffer dire consequences (<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Ngigi, 2016</a>).

The promise of well-tuned algorithms saving costs and managing institutional risk is unfortunately skewing attention away from client risks. Over-indebtedness needs to be reframed from a client perspective: can clients afford the loan? Even if they can repay, what sacrifices are they making? Are they at risk of not being a client ever again in the future (which would hurt both the client and the provider)?
<h3><strong>Mitigating Over-Indebtedness in a Digital World</strong></h3>
Over-indebtedness is a multi-stakeholder issue, and is linked to the client protection issues summarized in the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>. Prevention of over-indebtedness is a particularly tricky one, in that it requires the concerted effort of a wide range of stakeholders.

Providers have a responsibility to ensure that their practices do not lead to an oversupply of credit to clients who are unable to meet their payment obligations, and digital lenders will need to adopt a more client-centric approach to understand the risks of over-indebtedness from a client perspective. Algorithms need to evolve to take this into account.

Digital lenders need to understand the risks of over-indebtedness from a client perspective, and algorithms need to evolve to take this into account. Regulation also must guide good practice for fintech digital lenders<strong>.</strong>

Because only one irresponsible lender is needed in terms of over-indebtedness to negatively affect clients, it is necessary that financial consumer protection regulation evolves to guide the practices of otherwise unscrupulous digital lenders.

Investors can, and should, use their leverage to encourage good practices by digital lenders, as they have for analog lenders. They can reward digital lenders who design and deliver appropriate products, are transparent about terms and conditions, explain to clients the risks of over-indebtedness, adopt fair and responsible practices during repayments, and help clients who cannot, but want to, repay.

Importantly, digital providers can leverage the same technology used to deliver products to educate and empower clients. Clients have rights and responsibilities. Informed consumers are better able to protect themselves and avoid becoming victims of predatory lenders.
<h3><strong>Over-Indebtedness Is Multidimensional and Dynamic</strong></h3>
In the interest of long-term mutual benefits for both providers and clients, providers need to move away from a uni-dimensional definition of over-indebtedness that overly emphasizes repayment as the proxy for whether or not a client is indebted, towards <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/201-over-indebtedness-of-microborrowers-in-ghana-an-empirical-study-from-a-customer-protection-perspective">client-focused definitions of over-indebtedness</a>.

Digital credit providers need to complement credit bureau data with disbursement and repayment data on digital loans so that a fuller financial picture can emerge for digital borrowers.

Over-indebtedness is not a steady state. As the lives of vulnerable clients evolve, so do their needs and challenges. A client who may have received a loan from a responsible lender in the past may suddenly not be in a position to repay. We need to develop ways to monitor whether clients are showing signs of financial stress. Responsible institutions should be able to identify this, and work with clients until it is resolved.

The role of responsible providers goes beyond providing loans to ensuring that clients are supported, if needed. <a href="https://www.microfinanceopportunities.org/">Microfinance Opportunities</a>, in collaboration with <a href="http://socialperformance.net/">Social Performance Solutions</a>, has been developing a stress assessment tool that enables providers to monitor whether borrowers are incurring stress after having received a loan. Such tools are extremely important to have a full picture of over-indebtedness, and a broader suite of tools needs to be available to responsible providers.
<h3><strong>Fintech Protects Against Over-Indebtedness</strong></h3>
Fintech digital credit providers need to unite and agree to collective measures to tackle the problem of over-indebtedness. This will entail defining responsible digital underwriting, leveraging technology, while learning from the past, expanding credit bureau reporting, and agreeing on common practices for the benefit of clients. Some fintechs are already taking the lead, and through the Smart Campaign’s <a href="http://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>, they are working together to define and implement responsible practice. The body of evidence around risks is growing. Now is the time to define the guidelines of good practice for fintech digital lenders and identify solutions that work for clients.

<strong>References</strong>

McKinsey Global Institute, “<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">Digital Finance for All: Powering Inclusive Growth in Emerging Economies</a>,” September 2016.

Elena Mesropyan, “<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">63 Companies Shaping Africa’s FinTech Ecosystem</a>,” Fintech Ranking, December 2016.

Alexandra Rizzi, Isabelle Barrès, Elisabeth Rhyne, “<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">Tiny Loans, Big Questions</a>,” Center for Financial Inclusion at Accion.

John Owens, “<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/783">Responsible Digital Credit</a>,” Center for Financial Inclusion at Accion. Forthcoming, 2018.

George Ngigi, “<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Pain of Kenyans Blacklisted for Amounts as Small Sh100</a>,” <em>Business Daily Africa</em>, September 2016.

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Start-Ups and Digital Innovation: Are Fintechs in Africa Over-Indebting their Customers?

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

<em>&gt; Posted by Sola Salako Ajulo, President and Founder, Consumer Advocacy Foundation of Nigeria (CAFON)</em>

In fewer than twenty years, our concept of a market has evolved from a strictly physical location of commercial activity, to also include intangible, real-time e-locations. Research shows that up to 12 percent of all global commercial transactions now take place on the Internet - within and between countries, often across multiple currencies, and with little or no physical contact between seller and consumer.

Historically, consumer protection laws and guidelines attempted to protect consumers within physical locations and through the sovereignty of national policies. Our new worldwide market transcends physical and legal borders and confirms the maxim that the world has become a global village. It’s imperative that our consumer protection laws evolve as well.

Nigeria offers a case in point. E-commerce, enabled by electronic financial instruments, has become a reality. According to Babatunde Irukera, Director General of the Consumer Protection Council in Nigeria, research by the Council shows 67 percent of consumers in Nigeria between ages 18-40 now shop online. Online markets are increasingly important to commercial activity in the country.

Consumer protection regulators in Nigeria and elsewhere appear to be playing catch-up as the issues of online marketplaces often transcend the capacity of existing laws and regulations. The unique challenges to regulation in this space include the ubiquitous nature of many of these e-commerce platforms and the multiple sectors involved. Issues of exploitation, unfair trade practices, and sub-standard products and services now occur at breathtakingly alarming rates online. On a daily basis, consumers fall victim to issues like lack of grievance redressal, misleading advertisements, outright frauds and scams, and poor customer care with little or no regulation or intervention from regulatory agencies. Consumers International research shows that 49 percent of Internet users in Nigeria claim they are wary of e-transactions. Though a few of the more prominent online merchants in Nigeria have shown initiative by establishing their own consumer protection guidelines and structures, they are not adequately supervised by the government.

Another type of digital marketplace worth noting is informal platforms for personalized selling. Many individuals offer goods and services for sale on person-to-person platforms like WhatsApp, Instagram, Facebook, and so on. This form of e-commerce is even more challenging to regulate because it is a private transaction between two individuals. Yet the rate of fraud and scams is higher in these instances.

While comprehensive legislation might take years to materialize, the government needs to explore options that can immediately improve the standard and safety of online transactions for consumers. Here are a few options aside from regulation that should be considered.

Increased consumer education efforts could empower users with better information on the risks of e-transactions, how to identify scams and frauds, and how to insist on redress if their rights are violated. Consumer education is particularly important for person-to-person online marketplaces where it is often more difficult to verify the quality of the merchant and/or their products. Education can help consumers make informed choices on whether to take the risk of buying goods and services from individuals with weaker verification mechanisms.

Government can also work with providers to encourage peer-to-peer checks or self-regulation. When online marketplaces agree to sign up for a relevant code of conduct, digital markets become safer for consumers, which in turn builds trust and improves consumer patronage.

A good example of sector self regulation is found in the work of <a href="http://smartcampaign.org/">the Smart Campaign</a>, and its experience is especially relevant for online platforms, such Alibaba in China and Amazon in the U.S. which extend credit based on how individual merchants use their platforms. While such platforms provide much needed options to conventional banking, many consumers are wary of patronizing their services because of a lack of trust. If such providers were to become <a href="http://smartcampaign.org/certification">Smart Certified</a>, for instance, consumer confidence should improve. Government needs to encourage independent and credible sector self-regulating institutions, like the Smart Campaign, to improve consumer confidence in digital marketplaces.

Beyond these consumer protection concerns, when discussing online marketplaces it’s important to remember that there is a lack of fair access to the Internet for millions of consumers around the world. While the Internet is fast becoming an essential tool in developed countries, nations like Nigeria are still struggling to make it adequately available for the majority of consumers. With high prices for data access, it becomes a privilege reserved for those who will or can pay. This challenge becomes even more critical as essential services of governments, utility companies, and financial institutions become increasingly digitized.

This review of issues is definitely not exhaustive, but it shows the enormity of action required to keep consumers safe as they conduct commercial and banking transactions on digital platforms.

Distrust of digital marketplaces is not just about consumer protection, it has implications for economic growth. Nigeria is just one of many countries that must take bold steps to make digital marketplaces safer. Increasingly, these marketplaces will be a vital key to the globalization of local products and services.

<em>A different version of this post was published in <a href="https://www.thisdaylive.com/index.php/2018/04/19/making-online-marketplaces-safer-for-consumers/"><span style="text-decoration: underline">This Day</span></a>.</em>

<em>Sola Salako Ajulo is a Consumer Rights and Protection Advocate and President/Founder of Consumer Advocacy Foundation of Nigeria (CAFON).</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2018/03/30/why-is-financial-inclusion-in-nigeria-lagging-compared-to-its-african-peers/">Why Is Financial Inclusion in Nigeria Lacking Compares to Its African Peers?</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>

<a href="https://cfi-blog.org/2017/05/09/development-bank-of-nigeria-as-inclusive-as-it-promises/">Development Bank of Nigeria - As Inclusive As It Promises?</a>

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Making Online Marketplaces Safer for Consumers in Nigeria

Educating digital financial services (DFS) providers to understand that consumer protection is a core business strategy is as important – if not more important – than consumer protection regulation supervision if we hope to ensure that vulnerable consumers are well protected. For this reason, as I articulated in <a href="https://cfi-blog.org/2018/01/16/consumer-protection-in-digital-financial-services-core-not-compliance/">my last post</a>, I would like to see DFS providers and their managers <em>take the lead </em>when it comes to driving consumer protection, and that consumer advocates and regulators’ efforts are aligned to make sure this happens.

There are many possible reasons why DFS managers are not taking the lead, however, beyond a general lack of awareness of consumer protection and its importance:
<ul>
 	<li>They might be driven to achieve short-term targets with limited resources, prioritizing their time, budgets and activities to meet high ROI expectations. Or they might be under pressure to launch innovations and take advantage of the “next big thing” like digital credit or data monetization.</li>
 	<li>They could lack the necessary knowledge and experience in their teams to properly address consumer protection. Such know-how involves truly understanding customers' needs, developing intuitive user interfaces, designing appropriate sales incentive structures, assessing customers' loan affordability, and implementing effective internal control frameworks to address security, loss of privacy, or fraud risks.</li>
 	<li>Or perhaps the technology they have implemented does not have the required functionality to properly implement basic consumer protection requirements – like those of data security, for example. In such a case, it is left up to the individual DFS managers to make specific technical developments to address consumer risks. Such an institution-by-institution approach increases the overall cost of consumer protection to the industry and decreases the likelihood that it will be implemented as these measures compete with other priorities.</li>
</ul>
I would like to see regulators increase the priority of consumer protection among DFS providers by insisting that board members and senior executives attend consumer protection awareness training courses. They already require AML training, for example, before they issue licenses. It would also be great to see supervisors focus more on a DFS providers’ culture and incentive structures, as opposed to the more technical aspects, encouraging goal alignment with consumer protection issues. Finally, it’s critically important for regulators to start providing guidance on the emerging priorities of over-indebtedness, cyber security threats and privacy concerns, encouraging DFS providers to consider long-term sustainability over short-term gains as they take advantage of new technologies and revenue opportunities.

Consumer protection interest groups like <a href="http://www.smartcampaign.org/">the Smart Campaign</a> should increase the drive towards industry level codes of conduct, together with their associated training and certification programs, highlighting the direct link between consumer protection risks, their controls, and achieving DFS business goals. It will help a lot to have more “open source” guides and best practice models created, showing providers how to properly perform customer research to truly understand their needs, or how to implement best practice incentive structures, for example. Guidelines on how to perform digital loan affordability tests, and how to build privacy and security into smartphone apps, should be created as soon as possible. <a href="http://customersguide.cgap.org/about">The CGAP Customer Centric Guide</a> released in September 2017 is a good example of this.

DFS technology vendors are in a good position to help set some standards, by making consumer protection requirements a part of their standard product builds instead of waiting for individual clients to request them.  The industry can benefit from user groups getting together and defining requirements for standard functionality like “advice of charge”, “name lookup”, “intuitive menu structures”, “terms and conditions disclosure”, and ways to ensure informed consent. These are not necessarily competitive issues as they build the market for all participants. Perhaps we can see another donor industry initiative to help drive this, such as the <a href="https://leveloneproject.org/">Level One Project</a>, or the <a href="https://mmapi.gsma.com/">GSMA Mobile Money API Project</a>.

But what about the DFS providers themselves. Where should they start?  There is already a very strong intuition here due to the alignment of consumer protection goals and DFS business goals. However to truly succeed at both we need to clearly verbalize this intuition, and give it a name. Consumer protection as a core DFS strategy must be called out and embedded into the culture of the company, driven from the top down. Asking <em>How will we protect our customers?</em> must become as natural as <em>What is our revenue model?</em> when launching new products. Understand that consumer protection is a driver of revenue, and not a regulated compliance cost, and that your most important long-term KPI will always be customer activity rates. Then figure out what is restricting these rates from growing by asking your customers <em>What are your fears? Why are you confused? How can we make you feel more in control?</em>

A good place to start will be in the data that DFS providers already have, through their customer care or field research records. For each customer interaction providers should ask whether that particular customer is more or less likely to choose to buy the service, or more or less likely to continue using the service. Quantifying the size of each category that makes customers less active will tell providers where to focus their efforts on protecting their customers while increasing their revenues, thus creating a process of continuous improvement.

<em>I have spent the last year putting together a course for the </em><a href="https://digitalfrontiersinstitute.org/the-institute/"><em>Digital Frontiers Institute</em></a><em> (DFI) on consumer protection in DFS. To share what I have learned about consumer protection and how it relates to DFS business strategies, DFI is offering my four-week online course on </em><a href="https://digitalfrontiersinstitute.org/the-institute/consumer-protection-business-strategy/"><em>Consumer Protection as a Business Strategy</em></a><em>, which will first be available in February 2018 and then again later in the year.</em>

<strong>Have you read?</strong>

<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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Consumer Protection in Digital Financial Services – Providers Take the Lead

Keeping Clients First