Emerging Standards, Codes of Conduct & Principles for Digital Lenders

Image(Note that this is the 5th chapter of a new publication on Responsible Digital Credit and is still under review. It is posted here for the purpose of receiving comments and inputs from others)

As noted in the previous chapters, digital credit providers are playing different roles in different countries around the world.  Not all the types of players documented in this report exist in all markets and some are much more prominent than others often due to market conditions, legal and regulatory frameworks and cultural practices. It is also clear that as new digital credit players enter the market, new innovative products are offered and new credit models develop; laws and regulations alone will not be able to address all of the consumer protection issues. It will take a village[i] to protect especially new and emerging digital credit consumers. This requires customized local approaches collaboratively implemented by governments, regulators, industry players, consumer protection advocates and even consumers working together toward more responsible credit in the digital age.

Apart from the industry associations noted in chapter 3 and the various regulatory and policy networks noted in chapter 4, other groups such as the Smart Campaign, GSMA, the Digital Credit Observatory at the Center for Effective Global Action (CEGA), the International Telecommunications Union’s (ITUO Focus Group on Digital Financial Services, the World Bank, the Better Than Cash Alliance (BTCA) and MicroSave have all documented and provided inputs into developing responsible digital credit principles.[ii]

There appears to be more of a move, from a legal and regulatory standpoint, to develop consumer protection that are primarily principle-based rather than rules-based.[iii]  Regulators can look toward checklists such as the World Bank’s basic good practices that are broken down in 8 general categories to support consumer protection for financial services and which are adapted here to analyze how they apply to digital credit.[iv]

Good Practice Checklist for Consumer Protection[v] Detailed Principles Relevant to Digital Credit
Consumer/Investor Protection Institutions 1)    Consumer protection laws in place

2)    Sector specific codes of conduct

3)    Adequate consumer protection supervision

4)    Licensing of digital credit providers

5)    Access to judicial process

6)    Support from consumer protection groups and/or mass media

Disclosure and Sales Practices 7)    Properly suited products with appropriate credit analysis practices

8)    Requirement of a summary statement for all loans or digital credit investments

9)    Terms and conditions available in easily accessible form for consumers (no longer needing to be in paper form)[vi]

10) Laws/regulations prohibiting false or misleading advertising

11) Cooling off period especially for high push marketing products and services

12) Freedom to choose loans along with rules governing pre-purchase requirements as a condition for loan approvals

13) Providers should advertise the name of the financial regulator they report to on public sites and in advertising materials

14) Ensure that appropriate staff training for consumer protection is in place and practiced by providers

Customer Account Handling and Maintenance 15) Proper statements of all transactions provided to clients

16) All changes to fees, charges, terms and conditions must be provided to digital credit clients as soon as possible

17) Up-to-date records kept and available digitally to clients either without charge or for a reasonable fee

18) Clearing and settlement of payments is based on regulatory, statutory or approved self-regulatory arrangements

19) Prohibition of abusive collection practices

Privacy and Data Protection 20) Providers should be required to submit to credit reference sharing bureaus/agencies, and clients should be allowed to view and correct any errors

21) Digital credit providers must provide adequate security and protect customer data

22) Laws or regulations in place to protect consumer information sharing

23) Digital credit providers must inform customers of their policies for the use and sharing of personal, financial or transactional data

24) Credit information bureaus/agencies are subject to oversight by financial regulators

Dispute Resolution Mechanisms 25) Digital credit providers have a designated contact point with clear procedures for handling customer complaints. The provider must also maintain up-to-date records of all complaints they receive and develop internal dispute resolution policies and practices, including processing time deadlines, complaint response, and customer access

26) Consumers have access to an adequately resourced dispute resolution mechanism as well as access to an independent financial ombudsman or equivalent institution with effective enforcement capacity

27) Statistics of customer complaints, including those related to breaches of codes of conduct, are periodically compiled and published by the ombudsman or financial supervisory authority and reviewed with providers

28) Regulatory agencies are legally obliged to publish aggregate statistics and analyses related to their activities regarding consumer protection—and propose regulatory changes or financial education measures to avoid the sources of systemic consumer complaints. Industry associations also play a role in analyzing the complaint statistics and proposing measures to avoid recurrence of systemic consumer complaints

Guarantee/Escrow Rules and Insolvency[vii] 29) Regulator empowered to take appropriate measures to protect investors in the event of financial distress of a financial player

30) Escrow account rules are clear, especially in the case of P2P lenders, and ensure proper management and/or timely payout of escrowed funds

Consumer Empowerment & Financial Literacy 31) An appropriate digital credit financial education and information campaign is developed to increase the financial literacy

32) As much as possible, other governmental as well as non-government consumer protection groups and industry players participate in supporting financial education around digital credit

33) Mass media should also be encouraged by regulators to understand consumer protection issues and help to disseminate best practices

34) The impact of consumer education and empowerment should be measured through broad-based household surveys that are repeated from time to time to see if the current policies are having the desired impact on the digital credit marketplace

Competition, Regulatory Coordination and Consumer Protection 35) Financial regulators and other relevant regulatory agencies (Securities and Exchange Commission and/or Telecommunication Regulators) as well as competition authorities should consult and coordinate with one another in order to avoid regulatory arbitrage as well as ensure the development of an appropriate competitive marketplace

36) Competition policy in digital financial services should also consider the impact of competition issues on consumer welfare, and especially planned or actual limits on choice

37) Competition authorities and/or regulators should conduct and publish periodic assessments of competition among emerging financial players, as well as engage with the industry to make recommendations on how competition among digital credit providers can be optimized

It should be noted that not all digital credit players will fall under financial regulations. As much as possible though, financial regulations should be amended to ensure proper regulatory oversight of new players especially when they begin to reach large numbers of customers.[viii] In addition, since new digital credit products and models develop rapidly, principles-based regulations[ix] rather than rules-based regulations allow providers with space for innovation while at the same time provide regulators with the room to address emerging consumer protection issues specifically as they relate to digital credit and other digital financial services. JoAnn Barefoot, during her presentation at the ITU-Focus Group on Digital Financial Services meeting in Washington DC in April 2017, promoted the idea of supporting an innovative “online app store” approach to issues like consumer protection using new concepts around regulatory technologies (RegTech).  The concept, while simple, is an innovative one, in which regulators could promote and allow new approaches to compliance including issues around consumer protection by developing “App Store” like platforms for providers to upload new proposed approaches to deal with compliance on matters such as consumer protection. The idea is that regulators could use machine learning tools that would be self-executing and would allow digital credit providers to upload their disclosure statements, fees, charges, terms and conditions so that supervisors could more rapidly review and approve new approaches to compliance, which others could then download and use or build on to allow the industry to support innovative open-sourced approaches to such compliance issues such as consumer protection.[x]

Regulators alone cannot provide all the oversight needed for emerging digital credit players and models, so the industry and their associations as well as consumer protection advocates also need to play a role. As noted in chapter 3, it is clear that the digital credit industry is advocating for various standards and best practice principles in different markets around the world.

The best approaches witnessed so far by the industry have been specific principle-based voluntary codes on consumer protection rather than general broad-based principles or standards of conduct. These principles or codes of conduct need to be in plain language and provide commitments that are clear to digital credit clients and detailed enough for the industry to follow and put in practice. To be effective, these codes need to be endorsed and widely disseminated by the industry associations but also published as clear commitments on the websites of the providers.[xi]

OLA SealSource: Online Lenders Alliance

Associations supporting the industry should also provide, where feasible, additional support to address consumer complaints as well as play the role of an interim ombudsman similar to the way the Online Lenders Alliance maintains a consumer hotline for complaints for customers of their member institutions.

OLA Hotline image

OLA numberSource: Online Lenders Alliance

Overall, emerging industry digital credit principles and standards can benefit and learn from the practices developed by other groups with a focus on themes discussed in chapter 3 on industry responses.

In summary, industry principles and standards are based on the following:

Industry Digital Credit Practices and Standards Detailed Practices
Appropriate product design & delivery principles 1)   Matching product design and usage

2)   Use mobile technology expertise for mobile channel delivery

3)   Advertising and marketing best practices

Prevention of over-indebtedness principles 4)   Avoidance of debt traps

5)   Responsible underwriting

6)   Responsible credit reporting/sharing

7)   Pressure-free loan principles

Transparency standards 8)   Borrower disclosure standards

9)   Investor disclosure standards (P2P platforms)

Responsible pricing standards 10)         Pricing terms and standards that are reasonable and affordable
Fair and respectful treatment of client principles 11)         Clear collection policy and procedures

12)         Fair collection practices

Data privacy & usage standards 13)         Responsible data usage

14)         Consistent review of data privacy standards

15)         Consent to communicate electronically

16)         Informed consent & opt-in/opt-out policies

17)         Management of third-party providers to protect client data

Complaint resolution principles 18)         Timely, clear and responsive complaint resolution practices
Security & risk management principles 19)         Authentication practices

20)         Industry standards on security compliance

In addition, consumers must also understand their rights and responsibilities as well. To better support customers, consumer empowerment and financial education efforts are important. These efforts not only need the support of industry but governments as well.[xii]

Some of the best practices used by others in addressing consumer education are also applicable to issues around educating consumers on digital credit products as well.

  • Digital credit consumer education efforts should be included in national financial education programs that involve all stakeholders including the government, regulators, the industry and mass media.
  • Like other financial education efforts, digital credit consumer education should be focused on “teachable moments.”. This includes providing financial education on digital credit at the time the consumer wants it and in a form that he/she wants it. Given the digital channels used such as online or via a mobile device for most digital credit, experiences like Australia[xiii] and ongoing research being conducted with companies like Jumo and First Access[xiv] demonstrate that interactive interfaces may be used to better educate clients about the product and services they receive as well as to encourage more responsible usage of credit.
  • Financial education for digital credit products and services need to be customized and tailored to the consumer’s level of digital and financial literacy. What would work for a low-income mobile borrower in Africa would be quite different for the needs of an online borrower in China.
  • Financial education for digital credit products should be thoroughly tested. Digital channels actually permit useful testing that can more precisely measure client’s behavior as well as comprehension in ways that traditional financial education tools cannot.[xv]

 

 

 

 

 

 

 

 


 

[i] “It Takes a Village” https://en.wikipedia.org/wiki/It_takes_a_village

[ii] Smart Campaign (Sept 2017) Tiny Loans, Big Questions: Client Protection in Mobile Consumer Credit http://www.centerforfinancialinclusion.org/storage/documents/Smart_Brief_Tiny_Loans_Big_Questions_Final_092617.pdf

[iii] Discussion with Ros Grady during the Responsible Finance Forum VIII May 2017. See also King, Arnold The American (May 2012) Why We Need Principles-Based Regulation http://www.aei.org/publication/why-we-need-principles-based-regulation/

[iv] World Bank (2012) Good Practices for Financial Consumer Protection http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/Good_Practices_for_Financial_CP.pdf

[v] For the purposes of this report 37 of the 39 detailed principles that are applicable to digital credit have been adapted from the World Bank (2012) Good Practices for Financial Consumer Protection http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/Good_Practices_for_Financial_CP.pdf and listed in this table.

 

[vi] See example from the Australian Securities & Investment Corporation ((July 2015) Facilitating digital financial services disclosures http://download.asic.gov.au/media/3309666/ris-facilitating-digital-financial-services-disclosures-published-28-july-2015.pdf

[vii] Rules to protect investors of P2P lenders are relevant to this category of consumer protection for digital credit with examples now in place in China and India.

[viii] As P2P lending models grew rapidly in markets like China and India, regulators issued new regulations to ensure coverage of this group. As this particular trend grows in other markets, regulators should carefully study options to ensure that these players fall under financial regulations and can be properly supervised. In the Philippines, the central bank regulations on the Truth and Lending Act were amended to ensure coverage of all financial providers including pawnshops, traditional microfinance institutions as well as peer-to-peer lending platforms.

[ix] Grovelands (June 2013) What are the benefits of principles-based regulations? https://www.grovelands.co.uk/news/financial-services-news/why-we-need-principles-based-regulation/

[x] Presentation and discussion with JoAnn Barefoot in April 2017. See also Barefoot, JoAnn Hotwire (October 2017) Cracking the RegTech market will take more than great tech http://insights.hotwireglobal.com/post/102ehc5/cracking-the-regtech-market-will-take-more-than-great-tech

[xi] See the example of the Online Lenders Alliance seal http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf

[xii] Ibid.

[xiii] Australian Securities & Investment Corporation ((July 2015) Facilitating digital financial services disclosures http://download.asic.gov.au/media/3309666/ris-facilitating-digital-financial-services-disclosures-published-28-july-2015.pdf

[xiv] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf

[xv] Ibid.

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Digital Credit: Regulatory Concerns & Responses

rules and regulations marked on rubber stamp(Note that this is the 4th chapter of a new publication on Responsible Digital Credit and is still under review. It is posted here for the purpose of receiving comments and inputs from others)

Regulators from around the world are now challenged with updating financial consumer protection policies and regulations to deal with digital financial services, including digital credit. In 2016, the G20 Global Partnership for Financial Inclusion (GPFI) identified digital finance as a top priority, including work on the challenges for global standard-setting bodies (GPFI, 2016) and the inclusion of a financial consumer protection pillar as part of the new G20 High-Level Principles for Digital Financial Inclusion. In addition, regulatory networks like the Alliance for Financial Inclusion (AFI) and the International Financial Consumer Protection Organization (FinCoNet), which convenes supervisory authorities charged with financial consumer protection supervision, are also conducting work on the risks to consumers, including security risks, associated with the increased use of online and mobile-enabled digital financial service transactions by consumers. CGAP and the G20/OECD Task Force on Financial Consumer Protection have also been active in working with regulators on consumer protection principles that encompass digital credit products and services.

In international surveys conducted by the OECD on behalf of the G20 Global Partnership for Financial Inclusion[1] in 36 countries across Asia, Africa, Europe and the Americas, nearly three quarters of survey respondents stated that disclosure requirements and fraud/mis-selling represented the most important policy concerns or priorities in their jurisdictions. Access to complaint handling mechanisms, data privacy, security, and fund protection mechanisms were also mentioned as relevant financial consumer protection issues for digital financial service providers.[2]

Regulators and policy makers within the AFI[3] network also noted that digital financial services raised new risks to consumers, especially with the expansion in the number of third-party and new digital finance providers that often operate outside of regulatory oversight. They noted that for regulators and policy makers, this diversity of business models and new players create new challenges that include:

  • The need to keep regulations current for the fast-evolving lending practices being offered by digital credit providers;
  • Incremental strategies to provide regulatory coverage as new providers enter markets while ensuring a level playing field with existing providers;[4]
Reg1Source AFI (Sept 2015) Digitally Delivered Credit: Policy Guidance Note and Results from Regulators Survey
  • Challenges with how to assess compliance by digital credit providers under existing rules;
  • Monitoring the business conduct of a more diverse set of digtial credit products and delivery models.
Source AFI (Sept 2015) Digitally Delivered Credit: Policy Guidance Note and Results from Regulators Survey

While it was clear from discussions with regulators across the world that consumer protection principles applied to traditional credit providers need to apply (or be adapted) to digital credit providers and models, there are a few areas where regulators stated that digital credit services may require specific regulations or guidelines to protect consumers. These include the area of disclosure requirements, especially for digital credit consumers who apply via a mobile device as well as challenges to appropriate disclosures for P2P lending investors.[5]

In India[6] and China regulators are ensuring that new digital credit providers, especially P2P lenders, are being properly licensed and registered in order to ensure that regulators can properly supervise them and provide oversight.

Surveys with regulators[7] have also noted the concern with the “newer” threats around digital credit, including the risk of digital fraud and abuses, misuse of personal financial data, lack of transparency and inadequate information on products as well as challenges around ensuring appropriate redress mechanisms are in place, ensuring that data privacy and security vulnerabilities are managed, and that cybercrime is minimized, etc. Additional potential consumer risks are being viewed as arising from the design of the digitally delivered product itself (e.g., product unsuitable for the customer or the product is designed in such a way that it promotes over-indebtedness) or from the way the product is delivered (e.g., mis-selling by agents with limited or no knowledge about the product). [8]

Due to the challenges faced by regulators in coming up with appropriate regulatory responses, groups such as CGAP and AFI have promoted public-private dialogues around issues such as consumer protection for digital credit providers. As CGAP has noted,[9] progress in the area of digital consumer protection requires collective action, including industry-regulator consultation, formal industry standards, as well as responsive policy or regulatory measures. Given the diverse range of providers and products and the channels they use to disclose costs and loan terms and conditions to consumers, it is clear that only through ongoing exchange between regulators and lenders can appropriate consumer protection measures be in place and adjusted as new players and/or products are introduced.

Inappropriate designed or delivered/marketed products

Various regulators and regulatory networks have provided guidance on issues related to suitability and product design as well as recommendations on marketing and advertising that relate to digital credit products. AFI’s recent guidance on digital credit[10] recommends that regulators mitigate consumer risks by engagement with and oversight of providers on product design of digital credit products in order to address potential inherent weaknesses in product design. In addition, the guidance recommends that regulators play a proactive role in monitoring advertisements of digital financial services including digital credit to ensure that prohibited activities are identified and appropriate measures taken. Regulators in several markets[11] have also developed specific guidelines to ensure that promotional materials for digital credit are fair, reasonable and not misleading.

In CGAP’s work with regulators and digital credit providers,[12] researchers  noted that regulators may need to develop further guidance as to how product suitability principles may be applied to different types of lenders and models as well as address different customer segments and types of digital credit. To achieve this, regulators should encourage digital lenders to strengthen their customer segmentation and product diversification efforts as the basis for suitability-based lending and then periodically review the lenders’ portfolios and policies and gather information through consumer surveys.[13]

In addition, CGAP’s research noted that the use of push marketing practices in digital credit warrants closer attention in order to limit or prohibit certain practices of debt traps.[14] While this study and recommendations were focused on mobile data-based lenders, CGAP’s recommendations apply equally to other providers including e-commerce and tech giants who actively make use of push marketing techniques. CGAP further recommends that regulators should consult with digital credit providers as well as third-party data analytic firms to study and better understand their policies for using customer data and contact information when marketing digital credit products.

Issues around over-indebtedness

As with other forms of credit, AFI’s guidance recommends that regulators develop market monitoring mechanisms to review the levels of debt on a continuous basis, both from demand-side data as well as conduct portfolio-at-risk reviews of digital credit portfolios. As a means to mitigate over-indebtedness, regulators and policy makers should ensure that all digital lenders also report to crediting reporting and information systems.[15]

CGAP’s focus note on digital credit[16] also recommends that policy makers address gaps in coverage of and compliance with credit reporting regimes across the various types of digital lenders in the market. It also recommended that policy makers and regulators work with credit registers and lenders to explore the inclusion of new and valuable customer data (e.g., mobile money and payments data) in credit reporting systems. Finally, CGAP’s focus note recommends that policy makers may want to consider whether the consequences of delinquency and default are disproportionate for very small loans, especially when so many consumers are new to the product and to the formal financial system. In order to address these concerns, policy makers could consider a range of options, such as ensuring that existing rules for sharing both negative and positive credit information are enforced, enacting new rules on reporting requirements for a specific subset of credit products, using moral suasion for noncompliant lenders, disclosing consequences of nonpayment more clearly to consumers, and undertaking financial capability and consumer awareness efforts. This guidance is now be applied to the case of P2P lenders in India.

Lack of transparency

The regulatory working group of the International Telecommunications Union (ITU) Focus Group on Digital Financial Services came up with several recommendations on improving transparency and developing more appropriate digital disclosure practices that are relevant for regulators to consider including:

  1. Transparency of fees including full disclosure of all charges prior to a transaction being authorized or a loan application being finalized. Ideally fees should be disclosed in multiple formats (in brochures, verbally, on websites, via SMS, etc.).
  2. Standardized key fact or summary documents should be provided to borrows to ensure that consumers are able to properly comprehend key information related to the service or product in a concise manner.
  3. Full disclosure of the terms and conditions of loan contract must be made prior to the customer finalizing a loan document. Unclear terms or complicated sentences should be avoided so that they are as easy to understand as possible. Terms and conditions should likewise be available in the local language used by the client group. Simplified contracts and standard form contracts also enable simplified disclosure of terms and conditions to customers.
  4. Cooling off periods may be needed especially in markets where push marketing and repeated borrowing begin to result in credit issues.
  5. Adequate notice periods should be given to consumers by the providers before any changes to fees or terms and conditions come in effect.
  6. There should likewise be standards about honest advertising and penalties for misleading marketing materials.

Some regulators are actually changing regulations to promote and support more interactive forms of digital disclosure for digital credit and other digital financial service users. For example, the Australian regulators decided to remove barriers that previously favored paper-based disclosures instead of innovative digital product disclosure statements that use methods that are better suited to digital credit clients such as interactive web-based disclosures, apps, videos, games and audio presentations.[17]

High fees, interest rates and penalties

AFI’s working group noted that there is a need for market conduct regulation to require comprehensive disclosure of costs of digital credit to allow for comparison with other credit offers, both digital and non-digital, with a view to promote transparent and comparative pricing

Unfair client treatment

Most of the regulatory guidance around fair treatment of clients is similar to guidance for traditional credit products. However, CGAP’s focus note on digital credit recommended that supervisors should monitor how digital lenders determine penalty charges, the cost of these charges to consumers, how these charges are communicated to consumers, and lenders’ policy for writing off delinquent payments. CGAP further noted that supervisors may want to go beyond monitoring, for example, by reviewing the standardized messaging scripts and call center protocols digital lenders use to communicate with delinquent borrowers to ensure clear and responsible communication of penalty charges and collections practices.

Data privacy, data rights & related security measures

Given the nature and delivery of digital credit products and services, AFI’s survey[18] among regulators noted that there may be a need for an explicit regulation or guidance to clarify that digital credit providers are required to take sufficient measures to protect the confidentiality and security of a customer’s information against threats and against unauthorized access to, or use of, customer information, including sharing of consumer data to third parties without clear and explicit prior authorization.

The ITU Focus Group on Digital Financial Services provided several standards[19] that are relevant to issues on data privacy, data rights and related security measures to protect data privacy.  These include the recommendations that:

  • Data related to digital credit should be encrypted both when in transportation and when stored. The systems in place which encrypt the data should be regularly tested, monitored and issues addressed.
  • Providers need to put in place measures to prevent the misuse of data, implementation of levels of authorization and/or separation of roles within the organization (and with third-parties) to ensure that employees, agents, or business partners are not able to access the entirety of a consumer’s data without justification.
  • Customers are clearly and effectively informed of what data will be collected and how it will be used, prior to its collection and use, and are given the option to consent or not.
  • Providers should limit the amount of personal data they collect from consumers to only what is necessary. Providers should also limit the timeframe for the retention of data and destroy data after it is used for its intended purpose.
  • Providers should ensure that personal data is maintained securely, with appropriate authentication systems in place. Regulators should also have in place penalties and the power to remove the license for providers who repeatedly allow personal data to be misused.
  • Providers should have a data collection and handling policy which states what types of data will be collected and under which circumstances it may be shared.

Complaint resolution practices

Given the challenges of digital credit models and the remote contact with digital credit customers, AFI’s guidance[20] recommends that digital credit providers must ensure that appropriate recourse mechanisms are in place even when products and services are offered via a third-party like a telecommunications provider (or online broker).

The ITU Focus Group on Digital Financial Services[21] also recommends that   regulators should consider requiring that:

  • All digital credit providers have a complaints policy and procedure in place.
  • The complaint and resolution policy is effectively communicated using multiple channels (such as in branch, online, mobile, leaflets, verbally by agents, etc.), and the policy is made available in common local languages.
  • Clients should have access to a variety of channels to lodge complaints such as toll-free numbers, local agents, app-based, social media, SMS, and branches.
  • Consumers who are not satisfied with how their complaint was handled by their provider should be able to access alternative or external channels to seek redress. Information on how to use alternative methods should also be readily available.
  • Timeframes for how long consumers should expect to wait for a response should be reasonable and clearly communicated to consumers.

In addition the regulatory working group of the ITU recommended that there be coordination and collaboration between different regulators (such as telecommunication and financial system regulators) in order to address complaint issues when lead generators come from a different sector (such as an MNO). They also recommended that regulations should expressly state that financial regulators will receive and monitor complaints as well as track the resolution (or non-resolution) of customer complaints on a regular basis. This should include clear requirements that digtial credit providers share complaints data with the regulator as well as ensure available information during onsite audits.

Fraud and security issues

Several of the ITU Focus Group on Digital Financial Services[22] recommendations on fraud prevention and digital security are quite relevant to digital credit providers including:

  • Ensuring that digital credit providers are licensed and supervised under a regulatory framework. For example, China and India now have licensing rules for P2P lending platforms.
  • Ensuring that appropriate security measures are in place and regular tested.
  • Ensuring due diligence practices are in place for digital credit providers, their staff, and relevant third-parties such as agents, contractors, lead generators, and collectors.
  • Ensuring that digital credit providers are responsible for the actions of their third-parties (agents, contractors, lead generators, brokers and collectors).
  • Ensuring that consumers are aware of the potential for fraud and that they should be encouraged to report suspected cases. This includes the recommendation of consumer awareness campaigns on the most common incidents of fraud (via the internet, SMS alerts, signage at agents, etc).

AFI’s initial guidance to regulators in markets where digital credit products are now available include:

  • Proactive engagement with providers and their partners that are offering or planning to offer digital credit products in order to understand more clearly the specific product features and models being used for marketing/distribution/scoring/loan management/collections, with an eye towards identifying the key consumer protection vulnerabilities and risks and how they will be mitigated.
  • Considering whether pre-approval of new products or business arrangements can and should be required.
  • Ensuring that appropriate customer redress mechanisms are in place, especially in digital credit offerings where multiple parties may be part of the credit value chain.
  • Analyzing the available information on current customer experiences or collecting or commissioning studies (e.g., mystery shopping, surveys, focus group discussions, etc.) to prioritize and size these risks.
  • Analyzing the extent to which existing regulation and guidance covers and treats the products, models and risks in the market, in order to identify gaps and come up with a practical plans to assess compliance.
  • Support for peer-to-peer networking with regulators in other jurisdictions in order to stay abreast of new developments and emerging good practices.
  • In addition, while it is not a matter of regulation/supervision, jurisdictions (and other stakeholders) will want to consider how best to improve consumer awareness, understanding and behavior over time, including through awareness campaigns and financial capability interventions.

Investor Protections for P2P Lending

Certain issues regarding fraud prevention are quite relevant to marketplace lending. China’s $60 billion P2P lending sector is still the largest in the world. Due to fraudulent practices of a number of P2P lending platforms in the past, Chinese regulators have issued a number of regulations geared to protect investors as well as borrowers. Similar to practices in the UK, P2P lenders in China are now required to be licensed and must use appropriate escrow account services with a bank in order to manage investors funds and the payments of borrowers.  This appears to be helping to address trust and avoid several of the fraudulent practices of the past. India’s regulations for P2P lending platforms[23] require that funds be transferred directly from the lender’s account to the borrower’s account rather than be held by the intermediary P2P platform.

 

[1] OECD/G20 GPFI Report (2017) Ensuring Financial Education and Consumer Protection for all in the Digital Age http://www.oecd.org/daf/fin/financial-education/G20-OECD-INFE-Report-Financial-Education-Consumer-Protection-Digital-Age.pdf

[2] Also see ITU-T Focus Group on Digital Financial Services (May 2016) Commonly Identified Consumer Protection Themes for Digital Financial Services https://www.itu.int/en/ITU-T/focusgroups/dfs/Documents/09_2016/ConsumerProtectionThemesForBestPractices.pdf

[3] AFI (Sept 2015) Digitally Delivered Credit: Policy Guidance Note and Results from Regulators Survey https://www.afi-global.org/sites/default/files/publications/guidelinenote-17_cemc_digitally_delivered.pdf

[4] Some complaints have been raised by banking institutions regarding differences in treatment of banks and MNOs in terms of KYC requirements, with requirements being more stringent for banks rather than those offered in via an MNO. Regarding digital finance providers, conditions can become more stringent to regulated FSPs (e.g. the case of M-Pawa in Tanzania, which is offered through a regulated bank teaming up with MNO vs Timiza, a non- regulated Micro-credit Provider which teamed up with an MNO in Tanzania, and is not under the jurisdiction of the financial sector regulator).

[5] These include agents, lead generators, brokers, MNOs, P2P lenders and/or marketplace platforms, and third-party data analytic companies that offer services to digital credit providers.

[6] Reserve Bank of India (Oct 2017) Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11137

[7] G20/OECD INFE REPORT (April 2017) Ensuring financial education and consumer protection for all in the digital age http://www.oecd.org/daf/fin/financial-education/G20-OECD-INFE-Report-Financial-Education-Consumer-Protection-Digital-Age.pdf  

[8] GPFI (2016), Global Standard-Setting Bodies and Financial Inclusion: The Evolving Landscape. http://www.gpfi.org/sites/default/files/documents/GPFI_WhitePaper_Mar2016.pdf

[9] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf

[10] AFI (Sept 2015) Digitally Delivered Credit: Policy Guidance Note and Results from Regulators Survey https://www.afi-global.org/sites/default/files/publications/guidelinenote-17_cemc_digitally_delivered.pdf

[11] Hong Kong, China and Indonesia in particular have regulations around advertising and promoting digital credit products. See also G20/OECD INFE REPORT (April 2017) Ensuring financial education and consumer protection for all in the digital age http://www.oecd.org/daf/fin/financial-education/G20-OECD-INFE-Report-Financial-Education-Consumer-Protection-Digital-Age.pdf  

[12] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf

[13] Mazer, Rafe. (December 2016) 3 Steps Policy-Makers Can Take Now on Digital Credit http://www.cgap.org/blog/3-steps- policy-makers-can-take-now-digital-credit

[14] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf

[15] AFI (Sept 2015) Digitally Delivered Credit: Policy Guidance Note and Results from Regulators Survey https://www.afi-global.org/sites/default/files/publications/guidelinenote-17_cemc_digitally_delivered.pdf

[16] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf

[17] Australian Securities & Investment Corporation ((July 2015) Facilitating digital financial services disclosures http://download.asic.gov.au/media/3309666/ris-facilitating-digital-financial-services-disclosures-published-28-july-2015.pdf

[18] AFI (Sept 2015) Digitally Delivered Credit: Policy Guidance Note and Results from Regulators Survey https://www.afi-global.org/sites/default/files/publications/guidelinenote-17_cemc_digitally_delivered.pdf

[19] ITU-T Focus Group on Digital Financial Services (May 2016) Commonly Identified Consumer Protection Themes for Digital Financial Services https://www.itu.int/en/ITU-T/focusgroups/dfs/Documents/09_2016/ConsumerProtectionThemesForBestPractices.pdf

[20] AFI (Sept 2015) Digitally Delivered Credit: Policy Guidance Note and Results from Regulators Survey https://www.afi-global.org/sites/default/files/publications/guidelinenote-17_cemc_digitally_delivered.pdf

[21] ITU-T Focus Group on Digital Financial Services (May 2016) Commonly Identified Consumer Protection Themes for Digital Financial Services https://www.itu.int/en/ITU-T/focusgroups/dfs/Documents/09_2016/ConsumerProtectionThemesForBestPractices.pdf

[22] Ibid

[23] Reserve Bank of India (Oct 2017) Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11137

Posted in ACCION Center for Financial Inclusion (CFI), Fintech, Regulations, Responsible Online & Digital Lending | Tagged , , , , | 2 Comments

The Role of the Digital Credit Industry in Addressing Consumer Protection

acquire(Note that this is the 3rd chapter of a new publication on Responsible Digital Credit and is still under review. It is posted here for the purpose of receiving comments and inputs from others)

The digital credit industry has established a number of associations in different markets around the world. Some are either working groups of larger financial sector industry associations (usually under banker associations, payment service providers or FinTech networks) while others are specific to certain types of players, primarily marketplace lenders.  As governments, policy makers, regulators, investors, consumer protection advocates and the public at large have largely supported the expansion of digital credit, they have also raised concerns about consumer protection issues. Being aware of these concerns, industry associations are playing a more proactive role to address new digital consumer protection issues. Some of the more prominent examples include the Smart Campaign (global), the Responsible Business Lending Coalition (USA), the Online Lenders Alliance (USA), the Marketplace Lending Association (USA), the Coalition for Responsible Finance (USA), the Peer-to-Peer Finance Association (UK), the National Internet Finance Association of China (China) as well as various FinTech-related associations and networks in other markets in Latin America, Africa and Asia.

While laws and regulations play an important role, industry associations also need to play their role to ensure that their members operate in a responsible manner that also ensures consumer protection.  Although it has been traditionally difficult to get financial service industry players to deal with certain self-regulatory issues and focus on consumer protection issues, there are particular factors with regard to the digital credit industry that are pushing the players to be more proactive. The online connectivity and sharing of information among digital finance consumers and the potential to bring issues to light more quickly can have dramatic impact on industry developments and regulations. Digital finance consumers are also more likely to demand better information and protection from abusive practices by looking for better business standards or “seals of approval” than more traditional clients. The Online Lenders Alliance, for example, encourages its members to agree and follow a set of Best Practices[1] and then promotes the use of their seal of best practices on their members’ websites and online portals to demonstrate to clients as well as regulators that they as a member of an industry group agree to abide by these standards. The industry association backs these standards up with a consumer hotline number and a violation complaint form to better monitor and track their members to ensure better compliance.

In addition to the Online Lenders Alliance Best Practices, there are a range of industry standards and best practices that focus either directly or indirectly to improve consumer protection issues and concerns.

The primary industry-related consumer protection principles and standards to address the consumer risks identified in Chapter 2 include:

  • Appropriate product design & delivery principles
  • Prevention of over-indebtedness principles
  • Transparency standards
  • Responsible pricing standards
  • Fair and respectful treatment of clients
  • Data privacy standards
  • Complaint resolution principles
  • Security & risk management principles

Appropriate product design & delivery principles

  • The right product design for the right use case – The Small Borrowers’ Bill of Rights focuses on the principle of offering products based on appropriate analysis of debt capacity and capability along with right size financing. They also focus on matching appropriate credit products to actual needs and use cases. Other industry best practice guidelines also encourage the importance of product design and matching prospective borrowers with loan terms and conditions that better suit their needs.
  • Use of mobile technology expertise – The Online Lender Alliance’s guidance on mobile best practices is probably the most extensive industry associated guidance for digital lenders that interact with customers via a mobile channel.[2] This guidance includes the requirement for digital lenders to design all terms and conditions clauses to be viewed on ALL mobile devices.  This requirement avoids the issues that have been faced by several digital credit providers which have sent clients to a link on a website which cannot consistently display and format information for every web-enabled device that may be used to apply for or finalize a loan application. Specifically, they recommend that digital credit providers offering loans via a mobile device must make use of appropriate mobile developers that ensure that product information can be appropriately displayed on all mobile devices. CGAP goes further with recommendations about how smart mobile product design can be used to ensure terms and conditions cannot only be provided via a mobile device but can also be presented in such a way to improve “informed” client consent.[3]
  • Advertising and marketing best practices – The Online Lenders Association had the most extensive discussion on protecting consumers (and the industry) from deceptive or misleading advertising and marketing practices, including ensuring that:
    1. Advertising loan terms and conditions are accurate and only made for loans that are available by the provider (for example not marketing “same day” or “instant” loans when the provider does not offer these loans).
    2. Disclosure of conditions when trigger terms[4] are used including the amount or percentage of down payment, terms of repayment, the actual APR, if the rate is variable or subject to change.
    3. With regard to online digital credit products, especially those being promoted by lead generators or brokers, loan terms and conditions can be marketed in a misleading way or falsely represented altogether including offering loan amounts or terms that are not actually available. For example, advertising loans that can be approved on “same day” or within “minutes” when these features do not actually exist.
    4. Full terms and conditions including the implication of late payments, implications of non-payment, lender’s loan and loan renewal policies.
    5. Lenders are responsible for ensuring that their brokers and agents are also following the same practices.

Prevention of over-indebtedness principles

Arguably, advocating within the credit industry to take proactive steps to assist clients to limit borrowing in order to avoid over-indebtedness is one of the mast challenges consumer protection principles to promote. Apart from the Smart Campaign, both the Online Lenders Alliance and the Small Business Borrowers Bill of Rights have recommended industry principles to avoid over-indebtedness of clients.

  • Avoidance of debt traps – Several of the best practice industry principles encourage digital credit providers to avoid creating debt traps with automatic repeat loans.
  • Responsible Underwriting – Many industry principles encourage a focus on responsible underwriting with loans that are right sized to meet the specific terms and conditions that the borrow needs and can use. This includes ensuring that clients have the ability to repay even when loan proceeds are directly deducted from online sales which can be especially relevant for trade, supply chain finance and those firms that offer financing directly to vendors on e-commerce sites.
  • Responsible Credit Reporting – Where available, digital credit providers should report loan repayment information to major credit bureaus and consult credit data when underwriting a loan. As noted by the Small Borrowers’ Bill of Rights, such reporting enables other lenders to responsibly underwrite the borrower and helps the borrower build a credit profile that may facilitate access to more affordable loans in the future.
  • Pressure Free – Allow borrowers a reasonable time to consider their loan options free from pressure or artificial timelines.

Transparency standards

Not surprisingly, almost all industry consumer protection principles agree on the importance of transparency standards as this has been one of the areas where digital credit consumers have had the most complaints. Given the nature of digital credit platforms, where consumers can be both borrowers and lenders (investors), transparency standards proposed by the industry apply to both types of consumers of digital credit.

Borrower Disclosure Standards

Most industry standards require that digital credit providers must provide borrowers with the right to see the cost and terms of any financing being offered in writing and in a form that is clear, complete, and easy to compare with other options, so that they can make a better informed decision,

This approach, though, is easier said than done as most clients still do not understand the costs and terms of financing.  This is where financial technology, however; may be able to make a difference as has been demonstrated with some early industry testing conducted by CGAP[5] with several digital credit providers. In partnership with mobile data-based digital lenders, CGAP has demonstrated the role that more interactive and user friendly interfaces can have in improving loan terms and conditions to digital borrowers in Africa. These tests have demonstrated that:

  1. Borrowers make better loan decisions when costs are presented in a simple manner. For example, separating something as basic as loan principal payments from finance charges resulted in clients taking out better suited loans which resulted in lower defaults.
  2. Improving the sequencing of how and when loan terms are presented as well as summarizing key terms also helped to increase consumer attention and understanding. Usually, terms and conditions in loan contracts are the last option on a loan product main menu. By simply moving them and following standard clauses with a short summary of the key facts, clients ended up improving their comprehension of loan terms and conditions. More importantly, those who actually read the full terms and conditions had a 7 percent lower absolute delinquency rate. See the example from the CGAP report below:

Summary terms and conditons

Source CGAP (2017) Consumer Protection in Digital Credit

In addition to these examples for mobile data-based lenders, other digital credit providers could also benefit from replicating these CGAP experiments and testing more proactive and interactive ways of presenting loan terms and conditions to borrowers.

Investor Disclosure Standards

As noted previously, individual investors are also digital credit consumers and do require consumer protections as well. Many of the industry associations that deal with marketplace lenders, especially peer-to-peer lending platforms have developed recommended investor disclosure standards. This has become even more relevant in the aftermath of the fraud issues within the industry especially after recent abuses in China.[6]

Several of the investor disclosure standards issued by the Marketplace Lending Association[7] include:

Loan-level historical data
Provide investors access to overall performance data for the marketplace, Lenders including returns based on all loans issued through the marketplace’s programs equivalent to the investment being considered.

Overall marketplace performance data
Provide investors access to overall performance data for investments in all loans previously issued through the marketplace that are relevant to the investment program being considered, except where not permitted by regulators. This data may be segmented by criteria such as product, vintage, or investor type where appropriate.

Investment selection data 

For investment programs where investors acquire interests in individual loans on a discretionary or active selection basis, provide those investors access to detailed, loan-level data on each loan available for investment.

Investor portfolio data
Provide investors with access to regularly updated, loan‐level performance data on the loans in which they have invested.

Marketplace management practices to protect investors[8]

  • If the marketplace’s business strategy involves retaining an interest in a meaningful portion of the loans that are relevant to a specific investment program, such as 10% or more of the loans within a given loan product, disclose to investors considering investing in the same investment program how the marketplace selects which interests in loans it retains and which interests are offered to investors, and the overall performance for those interests in loans the marketplace retains.
  • Maintain a policy with respect to employees investing in loans issued through the marketplace, to address potential conflicts or use of nonpublic information.
  • Treat different categories of investors fairly. If an investment program is available to non‐ accredited as well as accredited investors, maintain allocation policies to ensure that each class of investors is provided fair access to loans.

Responsible pricing standards

Responsible pricing standards are also, arguably, one of the most difficult principles for the credit industry to actively promote among digital credit providers. The Smart Campaign’s principle around “Transparent and Responsible Pricing” states that pricing should be “both affordable to clients and sustainable for financial institutions.” This formulation emphasizes that low prices are good for clients, while allowing for the practical realities entailed in the provision of small loans.[9]

New digital credit models now enable providers to better customize and support responsible pricing approaches than traditional brick-and-mortar lending of the past. As noted in the ongoing research conducted by CGAP,[10]  digital lenders now have the technology to better segment potential and current customers, more carefully assess their repayment capacity, target appropriate use cases and improve overall pricing in a more responsible way. Since digital lenders’ post-sale servicing costs can be relatively low (because payments are collected remotely and loan monitoring is automated), this can better justify improved product design as well as pricing models. As noted in the study, this is now beginning to happened in places like East Africa where some newer entrants diversify and customize their product types, tenor (amount of time to repay a loan), and pricing. This includes charging daily interest (creating a form of “pay for what you use” approach to interest and fees), risk-based pricing both on initial and recurring loans, and not charging penalties for late repayment—all of which are innovations that could benefit from further testing and documentation of impact.[11]  

Fair and respectful treatment of clients

Another principle that most of the industry associations agree on is the promotion of fair and respectful treatment of clients. Most of the principles revolving around fair and respectful treatment of digital credit clients involve the issue of collection policies and practices.

The Online Lender’s Alliance Best Practices[12] lists some of the most detailed policies and practices for their members with regard to fair treatment of customers including:

  1. Collection policy and procedures
  • Collections policies and procedures should be documented in detail and followed by all digital credit providers and their business partners.
  • These policies should include but are not limited to: account flow and work flow procedures, account handling procedures, payment handling and posting, work force training, quality assurance and monitoring, customer complaint handling, vendor or partner selection due diligence and monitoring, contract review and compliance, exception account handling (bankruptcy, consumer credit counseling services, dispute and fraud).
  1. Fair Collection Practices
  • Approaches to provide advance notice to customers prior to calling them directly.
  • Ensuring proper disclose about the identity of the caller (whether it is from the lender directly or a third-party collection agency acting on behalf of the lender) and the stated purpose of the call.
  • Ensuring that digital credit providers and their contract third-party agents do not engage in false or misleading representations.
  • Ensuring that lenders and their agents do not engage in customer harassment (an “excessive” number of calls, calls late at night, social media harassment) or abuse.
  • The importance of treating consumers owing debts with professionalism, respect, and civility.
  • Recommendations to cease communication with consumers where: (i) the account is disputed and until the debt has been appropriately validated; (ii) the debtor has led for bankruptcy protection (in jurisdictions where this is provided for) and has provided the proper documentation of such action; (iii) the debtor is deceased; or (iv) the debtor has provided the necessary documentation showing that he or she is the victim of identity theft.
  • Not to threaten to sue or criminally prosecute. Do not lead consumers to believe that they would be sued or subject to criminal prosecution if they did not make payments.
  • The principle that consumers should not be pressured to pay off loan and quickly take out another one.
  • Ensure that discussions with clients are simple and clear and do not use legal jargon.
  • Not to threaten to charge extra fees.
  • The recommendation of responsible restructuring of loan practices when a customer is unable to repay the loan according to their original contract terms that provide flexibility based on the customer’s circumstances.

Given that fact that many digital credit providers also hire third-party collectors, groups like the Online Lenders Alliance also list a set of standards that outsourced collection agencies should follow.[13]

In addition, there are also communication recommendations that focus on opt-in and opt-out options for borrowers is well.[14] At the same time, both online and via the mobile channel do allow for improved communications with customers including the ability to inform clients about:

  • Technical support options
  • Alerts of deposit of funds into the customer’s account;
  • Alerts of missed payments;
  • Alerts of upcoming payment due dates; and
  • Alerts of servicing fees imposed, such as late fees. [15]

Digital credit providers may also provide proactive information that may better assist borrowers, such as:

  • Identification for financial counselors located in the customer’s geographic area;
  • Resources for customers who are suffering from financial strain.

Data privacy & usage principles

Driven by consumers and increasing government policies and regulations, the industry associations and those working with the industry have all focused on responsible data privacy and usage principles.

The Online Lenders Alliance[16] and the Marketplace Lending Best Practices[17] have come up with an extensive list of practices for their members that focus on comprehensive information security and data privacy policies that extend to all vendors, brokers and third-party agents. CGAP’s ongoing work directly with digital credit industry players has also contributed to a better understanding around emerging data privacy issues.

These key principles include:

Use data responsibly

  • As an overarching policy, digital credit providers must be able to fully and properly articulate to users (both investors and borrowers) the reason why the provider is collecting the data, otherwise the provider should not collect it.[18]

The role of regular updating of data privacy standards and practices

  • Ensuring that all personally identifiable information collected form consumers be collected using Hypertext Transfer Protocol Secure (https) and stored only in encrypted and unreadable formats as well as employing available security measures to guard against reasonably foreseeable attacks.
  • Retention of data only as long as necessary to satisfy a legitimate business or legal need.

Consent to communicate electronically with clients

  • Digital credit providers should not originate a loan until the consumer consents to receive disclosures electronically. To facilitate the Online Lenders Alliance recommends the use of an “I agree” or eSignature function to obtain this consent without which the transaction may not proceed further.[19]
  • In addition, before the consumer binds himself to the mobile loan agreement, the consumer must indicate that he has the mobile capability to download and retain such disclosures received by email or text.

 

Informed consent around privacy notices & opt-in/opt-in practices

  • Digital credit providers should communicate clearly with all customers and business entities regarding how information is shared with other entities by having a conspicuously-placed privacy policy on all websites owned/operated by the provider.
  • In recent discussions at the Responsible Finance Forum[20] in Berlin and in ongoing research by CGAP[21], concerns have been raised about whether digital credit customers provide “informed consent” regarding the collection, use, and sharing of their personal information and transaction data. Most often “consent” consists of checking an acceptance box at the end of their loan agreement or in some cases mobile phone or mobile money account contracts.[22]
  • In addition, as noted previously in the issue around loan terms and conditions, consent links are not able to be viewed via a mobile interface and, hence, most clients have not fully read or understood the data privacy rights that they are waiving. To address these issues, some lenders are upfront about their data collection practices in their pre-loan documentation and are following randomized control test to develop interfaces that improve “informed consent” of digital credit borrowers.[23] These messages are clear, timed in pre-loan procedures and are able to be viewed on a mobile device without requiring customers to open a weblink.

See a screenshot example below from a Kenyan lender which clearly identifies the type of data being collected in simple and clear manner:

 Screenshot

 

Source CGAP (2017) Consumer Protection in Digital Credit

 Management of third-party service providers such as vendors, agents and brokers to protect client data

  • Ensuring that digital credit providers exercise due diligence when selecting business partners to ensure amongst other things that potential partners have proper information security policies in place as well including employment screening requirements for all new hires, contractors or third-party personnel who have access to sensitive customer information.
  • Limiting the number and types of third-parties with whom such information may be shared in order to minimize, to the best extent possible, security risks to consumer data that is outside the control of the digital credit provider.

Complaint resolution principles

Most industry groups have recognized the need to clarify complaint resolution principles among digital credit providers.  These recommendations focus on the need to offer timely and responsive complaint resolution systems and procedures. This is highly relevant in digital credit where the borrower may be confused about who the digital credit provider is especially in partnership models between banks and third-party service providers like mobile network operators or marketplace lenders. In addition, due to the potential for confusion over different digital interfaces, especially those offered over a mobile phone, well-staffed call centers and other means of assisting with problem resolutions are essential.[24] Industry associations are also realizing the importance of not only maintaining a complaint resolution system that ensures appropriate, fast and reasonable resolution of complaints by borrowers and/or investors but also to track progress of resolution process. In some markets, industry has worked with regulators to participate in regulator-sponsored complaint portals.[25]

Security & risk management principles

While initially not perceived as a consumer protection principle, rising concerns over security, risk and fraud prevention for both consumers and digital credit industry players has required the industry to work together to improve security standards and principles that all can rely on. In addition, security and risk management is something that requires everyone to actively support, including educating digital credit consumers as well as the industry to report security breaches.

Authentication and security around consumer information are particularly important. The most common authentication method is something a person knows, commonly a password or PIN. If the customer types in the correct password or PIN, access is granted. However, because of the increasing risk of digital fraud and identity theft, most digital credit providers now use a two-factor authentication (or a multi-factor authentication) process[26] to ensure improved security around this procedure.

 

 

 

[1] http://onlinelendersalliance.org/wp-content/uploads/2015/01/Best-Practices-2017.pdf

[2] Online Lenders Alliance Best Practices (2016) http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf

[3] CGAP (Jan 2016) Finding a “Win Win” in Digitally Delivered Consumer Credit http://www.cgap.org/blog/finding-“win-win”-digitally-delivered-consumer-credit

[4] Examples of trigger terms in advertisements include:

  • Borrow now for just $10 per $100!
  • Only [x]% interest!
  • Get money now, pay back over the next 12 weeks!

[5] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf

[6] Lending Times (Sept 2017) Analysis of the P2P Market after the Regulatory Crackdown in China http://lending-times.com/2017/09/11/analysis-of-the-p2p-market-in-china-after-the-regulatory-crackdown/

[7] The Marketplace Lending Best Practices (2017) http://marketplacelendingassociation.org/industry-practices/

 

[8] Ibid

[9] Smart Campaign (July 2010) Responsible Pricing: The State of the Practice http://www.smartcampaign.org/storage/documents/Tools_and_Resources/Responsible_Pricing-The_State_of_the_Practice.pdf

[10] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf

[11] Ibid

[12] Online Lenders Alliance Best Practices (2016) http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf

[13] Ibid

[14] See the Mobile Marketing Association Guidelines (July 2017) Fintech: Inside the mobile revolution of the financial sector http://www.mmaglobal.com/documents/guidelines

[15] Online Lenders Alliance Best Practices (2016) http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf

[16] Online Lenders Alliance Best Practices (2016) http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf

[17] The Marketplace Lending Best Practices (2017) http://marketplacelendingassociation.org/industry-practices/

[18] Online Lenders Alliance Best Practices (2016) http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf

[19] Online Lenders Alliance Best Practices (2016) http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf

[20] Responsible Finance Forum VIII (2017) Opportunities and Risks in Digital Financial Services, Consumer Protection and Data Privacy https://responsiblefinanceforum.org/responsible-finance-forum-viii-2017/

[21] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf

[22] Ibid

[23] Ibid, see example on First Access (box 2 on page 9)

[24] Smart Campaign (Sept 2017) Tiny Loans, Big Questions http://smartcampaign.org/storage/documents/Smart_Brief_Tiny_Loans_Big_Questions_Final_092617.pdf

[25] It should be noted, however, that such portals are not without their own criticisms from industry see PYMNTS.com (July 2017) The CFPB’s Consumer Complaint Database: The Next Battle Between Regulators and Legislators https://www.pymnts.com/news/cfpb/2017/the-cfpbs-consumer-complaint-database-the-next-battle-between-regulators-and-legislators/

[26] See https://en.wikipedia.org/wiki/Multi-factorauthentication

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Protected: Risks Faced by Digital Credit Clients

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Protected: The Current Landscape of Digital Credit Providers

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How Alternative Data is Transforming Access to SME Finance

Digital SME Finance

By John Owens & Lisa Wilhelm

Reposted from the SME Finance Forum Blog

Many traditional commercial banks consider small and medium enterprises (SMEs) to be high-risk clients, as well as high-cost clients to acquire, underwrite and serve. There is limited SME coverage by credit reporting service providers especially in emerging markets where SME informality is high.

While being able to analyze SME financial data was difficult in the past, digitized finance that makes use of transactional and alternative data is offering a new opportunity to address opaque credit and financial histories of SMEs. Every time SMEs and their customers use cloud-based services, conduct banking transactions, make or accept electronic payments, browse the Internet, use their mobile phones, engage in social media, get rated online, buy or sell electronically, ship packages, or manage their receivables, payables, and recordkeeping online, they create and deepen the digital footprints they leave behind. SMEs’ own, real-time, and verified data — unprecedented volume, variety, and velocity — also means more data can be used for credit decisions.

A rapidly growing group of technology-focused SME lenders are putting the use of alternative digital data, customer needs, and advanced analytics at the center of their business models, thereby setting forth new blueprints for changing the SME finance market. These new lenders are also often providing more transparent, faster, easier, and better-tailored financing solutions that today’s increasingly tech-savvy SMEs seek.

The report titled “Alternative Data Transforming SME Finance” looked at 800+ innovative digital SME lenders and digital commerce, payments and service providers in more than 60 countries. Here are some of the key findings:

  • Banks have valuable data, but are often not using it: Banks have a highly valuable repository of SME data, including SME owners’ customers’ daily transaction data that provides reliable real-time visibility into SME cash flows and credit capacity. However, most banks lack the ability to create innovative SME lending models from it. The data often resides in a patchwork of legacy systems and data silos that make it difficult and costly to access. This gap has created an opening for digital SME lenders to capture this market segment and/or partner with banks to take advantage of these new models.
  • Digital SME lenders are developing new relationships with SME customers and their data: In some cases, non-bank digital SME lenders insert themselves between banks and their SME customers, and forge fundamental changes in SME customer expectations. SMEs are embracing the digital world more and more every day. Increasingly, many SMEs are more tech-savvy, more sensitive to slower service and paper-intensive loan applications, and more willing to shop around for unmet and unserved financing needs.
  • New SME digital data streams are becoming more readily available and accessible: Digital SME lenders leverage vast and expanding stores of data, including from electronically verifiable, real-time sales, bank account money flows and balances, payments, social media, trading, logistics, business accounting, and credit reporting service providers, as well as a wide range of other private and public data sources used in the SME credit assessment process.
  • There are a wide range of digital SME originator lending business models: The new digital SME lending originator business models that take advantage of the expanding universe of SME digital data vary widely. This report highlights these business models, selected players, and the digital SME data they use. It includes marketplace lenders, tech, e-commerce, and payment giants which are extending SME lending into their non-banking digital ecosystems where they are already dominant. It also includes supply chain financing firms, mobile micro-lenders graduating to SME lending, and innovative banks.
  • Digital SME lending is becoming more of a global trend: That these innovators are sometimes simultaneously launching nearly identical products in developed and developing markets alike demonstrates just how profoundly alternative data and technology are leveling the playing field. As such, they are enabling new digital SME lenders in many parts in the world to leapfrog traditional bank SME financing barriers.
  • Digital SME lender-bank collaboration is also a growing part of the future of SME finance: Banks may have been blind to digital SME lenders at first, and digital SME lenders may have said they would replace banks. However, both parties now have come to a simple conclusion: there are limits to what each player can do on their own and there is strength in collaborating. Apart from partnerships with banks, some non-bank digital SME lenders are instead partnering with each other, tech giants, cloud-based SME service providers, or alternative lenders in other sectors. In other cases, they are securing their own banking licenses, suggesting some new non-bank digital SME lenders still plan to forge an alternate path, thereby bypassing traditional legacy banks altogether. A vital characteristic of these collaborations is a sharing of each partner’s SME digital data. This facilitates the development of new and innovative SME credit decision models and expanded access to credit.
  • Access to data is no longer the problem in SME lending: Digital SME lenders have dispelled the long-held notion that SME lending is not achievable in a scalable, efficient, and profitable manner. In an increasingly digital economy, these lenders are beginning to demonstrate that access to data is unlocking many of the earlier challenges to expanding SME lending. The digital economy has also given rise to an ever-evolving set of value-added cloud-based services to help SMEs with their finances, business planning, productivity, legal issues, data backup and security, file sharing, web conferencing, website builds, online marketing, business training, e-commerce, payments, loyalty programs, business intelligence, and more. To increase customer engagement and help their SME customers be more successful, banks and other SME lenders have started partnering with these platforms to offer SMEs these applications individually, together, or wrapped up with other core products and services.
  • However, access to data for SME lending brings new challenges: With the abundance of alternative data, there are new issues of what to use, how to use it, and how to do this responsibly — while also respecting privacy and other important rights of SMEs. These new entrants bring new complexities, risks, and ways of thinking about the SME financing value chains, as well as new agenda items for policymakers and regulators.

This new generation of digital SME finance and data innovation is transforming the future of SME finance.  This report takes stock of the range of data, the range of institutions using the data and considers the opportunities alternative data presents to narrow the financ­ing gap for SMEs. It also notes the new issues and poten­tial risks raised by this massive increase and diversification of data supply to financial sector stability, and to consumer protection.

Any venture such as this is by its nature a collaborative effort guided by the valuable insights and expertise of our many reviewers along the way. We thank them and the Global Partnership for Financial Inclusion (GPFI), the SME Finance Forum, the World Bank Group, the German Government, the Silicon Valley Community Foundation, and the Swiss State Secretariat for Economic Affairs (SECO) for undertaking and supporting us in the development of this report.

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Payphone Bank in Colombia: An Innovative Way to Promote Micro-savings via Pay Phones

Tigo-Une’s “Payphone Bank” by Grey Colombia has won the Grand Prix for Product Design at this year’s Cannes Lions.

The telecom company turned 13,000 cast iron pay phones from the turn of the century into a micro-savings system for the poorest in Colombia, where 8 million people earn an average of $3.50 a day, and are completely left out of the financial services system. Now they can go to a Une store to activate an account, then deposit their earnings, which are mostly coins, into the public phone and their own microsavings account. That account can be used to pay utility bills, buy public transit tickets, and even get microloans at stores to buy basic appliances like a refrigerator.

“It’s helping a lot of people in one country, and could be very meaningful for other countries,” said Ruth Berktold, president of the Product Design jury and owner of Yes Architecture in Germany.

Colombia has won a Grand Prix at a previous Health Lions festival but this marks the country’s first Grand Prix at the main event.

Read more at http://creativity-online.com/work/tigoune-payphone-bank/52100

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What does responsible online and digital credit look like?

evarlyne_kioko_pg_2016_23Background & Research Questions

More and more online credit providers have started to offer loans to not only consumers`but also to SMEs around the world.

Outside of digital banking platforms, new alternative online and digital platforms that target consumers and small SMEs include:

  • Peer-to-peer (P2P) SME lenders
  • Online balance sheet lenders
  • Loan aggregator portals
  • Tech and e-commerce giants
  • Mobile data-based lending models

While the rise of alternative data-based lending has opened new and innovative credit opportunities for individuals and SMEs, these new technologies and providers also come with several consumer protection challenges. These can be categorized into seven main areas:

  • Data privacy and opt-in vs. opt-out challenges
  • Underwriting practices
  • Potential for exclusion of certain categories of clients
  • Cyber security and individual data protection
  • Clear and effective disclosure over pricing and terms
  • Customer recourse, complaint management and dispute resolution
  • Collection practices

To address these issues, both regulators and online lenders are analyzing various actions and standards to better protect online borrowers. In the US, the Department of Treasury, the Small Business Administration, the Federal Reserve Bank and the Consumer Financial Protection Bureau have all started to focus on consumer protection issues related to online lending providers.

While online lenders targeting consumers are regulated to a certain extent by US consumer financial protection practices, this is not the case for those targeting SMEs. To address some of these concerns, online and alternative lenders have started to develop consumer protection principles for small businesses under the Coalition for Responsible Business Finance (CRBF). In addition, they have supported a proactive Small Business Borrowers’ Bill of Rights focused on transparent pricing and terms, non-abusive products, responsible underwriting, fair treatment from brokers, inclusive credit access, and fair collection practices, suggesting this can be done without adding undue burden or cost to this emerging industry. Other groups and alliances have also formed with various different competing versions of responsible online lending including the Innovate Lending Platform Association and its Smart Box Capital Comparison Tool. In addition, the Online Lenders Alliance has also issued their Best Practice guidelines.

Outside of the US, regulators and online lenders in jursidictions like the UK and Singapore are proactively engaging with each other to discuss new consumer protection standards. Based on challenges within the growing P2P lending industry, Chinese regulators are now implementing strict guidelines while Indonesia’s financial regulator is just releasing new consumer protection guidelines to address P2P lending practices. [3] On the other hand, in most other markets, online lenders outside of the banks are lightly regulated or not regulated at all. International organizations like World Bank, the Consultative Group to Assist the Poor (CGAP), the Alliance for Financial Inclusion (AFI), the G20 and groups like Consumer International have all proposed various consumer protection principles which apply to online lenders. While online lenders are still outside of most regulatory and supervisory frameworks in many emerging markets, there are proactive approaches and standards that can be proposed.

Overall Objective & Hypotheses

Online lending for consumers and especially SMEs is highly relevant and important to expand access to finance and overall financial inclusion. However, trust, confidence and responsible lending practices need to be in place in order to ensure that this industry is able to continue to offer access to credit. Under a research grant from ACCION Center for Financial Inclusion Fellows program, this study will examine the various customer risks proposed by online lenders, what standards and practices are being proposed in some key jurisdictions, both by industry groups as well as regulators/policymakers, and what best practices can be recommended for setting consumer protection and risk mitigation standards for the emerging online financial services industry.

Study Design & Methodological Approach

The research study design will follow a systematic review of literature on the topic of responsible online lending practices including research studies, guidelines, policy notes, as well as standards that are being used to address consumer protection and risk mitigation practices in online lending across various jurisdictions. The study will especially focus on online lending practices not only of supervised financial service providers but also of new financial service providers, which may be lightly regulated or not regulated at all. Interviews with financial consumer protection agencies/associations, regulators and online credit industry players from several key markets, as well as discussions with key researchers and thought leaders from this industry will also be conducted.

 

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Tendencias en Servicios Financieros Digitales y Inclusión Financiera

Esta presentación fue preparada por el Banco Central de Costa Rica para aprender sobre los nuevos servicios financieros digitales que apoyan la inclusión financiera.

Posted in Alliance for Financial Inclusion, Digital Financial Services, Financial Inclusion, Fintech, Mobile Money Regulations, Payments, Regulations | Tagged , , , , , , , , , , | Leave a comment

Leveraging Fintech to Achieve Financial Inclusion in Indonesia

by Ghiyazuddin Mohammad and John Owens (reposted from MicroSave’s blog)

“Fintech” – an intersection of financial services and technology – is taking the traditional financial world by storm. Indonesia is no exception, with a fast-evolving ecosystem that includes a host of financial services offered by new generation fintechs.

The diagram below, by no means exhaustive, highlights a few of the fintech players covering a myriad of financial services like payments, credit, savings, insurance, and financial management.

MS_BlogIndonesia – Perfectly Placed to Reap “Fintech”

Indonesia is the fourth largest mobile market in the world with 339.9 million connections – a SIM penetration of 131%! 43% of Indonesians already own a smartphone. Furthermore, Indonesia is going “mobile-first” with 64.1 million out of a total of 88.1 million users accessing Internet through mobile devices. This is fuelling social media usage by platforms such as WhatsApp, Facebook, Blackberry, Line, Path, etc. This trend is also leading to explosive growth in electronic and mobile commerce, with big names such as Alibaba, Softbank, Sequoia, Rocket Internet, and Temasek backing local ventures. In contrast, only 36% of 250 million Indonesians have access to formal financial services.

Keeping these technological advancements in context, Indonesia is well placed to leverage “fintech” towards the cause of financial inclusion. Fintech innovations are providing a range of new opportunities to dramatically change four main financial service areas – payments, remittances, credit and deposit-taking.

Leveraging Savings

Without access to formal financial services, many poor Indonesians continue to utilise informal services such as Arisan (ROSCAs), package saving schemes, and savings with individual agents.1 The bank deposit-to-GDP ratio in Indonesia (an indicator of deposit mobilisation) stands at 34.55% – much lower than Malaysia (130.25%), Cambodia (42.97%), and the Philippines (54.38%). This presents a big opportunity to all financial service providers, but especially new fintech players.

If we look at examples from other countries, Equity Bank in Kenya is one of the best examples of deposit mobilisation through digital banking services. After starting agency banking in 2011, the bank now mobilises 20%2 of its total deposits through a channel network of 25,388 agents, spread across the country. A dedicated team focusing on agency banking business and a client-centric business model based on the philosophy of “listening to customers” has made this possible. Other examples include, M-Pawa’s interest-bearing savings account in Tanzania, developed in collaboration between Vodacom and CBA and the Lock Savings Account offered to M-Shwari users in Kenya, where clients can move money from their M-Pesa account to save through a fixed deposit account that earns higher rates of interest.

Other examples include rural banks in the Philippines which were one of the first financial service providers to offer SMS reminders for commitment savings that allowed for dramatic increases in savings rates.3 This has been followed by new fintech players supporting banks to support increased savings behaviours in low-income customers such as Juntos. Similarly, there is also a significant potential to utilise SMS technology and/or messaging platforms to support goal-based savings in Indonesia. A case in point, is the common practice of saving to meet expenditures for major religious events like Ramadan.

Enabling Payments

A booming e-commerce sector, fuelled by large international investors, needs an intuitive online and offline payments infrastructure. However, a 2015 Bank Indonesia study documented that 89.7% of the transactions in Indonesia are in cash. This provides a tremendous opportunity. Consider the following payment process in order to make a purchase through a leading e-commerce portal for those with bank accounts:

MS_Blog2
Navigation through multiple websites makes the payment process clumsy, leading to poor user experience. In addition, most online portals limit payment options to those with bank accounts or provides cash-on-delivery options which are costly to operators. Using mobile/electronic wallets for payments, an option available for leading e-commerce portals such as Tokopedia and Elevania, can provide a more seamless experience to customers as well as reduced expenses for operators.

Further, offline payments through mobile/electronic wallets also present a significant use case. Kopokopo―a leading merchant aggregator in East Africa with more than 10,000 merchants―is a successful example of providing a mobile-based small value merchant payment platform. Apart from acquiring merchants, the organisation focuses on providing value-added services such as merchant cash advances, transaction analysis tools, and merchant/customer engagement initiatives to ensure merchants remain active. Easypaisa in Pakistan and PayTM in India are other notable examples for merchant payments. Closer home – players like TCash, Tapp Commerce and Dimo Pay are catching up fast. The idea is to integrate the payment and financial service habits of users through a single e-wallet/account. This could then be used for a variety of payments whether making purchases online, pay for Gojek/Uber, restaurant bills, or bill payments.

Easing Remittances

Remittances–both domestic and international–are a big market in Indonesia. However, most domestic remittances are largely informal and cash based. In a research conducted by Gallup, 50% of the Indonesians said that they sent money to their family or friends in the preceding 12 months, in “cash”. An average of US$ 87.40 is sent about 1.6 times a month! Evidently, a huge untapped market waiting to be facilitated via fintech players. This is especially relevant to mobile/e-money users where 71.5% of all transactions (by value) are person-to-person transfers.

Indonesia provides a US$10.5 billion international remittance market – an opportunity for new fintech players to add value to a market heavily dominated by money transfer operators such as Western Union. This is especially the case with remittance prices, averaging 5% to 8.60% of the amount sent.4 Notable fintech players in this segment such as WorldRemit have already partnered with Dompetku – a mobile money service offered by Indosat Ooredoo. However, there is a compelling need for focused players to cater to Indonesian migrant workers, predominantly based in Malaysia, Taiwan, Saudi Arabia, Hong Kong, Singapore, and the United States.

Access to Credit

The World Bank estimates that only 13.1% of the Indonesians have borrowed from a formal financial institution. Further, domestic credit to GDP ratio in Indonesia is 43.5%, lower than its neighbours including Malaysia (140.5%), Vietnam (113.8%), the PhilippinesMS_Blog31 (55.8%) and China (169.3%). Online, fintech-based lending can play a pivotal role in narrowing this credit gap. Micro and MSME loans based on alternate credit assessment models are growing across the developing world.

Mshwari in Kenya offers small/instant loans in collaboration with Central Bank of Africa (CBA). Credit assessment is built on data generated on the basis of airtime usage, M-Pesa usage, length of association, etc. Tigo Tanzania (Tigo Nivushe), MTN Ghana (Mjara loans) and Equity Bank (Eazzy loan) are other examples of this model.

Given the market size in Indonesia, there is huge scope for growth. Following global cues, fintech credit players such as Uang Teman, Mekar, and Modalku have already emerged in Indonesia.

To read the entire article click here 

Related:

Facebook: The New Game Changer for Mobile Payments & Remittances 

 

 

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