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

This entry was posted in ACCION Center for Financial Inclusion (CFI), Fintech, Responsible Online & Digital Lending and tagged , , , , , , , , . Bookmark the permalink.

1 Response to The Role of the Digital Credit Industry in Addressing Consumer Protection

  1. karimjindani says:

    Hi,

    How can I get the password?

    Regards Karim

    On Mon, Oct 23, 2017 at 10:53 PM, Digital Financial Services for Development wrote:

    >

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