Responsible Online and Digital Credit

What does responsible online and digital credit look like?

Evarlyne Kioko, client of PayGo Energy, while Fausto Marcigot and Mark O’Keefe teach her how to use the PayGo platform on her phone, a pay-as-you-go stove and gas system in her home in Mukuru, an informal settlement outside of Nairobi.

I am establishing this new page and series of articles to collect, share and update others about the important aspects of providing online and digital credit in a responsible manner.  This will follow my research work being conducted under a research grant from ACCION’s 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.

Background & 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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