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> Posted by Alexandra Rizzi and Sonia Arenaza, Deputy Director of the Smart Campaign and Director of Accion Channels and Technology

This is the first of two blog posts about responsible digital financial services, on the occasion of the Responsible Finance Forum in Perth, Australia.

The Smart Campaign has watched with excitement as new forms of digital financial services (DFS) stand poised to bring financial access to millions of lower-income households previously excluded from the financial system. The potential benefits of this new ecosystem are enormous and include an array of positive outcomes ranging from lowered transaction costs to consumption-smoothing, among many others. Nevertheless, the excitement over new possibilities must not obscure the need to evaluate and respond to new risks to clients.

In an ongoing mapping exercise conducted by the Smart Campaign and Accion’s Channels and Technology team, we identified various things that can go wrong for clients of DFS, such as:

  • Clients lose their funds after an agent fails to take proper security measures or after a service outage
  • Agents charge unauthorized fees for transactions under guise of complicated pricing and fees
  • Clients lack or are not offered adequate customer care channels
  • Lack of data privacy due to clients not being informed or misinformed on how their data and history is being used or shared
  • Agents lacking liquidity serve only their favored clients

While these risks are grounded in anecdotes from the field, there is still much more evidence needed on the consumer harms that actually happen, including where they happen and how often. The Responsible Finance Forum in Perth will host several sessions that present demand-side evidence to help identify high priority risks.

But, what then? Once risks are known, how best to try to minimize them?

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> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign

The Smart Campaign secretariat does a lot of things – manage a Certification program, provide technical assistance, develop and promote industry standards, and conduct research. Our small team is always putting on different hats, and we joke about trying to explain our jobs to friends. At the end of the day, the one thing many of our friends can understand is that we are an industry-facing organization offering a “public good.” The Smart Campaign’s public good is not a road or a lighthouse. It just happens to be standards and guidance on protecting clients. These standards are a public good because they belong to everyone, and one individual or institution’s use does not reduce the availability of the resources for others.

Some of our ever-thoughtful friends then ask if this means that we contend with other classic public goods challenges.

The answer is yes, absolutely. One of the biggest issues we struggle with is the lack of a market feedback mechanism. Industry stakeholders can use Smart Campaign tools and resources without paying and thus without providing feedback on their experience. Without a price signal, it can be difficult for the staff to assess demand and user experience. This makes it hard to know how to tailor, expand, or improve offerings. We are curious to hear examples from readers about how other similar organizations consistently improve their offerings without market feedback.

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> Posted by Rafe Mazer, Financial Sector Specialist, Government & Policy, CGAP

It’s a great time to be working on consumer protection. Even while risks change or expand in scope as new products evolve and access increases, it seems that there are just as many talented researchers and new approaches to making consumer protection work emerging. Some of the most important breakthroughs are coming from consumer and behavioral research. This includes insights into what sales staff really do and why (see, for example, this infographic on a recent World Bank/CGAP/CONDUSEF audit study in Mexico), how consumers make financial decisions—not always for purely economic reasons, and what the context of low resources or scarcity means for financial behavior.

The next step is to take these research insights and turn them into improved consumer protection policies in emerging markets. CGAP’s recent publication, Applying Behavioral Insights in Consumer Protection Policy, describes a range of current and potential ways we can bridge the research and policy fields. But what about providers? What can we take from the recent behavioral insights emerging for the Client Protection Principles?

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> Posted by Jeffrey Riecke, Communications Associate, CFI

Understanding the cash flows and money management practices of the poor is a requirement for effectively designing financial services. Complex income scenarios and impossibly-thin budgets make finances for many poor people complex. It takes time and resources to capture such information in a meaningful way. Insight into these practices was sought in the ambitious Kenya Financial Diaries project, which included biweekly interviews with 300 lower-income households in Kenya over the course of one year. Results from the project were released earlier this week.

The Kenya Financial Diaries, a joint research project by Bankable Frontier Associates and Digital Divide Data, comprehensively tracked the transactions of households across Kenya using a customized, “intelligent” questionnaire. The questionnaire was tailored to each household’s composition, income sources, and financial devices used. As new information became available, the questionnaire adapted accordingly. Along with the quantitative records on their financial lives, researchers interviewed household members on their perceptions, stories, and life events affecting their finances.

The results?

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> Posted by Allyse McGrath, Senior Associate, FI2020, CFI

Once in a while, we in the Accion D.C. office gather in our state-of-the-art movie theater (a.k.a. conference room) for some collective viewing. Now that the World Cup has ended, this viewing has a lot less to do with fútbol and more to do with our day jobs. Last Friday’s feature was a recently-released documentary that highlights those who are left behind by the U.S. financial system. Spent: Looking For Change follows four households who represent the quarter of American households that are underserved and held back by the current financial system.

The film focuses on how families with precarious financial and economic lives end up using services like check cashers, title loans, and payday loans – the tools that those without bank accounts or with poor credit must rely on in the absence of affordable and accessible financial services. In one example, a former nurse and single mother had to stop working to care for an incapacitated family member. She turned to title loans to pay the bills and when she couldn’t keep up the loan repayments, the title company repossessed her car. Another family, which took out one $450 payday loan, is now stuck in a cycle of high interest rates and hidden fees because the family’s income is not high enough to pay off the debt altogether. Each narrative helps us understand why, in 2012, underserved Americans spent an estimated $89 billion on interest and fees.

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> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign

Serve clients with suitable products. Prevent over-indebtedness. Be transparent and price products reasonably. Treat clients respectfully, listen to their grievances, and protect their privacy.

The seven client protection principles make undisputedly good sense on paper. It’s hard to argue against any one of these practices, either normatively or from the perspective of the financial bottom line. We assume that well-treated, well-understood clients using appropriate products through the right delivery channels are more loyal, satisfied, and likely to refer their friends and family, provide useful feedback, and repay loans. Right?

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> Posted by Anne Gachoka, Research Supervisor, Digital Divide Data

Thanks to mobile and agent channels, formal financial services in Kenya now reach millions of previously unbanked customers with new and innovative products. Just look at M-Shwari, the new banking product offered to M-Pesa customers enabling them to move beyond money transfer and epay to small, short-term loans with eligibility based on data about their savings, mobile usage, and debt repayment history. Globally, this is all very exciting and represents an important breakthrough in providing financial services to the poor.

But, after studying the interactions between the poor and the financial sector through the Kenya Financial Diaries, a joint-research initiative between Digital Divide Data and Bankable Frontier Associates, I have come to the conclusion that banking will fail to deliver on the promise of improving the lives of the poor unless providers do more to improve pricing transparency and communication on terms and conditions. The Diaries study tracked the cash flows of 300 Kenyan households over the period of one year.

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This post was originally posted on the Grameen Foundation blog by Alex Counts, President and CEO of Grameen Foundation and a member of CFI’s Advisory Council.

Alok PrasadAs a result of a complex combination of unwarranted attacks and self-inflicted wounds, the microfinance sector in India experienced a crisis starting in late 2010 after many years of strong growth and recognition for its contribution to poverty alleviation and financial inclusion.  When I was asked to give a keynote address at a microfinance conference in India in 2012, I said that it was important to leverage the sector’s strengths and accomplishments, while also addressing its failures and shortcomings.

I visited India in May and July and found that these things were finally happening and leading to on-the-ground progress as well as tangible support from both the outgoing and the newly elected Indian governments.  And as this blog went to press, there was another promising development: the government published draft guidelines on creating a pathway for NBFC-MFIs to become specialized or “differentiated” banks, which would enable them to take deposits directly for the first time legally.  (Though not all NBFC-MFIs would likely be eligible unless the “stringent norms” proposed are made more flexible.)  

My May visit to Mumbai was centered around Grameen Foundation’s workshop “Designing for Adoption and Scale” (click here for highlights and here for my closing address).  

One of the highlights of the second trip was speaking with Alok Prasad, the CEO of theMicrofinance Institutions Network (MFIN), a respected microfinance industry association.  He spoke eloquently about the progress the industry has made recently and the reasons behind it.  Below are excerpts from our conversation. 

Alex Counts (AC): I sense a new optimism related to Indian microfinance after some difficult years.  Would you agree?  How would you characterize the last 12 months in terms of how the Indian microfinance sector has developed? What were some of the key contributions of MFIN?

Alok Prasad (AP): Clearly the mood is buoyant, but not in an irrational way! Looking at the last fiscal year (April 1, 2013 to March 31, 2014), much has gone well for the industry. Growth, both in terms of gross loan portfolio and clients, has been strong. Portfolio performance stays at levels which commercial banks can only dream of (for unsecured lending). Branch networks have expanded, and new geographies have been covered. Funding (both debt and equity) has improved markedly. The regulatory environment remains broadly positive, notwithstanding the Microfinance Bill falling by the wayside.

In specific terms, the aggregate gross loan portfolio of MFIN’s member institutions (Non Banking Financial Company-Microfinance Institutions or NBFC-MFIs) stood at Rs. 279.31 billion (US$4.63 billion), an increase of 35%, over the prior fiscal year. Clients covered stood at 28 million, representing growth of 20% over the previous year. Debt funding grew by 46%, along with a definite revival of investor interest.

MFIN, I believe, has played a key role in bringing stability to the sector. Deep and sustained dialogue with the government and the Reserve Bank of India (RBI) has resulted in regulatory changes that are conducive to growth; a much greater appreciation of our industry’s role in promoting financial inclusion; and, the recognition that the industry is an essential component of the national financial architecture. From a systemic standpoint, the development of the credit bureau ecosystem had been a big win. As of this date, more than 150 million client records are present on the databases of two national bureaus. These records are updated on a weekly cycle; and, all lending is only after a bureau check. This has given remarkable results in controlling multiple lending and over-borrowing by clients. Our recognition by the RBI as the self-regulatory organization (SRO) for NBFC-MFIs is a sign of both a certain maturing of the industry and the regulator’s acceptance of that reality. A nice ‘new normal’ for an industry which just 18 months ago appeared deep in the throes of a crisis!

AC: MFIs outside of Andhra Pradesh have begun growing again.  Can you give us a sense of this growth and how it compared to other parts of the financial sector?  What are the main reasons?  Are there risks?

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With under 40 days to go, the 17th Microcredit Summit is rapidly approaching. CFI’s Josh Goldstein will be speaking during a plenary session focused on new innovations for microfinance and other financial inclusion interventions to more effectively reach the excluded. With the theme “Generation Next: Innovations in Microfinance,” this should be a great opportunity to explore what is on the horizon to achieve full financial inclusion. In this post, Josh discusses industry context surrounding the Summit, and what he hopes he and those in attendance will be able to take away from the event.

I am a sometime skeptic about the proliferation of microfinance conferences, but the upcoming Microcredit Summit in Merida, Mexico seems particularly important and timely. Personally, I am very excited about it. (In the spirit of full disclosure, I should add that I will be a speaker, and of course piqued vanity can certainly lead to bias, but I don’t suspect this is the case here.)

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> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI

Fifteen years ago in the microfinance space you may have been able to get away with understanding very little about your clients. Without much competition, MFIs could probably still make a decent profit by offering one product to all their clients using only one delivery channel. Thankfully, those days are gone.

The base of the pyramid is no longer a hidden or forgotten market segment. In fact, according to the recently-released 2014 Microfinance Banana Skins report, the pendulum is swinging in the opposite direction. Overindebtedness once again tops the charts as the biggest perceived risk, perhaps indicating that many clients are now able to gain access to multiple services providers. In some areas, an excess of providers may now be crowding the market.

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