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> Posted by Sonja E. Kelly, Fellow, CFI

Big data is sexy. It’s new, it’s hip, and we’re only beginning to explore its uses for increasing financial inclusion. McKinsey calls it “the next frontier,” CGAP puts it in its “trends to watch” category, and we’ve talked about it on our blog. Big data is here to stay, and it’s changing the way that the financial inclusion industry operates. But as we proceed with big data, let’s exercise the caution required to ensure consumer protection.

Big data is starting to be used as an alternative to standard credit bureau data, with new scoring methods being created to construct credit ratings for those with thin or poor credit history. Proxies for credit history can be anything from how frequently a person “tops up” their mobile phone credit to the number of minutes spent looking at a loan product online. To determine creditworthiness, analysts look at larger trends in the data in the same way an insurance company might, comparing the individual to the average and looking for factors that correlate with creditworthiness. For example, on average, people who spend longer reading and understanding the terms of a loan online might be more likely to pay the loan on time.

Two groups of people currently share the bulk of potential benefits of big data applied to credit products. First, there are those who have previously been considered a credit risk who should not be classified as such. Perhaps these people have an unfairly low credit score, or perhaps past mistakes do not indicate future credit behavior. Second, there are those who have “thin files,” or not enough information available on them to enable a lender to make a determination of creditworthiness. For these two groups, additional data points could provide more indication about future credit behavior.

While recognizing that big data is an industry game-changer, we do need to keep in mind some critical questions. Big data has a great deal of power to transform financial inclusion efforts, but what are its downstream effects? What are the consumer protection and legal implications? Does big data allow for implicit new discrimination? And as it’s being used now, is it making life better for consumers?

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> Posted by Sonja E. Kelly, Fellow, CFI

What do you do if you’re trying to effect significant change in consumer protection in the financial industry but you have limited time and resources? You build a system that harnesses an army of consumers to do it for you!

This is the brilliantly simple strategy employed by the Consumer Financial Protection Bureau (CFPB), the United States government agency charged with protecting the users of financial services. The bureau’s consumer complaints system receives complaints from consumers and, after a process (described below), publishes all of the complaints in a public database. Much of this process is automated, and the beauty of the system lies in the fact that consumers do most of the heavy lifting, initially reporting their problem and then indicating whether it came to a satisfactory resolution at the end of the process.

To break things down a bit, here is a step-by-step picture of what happens to a complaint going through the CFPB system:

  1. The CFPB receives a complaint through its website, by email, phone, or fax.
  2. The CFPB reviews and routes the complaint.
  3. The company against whom the complaint is lodged has the opportunity to respond.
  4. The consumer has the opportunity to review the response.
  5. If the complaint is not resolved, the CFPB reviews and investigates.
  6. The CFPB publishes the complaint, response, and resolution in the database.

The bureau is quickly becoming a go-to source for disgruntled consumers, even though the bureau has hardly spent any resources on awareness-raising and education of the service. It probably helps that their website is unusually user-friendly, and their process of complaint resolution is centered firmly on the consumer. The consumer truly has the last word. Read the rest of this entry »

> Posted by Sucheta Dalal, Founding Trustee, Moneylife Foundation

World Consumer Rights Day is March 15. To celebrate, this week we’ll be sharing posts that explore the importance of client protection and initiatives that strengthen responsible practices in providing financial services. Given the tremendous growth of mobile phone-based financial services, it’s fitting that the theme of this year’s day is “fix our phone rights.”

India’s independent legal system and an activist judiciary are touted as the key to its vibrant democracy. However, those who have had to deal with India’s expensive and excruciatingly slow legal system know otherwise. Justice delayed is justice denied – this is especially true for the poor, the disempowered, and the middle class in India, who have to wait for decades for a judgment to be delivered. Add to this the fact that many laws are complex, the language obtuse and technical, new statutes are enacted without repealing old ones, and you get a picture of how the system really works.

In the past two decades after India embarked on an economic liberalization process, it also set up a slew of “independent regulators” to regulate capital markets, insurance, pensions, telecom, electricity distribution, etc., with full powers to receive complaints and act on them. All this means that citizens are constantly struggling for help in finding the right remedy or appropriate forum to resolve their grievances.

For instance, a person with a complaint against a bank can approach a banking ombudsman and get a fast and inexpensive resolution. But a consumer court, set up under a separate statute, would offer far better results if one were to complain about being missold an insurance policy or mutual fund. However, very few people know the difference. Ignorance about the laws governing information technology, social media, or privacy issues is even more endemic.

In response to a stream of queries and requests for support and counseling on legal issues, Moneylife Foundation set up a Legal Resource Centre (LRC). The LRC is not a legal aid centre in the sense that it does not draft lawsuits, file complaints, or argue cases for people. There are government-supported legal aid cells attached to Indian courts as is the norm in many countries.

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

World Consumer Rights Day is March 15. To celebrate, this week we’ll be sharing posts that explore the importance of client protection and initiatives that strengthen responsible practices in providing financial services. Given the tremendous growth of mobile phone-based financial services, it’s fitting that the theme of this year’s day is “fix our phone rights.”

The rapid expansion of mobile financial services in many emerging markets has created new consumer protection issues and challenges. One of these involves consumers’ digital data, and how this data is stored, used, and communicated to the consumer.

The implications of mobile financial services for data privacy are far-reaching and a topic of much recent conversation in the financial inclusion and consumer protection space. At a recent CGAP/Microfinance Opportunities/Citi Foundation roundtable on big data the discussion over privacy of mobile data and informed consent—making sure consumers truly understand and accept product terms before enrollment—proved to be one of the liveliest discussions of the day.

Focusing strictly on the behavioral dimensions of this debate, two important issues to consider are:

  1. How to effectively disclose to consumers in a salient way the complex subject of how their personal data will be used.
  2. Consumers often have a general preference for protection of their data, but this conflicts with the reality that in order to use a product they often must agree to let it track and share their information. So in practice, consumers will often consent to data sharing conditions that do not reflect their preferences because they do not want to be denied access.

Informing base-of-the-pyramid consumers on data privacy issues can be challenging because it requires educating individuals on their “digital footprints,” a topic that is both complex and, for many of these consumers, brand new. CGAP has been exploring this challenge in Tanzania with First Access through field testing of informed consent approaches. First Access is a data analytics firm that works with lenders to use financial and mobile data to predict credit risk for base of the pyramid financial consumers. Our research together is seeking to determine appropriate methods for informing borrowers in Tanzania how their data will—and will not—be used by First Access. Since few people understand that using their mobile phone creates data records, our research began by exploring how Tanzanians conceive of privacy in general, probing on financial, personal, and social information, and how individuals share and protect this information in their family, business, and community.

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> Posted by Elisabeth Rhyne, Managing Director, CFI

Nearly every industry requires infrastructure to thrive, and this goes for the microfinance industry too. But the infrastructure that the global microfinance industry has constructed over the past two decades is looking a bit shaky today. Infrastructure investments are urgently needed to keep the industry sound and prepare it for the future.

One could argue what exactly constitutes the microfinance industry’s infrastructure, and there are a range of organizations to choose from, but for this conversation, let’s look at several key organizations dedicated to setting standards and providing information for microfinance globally: the Microfinance Information Exchange (MIX), the four specialized microfinance rating agencies, the Social Performance Task Force (SPTF), Smart Campaign, and Microfinance Transparency (MFT). These organizations, which perform vital functions for the industry, arose during two different phases of microfinance industry development.

The first generation of organizations – MIX and the rating agencies – were created to provide financial transparency and standards, primarily so that investors could identify well-performing institutions, and also so microfinance institutions could evaluate their own performance against common standards. It took a lot of work to create these organizations. MIX had to find ways to incentivize MFIs to report and to devise a system for data quality assurance. The founders of the rating agencies – Microrate, Planet Rating, Microfinanza Ratings, and M-CRIL – took substantial personal risk in devoting their careers to promoting financial transparency in microfinance.  Together, these organizations have helped spread financial standards throughout the microfinance industry and contributed to improving the financial performance of MFIs, enabling the entry of private social investors who now contribute very importantly to the funding of microfinance. We sometimes now take financial transparency for granted, but if these organizations were to stop playing their role in upholding it, adherence to standards across the industry would undoubtedly drop, with consequences for investor interest, which up to now has remained strong.

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> Posted by Antonino Serra Cambaceres, Consumer Justice and Protection Programme Manager, Consumers International

World Consumer Rights Day is March 15. To celebrate, this week we’ll be sharing posts that explore the importance of client protection and initiatives that strengthen responsible practices in providing financial services. Given the tremendous growth of mobile phone-based financial services, it’s fitting that the theme of this year’s day is “fix our phone rights.”

While looking at some banking advertisements during a research study we conducted in 2009 on financial consumer protection in Latin America, we found one that used the motto A bank that doesn’t seem like a bank. Curious, right? Why should a bank say that the benefit it offers clients is that it is not like a bank?

In 2007, at the Consumers International Office for Latin America and the Caribbean we drew attention to the need to discuss the problems that consumers face in relation to financial products and services by organizing two workshops in Santiago, Chile and Buenos Aires, Argentina, on consumer protection, debt, and overindebtedness. The issues raised in the workshops convinced us that this was a substantial issue; the 2008 world financial crisis confirmed what we suspected.

We looked at transparency of information, ethical business, financial education for consumers and banks, and responsibility lending. We wanted to show financial institutions that the way they were conducting their business was not aligned with consumer protection in many areas, and that a fair relationship with consumers will bring wins to all.

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> Posted by Center Staff

It’s common knowledge in the United States that the student loan situation is bad and getting worse, but what are the actual statistics and how severe is this trend? Like other kinds of debt, student debt has innumerable implications for young borrowers, as well as for the country’s recovering economy.

A new report from the New America Foundation inspects undergraduate student loan debt data from the past ten years, compiling borrower rates and amounts, in aggregate and by institution and degree type. The report, The Student Debt Review, draws from the National Postsecondary Student Aid Studies, a national survey series of student financial aid. Here are some of the report’s main findings:

  • More students are indebted. Across all institution and degree types, the percentage of graduates with debt increased from 54 percent in 2004 to 62 percent in 2012. In 2004 there were 1.6 million graduates with debt. By 2012 there were 2.4 million.
  • They owe more. Total student loan debt increased by an average of $3,300 between 2008 and 2012 after a period of four years in which it changed only marginally (2004-2008).
  • For-profit colleges are a sore spot. Student debt is increasing especially quickly for bachelor’s degree recipients at private for-profit colleges, who now graduate with an average debt of $40,000 and pay $153 more each month than those graduating with bachelor’s degrees at public colleges. A very high proportion of the bachelor’s degree graduates at private for-profit colleges have borrowed (87 percent), compared to public colleges (64 percent).

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> Posted by Laura Galindo and Alexandra Rizzi, Senior Associate and Deputy Director, the Smart Campaign

A few days ago a post on this blog detailed debt collections practices in the United States. The Smart Campaign, led by Jami Solli of Consumers International, is working to shed light on provider practices in microfinance through exploratory research in Peru, India, and Uganda.

Once a client becomes seriously delinquent and moves into default, the possibilities for serious consequences for the client arise. Yet little is known about how microfinance institutions treat clients at these later stages. What alternatives do providers offer to clients who are in protracted arrears? How are clients treated when they are defaulting on multiple loans? What do clients experience during this difficult and stressful stage? And after the default, are client debt obligations resolved? Is there a concerted effort to rehabilitate or re-include defaulters?

In September, the Smart Campaign kicked off a research project to explore what happens to clients who default. The project focuses on how microfinance practitioners treat defaulting clients. It is scanning for best practices around the world – like debt mediation projects in Europe and middle-income countries – and examining practices in detail through interviews with practitioners and regulators in Peru, India, and Uganda. Interviews were also conducted with credit bureaus, debt collections agencies, consumer advocacy/protection groups, and researchers specialized in those markets. These countries were chosen, in part, because of their variation in credit bureau infrastructure and the hypothesis that this would have significant impact on provider practices.

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> Posted by Jeffrey Riecke, Communications Assistant, CFI

Thirty million Americans are currently being pursued by debt collectors. During 2012, the Federal Trade Commission (FTC) received 180,000 complaints about the practices of these companies – a 13 percent increase over 2000 levels and more FTC complaints than from any other industry. Troublesome practices seem to only be limited by the imagination, but some of the more reported-on ones are incessant calling at all hours and issuing unsubstantiated, misleading threats. Today the U.S. debt collection industry stands at over 4,500 companies and $12 billion.

To make matters worse, many of those being pursued don’t even have the debt in question. About one-quarter of the collection-related complaints the Consumer Financial Protection Bureau (CFPB) received last year were from individuals who were being wrongly pursued.

Debt collection happens, with some variation, in one of three ways: lenders carry out the collection in-house; third-party companies are hired and paid to complete the collection; or third-party companies buy a lender’s debt and independently complete the collection. In the latter case, collection companies buy individual’s debts from lenders for as low as a few cents for each dollar of debt and in return they receive a spreadsheet with basic information like names, phone numbers, and debt amounts. Collectors pocket the difference between what they paid to the lenders and the total they collect. It’s not uncommon for this spreadsheet information, intentionally or not, to be inaccurate or faulty. And even when a person is wrongly pursued, the consequences can be serious.

A popular debt collections practice brought to public attention in recent years thanks to legal suits centers on collectors taking debtors to court without their awareness (giving new meaning to the phrase blind judgment). Collections agents fail to serve a debtor a notice of complaint, produce a false affidavit claiming the individual has been properly served, and then proceed with a court hearing. The defendant, of course, does not attend, and so most often the debt collector wins the case and a default judgment is issued. (More than 95 percent of credit card lawsuits end in a default judgment, an automatic win for the collector or lender.) Such rulings could include the freezing of bank accounts, garnishing of wages, and they are very likely to reduce credit scores.

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> Posted by Elisabeth Rhyne, Managing Director, CFI

The following post was originally published on the IFMR Trust Blog

The Mor Committee Report offers a radical take on client protection, built around the concept of a legal right to suitability. After describing the recommendations briefly, I would like to tell IFMR’s readership why I’m excited about the approach (two big cheers), provide some thoughts on how to make it work (and how the Smart Campaign could assist), and raise a couple of questions.

Suitability is about ensuring that clients are sold financial services that are appropriate for their circumstances. A suitable product is one the client can be expected to manage with a low probability of serious hardship and a reasonable prospect that it will provide value. The concept has been present for some time in financial consumer protection regulation, most notably in the UK and Australia. The Mor Report proposes a unique approach to implementing suitability, which places responsibility on the service provider to install processes to ensure that clients are sold suitable products, e.g., client targeting and underwriting procedures that adequately assess repayment capacity. Regulation would hold the board of directors responsible for approving and overseeing the implementation of these processes, subject to external review. Hand in hand with this, the report recommends an energetic grievance redress system (which I will not address here), including both internal and external mechanisms to cope with individual problems.

The first big cheer goes to the decision to focus on suitability as the heart of client protection. This directs attention exactly where the greatest potential for harm occurs. Overindebtedness, is perhaps the greatest failure of suitability, resulting from selling loans that exceed a client’s debt threshold. This is why the Smart Campaign places Appropriate Product Design and Delivery and Prevention of Overindebtedness as Client Protection Principles #1 and #2, even ahead of Transparency. Among all the standard client protection problems, only overselling of credit has repeatedly caused sector-wide crisis and collapse, and thus if there is to be a focal point, this is the right one. (The report discusses the relative merits of suitability vs. disclosure as the core of consumer protection policy, which raises both practical and philosophical issues – an engaging topic for another day’s post.)

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