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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?
> Posted by Jeffrey Riecke, Communications Associate, CFI
A proactive step for client protection was recently taken in Laos when the country’s Microfinance Association (MFA) established an industry code of conduct focused on client protection. Laos’ code centers on the client protection principles and the accompanying Smart Certification standards, which designate how institutions can instill fair client treatment in their practices. The code was developed by the MFA following a Smart assessor training in late 2013, and was reviewed by the Campaign to ensure accurate reflection of the client protection principles and standards. In April, the code was presented at an MFA member meeting, where all members present committed to embedding it throughout their institutions. This new code fills an important gap, given that client protection regulation for financial services is not well developed in the country.
Established in 2007, the Microfinance Association and its members represent a growing share of the country’s industry. Members include MFIs, as well as donors, training institutes, and individual experts and advocates. The 32 MFIs that are members make up roughly 50 percent of Laos’ formal microfinance industry by number of clients.
> 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.
> 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.)
> Posted by Calum Scott, Program Impact Director, Opportunity International
As a network of 40 microfinance institutions in 22 countries, Opportunity International is well positioned to play a powerful role in supporting the positive development of the microfinance industry. For client protection, we believe that the Smart Campaign’s Client Protection Certification represents the highest standard of assurance that an institution’s practices are responsible.
To promote client protection and certification among our network, we’ve engaged the support of MicroFinanza Rating – a specialized microfinance rating agency and one of the Smart Campaign’s licensed certifiers.
The agreement with MicroFinanza will facilitate our network partners to undergo certification missions, and promote the sharing of lessons learned from certification experiences across our network of institutions. This agreement also demonstrates our confidence in the quality of the work that MicroFinanza does.
> Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign
Over 165 investors and donors have endorsed the Smart Campaign and the Client Protection Principles. But our Campaign staff wanted to dig deeper: what does this support mean in practice? Are investors using the Client Protection Principles in their everyday work? How? Earlier this year, we embarked on a project to find out.
The Campaign worked with three Virtual Volunteers from Credit Suisse – Lloyd Yetton, Meha Jain, and Nicolas Vucekovic – to create a short survey aimed at understanding how investors incorporate client protection into their due diligence, post-investment monitoring, and reporting. The virtual volunteers spoke with representatives from 12 of the leading microfinance investors.¹ The findings, highlighted below, will help the Campaign shape its engagement with this pivotal stakeholder group.
Client Protection Universally Important But Not Uniformly Applied
All the investors interviewed stated that client protection was important to them from both a social perspective and for their bottom line. Most had seen first-hand the positive influence from strong client protection practices as well as the problems and instability that sprang up in their absence. Such universal recognition is an encouraging step forward from earlier days of the Campaign. In addition to understanding the importance of client protection, nearly all respondents said that client protection was already explicitly incorporated into due diligence. Investors are indeed scrutinizing a microfinance institution’s client protection practices before investing in it.
> Posted by Alyssa Passarelli, Communications and Operations Assistant, the Smart Campaign
The findings in the Study of Client Protection Practices in Latin America and the Caribbean (LAC), a new report from the Smart Campaign, are intended to help microfinance stakeholders reflect on the current state of practice among institutions in LAC and on how performance gaps can be addressed.
Over the past two years, the Smart Campaign conducted a study on the client protection practices of twelve Latin American microfinance institutions, examining their implementation of the Client Protection Principles. The study looked at an assortment of organizations such as NGOs, banks, and credit unions in different countries, analyzing their client protection performance from the point of view of practitioners, and offering recommendations to improve their client protection practices.
Overall, the MFIs studied in the report performed well in the principles of Preventing Over-Indebtedness, Responsible Pricing, and Ethical Staff Behavior, but there was (sometimes significant) room for improvement in the principles of Transparency, Appropriate Collections, and Mechanisms for Complaint Resolution. The report revealed that client protection performance is not easily generalized, and that it’s often essential that particular client protection areas be improved if clients are to be served responsibly.