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In the era of digital credit, we need not just new laws, but also new mental models for responsible digital credit provision.

> By John Owens, CFI Fellow

Responsible Digital_Credit Report CoverAs digital credit providers have grown exponentially over the past few years, and as digital products and models have proliferated, so too have concerns around consumer protection. In the recently published report, Responsible Digital Credit, I argue that ensuring that digital credit customers receive responsible treatment requires more than enhanced consumer protection laws and regulations. It also requires strong commitment from the digital credit industry. Finally, it needs consumers who are empowered to play a more proactive role in managing their digital credit responsibly.  Read the rest of this entry »

With the weakening of institutional watchdogs and regulations for mortgage lending in the U.S., the future of consumer protection in financial services is jeopardized.

Free standing house with driveway

> Posted by Carmen Paraison, Senior Program Associate, The Smart Campaign

Can your skin color help predict whether you may be financially exploited in the United States? Unfortunately, even in 2018, the answer is still yes.

In February of this year, Wells Fargo was sued by the city of Sacramento, California for allegedly discriminating against black and Latino mortgage borrowers since 2004. The specific charge, raised against the country’s third-largest bank in terms of assets, was providing these clients with more expensive loans compared to those offered to white borrowers.

Across the country, in Baltimore, Maryland, a study that found that black homeowners were charged higher interest rates and disadvantaged at every stage in the borrowing process compared to similarly qualified white borrowers – even taking into account factors such as credit scores, income and down payments. Over the span of a 30-year loan, the researchers say, discrimination against black borrowers cost them an extra $14,904 each, compared with white borrowers.

Homeownership is one of the most important ways for working and middle class families to build generational wealth. According to the U.S. Census Bureau, 69 percent of a household’s net worth in America lies in the net equity in their home. And investigations have repeatedly shown that people of color pay a heftier price to achieve wealth than their white counterparts.

What are the economic implications of financially exploiting people of color in home ownership? More expensive mortgage loans translate into higher monthly payments, lower savings, and a higher risk of default and foreclosure. On a macro-level, consequences include a stagnant homeownership rate among people of color, a yawning (and growing) racial wealth gap, and continued institutional discrimination against people of color in the United States.

As a national consumer advocacy entity, the Consumer Financial Protection Bureau (CFBP) is designed to investigate claims of nefarious behavior among financial service providers and ensure that providers treat consumers fairly. However, its Office of Fair Lending and Equal Opportunity was stripped of its power earlier this year, with the removal from its mandate of oversight and enforcement. Commenting on the move, Lisa Donner, executive director of Americans for Financial Reform remarked, ‘‘These changes . . . threaten effective enforcement of civil rights laws, and increase the likelihood that people will continue to face discriminatory access and pricing as they navigate their economic lives.”

The burst of the U.S. housing bubble yielded the Great Recession, which spread throughout world. Its origins in reckless lending in the subprime market convinced many people involved in the financial sector that consumer protection was urgently needed. In response to this gap, the 2010 Dodd-Frank financial reform law was passed. However, the current administration has since rolled back banking regulations, making it harder to detect discriminatory mortgage lending practices. Signed in May 2018, the new Economic Growth, Regulatory Relief and Consumer Protection Act would exempt 85 percent of banks from reporting detailed information about mortgage loan applicants. This means it will be more difficult to identify systemic issues, conduct research about them, and respond with corrective action.

As borrowers of color in the U.S. continue to access credit with the goal of owning a home, and the steady deliberate weakening of institutional watchdogs and regulations continues, the future of consumer protection in financial services for all remains in jeopardy. As banks continue to backslide into more discriminatory and predatory practices towards people of color, we as consumers and advocates should continue to be aware of and vigilant about them.

Image credit: David Sawyer via Flickr. (CC BY-SA 2.0)

Consumer protection is a driver of revenue, and not a regulated compliance cost

> Posted by Dylan Lennox, Partner, MFX

Educating digital financial services (DFS) providers to understand that consumer protection is a core business strategy is as important – if not more important – than consumer protection regulation supervision if we hope to ensure that vulnerable consumers are well protected. For this reason, as I articulated in my last post, I would like to see DFS providers and their managers take the lead when it comes to driving consumer protection, and that consumer advocates and regulators’ efforts are aligned to make sure this happens.

There are many possible reasons why DFS managers are not taking the lead, however, beyond a general lack of awareness of consumer protection and its importance:

  • They might be driven to achieve short-term targets with limited resources, prioritizing their time, budgets and activities to meet high ROI expectations. Or they might be under pressure to launch innovations and take advantage of the “next big thing” like digital credit or data monetization.
  • They could lack the necessary knowledge and experience in their teams to properly address consumer protection. Such know-how involves truly understanding customers’ needs, developing intuitive user interfaces, designing appropriate sales incentive structures, assessing customers’ loan affordability, and implementing effective internal control frameworks to address security, loss of privacy, or fraud risks.
  • Or perhaps the technology they have implemented does not have the required functionality to properly implement basic consumer protection requirements – like those of data security, for example. In such a case, it is left up to the individual DFS managers to make specific technical developments to address consumer risks. Such an institution-by-institution approach increases the overall cost of consumer protection to the industry and decreases the likelihood that it will be implemented as these measures compete with other priorities.

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> Posted by Ana Ruth Medina Arias, Lead Specialist for Latin America and the Caribbean, the Smart Campaign

“The risk is to regulate by anecdotes and not by evidence.” – Mariela Zaldivar, Deputy Superintendent, the Superintendency of Banking, Insurance and Private Pension Fund of Peru (SBS Peru)

In recent years, Peru has called for our attention not only for being at the top of the Global Microscope’s international country rankings for the most conducive environment for financial inclusion, but also for its historic collaborative effort to establish a fully-interoperable nationwide digital payments platform (Bim) to support the supply of financial services. But buckle up, there is more.

The country’s regulator, the Superintendency of Banking, Insurance and Private Pension Fund of Peru (SBS Peru), has taken client protection very seriously, and despite already having very robust systems (on grievance redress and dispute resolution, for example), it continues to lead with groundbreaking policy changes based on evidence and research to ensure that regulation is aligned with the needs and capabilities of the end client. The Smart Campaign is proud to have collaborated with the SBS on these policy changes.

Client Voices was a research project of the Smart Campaign that directly asked clients in four countries (Peru, Benin, Georgia and Pakistan) about their experiences with financial providers and what they thought constituted good and bad treatment. In Peru, the project was made possible through strong support from the SBS, which was involved from the very beginning, providing substantive inputs to all project phases. However, their engagement did not stop there. The SBS is also committed to implementing the client protection recommendations arising from the project.

Here is how the SBS turned the major findings of the research into an opportunity for policy improvement in the area of financial consumer protection.

Read the rest of this entry »

> Posted by Dr. Katharine Kemp, Research Fellow, UNSW Digital Financial Services Regulation Project

The following post was originally published on the IFMR blog. 

Financial inclusion is not good in itself.

We value financial inclusion as a means to an end. We value financial inclusion because we believe it will increase the well-being, dignity and freedom of poor people and people living in remote areas, who have never had access to savings, insurance, credit and payment services.

It is therefore important to ensure that the way in which financial services are delivered to these people does not ultimately diminish their well-being, dignity and freedom. We already do this in a number of ways – for example, by ensuring providers do not make misrepresentations to consumers, or charge exploitative or hidden rates or fees. Consumers should also be protected from harms that result from data practices, which are tied to the provision of financial services.

Benefits of Big Data and Data-Driven Innovations for Financial Inclusion

“Big data” has become a fixture in any future-focused discussion. It refers to data captured in very large quantities, very rapidly, from numerous sources, where that data is of sufficient quality to be useful. The collected data is analysed, using increasingly sophisticated algorithms, in the hope of revealing new correlations and insights.

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> Posted by Alexandra Rizzi, Senior Director, the Smart Campaign

The merits and pitfalls of mobile credit continue to be debated hotly in financial inclusion circles. Mobile products are making credit more accessible through branchless banking and alternative underwriting and business models. But experimenting with new ways of lending when your borrowers include those at the base of the pyramid brings steep risks and some models can be downright reckless. Which side of the fence are you on?

The Smart Campaign is seeking to assist the sector to develop a consensus about responsible online credit practice, and the good news is that these questions have recently become top-of-mind for a range of stakeholders. Quona’s Johan Bosini and Positive Planet’s Bezant Chongo gamely volunteered for an Oxford-style debate on whether mobile credit is good for its clients at the 4th Annual Mondato Summit in Johannesburg back in May.

The convenience and ease-of-access of mobile credit products are immensely beneficial to the unbanked, according to Bosini, speaking for the pro side. When juxtaposed to traditional lending products that take, for instance, in Benin, an average of almost 5 weeks to access (involving multiple trips), mobile credit seems supersonic, he emphasized. Using alternative data and analytics, mobile credit unlocks access for individuals without credit history. The reality for the poor, as elucidated by the Financial Diaries and other research, is that incomes fluctuate widely. Now with mobile credit, a person in a pinch can help smooth the inevitable bumps in income with a few clicks on the phone.

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CFI Fellow Patrick Traynor, Associate Professor in the Department of Computer and Information Science and Engineering at the University of Florida, explains his research on the privacy and security of data in mobile lending applications.

We have all seen privacy policies before: sign up for a credit card and you receive a pamphlet with tiny print detailing your bank’s particular policy. Create an account at an online service and you will get a link to something similar from it, too.  These policies are supposed to provide consumers with detailed information about which pieces of their data will be stored, how they might be used, with whom they can be shared, and how they will be protected. Privacy policies are now mandatory for financial institutions in developed nations, and here in the United States we are provided protection by laws such as the “Gramm-Leach-Bliley Act” (also known as the Financial Services Modernization Act of 1999).

Unfortunately, the reality of such policies is often not so clear. Many of these policies are written by attorneys with the sole intention of being consumed later on by other attorneys. That means that, in some cases, even highly educated individuals without a degree in law may not be able to fully understand what they are reading. What chance does the common consumer have to understand such policies?

You would think that consumers would be up in arms. But, let’s be honest – most people have never actually read these privacy policies, yet alone tried to understand them. Have you?

So then why is it important to examine the state of privacy policies?

Let me offer first an insight into the role of studies like ours and then some comments on why privacy policies for digital credit matter.

Read the rest of this entry »

> Posted by Jeffrey Riecke, Senior Communications Specialist, CFI

Phones are making everything more convenient, but are they also reducing costs? That depends on which service and whose wallet you’re talking about. If it’s the consumer’s mobile money wallet, well, the verdict is still out. In a CGAP paper published last year, Rafe Mazer and Philip Rowen lamented that pricing transparency practices in mobile money services are wholly inadequate across payments, credit, and other product lines. They assert an urgent need for standards and policy to impose better practices on mobile money providers. It’s critical to know how prices are tabulated and what fees are incurred – for the betterment of customers and the industry.

In Kenya, arguably the world’s most robust and dynamic mobile money market, we’ve seen a few recent steps in the right direction.

As of May 2017, per a directive issued by the Competition Authority of Kenya (CAK), telcos and financial institutions providing mobile money services were required to ensure that their users are informed via real-time notifications of the price of their transactions – after they are initiated by the user, but before the transactions are completed and money is transferred. This order by the CAK was permitted to be carried out in stages: first, mobile money providers were asked to let users know the price of their money transfers and bill payments after their transactions occurred; then, providers were required to provide pre-transaction pricing for these two services; and finally, this pre-transaction price disclosure was extended to “value-added” mobile money services like micro-loans and micro-insurance. The new rule applies to mobile money services offered through apps, USSD codes, and SIM toolkits.

You might not think that getting notified about relatively small fees is a big deal. After all, mobile money services in Kenya like M-Pesa are used so often that users probably have a strong grasp on pricing. But this is unclear. When CGAP queried mobile money users in Kenya on M-Pesa pricing changes in 2014, despite claiming to be aware of current pricing figures, many respondents in fact were not.

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> Posted by Carmen Paraison, Senior Program Associate, Africa, the Smart Campaign

Smart Campaign Uganda convening participants

Smart Campaign Uganda convening participants

Earlier this year, the Smart Campaign co-hosted a financial inclusion and consumer protection event in collaboration with the Microfinance CEO Working Group and the Association of Microfinance Institutions of Uganda in Kampala, Uganda. With more than 100 people in attendance representing diverse stakeholder groups, the event served as a platform to exchange ideas and commit to greater partnership to progress financial inclusion policies and practices, and consumer protection in Uganda.

The goal of the event was to provide an opportunity to obtain clear commitments in support of the key themes and objectives of Uganda’s developing national financial inclusion strategy, and to place consumer protection at the heart of its roll out. The convening brought a variety of stakeholders together, including financial service providers, donors, researchers, government ministries, and the Bank of Uganda, to support the country’s consumer protection goals and facilitate better collaboration.

After hearing the perspectives and inputs of the key sector stakeholders in attendance, we took stock of our three-year strategy for the country. Going forward, the Campaign’s approach will focus on the following:
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> Posted by Kyle Burgess, Executive Director and Editor in Chief, Consumers Research

From cash to digital currency

Image Credit: FamZoo Staff. No alterations made. CC BY-SA 2.0

Digital currencies, such as Bitcoin and its underlying blockchain protocol, introduce a technical platform for a new global payment infrastructure that has the potential to level the playing field for the 2.5 billion people across the globe who are unbanked or underbanked. The immutable and distributed nature of digital currencies and a number of the platforms built on top of blockchain protocols can provide improved security, efficiency, affordability, privacy, and transparency in financial transactions, as well as a whole host of other transfers of value or information. Furthermore, thanks to the proliferation of mobile devices, blockchain-based digital currencies can even remove the middleman, and serve as a bank in your pocket. However, fully removing a third party intermediary comes with significant risks, as there’s no one to call if you lose your private key (which functions as your password), break your hardware wallet (which acts as your digital vault), or want to dispute a payment because the goods you purchased are damaged (because digital currency transactions are irreversible). Like any other product, consumer protection must be at the forefront of the development and implementation of digital currency and blockchain-based financial services.

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The views and opinions expressed on this blog, except where otherwise noted, are those of the authors and guest bloggers and do not necessarily reflect the views of the Center for Financial Inclusion or its affiliates.