As noted in a recent blog post by Beth Rhyne of CFI, supervisors need to upgrade their skills if they are going to keep pace with an additional 2-3 billion people over the next decade potentially entering financial services for the first time.

The financial inclusion movement is taking shape at the same time that banking supervisors globally are searching for more “forward-looking” indicators to help them detect early problems in institutions and financial systems. Whether it’s the subprime crisis in the United States and Europe, or over-indebtedness problems in Bosnia and Southern India, many of the early warning signs were evident in consumer abuses before they showed up on the balance sheets and capital ratios of institutions. As such, one of the best avenues for supervisors to improve their quantitative-focused prudential oversight is to start putting greater emphasis on qualitative-based consumer protection indicators.

Through a World Bank-sponsored program in the Eastern Caribbean to improve the quality of supervision of non-bank financial institutions, the Smart Campaign inspired consumer protection supervision to become integrated into new prudential examination procedures.

While it’s understandable that central banks are trying to effectively allocate their own scare resources to the greatest asset concentrations in commercial banks, the practical effect is that savings of rural and economically vulnerable populations are often left at risk. This challenge is being tackled in the Caribbean and afield by a combination of forming consolidated commissions to oversee non-banks (i.e., Barbados, Eastern Caribbean, Moldova) or moving such institutions under central bank supervision (i.e., Trinidad & Tobago, Jamaica).

In the video included here, Smart Campaign Steering Committee members Kate McKee of CGAP and I recently discussed integrated prudential and consumer protection on-site exam in the Eastern Caribbean.

Image credit: The Smart Campaign

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The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.”

“Pushing financial access is great, but what are clients being pushed into?” This has been the common refrain I’ve heard from regulators in Basel, the Alliance for Financial Inclusion, and central bankers in the Caribbean, where I’m sitting now when I talk about the prospects for full financial inclusion within the decade. Given what the financial communities in Europe, India, and the U.S. have been through, we should not be surprised by this common-sense reaction. Consumer protection must be a key component of the Financial Inclusion 2020 platform. Together with a team of policy, technology, regulatory, and financial institution executives, and a former lobbyist for financial cooperatives (um, me), we’ve developed a framework of actionable recommendations that seek to balance access with protection.

We, in the FI2020 Client Protection Working Group, can foresee that even in a state of full financial inclusion, incentives persist for providers to look out for their own interests at the expense of clients, due to certain information, power, and structural imbalances in financial services. The challenge of client protection therefore is to reduce these imbalances and provide countervailing incentives or requirements for positive behavior.

It’s a challenging task yet there is evidence from some client-focused providers that it can be done and that attention to client protection may even enhance profitability (see examples from Germany and Australia).

Full financial inclusion with client protection requires clients and financial services providers to interact in a supportive environment led by effective regulators, in such a way that produces a safe and healthy result for clients in the long term. To support the development of this ecosystem, we have developed over a dozen recommendations for financial services providers, regulators, client empowerment, and their operating environment. Below is a sampling of some of the key recommendations.

Key Recommendations for Client Protection

1. Clients: Develop means for clients to raise their own voices
2. Policymakers and regulators: Client protection standards implemented in each country
3. Providers: Embrace client protection as a core part of the banking profession
4. Researchers and global community: Articulate the benefits of client protection for clients, providers, and economic stability. 

Develop means for clients to raise their own voices 

Travelers have Trip Advisor and AAA, home remodelers have Angie’s List, and diners have Yelp and Michelin to aid them in their decisions on where to spend their money. These serve as a valuable two-way street giving companies unfiltered feedback on what works and what doesn’t. Whether because financial services are sticky or consumers feel less empowered, no ubiquitous system exists to give consumers retail financial services a powerful voice short of a regulatory framework or an outspoken advocate. Client protection abuses might be prevented or minimized if decision-makers at financial institutions regularly hear the voices of clients. This could be accomplished through client ownership (as with credit unions), use of regular client opinion research, or a Trip Advisor type system for banking. To illustrate the point, a local bakery in New York City has received nearly 2,000 reviews, but all of the retail banks combined in New York City have received less than 200 reviews on Yelp and the same general proportions hold true in my home town and many cities.

Client protection standards implemented in each country

Perhaps the single most important action in supporting improved client protection is the implementation of effective regulation and supervision of client protection by banking authorities in every country. To this end, at a global level, the world community should issue and adopt as a clear goal the implementation of national standards for financial client protection in every country by the year 2020. Among other things, these goals should be based on and fully address the globally accepted principles of client protection, cover all providers of financial services, and be adapted to the needs of prospective clients. We would like to see each country make a strong client protection commitment through the Alliance for Financial Inclusion’s Maya Declaration process.

Embrace client protection as a core part of the banking profession

To build a culture of client protection in the banking industry, we recommend the creation of a professional identity for financial service providers centered on responsible, ethical standards. A corollary to this effort is a “Financial Consumer Bill of Rights” for clients, also adopted and promoted by providers. The Smart Campaign is doing exactly this kind of work within the microfinance community, but it needs to spread to all providers of financial services to lower-income clients.

Articulate the benefits of client protection for clients, providers, and economic stability

Building a business and social case for client protection requires metrics for monitoring client protection effectiveness at a market level, micro-level research on client outcomes, and documentation of the costs and, potentially, revenue growth by providers that implement client protection standards.

These recommendations will take the concerted effort of many actors but will ultimately benefit both clients and providers as the next 2.5 billion customers enter the financial sector. FI2020 is not just about access, it’s about the quality of financial services as well!

For more information on Financial Inclusion 2020, sign up for campaign updates.

Image credit: The World Bank Group

Have you read?

Client Protection and Microfinance: Crossing a Threshold

The Three-Legged Stool of Client Protection

35 Central Banks Commit to Financial Inclusion