Close to Washington, D.C.’s antipode in Perth, Australia I attended the Fifth Annual Responsible Finance Forum, which this year focused on responsible digital finance. The organizers assembled an impressive mix of representatives from all three legs of the responsible finance stool – industry, regulators, and consumers. A number of familiar risk areas were examined during the two great days of presentations, debate, and discussion, and three prominent themes emerged for me: the centrality of the service agent, the increasing importance of financial education, and considering responsible finance at the ecosystem level.

The first day of the forum focused on the identification of risks to consumers from digital financial services (DFS) and the second day was framed around how to mitigate and minimize those risks. An online “Global Pulse Survey” that CGAP conducted as well as some demand-side research conducted by MicroSave and Bankable Frontier Associates (BFA) brought both the practitioner and consumer perspectives on DFS risks to the forefront. The MicroSave and BFA research canvassed nearly 700 DFS users and 50 non-users through focus groups in Colombia, Bangladesh, the Philippines, and Uganda. While respondents of the survey and focus groups identified a wide variety of harms or worries, some common items emerged, listed in the table below. Though preliminary, this data is extremely important in helping us frame the areas where stakeholders could focus to mitigate against client harm and risk. These risks fall squarely into the framework of the Smart Campaign’s seven Client Protection Principles, furthering our belief that a principles framework can carry forward into digital financial services.

The Centrality of the Agent

(click to enlarge)

Most of the risks to clients mentioned during the conference stem from behaviors or practices by an agent of a mobile money or branchless banking network. Agents, typically operators of retail outlets or small kiosks, occupy a murky position that is not well understood by customers or even the agents themselves. They are representatives of services, like MTN or Easypaisa, but are not employees. Yet many customers interact only or primarily with agents, never coming in contact with full-time staff members of a DFS service. In these cases, agent behavior colors the perception of the entire service. MicroSave spoke of extremely high turnover in agents, particularly in Uganda, and others discussed lack of training and incentives for agents to treat clients well. There were some positive examples, such as those presented by Oxigen, India’s largest money transfer service provider, but the centrality of the agent to client protection concerns was clear. While some forward-thinking participants in the conference envisioned a system that bypassed the agent and was completely mobile, most agreed that for the near-term agents are here to stay and are an integral part of the DFS ecosystem. There is a need for more thinking around the incentives, training, and practices that could help to minimize the risk of agent harm to clients.

Financial Education

Another common refrain was the need for strong financial education for clients to support the increasing complexity of DFS, to help clients “self-protect” and minimize their own risk. While the need for financial education is huge, evidence to support its effectiveness is slim. With each clarion call sounded at the conference for large financial education efforts, I pondered the cost-effectiveness of investing a small percentage of programmatic money into rigorous evaluations. Folks like Innovations for Poverty Action, ideas42, and Microfinance Opportunities are on the cutting edge of understanding the evidence on what works in financial education, particularly regarding the use of behavioral psychology insights to shape design and delivery, and technology as a delivery channel. Of course implementation should not cease completely until all the evidence emerges, but given the importance put upon financial education, and the money likely to be spent on financial education programs, there should be more attention to experimentation and evidence.

Responsible Ecosystem

While the framing of the forum was around the client protection risks to consumers, there were consistent calls for a responsible DFS ecosystem that involved interoperability, processing systems that allow for maximum usage and reduction of costs to consumers. Participants cited the emergence of SWIFT, which established common standards for financial transactions and data processing in the mid-1970s in the hopes that analogous systems could be developed and deployed for financial inclusion. Ripple, an open payment protocol that simplifies interbank payments and makes them faster, and Klickex, a currency exchange service, were held up as potential examples. While further removed from the treatment of a client by a financial institution, progress on these issues would certainly yield benefits to clients in terms of reduction of costs and increase of value.

Looking back on the two productive days in Perth, and still fighting off jet lag after safely circumnavigating the globe, I’m encouraged by the enthusiasm and attention demonstrated for responsible digital finance. With the rapid expansion of technology-enabled services, action in this area from all stakeholders will be needed to ensure that clients are adequately protected.

Have you read?

eCPPs: How a Principles Approach to Client Protection is Built for the Digital Age

What is It Like to be a ‘Digital Immigrant’ in a Developing Country?

The Kenyan Journey to Digital Financial Inclusion

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?

The Smart Campaign has worked for over five years to mitigate against and minimize client harm in the microfinance industry. Our technical foundation is the framing of consumer protection risks using the seven Client Protection Principles (CPPs). The CPPs reflect a widespread common agreement of what constitutes fair treatment and reflect observed incidence and risk of harm for microcredit borrowers, and the standards for implementing them have evolved over five years through thousands of data-points. These inputs include observations of practices at financial institutions (through the Beyond Codes project and later assessments, self-assessments, and certification exercises) and through client research. The seven CPPs have been endorsed by over 4,000 individuals worldwide including over 1,400 MFIs.

While we expect that many readers of this blog know the CPPs by heart, it never hurts to repeat them. The seven Client Protection Principles are:

• Appropriate Product Design and Delivery
• Prevention of Overindebtedness
• Transparency
• Responsible Pricing
• Fair and Respectful Treatment of Clients
• Privacy of Client Data
• Mechanisms for Complaint Resolution

Going one level deeper, each of the seven principles has a set of standards and indicators that operationalize where the industry sets the bar in terms of what clients should expect from their financial service providers. The 30 standards and 95 indicators specify what “doing no harm” must entail in practice.

While its origins were in microfinance, the seven principles are a robust framework that can cover the emerging risks in digital financial services. The examples cited earlier fall cleanly into one or even more of the principles:

• Clients lose their funds after an agent fails to take proper security measures or after a service outage (Appropriate Product Design and Delivery Channels; Privacy of Client Data)
• Agents charge unauthorized fees for transactions under guise of complicated pricing and fees (Transparency; Fair Treatment)
• Clients lack or are not offered adequate customer care channels (Appropriate Product Design and Delivery Channels; Mechanisms for Complaint Resolution)
• Lack of data privacy due to clients not being informed or misinformed on how their data and history is being used or shared (Privacy of Client Data)
• Agents lacking liquidity serve only their favored clients (Fair Treatment)

As mentioned earlier, as part of the ongoing work to keep the guidance related to the CPPs up to date, the Smart Campaign secretariat is working with the Channels and Technology team at Accion to map the emerging risks to clients using digital financial services, particularly when microfinance providers are offering such services. This inquiry will lead to an initial set of recommendations on how to build out the guidance and standards related to DFS for each CPP.

The Campaign is excited to apply the industry’s framework of the CPPs to digital finance. The more actors frame issues in a common and clear way, the easier action and mobilization will be, which ultimately will lead to better protected clients.

Have you read?

The Emergence of Responsible Digital Finance

Helping Consumers Understand Their Digital Data: Initial Experiences from Tanzania

Electronic G2P for the Poor: Does Electronic Social Protection Need Better Consumer Protection?

Achieving financial inclusion by 2020 will depend in large part on the proliferation of fast, affordable, and accessible digital financial services (DFS). Indeed these effective, scalable models were a clear theme at the FI2020 Global Forum hosted by CFI last fall. Yet as excitement for DFS dominated much of the public discussion, a small and diverse set of financial inclusion leaders convened a private side-meeting to discuss an often-overlooked question: what are the consumer risks to these new, innovative digital models?

The meeting, co-hosted by CGAP and UNCDF’s Better Than Cash Alliance, introduced the concept of “responsible digital finance” and revealed heightened awareness of and interest in an array of issues related to the potential consumer risks of digital financial services, including:

• Fraud types that have potential negative effects on customers, such as SIM swaps and card skimming.
• Breaches of data privacy and protection, as inadequate data handling can trigger other risks such as identity theft, misuse by government, sale of one’s data without knowledge or consent, etc.
• Agent misconduct that causes financial loss, poor service quality, or mistrust in the agent network.
• Ineffective or inadequate consumer recourse and its effect on consumer trust as well as financial services uptake and usage.
• Customer risk implications of the predicted rapid transition to smartphones in BOP markets.

Despite the fruitful discussion of what risks may exist, the only consensus among this group was that the field knows far too little about a) nature, incidences, and consequences of these emerging risks, b) how they may vary by market or segment, and c) how best to mitigate them.

The group raised several critical questions on the meaning and direction of responsible digital finance. Here are some highlights:

• Which risks are the greatest, where and for whom and why?
• Who is responsible for mitigating consumer risks to DFS? For example, which problems are best attacked through regulation versus improved industry practices versus customer awareness/education?
• What are the costs of responsible finance? How do we ensure appropriate protection and responsible practices while supporting innovation and sustainability?
• Where do clients get their information on services and risks? Who is their sensitive information given to? What is the data trail?
• How does digitization affect current approaches to consumer protection? Are digital models uniquely more or less risky?

That small FI2020 side-meeting has inspired an array of activity around responsible digital finance. In fact, in August the 5^th annual Responsible Finance Forum will focus exclusively on responsible digital finance. It also inspired an initiative of the same name at CGAP, which aims in the short run to address the pressing need to understand the global landscape of perspectives and experiences around consumer risks in digital financial models. In order to have a constructive, global, multi-stakeholder conversation around how best to balance mitigation of consumer risks with promotion of innovation in the DFS market, this understanding is crucial.

To bolster the discussion and gather preliminary data on the global state of play and court of opinion on responsible digital finance, CGAP recently launched a Global Pulse-Taking Survey on Responsible Digital Finance. The stocktaking will help the growing digital finance field to explore some critical needs by:

• Identifying particular consumer risks that arise when financial services are delivered digitally.
• Exploring how leaders in the private, public, and non-profit sectors have addressed (or prefer to address) incidences of risks.
• Shaping the global dialogue on collective action and practical next steps to advance digital finance, responsibly.

To share your experiences and perspectives, and guide the digital financial inclusion agenda down the right path, access the brief, confidential survey here. The survey closes August 8^th, and results will be shared on this blog. Stay tuned!

Jamie M. Zimmerman is a senior policy consultant at CGAP and is supporting CGAP’s recently-launched Responsible Digital Finance Initiative. 

Image credit: Gates Foundation

Have you read?

Helping Consumers Understand Their Digital Data: Initial Experiences from Tanzania

Electronic G2P for the Poor: Does Electronic Social Protection Need Better Consumer Protection?

The Kenyan Journey to Digital Financial Inclusion