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Responsible Digital Credit

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Responsible Digital Credit Responsible Digital Credit What does responsible digital credit look like? July 2018 AUTHOR John Owens Acknowledgements This report could not have been written Digital Lenders without the guidance and inputs from the Rob Suber, Brett King, Dan Cohen, Aiaze Smart Campaign and the Center for Financial Mitha, Jared Miller, Richard Eldridge and Mark Inclusion at Accion, especially Elisabeth Mackenzie, Eduardo Bazoberry, Neal Cross, Rob Rhyne, Isabelle Barrès, Alexandra Rizzi, Sonja Findlay, Constanze Lehmann, Jerry Nemorin, Kelly, Pablo Antón Díaz, Virginia Moore, Tess Anju Patwardhan, Mah Kam Lin Noronha, and Johnson, and others. In addition, the author Tobias Fischer benefited from peer reviews and inputs from many policy makers, regulators, industry Regulators players and experts and would like to thank Maria Lúcia Leitão, Ramón Rosales, the the following for their valuable contributions: Bank of Russia, the Central Bank of Kenya, the Bank of Tanzania, the Superintendencia Experts de Bancos de Guatemala, Bank Indonesia, Kate McKee, Matt Gamser, Ros Grady, Claudio the Reserve Bank of Fiji, Bangko Sentral ng González-Vega, Michelle Kaffenberger, Graham Pilipinas, the Central Bank of Armenia, the Wright, Bennett Gordon, and JoAnn Barefoot Bank of Papua New Guinea, the Peruvian Ministry of Production, Ghiyazuddin Industry Organizations Mohammed, Eliki Boletawa from the Alliance The Responsible Business Lending Coalition, for Financial Inclusion (AFI), as well as AFI’s the G20 GPFI Subgroups on SME Finance and Digital Financial Services Working Group Markets and Payment Systems members, the Innovative Lending Platform Association, the Cover photo by John Rae for Accion. Coalition for Responsible Finance, the Online Lenders Alliance, Emmanuel Daniel, Anastasia Demidenko, Alejandra Ríos, Anna Gincherman, Ruth Goodwin-Groen, and Jami Solli Executive Summary 2 1. The Landscape of Digital Credit Providers 7 Marketplace Lenders 7 Other Digital Lenders 10 2. Consumer Risks, Desired Outcomes and Movement Toward Standards 12 1. Appropriate Product Design and Delivery 12 2. Prevention of Over-Indebtedness 15 3. Transparency 17 4. Responsible Pricing 20 5. Fair and Respectful Treatment 22 6. Privacy of Client Data 25 7. Mechanisms for Complaint Resolution 28 8. Fraud and Security 30 3. Achievements and Challenges in Advancing Standards among Industry Associations and Regulators 32 Industry 32 Regulation 33 Public-Private Dialogues 34 4. Recommendations for Smart Campaign 37 Annex Matrix of Responsible Digital Credit Standards, Codes of Conduct and Principles 41 Notes 42 RESPONSIBLE DIGITAL CREDIT: WHAT DOES RESPONSIBLE DIGITAL CREDIT LOOK LIKE? 1 Executive Summary Throughout the world, small loans to To address these issues, digital credit providers individuals and very small businesses are should design, target and sell only products increasingly made through digital credit. Digital with features that meet the particular needs credit is defined as loans accessed through a of the customer segments or individual digital channel, either online, through a mobile customers for whom they are intended. device or through a third-party agent. In this Emerging standards address: study, we analyze a range of digital credit provider categories and models, the consumer • Ensuring the right product for the risks they involve, and some of the standards right customer and use case being developed to address these risks. Finally, • Appropriate mobile interface design practices we make recommendations for the Smart • Adopting responsible advertising Campaign and other organizations concerned and marketing standards with financial consumer protection to consider. • Pressure-free loans Consumer Risks in Digital Credit 2. Preventing Over-Indebtedness Digital credit customers in markets around Industry associations, regulators and the world are facing diverse and numerous consumer protection advocates have raised financial consumer protection challenges. concerns that digital credit products may trap While digital credit creates some of the same clients in an expensive cycle of borrowing, consumer risks as traditional lending models, especially if they are made without sufficient new technologies and new channels, along information on the borrower’s ability to repay. with new credit providers, also create unique Some of the observed practices that trigger new risks. This study summarizes both types such concerns include: of risks, using the seven Smart Campaign Client Protection Principles as an organizing • Limited debt capacity analysis framework, and adds an eighth category to • Inappropriate financing address security and fraud concerns. • Lack of responsible credit reporting • Responsible restructuring or 1. Product Design and Delivery Risks refinancing options The way digital credit is designed and delivered can create various consumer risks including: Industry standards should encourage digital credit providers to avoid creating debt traps • Products designed with insufficient through automatic repeat loans by ensuring: customer information • Nearly automatic and frictionless access • Responsible underwriting • Mobile information limitations • Robust credit information sharing • Aggressive digital marketing •Misleading marketing or false representation 2 CENTER FOR FINANCIAL INCLUSION 3. Transparency for Borrowers and P2P Investors While digital credit creates some of the The transparency principle asserts that same consumer risks as traditional lending lenders have a responsibility to provide all models, new technologies and new channels, the important information about a product, particularly pricing information, in a manner along with new credit providers, also create that enables clients to understand and make unique new risks. informed choices. In many cases, however, digital loan interest rates, fees, charges and terms are unclear, incomplete and hard for clients to compare across products. • Non-transparent rates and hidden fees 4. Responsible Pricing • Terms and conditions that are hard Several digital credit models have been to understand developed based on high loss rates which • Confusing menus and user interfaces require providers to charge high rates, fees • Lack of ability to compare products or penalties. This has especially been the across providers case for digital payday lenders as well as • Lack of notice regarding referrals some of the new mobile nano-lenders. There • Lack of transparent broker/agent fees have also been failures to provide consistent or comparable disclosure of finance charges To address these issues, digital credit across digital lenders. providers should ensure that their products Responsible pricing should be both feature the following: affordable to clients and sustainable for financial service providers. Digital lenders • Availability of information and ease now have the technology to better segment of understanding potential and current customers, assess their • Disclosure approaches that facilitate repayment capacity more carefully, target comparison appropriate use cases and improve overall • Adequate notice periods pricing in a more responsible way. To protect the industry, encourage competition and In the case of peer lending models, a special avoid policy maker overreach (interest rate transparency concern arises, because investors caps), regulators and industry players should into these models put their funds at risk, move toward standardized interest rate and and so investors as well as borrowers require fee disclosure and promote open, transparent protections. Some of the most important and comparable industry interest rate and challenges include a lack of standardized fee platforms for the public to view. disclosure and misleading advertising. To address issues faced by individual 5. Fair and Respectful Treatment of Clients investors, P2P lending platform providers While digital credit does involve little face-to- should disclose and take steps to share: face contact, some client treatment issues still affect clients of digital credit: • Historical performance data • Investment selection data • Discriminatory practices • Investor portfolio data • Unfair collection practices • Marketplace management practices • Lack of disclosure of conflicts of interest • Any related party investment by P2P lending platform owners/employees RESPONSIBLE DIGITAL CREDIT: WHAT DOES RESPONSIBLE DIGITAL CREDIT LOOK LIKE? 3 • Appropriate laws, regulations and policies In pursuit of a digital credit system that is safe to protect data privacy and consumer for participants, regulators need to take the information sharing lead in dialogues that involve public and private • Secure handling of sensitive data •Informed consent entities as well as consumer representatives. • Awareness of consequences of data sharing • Consent to communicate electronically with clients • Internal procedures to prevent data misuse • Limits on collection and data retention periods • Management of data usage by third-party Among the recommended steps to prevent providers poor client treatment are the following: • ARCO Investment Management principles • Documenting the rationale for 7. Mechanisms for Complaint Resolution algorithmic features Complaint resolution issues include: • Using regulatory technology (RegTech) to identify potential discriminatory • Limited knowledge about how to complain practices and resolve complaints • Detailed fair collection policies • Lack of appropriate channels for and procedures correcting errors • Policies and procedures
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