Digital Standards and Nascent Business Models: Smart Campaign Reacts to The Global Microscope

Isabelle Barrès, Director of the Smart Campaign, reflects on the findings from the Economist Intelligence Unit’s report on the enabling environment for financial inclusion.

Consumer protection is essential for ensuring that financial inclusion works for consumers and results in a healthy sector. That’s why the Global Microscope includes indicators on the state of consumer protection regulation in its overall assessment of a country’s enabling environment. The Smart Campaign’s expertise in consumer protection give its team an informed perspective on these issue. We sat down with Isabelle Barrès to get deeper perspectives on this relationship and her general reactions to the Microscope.

Did the Microscope reveal any surprises from a consumer protection perspective?

What stood out to me was the way consumer protection cuts across all of the domains in the Microscope framework. Indeed, while specific consumer protection and privacy regulations are key, as I look through the Microscope indicators, I’m struck by how nearly all of them contribute to minimizing consumer harm.

For instance, a favorable environment for consumer protection requires government and policy support and a solid infrastructure. Consumers stand a better chance of being protected if financial literacy programs enable them to make more informed choices and advocate for their rights. Thoughtful product design is critical to mitigate risks – for example in designing a loan product, it’s important to build in restrictions against excessive borrowing. The way agents and outlets are supervised can make a critical difference in the way clients are treated.

This 2018 Microscope has increased its weighting on cybersecurity one of the rising risks to consumers and the industry, which the Smart Campaign is tracking.

How do you get a robust regulating environment that doesn’t stand in the way of new players? Where’s the balance?

The Smart Campaign helped draft a model legal framework – a guideline for regulators – largely for this purpose. It builds on existing guidelines, tools, and recommendations, and is drafted in a way that leaves room for regulators to factor in the level of competition in the market, the types of players, the level of maturity, prep regulation to support a balance between regulation and innovation. In developing standards for digital credit providers, we see a number of practices that, if we were looking at a traditional provider, we would have been very critical of (e.g., portfolio quality and pricing). While still very much focused on these issues, we recognize that many of these models are nascent and providers are still refining their models and need time to innovate and adapt. We are therefore providing space for early stage providers to innovate rather than have more stringent guidelines from the get go, as long as risks to clients are mitigated.

The Microscope states that, “in the best-performing countries, traditional consumer protections are coupled with data privacy and cybersecurity safeguards… strong performance on traditional consumer protection (countries that scored greater than 80) does not necessarily indicate that a country has a sufficient framework for digital consumer protection.” What does this mean to you?

That means that countries have traditional consumer protections in place, but these are not sufficient to deal with newly arising risks. So just because a country has a good consumer protection framework, doesn’t mean it’s up to date with the emerging digital risks.

Just because a country has a good consumer protection framework, doesn’t mean it’s up to date with the emerging digital risks.

The main adaptations that we see needed for an adequate framework for consumer protection in a digital world are the need to account for 1) the increased reliance on agent networks for sales and service; 2) the reliance on technology and technical interfaces and the client risks linked to data collection, use and storage; and 3) more complex value chains. These are taken into consideration in the current update to the Client Protection Standards for digital services.

Would the countries that have done well in traditional consumer protection be well positioned to adopt digital consumer protection?

In some ways, yes. Digital consumer protection builds off of traditional consumer protection. The “traditional” consumer protection dimensions (appropriate product and delivery design, prevention of over indebtedness, transparency, responsible pricing, fair treatment, recourse) are still relevant, with adaptations needed for the new risks that come with low touch/ high tech models. The biggest changes from the digital revolution that affect consumer protection are linked to data: data privacy, data security and data use, and the confluence of industries that used to work independently: technology and finance. While data privacy and protection was part of the traditional consumer protection, the extent to which the data protection frameworks need to be extended to cover consumer risks in a digital world is considerable. Countries that have strong data protection policies and enforcement (e.g., The Philippines, Colombia) are getting a head start to address consumer protection issues in a digital world.

The extent to which countries are well positioned to adopt digital consumer protection also depends on the extent to which they embrace innovation, the extent to which non financial digital providers can be integrated to the financial infrastructure, and the extent to which telcos and banking regulators cooperate. As highlighted by the Microscope, The Philippines is a good example of a country making headway in building an effective digital finance ecosystem and increasing the collaboration between regulators and industry. Their work under the R2A program in developing and testing technology based solutions that can support good consumer protection is an interesting example to follow.

The Philippines is a good example of a country making headway in building an effective digital finance ecosystem and increasing the collaboration between regulators and industry.

Are there any country-level assessments that especially caught your attention?

For Cambodia, in terms of key barriers to financial inclusion, the Microscope authors worry about the expansion in the number of MFIs and MBIs, and it does reference the surge of refinanced loans. In our work, we’re seeing self-organization efforts in response to a surge of lending and a fear of over-indebtedness that has been well documented through Mimosa. We see ongoing efforts from investors to share information on their portfolios. There are industry efforts in the form of lending guidelines that have started. It’s an example of an industry-based initiative that is complementing what regulators are doing.

Kenya is another example. The Microscope highlights the Consumer Protection Act, which aims to protect consumers from aggressive lending. Yet, regulations are not yet going far enough, because of the proliferation of digital lenders that aren’t regulated. It would be great if the Microscope analysis could dig deeper into the institutional landscape.

Read the Microscope and let us know what you think!

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