We’re living in a period of spectacular innovation in financial services: new technologies are changing nearly every aspect of the formal financial sector. It’s a very exciting time for everyone who aspires to create a financially inclusive world: for the first time, we have new tools that work anywhere, anytime, and can help us achieve our vision. Given that financial inclusion enables eight of the United Nation’s Sustainable Development Goals, fintech can ultimately help provide better food, promote economic growth, increase women’s autonomy, and contribute to a safer, more equitable world.
But, to realize that potential, we must acknowledge that fintech—like any financial product or service—can either help people thrive or exacerbate inequality. Nano-loans can provide someone with a quick loan so they can fix their car and get to work, but they can also enable gambling and over-indebtedness.
And, much like with traditional finance, a given fintech’s quality largely depends on its provider: emerging technologies provide entrepreneurs and startups with new tools and channels to reach the world’s 3 billion financially underserved. But, in some cases, developers use these technologies to create services that don’t help users—and may even harm them.
Despite that risk, we still believe that inclusive digital financial services tend to improve peoples’ lives and help businesses thrive. But to cultivate beneficial digital financial services, providers, investors, and regulators need a deep understanding of users, as well as their needs, priorities, and behaviors. They also must understand the specific ways that technologies can help the world’s underserved. And, just like traditional financial services, fintechs must constantly strive to emphasize the positive effects and minimize the possibility of negative consequences.
Striking that balance can be difficult: fintech innovators and their investors see an enormous need and sometimes rush to meet it. Regulators have a difficult time, too—especially in such a rapidly changing field.
But difficult isn’t impossible, nor is it an excuse. Early inaction can have lasting consequences. As microfinance institutions were just beginning to scale, the industry suffered major setbacks because it failed to prioritize consumer protection. Whether this was brought on because of regulators’ benign neglect or institutions’ failure to self-regulate, clients in Andhra Pradesh and around the world suffered because of it. We can’t allow that to happen with fintech.
One way to begin fostering consumer protection in digital financial services is to have open, frank conversations about what’s working and what isn’t. Recently, the Center for Financial Inclusion at Accion established a Community of Practice where fintech providers discuss the challenges they must address when embedding consumer protections into their work. Their conversations about the successes and failures they’ve encountered in the provision of digital credit helped the Smart Campaign—the leading global voice on financial consumer protection and empowerment—align its Client Protection Principles with emerging trends in digital financial services.
The Community is an important first step—but it’s only a first step. It’s time to embrace the next phase in digital client protection by developing a comprehensive definition of responsible digital finance and the norms, frameworks, and tools necessary to operationalize it on a global scale. New technologies, delivery channels, service providers, and customers necessitate adapting and expanding how we approach consumer protection and digital empowerment. That’s only possible if digital financial service providers understand how to do so and why they should.
To ensure that they have that knowledge, we should articulate the incentives that can motivate fintechs to embed ‘protection by design’ into their products, delivery channels, and business models. With the right data on business model economics—including the potential upside for fintechs that prioritize consumer protection and the risks that they face if they don’t—we can show fintechs the business case for incorporating sound consumer protection principles into their products and services. We’ll also need to continue working with fintechs and their users to ensure that new standards are informed by customers’ evolving expectations and address their needs.
We all stand to benefit from building digital financial services that emphasize client protection: they reduce risks, promote trust, and develop a positive reputation for the financial sector. More importantly, responsible digital financial services help ensure that we harness the ongoing transformation of the financial sector to help people everywhere build better lives.