Bansal, the <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign">Smart Campaign</a>'s Senior Director in South and Southeast Asia, notes that the problem over-indebtedness is more severe in the island country than elsewhere.

She also points out that the government's decision to write off business loans of up to 100,000 rupees falls short.

"One-off measures will not do, says Ms Bansal: Sri Lanka needs properly enforced rules that prevent over-indebtedness and ensure fair treatment of borrowers."

<strong>Read the <a href="https://www.economist.com/finance-and-economics/2019/08/15/microfinance-is-driving-many-sri-lankan-borrowers-to-despair">full article</a> (soft paywall).</strong>

In The Economist: Hema Bansal on Over-Indebtedness in Sri Lanka

The Smart Campaign

South Asia

Sri Lanka

Consumer Protection

Over-indebtedness

News

This year’s Financial Inclusion Week is a chance for our industry to reflect on the purpose and impacts of our work as an industry. At CFI, we're observing trends that make us believe this an important time to reflect on these issues, which is why we’ve chosen the theme “Financial Inclusion: For What?”.

As we described throughout our <a href="https://www.centerforfinancialinclusion.org/program_teams/mainstreaming-financial-inclusion">Mainstreaming Financial Inclusion</a> series, the digital revolution is fundamentally altering how traditional financial service providers and innovative fintechs interact with each other and how they recruit, onboard, serve, and retain customers. The potential opportunities are limitless, but the move to digital also exposes low-income households to new and poorly understood risks.

Simultaneously, the scope of the financial inclusion industry has widened dramatically. Attention and investment once given almost entirely to microcredit is now being shared with cash transfer, savings, and insurance services, and these products are being offered through increasingly dynamic platforms. When used well, the financial ecosystem can be staggeringly important, delivering digital payments to health workers combating Ebola, facilitating life-saving G2P and P2P cash transfers, or providing working capital to small businesses at critical moments. When it works less well, we read about Kenyans racking up unpaid gambling debts financed through mobile money-delivered nano loans.

Financial Inclusion Week is an opportunity to explore this dynamism while reflecting and refocusing our goals as an industry. Why are those of us in this space engaging in this important work? How do our goals inform our perspective on these and other trends? What does it mean if we’re working to different or competing aims? How should we think about success, and what is necessary to ensure we achieve it?
<blockquote>During Financial Inclusion Week events, four possible answers to the question “Financial Inclusion: For What?” will be in focus.</blockquote>
From October 21 to 25, 2019, CFI and partner institutions will be hosting digital and in-person events to explore these questions, and we invite you to <a href="http://financialinclusionweek.org/get-involved">join the conversation</a>. During Financial Inclusion Week events, four possible answers to the question “Financial Inclusion: For What?” will be in focus. We’ll ask leading voices in the industry to debate the merits of these questions and articulate why these objectives should or shouldn’t be the guiding light of the industry.

Financial Inclusion: For What?

Financial Inclusion Week 2019

Financial Health

Financial Service Providers

Resilience

Social Performance

Blog Post

<em>This post was originally published on the FinDev Gateway <a href="https://www.findevgateway.org/blog">blog</a>.</em>

Last week the <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign">Smart Campaign</a> launched new <a href="http://www.smartcampaign.org/storage/documents/Digital_Credit_Standards_June_2019.pdf">standards</a> and <a href="https://www.smartcampaign.org/storage/documents/2019_06_19_Principles_Guidelines_FINAL2.pdf">guidance</a> covering digital financial services, especially credit. This is a milestone for the Campaign, and a step forward for protecting consumers who are accessing financial services digitally for the first time. We would like the standards to be widely used to guide the practices of both fintechs and traditional financial service providers undergoing digital transformation.

Through the in-depth research, piloting and consultation to prepare these standards, we have developed an approach to consumer protection for digital credit that is in many ways familiar and in other ways brand new. The Client Protection Principles, from transparency to fair and respectful treatment, continue to be the bedrock on which the standards are based, and many of the original standards still apply with few or minor changes.

But there is also big news in these standards. They shift the emphasis in application of consumer protection from staff and operations toward product design and delivery. When services are delivered primarily through front line staff or loan officers, clients are protected by ensuring that staff are well-trained and properly incentivized. With digital services, the consumer experience is embedded in the design of the product and user interfaces – largely in advance. This is a profound shift. To ensure consumer protection, digital financial service providers will need to institute practices in the design process to confirm that consumer risks are mitigated. These practices are only now emerging in the sector.
<blockquote>There's big news in these standards: They shift emphasis in application of consumer protection from staff &amp; operations to product design &amp; delivery.</blockquote>
For example, we propose that to protect clients against over-indebtedness in digital lending, where predictive algorithms substitute for repayment capacity analysis, providers must regularly review the choices embedded in the algorithm and selection of data points (ex ante measures), and they must monitor results in the portfolio and directly with clients (ex post measures).

Similarly, there is a broad shift in emphasis from Client Protection Principle #5, Fair and Respectful Treatment, to an expanded Client Protection Principle #1, reformulated as Design of Products, Services and Delivery Channels. In non-digital models the standards around fair treatment focus on staff behavior toward clients, such as codes of conduct and sanctions for lapses. In the new standards, more attention is given to ensuring that the design process incorporates client input and that predatory or deceptive sales and marketing techniques are not programmed.

Another big change in the standards is the elaboration of the Privacy of Client data principle, which has been reformulated as Privacy, Security and Integrity of Client Data. When the Smart Campaign began, data privacy was often regarded as the least important of the principles, but today it is a major concern, as financial service providers and their partners have, use and share so much more client data. Many providers have not yet determined what privacy policies to follow or how to implement them. Informed consent is a starting point, as the standards state, but we are also looking at ways to bake privacy protections into design. As more data is manipulated, stored and moved from place to place, risks increase for data breaches and misuse, prompting us to also deepen attention to cybersecurity.
<blockquote>As more data is manipulated, stored and moved, risks increase for data breaches &amp; misuse, prompting us to deepen attention to cybersecurity.</blockquote>
A final noteworthy shift is the use of partnerships (including agents) to deliver products, which makes it harder to assign responsibility for client mistreatment. For example, an agent may be managed by a network operator while selling products of a bank or other financial service provider. When something goes amiss, it should be made clear who is responsible to make the client whole. The standards call on providers to discuss relevant practices with partners and secure agreement for partners to meet high standards, wherever possible.

As a first cut at a complete set of consumer protection standards for digital services, we recognize that these standards will need to continue to be tested and refined. An enormous thanks to the organizations who worked with us to develop the standards, particularly the <a href="http://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects</a> community of practice and <a href="https://www.mf-rating.com/">MFR</a> (formerly Microfinanza Rating), as well as to the many people who provided comments and critique. We continue to welcome your feedback. Meanwhile, we call on digital financial service providers around the world to apply the standards so that they and their consumers will face fewer risks and receive the value they seek from using financial services.

Consumer Protection in a Digital Age

Responsible Digital Finance

The term “rural brain drain” was popularized nearly a decade ago when two sociologists published a book documenting <a href="https://www.wired.com/2010/02/how-do-we-stop-hollowing-out-the-middle-of-america/">their experience living in Iowa</a>. Their goal was to understand the exodus of a young, educated workforce from rural areas to urban hubs. Today there are many factors contributing to this population shift, among them deindustrialization, lack of high-paying jobs, and weak broadband connectivity. A <a href="https://www.federalreserve.gov/publications/files/consumer-community-context-201901.pdf?mod=article_inline">Federal Reserve</a> report published earlier this year brought to light another reason for this phenomenon that dozens of states are grappling with: student loan debt.

The student debt crisis made headlines in 2010 when student loan debt surpassed credit card debt in the United States, at a staggering $1.56 trillion today, student debt is growing much faster than <a href="https://www.finder.com/student-loans-to-overtake-mortgages">mortgage debt</a> (10.4 percent per year versus 0.6 percent for mortgages). According to the Federal Reserve Bank of New York, nearly two-thirds of this financial burden falls on Americans under the age of 39.

As young people are increasingly burdened by student debt, they are flocking to the places that offer high-paying jobs: cities. According to Pew Research, <a href="https://www.pewresearch.org/fact-tank/2018/03/16/how-millennials-compare-with-their-grandparents/">88 percent</a> of millennials live in metropolitan areas. The average age is higher in <a href="https://www.citylab.com/life/2018/05/mapping-americas-aging-population/561200/">the Midwest and the Appalachians</a>, regions that are struggling to keep pace with urban hubs in terms of broadband access, variety of jobs, quality of higher education institutions, and other success factors in today’s markets. As evidenced by the Fed’s report, individuals with student debt are less likely to remain in rural areas than those without debt. Furthermore, nearly two-thirds of the students most burdened by debt leave rural areas within one year after entering repayment. The term for this migration pattern has been coined the “rural brain drain,” and its impacts on the economic vitality of these regions are increasingly apparent. The inability of rural areas to attract a young, educated workforce is deepening the rural-urban divide.
<blockquote>Young people are flocking to the places that offer high-paying jobs: cities.</blockquote>
Some may argue that widespread access to education loans has created better opportunities for younger populations all over. However, according to U.S. Census data, wages have been stagnant since the 1970s, while the average cost of public college tuition has increased almost four fold. Simultaneously, homeownership among those under 35 has dropped <a href="https://www.census.gov/library/stories/2018/08/homeownership-by-age.html">10 percent</a> since 2006, and birth rates have declined every year since 2007. People in the age groups we might expect to be buying homes, settling down, and raising the next generation cannot afford to do so.
<blockquote>Wages have been stagnant since the 1970s, while the average cost of public college tuition has increased almost four fold.</blockquote>
We often look to countries like Finland, Denmark, and Norway, which offer tuition-free college to their citizens, as paradigms of what could exist here at home. Which country has the best model for us to try to replicate? According to former Secretary of Labor Robert Reich, the answer is <a href="http://inequalityforall.com/wp-content/uploads/2014/12/A_Visual_StoryPDF.pdf">the United States</a>. In post-war America, tuition fees were waved for veterans, and there was a massive proliferation of public universities. The GI Bill was one of the important factors that led to a tripling of the number of Americans with a bachelor’s degree from 1950 to 1977, and these educated workers helped the U.S. to grow to have the largest and most prosperous middle class in the world. At this time, public tuition was about 6 percent of an average male salary, compared to today’s 25 percent.

Times have changed, however, and modern problems require modern solutions. Refinancing and forbearance can provide some relief, but they ultimately increase debt in the form of interest. Other <a href="https://www.forbes.com/sites/andrewjosuweit/2017/11/05/6-ways-congress-can-help-ease-the-student-loan-crisis/#1cdcbb656cf6">proposals</a> to remedy the student debt crisis include erasing all debts, boosting the tax deduction for those making on-time payments, expanding the Pell grant program, creating a tiered system that lowers or eliminates debt based on income, and proper adherence to the <a href="https://www.nerdwallet.com/blog/loans/student-loans/public-service-loan-forgiveness/">Public Service Loan Forgiveness Program</a>. The latter program was created in 2007 to forgive remaining student loan balances of those who have worked for 10 years in public service. In 2017 applicants first became eligible for relief through this program, which has a two-year budget of $700 million. However, as of April this year, only 1.5 percent of those funds have been utilized. While the <a href="https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/temporary-expanded-public-service-loan-forgiveness#how-qualify">requirements</a> for forgiveness are publicly available, the Department of Education has come under fire for not providing clear guidance to successfully navigate them.

Some believe that a policy to eliminate all or most student debt would be a major <a href="https://www.marketwatch.com/story/canceling-14-trillion-in-student-debt-could-have-major-benefits-for-the-economy-2018-02-07">economic stimulus</a>, spurring job creation and narrowing the wealth gap over the next decade. Our recent history proves that a well-educated population fuels a virtuous cycle of growth through competitive wages, increased tax revenues, and expansion of jobs. An affordable education lies at the foundation of this cycle, and will be a key factor in creating a more economically inclusive rural and urban America.

Rural America: Another Casualty of Student Loan Debt?

North America

United States

Barres's questions that Libra's developers should consider when innovating for the new cryptocurrency are:
<ul>
 	<li>What would data privacy agreements look like if we wanted them to be understandable, fair and with an option to opt out?</li>
 	<li>How would algorithms that did not discriminate be set up?</li>
 	<li>How might fully transparent, low-cost and high-quality products and services that truly solve problems be brought to bear?</li>
</ul>
Read the <a href="https://www.euromoney.com/article/b1g0hvpnhqmyg0/cryptocurrency-facebook39s-libra-is-this-how-we-get-to-responsible-fintech">full article in Euromoney</a>.

In Euromoney: Smart Campaign's Isabelle Barres Poses Questions About Libra

Appropriate Product Design and Delivery

This week the <a href="https://www.centerforfinancialinclusion.org/about/what-we-do/the-smart-campaign/">Smart Campaign</a> is celebrating its 10th anniversary year with a bang by releasing its new standards for digital financial services. These standards represent the opening of a new phase for Smart to meet the growing challenges of the digital age.

The Smart Campaign began in the context of the 2008 global financial crisis. The financial system, and indeed the world economy, had just been brought down by interlocking defects in the financial system, a chain of events triggered by reckless lending in the U.S. mortgage market. A parallel phenomenon was taking place in the microfinance market in countries as diverse as India, Nicaragua and Morocco, with fast growth and commercialization leading to widespread over-indebtedness among customers, and a resulting backlash in public opinion. Customers suffered and providers lost the trust they had enjoyed. No greater object lesson can be imagined for prompting a focus on <a href="https://www.centerforfinancialinclusion.org/topics/consumer-protection">consumer protection</a>.

Smart quickly became a vehicle for the growing community of financial service providers, investors, regulators and support organizations who wanted to embed consumer protections into the microfinance sector. With the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>, the community created a common language and, with detailed guidance, standards and tools, it improved consumer protection and built trust.

Over the past decade, Smart has expanded its reach into the broader financial inclusion sector, and now there are thousands of endorsers and networks of providers and practitioners around the world who are engaged in embedding client protection standards into their products and practices. Today, more than <a href="http://www.smartcampaign.org/certification/certified-organizations">115 financial service providers</a>, serving over 45 million customers, have been awarded the <a href="http://www.smartcampaign.org/certification/all-about-certification">Smart Certification</a> seal, which demonstrates their commitment to treat customers with fairness and respect. <a href="https://www.centerforfinancialinclusion.org/the-business-case-for-smart-certification">Investors have adopted</a> the standards in their due diligence and social impact assessments. Regulators in many countries rely on the principles and the Smart’s research to design policies that balance client risk with provider sustainability, taking the voices of both providers and clients into account. Smart has facilitated the collaboration needed to create a world in which clients can access financial services with confidence.

In recent years, Smart has examined the new risks emerging as financial inclusion goes digital. Digital financial services make access much more available and more convenient for many of the people who were previously excluded, but care is needed to get it right for the vulnerable. After much research and consultation, we've developed practical guidance and standards for digital providers.
<blockquote>After much research and consultation, we've developed practical guidance and standards for digital providers.</blockquote>
As we launch these new standards, we see some parallels with the situation ten years ago, though with different headline risks. In the mainstream economy, concerns over the <a href="https://www.centerforfinancialinclusion.org/financial-inclusion-responds-to-the-zuckerberg-moment">rising power of “big tech”</a> and the appropriate use of personal data are causing widespread anxiety and mistrust. In the financial inclusion sector, data privacy and protection are also <a href="https://www.centerforfinancialinclusion.org/consumer-harm-from-data-breaches-is-a-black-box">central concerns</a>. The Smart Campaign standards address these concerns, as well as more traditional issues like over-indebtedness and transparency, which must be handled differently when digital interfaces replace face-to-face. Smart commends digital financial services for giving more people greater access to powerful financial tools. Our goal is to ensure that the digital revolution develops in a way that is healthy for customers and providers alike.

A heartfelt thank you goes out to all who have been part of this movement. We are thrilled to continue this journey together with many partners who are old friends and many more who are new ones. As we celebrate a decade of practical action to instill good practices, we ask stakeholders across the sector to join us in ensuring that the digital revolution builds trusting relationships and mutual benefits for customers and financial service providers well into the future.

<em>Stay tuned for an upcoming post on the launch of the digital standards, which will provide in-depth discussion of the new standards. For now, this <a href="https://www.centerforfinancialinclusion.org/help-us-shape-standards-for-responsible-digital-lending">post from the standards’ comment period</a> provides more detail on what these standards are.</em>

Smart Campaign’s Next 10 Years to Start With New Digital Standards

Today there are close to 700 million mobile money accounts registered worldwide — a number that, if it were a population, would rank as the world’s third-largest country. East Africa continues to lead in digital financial innovations as well as account usage, with two-thirds of the combined adult populations of Kenya, Rwanda, Tanzania, and Uganda actively using mobile money. With the proliferation of mobile financial services, particularly among underserved populations, it is vital that users be treated fairly and with dignity. In the momentum to define responsible digital finance and recognize providers of high-quality financial services, the industry must not forget the consumer.
<h1>Client Voices: Why We Listened</h1>
<a href="/about/what-we-do/the-smart-campaign/">The Smart Campaign</a>, a global initiative to create an environment in which financial services are delivered safely and responsibly to low-income clients, has long recognized that client perspectives are often underrepresented in consumer protection discussions. With the Client Voices Project, the Campaign questions whether the industry’s assumptions about what constitutes problematic treatment rightly reflect what clients themselves worry about.

The dual objectives of the project are to solicit input from low-income clients about what they consider good and bad treatment in their interactions with financial service providers and to assess the prevalence of consumer protection problems among these clients, using quantitative surveys. The project is designed to act as a catalyst for financial service providers, regulators, industry associations, consumer advocacy groups, and others to improve client protection in ways that are grounded in client feedback.
<h1>Major Findings</h1>
Based on a survey of over 1,200 people in three districts in Rwanda, this report delves into the experiences of individuals who use digital financial services (DFS), the main client protection issues they are concerned about, and the impact and prevalence of negative experiences. We find that mobile money enjoys a high degree of satisfaction and trust from clients in Rwanda, even though 40 percent of clients report being targeted by fraudulent schemes, which have become increasingly sophisticated.
<blockquote>Customers report wising up to scams and fraud, but with a continuous influx of new mobile money users and fraudsters who innovate quickly, the threat is real and constant. Fraud represents the greatest potential to damage customer trust and engagement with mobile money in Rwanda.</blockquote>
However, there are many ways that DFS operations and practices can be improved to better protect clients and strengthen trust. Client recourse mechanisms, for example, represent an important area for improvement: many clients shared that they feel helpless and unsure about what to do after realizing they have been duped. Additionally, for business models that rely more on the mobile interface than on human interaction, clients increasingly rely on agents for information and guidance. This presents an opportunity to provide better service, as well as a risk for poor client treatment.

We hope that providers, industry associations, support organizations, regulators, consumer protection advocates, and clients can benefit from these findings to create a stronger, more inclusive client protection ecosystem. We offer specific recommendations for many of these stakeholders.

Client Voices: Rwandans Speak on Digital Financial Services

Laterite Ltd

Mastercard Foundation

Rwanda

Sub-Saharan Africa

Keeping Clients First

Agent Banking

Client Treatment

Complaint Resolution

Credit

Credit Provision

Delivery Channels

Digital Credit

Digital Financial Services

Mobile Banking

Payments

Privacy

Telcos

Underserved Groups

Report

<a href="https://libra.org/en-US/">Libra</a>, a new digital currency backed by blockchain technology and introduced today by Facebook, has the potential to reach any consumer with a digital connection. It’s exciting news for the 3 billion people worldwide who are currently unserved or underserved by the world’s financial sector. In addition to leveraging connections between people already on the world’s largest social network, the platform will be leveraged by many innovators -- starting with an impressive <a href="https://mashable.com/article/facebook-libra/">array of founding members</a> -- enabling people across the globe to transact and access new products securely. While this represents a huge opportunity, there’s also a responsibility to ensure that access to the platform and new financial service customers’ data and funds be safeguarded.

The value proposition of a global payment infrastructure has been recognized before, with many innovators moving into this space to launch solutions tailored to the underserved. Yet, the potential scale of Libra, through familiar and popular platforms such as WhatsApp and those of other founding companies, is a potential game changer. Libra has the potential to add a streamlined payment feature in millions of people’s phones – without even requiring that they download a new app.

At the <a href="http://smartcampaign.org/">Smart Campaign</a>, we’re enthusiastic about the potential for partnerships and innovations through Libra, which will be governed by the independent, non-profit Libra Association. Vulnerable unbanked and underbanked populations still face challenges to access high-quality and trustworthy products. Libra will allow a wide range of innovators to develop creative solutions, backed by secure technology.

Ensuring the privacy and security of client data is at the core of building lasting trust in a digital world. Providers can strengthen their privacy and security practices by having:
<ul>
 	<li>Sound data collection and storage policies</li>
 	<li>Clear guidelines about when and with whom to share data</li>
 	<li>Informed consumers who have meaningful choices in regard to the handling of their data</li>
 	<li>Systems to detect and respond to fraud</li>
</ul>
Those are a few of the safeguards that the Smart Campaign promotes with providers and is helping providers to implement. Together, we can ensure that the products and services that are developed to use the Libra platform create trust and value for both providers and customers.

The <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>, which form the cornerstone of the Smart Campaign’s work, provide a framework to anticipate and evaluate the consumer risks introduced by blockchain innovations. We look forward to working with innovators in the Libra community, as we have with our <a href="https://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>. Similar to our work with Fintech Protects, we hope to promote greater awareness and consensus among Libra innovators on consumer risks in digital financial services and how to mitigate them.
<blockquote>We hope to promote greater awareness and consensus among Libra innovators on consumer risks in digital financial services and how to mitigate them.</blockquote>
There will be adoption challenges for any cryptocurrency among low-income consumers. Over a decade of learning about the needs of this customer segment has shown us that appropriate product design requires a feedback loop between consumers and those developing the products. We know that payments can be an on ramp to access, but that <a href="https://www.centerforfinancialinclusion.org/financial-inclusion-hype-vs-reality-deconstructing-the-2017-findex-results/">does not guarantee consumers will make meaningful use</a> of other core financial services, such as credit, savings, or insurance. Thinking through the last mile use cases for Libra, including cash out points and merchant transactions, will be key, as will anticipating the risks that can damage consumer trust. Our goal is to ensure that new financial products aren’t just exciting new innovations, but that they actually deliver quality, appropriate, fair and trusted services.

Libra: With Opportunity Comes Responsibility to Safeguard

Discussions about digital credit default rates have critiqued the "how" it gets delivered, but an alternative view is to blame "what" is being offered and conclude that more diverse and useful DFS are needed sooner. The digital credit so far in the form of the uniform, very small amount nanoloans aren’t delivering a strong enough value proposition in meeting specific needs to rank them high in a person’s order of expenses to cover and debts to repay.

How do we know that improving value propositions of DFS hold promise as a solution to defaults? Looking to two markets whose mobile money ecosystems have had more time to develop credit products can provide clues.

In this post, I'll compare digital credit in Kenya and Tanzania. CGAP’s research reveals <a href="https://www.cgap.org/sites/default/files/publications/Working-Paper-A-Digital-Credit-Revolution-Oct-2018.pdf">Tanzania’s default rate is 31 percent, almost 3 times higher than Kenya’s</a>. Why do these neighbors have such drastically different default rates? Apart from other <a href="https://fsdkenya.org/blog/four-differences-and-five-similarities-of-digital-credit-markets-in-kenya-and-tanzania/">distinctions</a>, two differences embedded in the research are:
<ul>
 	<li>Kenya has diversified the range and number of products on the market.</li>
 	<li>Tanzanians consistently preferred to use informal sources rather than digital credit.</li>
</ul>
Compare the data from the graphs below, from "<a href="https://www.cgap.org/sites/default/files/publications/Working-Paper-A-Digital-Credit-Revolution-Oct-2018.pdf">A Digital Credit Revolution: Insights from Borrowers in Kenya and Tanzania</a>," a CGAP/FSD working paper published October 2018.

Diversifying Digital Financial Services: A Way to Tackle Defaults and Over-Indebtedness

Kenya

Tanzania

Informal Credit

Nano Loans

Griffin is a long-time consumer protection expert in financial services. She advised CGAP on outcomes-driven market conduct approaches, focusing on jurisdictions incorporating TCF concepts into their regulatory system. Griffin is currently a senior advisor with the Consumer Financial Protection Bureau. This blog post is the result of the author’s independent research and does not necessarily represent the views of the <a href="https://www.consumerfinance.gov/">Consumer Financial Protection Bureau</a> or the United States.
<h2>What is "Treating Customers Fairly?"</h2>
TCF is an emerging outcomes-based regulatory and supervisory approach that shifts the responsibility for protecting consumers somewhat from the regulator to the financial services provider. The UK developed the <a href="https://www.fca.org.uk/publication/archive/fsa-tcf-towards.pdf">TCF approach</a> to market conduct regulation, implemented through its <a href="https://www.fca.org.uk/">Financial Conduct Authority</a>. Under the UK’s approach, also adopted by South Africa, firms are expected to demonstrate that they deliver the <a href="https://www.fca.org.uk/firms/fair-treatment-customers">6 TCF outcomes</a> to their customers throughout the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling. Other jurisdictions have taken on the approach, customizing it to fit their regulatory framework and capacity.
<blockquote>TCF shifts responsibility for protecting consumers from the regulator to the financial services provider.</blockquote>
Under this approach, regulators are challenging financial service providers to demonstrate the value of their products. They’re saying, “You’re selling products to consumers. You’re telling consumers these products are going to help them achieve their financial goals. So show us!”
<h2>Why is TCF important right now?</h2>
In the past 10 years, we’ve experienced a global financial crisis, and we continue to experience round-the-world mis-selling and overselling of financial services and products. More and more countries are realizing the connection between financial services and the ability of consumers – particularly vulnerable consumers – to achieve key financial goals. Whether it is moving out of poverty or achieving a milestone such as purchasing an asset, having access to appropriate financial services is critical.
<h2>You mention that TCF is often outcomes driven. Could you elaborate on this?</h2>
Rather than focusing only on compliance or firm behavior, an outcomes-driven approach looks at results: how have consumers fared in the marketplace and are they being treated fairly. The six outcomes assess whether or not firms are treating their customers fairly, and whether the products they sell meet the needs of the consumers for whom the products were developed. Companies are marketing their products more and more by linking them to improved financial and other outcomes for their customers. TCF is asking to see some proof.
<h2>Could you tell us more about the difference between various levels at which customer suitability for a product is addressed: ability to repay, affordability, and suitability?</h2>
In financial services markets characterized by information asymmetry – where consumers do not have the relevant information, they need to make decisions – <em>caveat emptor</em> (buyer beware) has been the norm. As stronger protections are put in place, the situation moves from companies being required to “do no harm” to consumers to placing the consumer’s interest ahead of their own. Between those two standards lies different levels of protection – from selling products that are affordable, to selling products that are not unsuitable, and on up to selling products that are suitable to the needs of the particular consumer (see illustration below).

&nbsp;

Taking Consumer Protection to the Next Level: The Treating Customers Fairly Approach

Transparency

Amit Gupta

Senior Manager, Credit and Business Processes

Leah  Wardle

Accreditation Manager, The Smart Campaign

Amee Parbhoo

Elisabeth Rhyne

Iain Brougham

Michael Schlein

Mona Kapoor

Vikas Raj

Virginia Moore

Colombia

Costa Rica

Egypt, Arab Rep.

Europe and Central Asia

Honduras

India

Netherlands

Pakistan

Peru

Philippines

Customer Centricity

Data Analytics

Enabling Environment

Financial Inclusion Strategy

Financial Technology

Fintechs

Governance

Human Touch

Impact Investing

Neobanks

Policy, Regulation and Government Initiatives

Trends

Article

Case Study

At Accion Venture Lab, we want to know we’re always investing in the most promising seed-stage fintech companies — startups with the power to transform communities and reach the underserved. That means we stay on top of <a href="https://medium.com/accion/7-fintech-trends-to-watch-in-2018-3fa96310732f">the trends in our dynamic industry and the markets we work in</a>, whether it’s the growth of neobanks in emerging markets, innovative models in insurtech, or renewed focus on financial health.

As we continue to track the forces shaping fintech for inclusion, we’ve seen that beneath innovations in products and services, the very tectonic plates of our industry are moving. As the world shifts, the landscape of fintech for inclusion will be affected — from the ecosystem startups work in, to the business models companies set up, to the customers they target. We’ve identified six fundamental factors driving these changes. As investors, these trends affect how we evaluate early-stage companies, but even as startups build and scale their businesses, they will need to adapt to succeed.
<ol>
 	<li><strong><em>Tech platforms take over. </em></strong>While traditional financial institutions continue to position themselves as digitally innovative, we’re seeing only incremental progress across the globe. Many banks in emerging markets haven’t figured out how to partner with fintech startups yet and have shown a limited ability to go at it alone. But outside of traditional finance, we’ve seen companies offering financial services in many of our markets — in particular, <a href="https://www.cgap.org/blog/series/platform-economy-what-it-means-financial-inclusion">large tech platforms</a> like Facebook, Google, Amazon, and Ant Financial. These companies will continue to expand into Africa, Asia, and Latin America. As they do, we expect that small business and consumer lenders, as well as digital payments companies, will have to explore ways to remain relevant in their markets. The threat of big tech is heightened as newer and more local platforms in sectors like ride-hailing or food delivery also get into financial services, which is already happening in <a href="https://www.forbes.com/sites/eladnatanson/2019/07/01/from-food-delivery-to-fintech-the-new-app-convergence-in-brazil/#7a2fdc9057cc">Brazil</a> and <a href="https://www.forbes.com/sites/eladnatanson/2019/05/14/indonesia-the-new-tiger-of-southeast-asia/#3996254876ce">Indonesia</a>. But fintech startups shouldn’t just look at tech platforms as a competitive risk. They also may offer an opportunity. As tech platforms enter new markets, existing fintech startups offer <a href="https://techcrunch.com/2019/01/18/gojek-coins-ph-philippines/">out of the box and locally relevant acquisition targets</a> for expanding platforms.</li>
 	<li><strong><em>Protecting customers matters more than ever. </em></strong>With more underserved individuals and businesses accessing fintech products, there’s a growing awareness of the need for <a href="https://www.accion.org/how-startups-can-both-empower-customers-and-protect-their-data">stronger consumer protection</a> — preventing overindebtedness, ensuring data privacy and security, communicating transparency in pricing, and much more. The introduction of GDPR has shifted data privacy laws in the EU, and while data protection remains <a href="https://qz.com/africa/1271756/africa-isnt-ready-to-protect-its-citizens-personal-data-even-as-eu-champions-digital-privacy/">a largely unregulated space</a> in many emerging markets, that <a href="https://www.standardmedia.co.ke/business/article/2001332615/no-crb-listing-for-loan-defaulters-before-6-months?__s=sebuus7a8bmixxhrbcir">is changing</a>. We will see consumers, investors, and regulators take a closer look at the issues, and fintech companies should be proactive in evaluating their consumer protection measures. The Center for Financial Inclusion at Accion’s Smart Campaign recently drafted <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">Client Protection Standards for digital credit</a>. Expectations for startups to protect customers will continue to grow, but we’ve already been working with our companies to build out responsible practices, particularly around data protection (see <a href="https://www.accion.org/data-protection">our resource for fintech startups here</a>).</li>
 	<li><strong><em>Customers have more fintech options.</em></strong> Fintech for inclusion startups are operating in an increasingly crowded space. Gone are the days when customers had limited options. As a result, it’s getting more <a href="https://liftoff.io/resources/report/mobile-finance-apps-2019/?__hstc=241307293.228d43615f0d5539896fac05c1a5f6ac.1561572502255.1561572502255.1561572502255.1&amp;__hssc=241307293.1.1561572502256&amp;submissionGuid=43ac8e38-041d-4a47-8ddf-1ad939e60778">expensive to acquire customers online</a> and getting more important for companies to focus on the right acquisition channels. This will involve finding win-win solutions with channel partners who have direct relationships with customers and are looking for their own ways to build a stronger value proposition. We’re scrutinizing the success of startups <a href="https://cfsinnovation.org/research/employee-financial-health/">working through the employer channel</a>. We’re also learning from what our own portfolio companies are doing working with retailers (like <a href="https://toffeeinsurance.com/">Toffee</a>, which sells ‘bite-sized’ insurance through retail partners in India), manufacturers (such as <a href="https://www.pula-advisors.com/">Pula</a>, which sells insurance to smallholder farmers through seed and fertilizer providers in Africa), and supply chain players (like <a href="https://www.tiendapago.com/">Tienda Pago</a>, which provides inventory finance for MSMEs through FMCG distributors).</li>
 	<li><strong><em>New customers aren’t enough. </em></strong>If there’s one metric that’s often overlooked in the pitch decks we see for early-stage fintech companies, it’s customer lifetime value. Companies are often more focused on new customer growth metrics. However, with an increasingly competitive landscape in many markets and the cost of new customer acquisition increasing, the focus is shifting to how well a company can retain customers. There are many strategies startups can take to improve retention — such as introducing better terms or new products — but a major part of it will be improving the customer experience for underserved customers.</li>
 	<li><strong><em>Fintech needs to do more. </em></strong>While the vision of fintech was an unbundled world where customers could pick and choose what they needed from an a la carte menu of apps and websites, <a href="https://www.pymnts.com/news/banking/2018/unbundled-banking/">many people</a> still have an appetite for an all-in-one solution. So, fintech companies are making moves to expand their offerings beyond their initial use cases — providing insurance on top of credit, business management tools along with payment solutions, etc. This rebundling creates challenges for fintech companies as they consider new strategic directions — when should they offer these new lines? How do they build the internal capabilities to offer these services? To whom do they offer them? But ultimately offering more comprehensive services may help solve the retention challenge fintechs face. We expect to continue to see new digital banks emerge, offering customers better services across all of their financial needs.</li>
 	<li><strong><em>All-digital isn’t always the answer.</em> </strong>Customers are changing as technology becomes cheaper, faster, and more readily available and as customer attitudes to this technology and financial services in general shifts. These changes present tremendous opportunities for fintech for inclusion startups to reach more of the underserved, but it will require startups to take a more nuanced look of their specific customers’ needs and preferences. While customers are becoming more comfortable with using technology, things are still slow to change. Nearly <a href="https://www.gsma.com/r/mobileeconomy/">2 billion of the 5 billion mobile subscribers remain offline</a>. Even where they have access to affordable handsets, reliable data connectivity, and stable power, many people find accessing digital financial services challenging. After all, these customers may not be familiar or comfortable with technology or financial products, and they may not have reason to trust financial service providers. The result is that fintech companies will need to continue <a href="https://www.accion.org/the-tech-touch-balance">balancing new digital technologies with appropriate human interactions</a> to engage, educate, and support their customers.</li>
</ol>
<em><a href="https://www.accion.org/bio/vikas-raj">Vikas Raj</a> also contributed to this piece.</em>

Six vital trends changing the future of fintech

Pula

Tienda Pago

Toffee Insurance

Business Leader

Financial Service Provider

Impact Investor

Accion Venture Lab

Inclusive fintech CEOs work in the most highly-regulated sector on earth. They have to hire talented teams, navigate opaque regulations, and work hard for funding. In addition to entrepreneurial challenges, they’re also trying to create impactful businesses that help build a financially inclusive world.

That doesn’t overwhelm the founder-CEOs that we work with. Being in a room with roughly 50 of the most innovative fintech CEOs and company leaders at the Inclusive Fintech CEO Forum in The Hague was absolutely thrilling: they’re all working on a common mission and trying to bring new financial tools to people who need them.

[caption id="attachment_18223" align="alignleft" width="500"]<img class="wp-image-18223" src="https://content.accion.org/wp-content/uploads/2019/04/FintechForInclusionGlobalSummit_2019_NicoAlsemgeest_0116-1-1024x708.jpg" alt="" width="500" height="346" /> <em>At the Inclusive Fintech Summit, leaders came together to discuss how we can drive financial inclusion.</em>[/caption]

Hosted by <a href="https://www.accion.org/how-we-work/invest/accion-venture-lab">Accion Venture Lab</a>, <a href="https://quona.com/">Quona Capital</a>, and <a href="https://www.fmo.nl/">FMO</a>, the Forum allowed CEOs to learn from one another: whatever a CEO’s top problem was, someone else there had solved it, thought about it, or, at the least, could commiserate about it.

More often than not, their conversations returned to basic issues like hiring staff, creating an effective corporate culture, overcoming adversity, or engaging customers. These issues are more important today than ever before: by understanding peoples’ behavior, needs, and goals, we can use technology to provide more customers with better, faster, cheaper, and safer financial products and services. Knowing our customers is the only way to develop a scalable, sustainable, and impactful company — and building those companies is how we’ll create a financially inclusive world.

Our CEOs’ energy and passion were inspiring; I’m still impressed by some of the highlights from their conversations:
<h2><strong>It’s all about people – not technology </strong></h2>
Companies everywhere are wrestling with how to use technology to achieve scale and efficiency while meeting customers’ preferences for <a href="https://www.accion.org/does-human-touch-still-have-a-place-in-a-high-tech-world/">human touch</a>. Being well-informed about and responsive to your customers is the only way to come up with appropriate solutions:
<ul>
 	<li><strong>Technology is not the product. </strong>Instead, it’s a background layer that should enable product delivery. For financially underserved customers, the technology tends to work best when it automates internal operations in the background — not when it’s foregrounded as the product itself.</li>
 	<li><strong>Don’t assume. </strong>Talk to prospective clients first. What technology do they use? How do they use it? What are they willing to try?</li>
 	<li><strong>Shrink your time zones</strong>. Have your tech team near your customers so they can respond quickly. Create a feedback loop where both your tech team and customers inform one another.</li>
 	<li><strong>The more your team knows your clients, the better</strong>. Make sure your entire team knows who your customers are. Arrange client visits or allow back-office staff to join customer calls.</li>
</ul>
<h2><strong>Tips for hiring teams in emerging markets </strong></h2>
Hiring is the only challenge that gets more difficult with time: as roles become more complex and as an organization takes on more work, hiring the right candidates becomes harder and inhibits companies’ ability to scale.

This is a challenge for startups everywhere — but it’s particularly pronounced in emerging markets, where top talent can be difficult to recruit and retain. Here are some of the ways our CEOs address this:
<ul>
 	<li><strong>Always be recruiting</strong>. Extend your talent pipeline as far as it can go, because even if the seats aren’t open today, they will be soon.</li>
 	<li><strong>Treat recruiters as business partners</strong>. Ultimately, you’re both working to build a better organization.</li>
 	<li><strong>Value the right attitude and generalists over specialists</strong>. Specific skill requirements can change over time, so it’s better to get someone who can adapt to multiple future needs. And attitude should count as much as skills: <a href="https://news.harvard.edu/wp-content/uploads/2015/11/16-057_d45c0b4f-fa19-49de-8f1b-4b12fe054fea.pdf">Harvard Business School</a> found that avoiding toxic employees is worth twice as much as the returns that top workers produce. Toxic workers also diminish productivity and drive out other employees.</li>
</ul>
<h2><strong>Corporate culture results from CEOs’ choices and behavior</strong></h2>
[caption id="attachment_18217" align="alignright" width="500"]<img class=" wp-image-18217" src="https://content.accion.org/wp-content/uploads/2019/04/Fintech-For-Inclusion-Global-Summit-2-1-1024x678.jpg" alt="" width="500" height="331" /> <em>CEOs’ actions and choices have an outsized role in creating corporate culture.</em>[/caption]

High-performing organizations have great corporate culture: it gives them a competitive advantage.

CEOs’ actions and choices have an outsized role in creating corporate culture; the values they exhibit and the behaviors they reward shape an organization’s character:
<ul>
 	<li><strong>Explain what you believe. </strong>Every organization should explain its values in concise, memorable language. Those values should factor into hiring new employees or evaluating current employees.</li>
 	<li><strong>Cultivate psychological safety. </strong>The feeling that a team “is safe for risk-taking” was the biggest contributor in <a href="https://rework.withgoogle.com/print/guides/5721312655835136/">Google's</a> review of successful team dynamics. Psychologically safe teams brought in more revenue and were twice as effective as ‘unsafe’ teams.</li>
 	<li><strong>Develop <a href="https://www.accion.org/hiring-and-talent-employee-value-proposition">employee value propositions</a></strong>. These identify why a prospective employee should work for a given startup. They elevate the organization’s mission and explain how an employee could grow from their work at a particular company.</li>
</ul>
<h2><strong>How to help your team get through a crisis </strong></h2>
One session on overcoming adversity resonated with many in the room. Founder-CEOs routinely face any number of crises; professionally, there’s nothing harder than trying to lead your team through a major challenge.

But it’s something that every entrepreneur needs to be prepared for. And while there’s no one way to overcome adversity, CEOs did reflect on a few measures that helped:
<ul>
 	<li><strong>Keep the right people with you.</strong> Rely on the team you trust to help turn the ship around. Promote them if that’s what it takes to retain them.</li>
 	<li><strong>If bad news is coming, you want to be the one sharing it.</strong> Don’t let someone else tell your story. This is true for your investors, employees, and family.</li>
 	<li><strong>It’s important to be honest and transparent.</strong> In good times — and especially in bad times — let people know what’s really happening. That said, you don’t need to bring everyone through every twist and turn. Focus on the most important issues and communicate them well.</li>
 	<li><strong>Protect your health. </strong>Founders emphasized basic self-care, including exercise, sleep, cutting alcohol and sugar, and seeking advice from mentors.</li>
</ul>
By focusing on our users and understanding their needs, behaviors, and goals, we’re more likely to create valuable financial products and services. And by building teams that know their end-clients, founder-CEOs can create impactful and successful companies.

That’s easier said than done. But after meeting and speaking with so many extraordinary people who are all working so hard to pursue a common vision and change the world, I’m more optimistic than ever about our chances.

<em>Many thanks to CGAP, Catalyst Fund, Triodos, Citi Inclusive Finance, Mastercard Foundation, and Community Investment Management for helping to convene the Inclusive Fintech CEO Forum.</em>

The fintech event that puts people first

Financial Inclusion Practitioner

Institutional Funder

Regulators and policymakers are key to creating a financially inclusive world: their decisions affect financial service providers, fintech innovators, investors, and individual clients. And they’re instrumental in establishing responsible, standards-based industries that protect and empower clients.

Working alongside the Center for Financial Inclusion at Accion (CFI), Accion’s legal team sought to develop a new model tool and legal guidance that would help policymakers and financial service providers contribute to a financially inclusive world.

This ambitious project demanded the right type of legal support: Accion relied on New Perimeter, a nonprofit organization established by global law firm DLA Piper. New Perimeter’s global focus and demonstrated commitment to large-scale pro bono projects made it an ideal partner to take to on this long-term, industry-shaping work.

Partnering for consumer protection: DLA Piper, New Perimeter and Accion

DLA Piper

Since 2008, the Mastercard Foundation has supported several Accion initiatives, underscoring our shared commitment to building prosperity through financial inclusion and education. The Mastercard Foundation-Accion relationship has evolved over a decade, and each has enabled the other to explore new areas and reach underserved populations, especially in Africa.

&nbsp;

<strong>The Smart Campaign</strong>

The Mastercard Foundation was an early sponsor of the Smart Campaign, a global campaign committed to embedding client protection practices into the institutional culture and operations of the financial inclusion industry. Spearheaded by the Center for Financial Inclusion at Accion (CFI), the initiative is focused on creating an environment in which financial services are delivered safely and responsibly to low-income clients. The Foundation’s initial and continuing support for educating financial service providers and consumers alike has been central to the Campaign’s progress. The Mastercard Foundation enabled the Smart Campaign’s expansion into five focus countries in Africa, where it is addressing client protection and empowerment issues emerging from new technologies and seeking to affect change at a national level.

&nbsp;

<strong>Leadership Development in Financial Inclusion </strong>

In addition, the Foundation has helped fund two innovative Accion programs for leadership development in financial inclusion. Over the course of a decade, scholarship funding from the Foundation allowed for more than 340 leaders from financial institutions around the world to participate in the annual Harvard Business School-Accion Program on Strategic Leadership in Inclusive Finance. This unique executive education opportunity brings professionals together to learn about the latest challenges and breakthroughs in financial inclusion and develop their problem-solving skills. The Foundation also supports CFI’s Africa Board Fellowship, a peer learning, and exchange program for executives and board members from African financial institutions that focus on building capacity in governance and risk management. More than 230 fellows from approximately 60 African institutions have taken part in the program to date.

&nbsp;

<strong>Accion Venture Lab in Sub-Saharan Africa</strong>

Most recently, the Mastercard Foundation has been a key sponsor of Accion Venture Lab’s work in Africa. In addition to general support for Venture Lab’s efforts to identify, invest in, and support promising fintech start-ups in Africa, the Foundation is also sponsoring pilot projects, such as the new “Company Builder” initiative, which recruits experienced business executives with entrepreneurial aspirations to create fintech startups from scratch in Nigeria.

The Mastercard Foundation-Accion partnership has yielded multiple pioneering initiatives whose legacy is only beginning to take shape, as financial service providers and fintech entrepreneurs build a more inclusive economy in Africa and beyond.

&nbsp;

Mastercard Foundation and Accion: Building prosperity through financial inclusion and education

Credit Suisse has been a longstanding partner of Accion, notably in helping to launch both the Center for Financial Inclusion (CFI) in 2008 and Accion Venture Lab in 2012. Its support has gone well beyond financial contributions and has developed into a valuable relationship of mutual advice, referrals, and opportunities to engage public audiences.

A leading global financial institution, Credit Suisse is committed to, as it states in its corporate responsibility report, “fostering inclusive growth by addressing socio-economic challenges.” Through its involvement in the founding of impact investment asset manager responsibility in 2002 and its own Financial Inclusion Initiative (formerly the Microfinance Capacity Building Initiative), Credit Suisse was one of the first Swiss banks to recognize the power of microfinance as both a transformative tool for the financially excluded, and an investment opportunity for its clients.

Credit Suisse and Accion: Exploring new frontiers in financial inclusion

Credit Suisse

<p id="4a25" class="graf graf--p graf-after--figure">Advances in how we can collect and analyze data have disrupted the financial services industry. Organizations are now able to learn more about customer behavior and preferences than ever before, and they’re applying these insights to improve the customer experience. However, as this capacity continues to grow, so do concerns about identity, privacy, and data protection. In the <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/what-is-identity-and-why-does-it-matter-3febb558785f" target="_blank" rel="noopener noreferrer">previous blog</a> in our digital identity series, we looked at the definition of identity. Now, we’re investigating the implications of digital identity from a privacy perspective and analyzing the impact of the EU’s General Data Protection Regulation (GDPR) as a demonstration model for emerging markets.</p>
<p id="b452" class="graf graf--p graf-after--p">If the recent congressional hearing into <a class="markup--anchor markup--p-anchor" href="https://www.theguardian.com/technology/2018/apr/11/mark-zuckerbergs-testimony-to-congress-the-key-moments" target="_blank" rel="nofollow noopener noreferrer">Facebook’s data</a> practices wasn’t enough to make you wonder about the privacy of your online identity, the barrage of emails from companies chasing GDPR compliance likely was. While the scope of the legislation is only applicable for organizations dealing with the personal data of EU residents, it is likely to influence privacy protection principles worldwide.</p>
<p id="d3d6" class="graf graf--p graf-after--p">Despite the fact that GDPR addresses<a class="markup--anchor markup--p-anchor" href="https://iapp.org/news/a/top-10-operational-responses-to-the-gdpr-part-2-lawful-bases-for-processing/" target="_blank" rel="nofollow noopener noreferrer"> 6 different legal grounds</a> for processing customer data, media coverage of its introduction has honed in on two key themes: 1) consent for access to data, and 2) transparency in communicating precisely how that data will be used. The focus on customer consent has sparked analysis of the effectiveness of enhancing privacy through increasing consumer rights to control their identity information.</p>
<p id="e5e9" class="graf graf--p graf-after--p">Although, in theory, the right to consent will allow consumers to prevent access to their information in certain circumstances, in practice it may fall short of driving data protection. Consumers often do not read lengthy communications on legal terms and conditions, and when they do, many may still be unclear about the implications of permitting access to their data. This issue is exacerbated in emerging markets where consumers are typically less literate, less familiar with technology, and as a result, are potentially more vulnerable to exploitation.</p>
<p id="5619" class="graf graf--p graf-after--p">With this in mind, it’s uncertain whether the right to consent inherently enhances consumer privacy or whether it simply provides a privacy-enabling structure that can be leveraged only by the highly informed. Given this context, we need to take the discussion beyond consent when considering how to protect user privacy in developing economies.</p>
<p id="8fe5" class="graf graf--p graf-after--p">To explore this topic further, we hosted a webinar on <a class="markup--anchor markup--p-anchor" href="https://www.youtube.com/watch?v=yhdTyqjUMEI" target="_blank" rel="nofollow noopener noreferrer">Digital Identity for Financial Inclusion (click here to watch).</a> During the session, we took a look at some of the solutions being utilized to manage personal information and the impact they are having on financial inclusion, privacy, and commercial viability for financial service providers.</p>

Is data privacy in emerging markets feasible?

Accion Global Advisory Solutions

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

<p class="graf graf--p">Reports of data security breaches have become increasingly prevalent in recent years. As various countries across the globe establish national identity databases and centralized credit bureaus, such as DNI in Peru, NADRA in Pakistan, Aadhaar in India, and CNIC in Thailand, media coverage of incidents is amplified. In 2016, <a class="markup--anchor markup--p-anchor" href="https://www.riskbasedsecurity.com/2017/01/2016-reported-data-breaches-expose-over-4-billion-records/">over 4.2 billion data records</a> were exposed globally. These attacks are not limited to emerging markets, as proven by the recent breach of US-based credit bureau service Equifax, which exposed several hundred million <a class="markup--anchor markup--p-anchor" href="https://www.consumer.ftc.gov/blog/2017/09/equifax-data-breach-what-do">consumers’ information </a>— including names, Social Security numbers, birth dates, and addresses. Late last year, researchers discovered <a class="markup--anchor markup--p-anchor" href="https://www.wired.com/story/macos-high-sierra-hack-root/">a flaw in Apple’s macOS</a> that enabled super-user access to any Apple device, enabling malicious software to be installed easily and remotely. Now, India’s Aadhaar database has joined the long list of data breaches, as <a class="markup--anchor markup--p-anchor" href="https://www.cnbc.com/2018/01/04/aadhaar-database-breach-investigation-opened-in-india-on-tribune-report.html">recent reports</a> indicate that access was purchased through a WhatsApp group to the Aadhaar portal and the private data of over 1.2 billion Indians, all for a paltry sum of 500 rupees — about US$ 8.00.</p>
<p class="graf graf--p">When you see news of a crack in data security, you may picture savvy hackers exposing cryptographic vulnerabilities to access your banking information, but this isn’t always the case. Human error, process failures, and policy violations are overwhelmingly the most significant causes of such breaches and leaks of sensitive personal information.</p>
<p class="graf graf--p">In addition, while it is true that the majority of data attacks are executed outside the targeted organization, more often than not, the exposed weakness that enabled them was initiated — unwittingly — by internal staff. According to a <a class="markup--anchor markup--p-anchor" href="https://www.recode.net/2016/5/24/11756584/cyber-attack-data-breach-insider-threat-steve-durbin">survey from the Information Security Forum</a>, in most cases, employees were doing ordinary tasks, like taking files home to work in the evening, with no malicious intention of harming employers or their customers.</p>
<p class="graf graf--p">In other words, the human-driven processes that compliment secure technologies are equally as important as the technologies themselves. These processes can be easily overlooked or become out-of-date, leaving even the most robust of digital security systems useless for preventing criminal access.</p>
<p class="graf graf--p">The Aadhaar security breach is a prime example of this type of internal process failure. <a class="markup--anchor markup--p-anchor" href="http://indianexpress.com/article/opinion/columns/all-is-not-well-with-aadhaar-leak-aadhaar-details-5013305/">Analysis indicates</a> that this is a case of mismanagement and poor administration within the government bureau that manages Aadhaar, <a class="markup--anchor markup--p-anchor" href="https://uidai.gov.in/">UIDAI</a>, where UIDAI’s operations team failed to block (or delete) defunct legitimately issued access rights.</p>
<p class="graf graf--p">To meet the government’s ambition of registering hundreds of millions of Indians with Aadhaar identity cards, approximately 300,000 Village Level Enterprises (VLEs) were initially employed under the government’s Common Services Centres Scheme (CSCS). Once the targets were met (or the initiative had reached a logical conclusion), these jobs went away. But the access rights were not disabled by UIDAI staff, enabling malicious individuals to abuse the privilege.</p>
<p class="graf graf--p">From a financial inclusion point of view, robust identification is a fundamental requirement for micro-entrepreneurs to access the financial tools that provide growth and stability. Centralized identity databases enable customers to access their accounts remotely, and they limit leakages by preventing multiple enrollments by the same individual. Without a clear identity that can be proven, it is nearly impossible for any individual or business to obtain the necessary financing to grow. As Makhtar Diop, the World Bank Vice President for Africa, stated in the Identification for Development annual report, “Identification provides a foundation for other rights and gives a voice to the voiceless.”</p>
<p class="graf graf--p">However, any system is only useful if people trust it. Trust is instilled if the system is easy to use and understand, if issues are resolved immediately, and if people believe their transactions are safe.</p>
<p class="graf graf--p">In India, trust in the central identity database has been shaken. This trust needs to be re-instated and amply demonstrated through better policies, governance, controls, and operational processes. These improvements should be backed by unscheduled internal and external audits to test the core system, internal operations, and the extended distributed network, which is more susceptible to such breaches. Interestingly, the Aadhaar team has now come with Virtual ID to replace the Aadhaar number for third-party verification purposes. Let’s hope this is not a knee-jerk reaction but a well-considered solution that can earn the trust of the more than 1.2 billion people of India who look to Aadhaar for their unique IDs.</p>

Is India better off without Aadhaar?

<p id="e820" class="graf graf--p graf-after--figure">In a landmark ruling yesterday, the U.S. Federal Communications Commission (FCC), led by Chairman Ajit Pai, voted to end net neutrality — the requirement for internet service providers to treat all the content they carry equally regarding access, price, and speed/quality of delivery. This decision, overturning Obama-era internet regulations, is a big deal and may shape the way Americans experience the internet in the future.</p>
<p id="d31d" class="graf graf--p graf-after--p">Under the new ruling from the FCC, internet service providers (ISPs) may give preferential treatment to content from applications they favor — unlimited access, differential pricing, or faster/better download speeds — while slowing or even blocking other applications.</p>
<p id="7fb3" class="graf graf--p graf-after--p">Defenders of net neutrality call it the First Amendment of the internet. They see it as protecting the open culture of the net with web access available to anyone who wants to hear or be heard. Without net neutrality, say its defenders, the internet will begin to look more like the cable TV industry of a few years ago, in which competition is limited, and consumers are offered only a few pre-packaged bundles of services. They fear that ISPs will engineer consolidation in the industry by favoring companies they own, buy, or negotiate sweetheart deals with — and these will probably only be big companies. Some consumer advocates imagine a tiered internet emerging in which high-end consumers pay for deluxe packages and lower-income people receive poor quality and limited services.</p>

<h2 id="5ce1" class="graf graf--h4 graf-after--p">Net neutrality around the world</h2>
<p id="50f3" class="graf graf--p graf-after--h4">Yesterday’s ending of net neutrality ruling applies only in the United States. Europe retains the principle, though it may not always enforce it. In emerging markets, regulations vary widely, and in some areas, they are hotly debated. <a class="markup--anchor markup--p-anchor" href="https://www.bnamericas.com/en/news/Lower_house_approves_internet_neutrality_law/?position=524428" target="_blank" rel="nofollow noopener">Chile enacted net neutrality in 2010,</a> becoming one of the first countries to introduce rules on internet neutrality. Mexico, as well, has such legislation. Despite much discussion around net neutrality in India, there’s still no legislation in place there. At issue in India has been telcos’ interest in maintaining their core telephone revenue in the face of competition from digital telephone service providers like WhatsApp.</p>
<p id="e0d6" class="graf graf--p graf-after--p">At this point, we can only speculate about the effects of yesterday’s decision on financial inclusion in the U.S. and around the world. But if the net neutrality advocates are right, such changes in the shape of the internet could substantially hurt financial inclusion, primarily by making it harder for smaller companies and startups to succeed.</p>
<p id="03e1" class="graf graf--p graf-after--p">To illustrate how ISPs and big tech are likely to team up, <a class="markup--anchor markup--p-anchor" href="https://www.nytimes.com/2017/12/10/business/net-neutrality-europe-fcc.html?action=click&amp;contentCollection=Technology&amp;module=RelatedCoverage&amp;region=EndOfArticle&amp;pgtype=article" target="_blank" rel="nofollow noopener">recently in Sweden</a>, Telia, a telco offering internet services, sought to provide a package of unlimited access to Facebook, Spotify, and Instagram (owned by Facebook), among other top platforms, while charging for content from other sources. The offering has been challenged under European net neutrality rules, but it marks a path toward industry consolidation.</p>

<h2 id="70fe" class="graf graf--h4 graf-after--p">Why web access matters for financial services</h2>
<p id="dff9" class="graf graf--p graf-after--h4">As large internet companies increasingly enter the financial services arena, payment services offered by internet giants would likely be part of packages like the example from Sweden. Other companies — like fintech startups and smaller financial institutions — would not have the market power to negotiate their way into favored packages. If the fears of supporters of net neutrality come true and extend into financial services, that would mean less innovation, less competition, less variety, and possibly higher prices for the same (or worse) services.</p>
<p id="18d0" class="graf graf--p graf-after--p">In such a scenario, it would become harder for lower-income customers to use internet-enabled financial services if their end of the market is differentiated from the premium end. Reaching customers would become more expensive and difficult for fintech startups and small financial institutions aiming at a mass market if the ISPs shut both companies and customers out of the premium internet. Companies with deeper pockets may be able to afford faster (or any) access to potential customers, and it is conceivable, under the new rules, that an ISP could completely block a service that competes directly with one of its initiatives. If fintech startups are trying to nudge and disrupt the often massive, well-entrenched financial service companies, these companies will face fewer innovations challenging their business models.</p>
<p id="c4c8" class="graf graf--p graf-after--p">In the worst case, we are worried that the “big five” tech companies, who already have the data and the access to make any other fintech startups irrelevant, just became even more powerful. Not only do they have the data they need to better understand and serve any customer on the planet, these major tech companies soon may be the only ones that can afford to access and engage with those customers, and we know they have big ambitions in the financial services arena.</p>
<p id="a390" class="graf graf--p graf-after--p">The net neutrality debate raises fundamental and profound questions about freedom of speech, the role of a free and open internet in society, market concentration in the digital economy, and so forth. Its effect on financial inclusion may get lost in the more prominent debates and the titanic struggles for influence among powerful companies. When it comes to shaping the future of financial inclusion, a lot depends on decisions made without much thought about their effect on the financial sector.</p>
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Net neutrality ruling could block your bank

Center for Financial Inclusion

For the last 10 years, the <a href="http://www.centerforfinancialinclusion.org/microscope"><i>Global Microscope on Financial Inclusion</i></a> has systematically reported what it takes to create an enabling environment for financial inclusion. The good news is that the global financial inclusion community increasingly understands what works and is designing essential reforms. But the rate of progress is gradual and uneven, and in some areas, still lacking. The latest <i>Global Microscope</i> takes a closer look at what it takes to create an inclusive financial sector—and where intensive effort is most needed.
<h2>The leaderboard</h2>
Tying for first place in the global rankings are Peru and Colombia, scoring 89 (out of 100). Second place is also a tie, with two Asian countries, India and Philippines, each scoring 78. Pakistan earns third place with a score of 63. The spreads between first, second and third place are wider than they are between any other consecutive rungs in the index, but the top-ranking countries are in fact the same as last year. Peru, Colombia, Philippines, India, and Pakistan are longtime financial inclusion institutional and regulatory leaders.

With this much consistency in the leaderboard, the more fascinating stories may lie with this year’s “most improved players”: India, Costa Rica, Honduras, and Egypt. Each country has made notable progress on financial inclusion, but none more than India. With a national biometric identification system in place, continued progress on access and usage of bank accounts, an improved institutional framework and commitment to digital payments, India—already among the top countries—is increasingly seen as a model for ongoing progress.
<h2>Keys to success</h2>
<h3><b>Commitment and consistency matter. </b></h3>
An enabling environment for financial inclusion does not happen overnight. Colombia’s and India’s financial inclusion policy efforts predate even the first <i>Global Microscope</i>. Peru and Philippines signed on to the Maya Declaration, the first global platform for commitment to financial inclusion, back in 2011, with a small group of only 15 other countries. In short, it has taken years of concerted effort and political will for the top countries to earn and keep their spots in the <i>Global Microscope</i> index.
<h3><b>Broad-based policy pays off.</b></h3>
The <i>Global Microscope</i> measures 12 components of the financial sector, ranging from the level of government support to strength of dispute resolution mechanisms. None of the leading countries scored below 50 percent in any of the 12 components, and all but India achieved 100 percent in at least four components. (Colombia achieved perfect scores in a whopping eight components.) The leading countries demonstrate that you have to proceed on multiple fronts simultaneously to make meaningful progress in financial inclusion.
<h3>Consumer protection is a winning strategy.</h3>
Treating consumers right is an essential part of successful financial inclusion, but when it comes to fair treatment, especially mechanisms for airing and resolving customer complaints, most countries are underperforming. By contrast, leading countries prioritize consumer protection, and their scores show it. Colombia and Peru receive perfect scores in the consumer protection-focused components, and the rest of the leading countries rank in the top eight. Prioritizing consumer protection, as the leading countries have done, is a key to expanding financial inclusion.
<h2>Remaining challenges</h2>
<h3>Enforcement is limited.</h3>
Rules don’t mean much if you can’t enforce them, and that’s the story for many countries’ financial sectors. The average score for regulatory and supervisory capacity for financial inclusion, which spans credit portfolios, deposit-taking activities, insurance for low-income people and branch/agent models, is only 48 out of 100.
<h3>Consumer protection is especially weak.</h3>
Again, consumer protection is an area of particular weakness, constituting some of the lowest average scores in the index. For example, monitoring of consumer protection for insurance for low-income people netted an average score of just 15 out of 100. Most countries are grappling with widespread lack of market transparency and predatory sales and collection practices.
<h3>Usage still lags policy.</h3>
Countries like India and Philippines have successfully enacted policies to increase access to formal banking, but are still exploring how to get people to actually use the accounts they open. Those countries are pursuing tactics like government-to-person (G2P) transfers to build familiarity and instill the habit of using accounts. On the other hand, countries like China that are experiencing the fallout from unregulated peer-to-peer (P2P) lending are now exploring how to protect investors without prohibiting the flow of capital.

As the financial sector expands thanks to digital advances and new product offerings, the policy environment will also need to evolve accordingly. The <i>Global Microscope</i> continues to report what the policy environment for financial inclusion should entail.

<em>This post originally appeared on <a href="http://partners.wsj.com/metlife/multipliers/articles/financial-inclusions-best-in-class/">Multipliers of Prosperity</a>. </em>

Financial inclusion’s best in class