Low-income women, especially minority women, continue to be the group most excluded from traditional financial systems in the United States. Many don’t have bank accounts or credit histories. These are major challenges – and reasons why we are sharing our insights with a view toward “getting inclusion right” for this vulnerable population right here in one of the wealthiest countries in the world.

Nearly <a href="https://www.fdic.gov/news/news/speeches/spmay2317.html">27 percent</a> of households in the United States, or 90 million people, are unbanked or underbanked—and many of these households are poor and led by women. Despite accounting for a growing share of new businesses, women receive only <a href="https://microbiz.org/wp-content/uploads/2014/07/21st-Century-Barriers-to-Womens-Entrepreneurship.pdf">4 percent</a> of all small business loans from conventional financial institutions.

These numbers have not improved much over recent years, and they are unlikely to change dramatically unless we give women, particularly those living in poverty, a chance. The deck is overwhelmingly stacked against them. To break out of this vicious cycle of poverty, women need tools to both save and borrow money, and to build their credit histories. Only then can they gain meaningful control over their lives and their futures.

Grameen America’s lending model does this by drawing on and building women’s social capital—an extremely valuable resource—to connect them to sources of financial capital.

Most financial institutions and traditional lenders require collateral. But this is a huge barrier for people with extremely limited resources. As a result, their ability to start or grow their businesses is severely curtailed. <a href="https://www.grameenamerica.org/">Grameen America</a> focuses on this population, women living below the poverty level, and our approach is different from that of traditional lenders.

We see immense value in women’s social capital. Our group-lending model is built not on traditional collateral, but rather on trust and a social contract that holds the members accountable to each other. There is joint responsibility. Moreover, the relationships the women form with each other and their shared values—and often their shared sense of identity—strengthens them individually. They have a sense of belonging, and because they are part of this social network, they have access to information that they wouldn’t have otherwise. They gain support and build greater confidence, along with stronger financial footing, through the group model.

This model itself is a form of social collateral. The women we serve may not be able to provide financial collateral, but they do have reputations within their communities. Their peers deem them responsible, disciplined, and reliable, and therefore they are accepted into the Grameen group. And by being a member of the group and getting and repaying their loans, their social capital grows as does their financial independence. They gain much by the solidarity they share, and by participating in the program, they are able to grow their businesses, save money, and ultimately break out of poverty.

Most banks believe that low-income women are among the riskiest borrowers. However, Grameen America has proven time and time again that this is not the case; we have served over 108,000 women over the last ten years, and they have maintained a repayment rate of over 99 percent. We have found that low-income women are highly dependable and trustworthy, and they can be highly effective entrepreneurs when given the opportunity. They are in fact one of the wisest investments we can make.

Aracely -- a member in Omaha, Nebraska -- recently said, “Other companies don’t believe in poor people, but Grameen does. They helped me start my business, changing my life in the process.” We have seen that when low-income women are entrusted with microloans and other financial services and support, they can start to build better lives for themselves—and building their social capital is crucial to achieving this.

Leveraging Social Capital to Expand Women’s Financial Opportunities

United States

Financial Inclusion Week 2018

Credit Provision

Women

Blog Post

In celebration of its 10th anniversary, the Center for Financial Inclusion at Accion asked 10 leaders in the financial inclusion community to set out their agenda for Getting Inclusion Right. The resulting essays and webinar series creates a roadmap to take financial inclusion into the next decade.

You are invited to join CFI on <a href="https://attendee.gotowebinar.com/register/5224822474483746561">Thursday, October 18, at 10 am EDT</a> for this second virtual event, featuring <a href="https://content.centerforfinancialinclusion.org/people/simone-di-castri/">Simone di Castri</a> and Ariadne Plaitakis of Bankable Frontier Associates (BFA) on getting policies right and <a href="https://www.linkedin.com/in/buhle-miranda-goslar-a0ba1830/">Buhle Goslar</a>, Chief Customer Officer of Jumo, on getting credit right.

You can listen to the <a href="https://www.centerforfinancialinclusion.org/webinar-getting-inclusion-right">first virtual event</a> of this series featuring Garance Wattez-Richard of AXA on getting insurance right and Elisabeth Rhyne, Managing Director of CFI, on getting inclusion right from the customer’s perspective. It was held September 18.

Over the coming weeks you will have a chance to read or hear from Tim Adams of the Institute of International Finance on why financial inclusion matters, Shameran Abed of BRAC on the digital divide, and Mark Pickens of Visa on payments. We will also look at the ecosystem with Chris Skinner of the Finanser, data privacy with Katharine Kemp of the University of New South Wales, and the role of investors with Jonathan Whittle of Quona Capital.

Together, these 10 leaders lay out a “true North” for the financial inclusion sector that is both visionary and practical as we work to create tangible benefits for the financially excluded and underserved.

Don’t miss your chance on October 18 to tune into this live conversation with these leading figures as they discuss and respond to your questions about key challenges and opportunities for getting policies and credit right—we look forward to having you <a href="https://attendee.gotowebinar.com/register/5224822474483746561">join us</a>!

You can keep up with 10th anniversary events, webinars, essays and blog posts on Twitter at #gettinginclusionright, on our website's <a href="https://www.centerforfinancialinclusion.org/series/getting-inclusion-right">series page</a>, or by searching "Getting Inclusion Right" in Google.

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Webinar: Getting Credit and Policies Right

Getting Inclusion Right

Credit

Enabling Environment

Financial Service Providers

Fintechs

Policy, Regulation and Government Initiatives

Webinar

All over the world, small loans to individuals and very small businesses are increasingly made using digital channels, whether online, via a mobile device or through an agent. However, trust, confidence and responsible lending practices need to be in place to ensure this industry is successful and its customers are protected and empowered.

In <a href="storage/Responsible_Digital_Credit_FINAL_2018.07.18.pdf"><em>Responsible Digital Credit</em></a>, CFI Fellow John Owens outlines the digital credit landscape and the risks customers face, and examines the best practices, standards and initiatives that exist or should be implemented to improve consumer protection in digital lending. Ultimately, John argues, it will take a village to ensure that digital credit clients are protected<span style="font-size: 11pt; font-family: 'Calibri', sans-serif;">—</span>including govenrments, regulators, industry players, advocates and consumers themsleves. He sees three key activities: 1) industry self-regulation, 2) certification of digital credit providers, and 3) directly empowering consumers, as key to the future of what responsible digital credit looks like.

This report is published jointly with the <a href="http://www.smartcampaign.org/">Smart Campaign</a> and was made possible by support from Mastercard Foundation and other partners.

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Responsible Digital Credit

Mastercard Foundation

CFI Research Fellows Program

The Smart Campaign

Consumer Protection

Responsible Digital Finance

Report

It’s the most wonderful time of the year! We are thrilled to announce that we are <a href="http://www.centerforfinancialinclusion.org/storage/documents/CFI_Fellows_2018_RFP_2018-05-07.pdf">now accepting proposals</a> for the 2018 cohort of CFI Fellows.

Building upon the impact of the <a href="http://bit.ly/CFI-Fellows">CFI Fellows Program</a> over the past three years, we’re looking for proposals from researchers and practitioners with demonstrated experience executing high-quality research projects from start to finish. Successful proposals will articulate a thoughtful and feasible response to one of the questions in our research agenda.

This year’s research agenda reflects an exhaustive consultative process, and thanks to <a href="https://cfi-blog.org/2018/04/12/help-us-shape-our-fellows-program-research-agenda/">your help</a>, we’ll be selecting proposals that best address one of the following topics:
<ol>
 	<li><strong>How do financial institutions use mass APIs, open APIs, custom APIs and bespoke partnerships to partner effectively with fintechs to reach the underserved? </strong></li>
</ol>
Financial institutions of all sizes are finding that <a href="http://bit.ly/PartneringFintechs">partnerships with fin</a><a href="http://bit.ly/PartneringFintechs">techs</a> can help them reach underserved customer segments, and increasingly, these partnerships use APIs to create the necessary connections that enable data sharing between fintechs and financial institutions. However, it may be especially challenging for smaller financial institutions to benefit from such connections. How do recent efforts to create more accessible APIs function? Which models are working well? Research should include a comparison between mass APIs, API marketplaces, open APIs, bespoke APIs, and custom partnerships, recognizing that there are opportunities and challenges associated with each.
<ol start="2">
 	<li><strong>How do electronic invoicing (e-invoicing) and other electronic filing mandates enable financial services providers to make better decisions about MSME lending? Have more MSMEs become financially included as a result of these efforts? </strong></li>
</ol>
We’ve seen that e-invoicing is being mandated by governments across Latin America and in selected other countries as a tax compliance initiative (<a href="https://assets.kpmg.com/content/dam/kpmg/us/pdf/2017/10/mandate-for-e-invoicing-adoption-kpmg.pdf">KPMG, 2017</a>) and we expect that this practice may have spillover effects for financial inclusion. Through the collection and analysis of rich transaction data from micro, small and medium enterprises (MSMEs) that electronic invoicing provides, lenders are finding new ways of assessing this customer segment. This research will identify which providers are leveraging this data to improve their lending operations for MSMEs and through what means.
<ol start="3">
 	<li><strong>How can employers in developing countries support the financial health of their employees?</strong></li>
</ol>
Financial health is an increasingly important concept in the financial inclusion ecosystem, but we find that one often overlooked set of actors is employers. Employers have an important stake in the financial health of their employees, as financial challenges can create stress, absenteeism and other problems. This fellowship will explore the research on financial stress and employment to better articulate why employers in emerging markets should care about financial health, the interest of employers in active involvement, examples of good practice and/or tools or resources that employers need to get involved.
<ol start="4">
 	<li><strong>What is the landscape of financial products and services designed to</strong><strong> meet previously underserved consumers’ (physical) health needs? </strong></li>
</ol>
This fellowship will review the current status of health finance initiatives in the developing world or in a region or set of countries. It will identify and analyze the key challenges that existing programs encounter, with reference to the most successful models.

If you are passionate about financial inclusion, can craft a high-quality research plan that demonstrates a thoughtful approach, and have relevant experience in producing impactful analytic work, we want you to submit a proposal or share this opportunity with a colleague.

For more information (or inspiration), visit <a href="http://bit.ly/CFI-Fellows">our website</a>, view the full <a href="http://www.centerforfinancialinclusion.org/storage/documents/CFI_Fellows_2018_RFP_2018-05-07.pdf">request for proposals</a>, or email <a href="mailto:tjohnson@accion.org?subject=Question%20About%20CFI%20Fellows%20Program%202018">Tess Johnson</a>. We can’t wait to see how you tackle these questions!

&nbsp;

&nbsp;

CFI Fellows Program Now Accepting Proposals

Digital Financial Services

Financial Health

MSME/SME Finance

<span style="float: none;background-color: transparent;color: #333333;cursor: text;font-family: Georgia,'Times New Roman','Bitstream Charter',Times,serif;font-size: 16px;font-style: normal;font-variant: normal;font-weight: 400;letter-spacing: normal;text-align: left;text-decoration: none;text-indent: 0px">Despite the rise in mobile money in Africa, and globally, the gap between supply and demand for credit in the region remains. Surprisingly, in this milieu, start-ups are at risk of accelerating the pace of over-indebtedness in Africa. The number of start-ups reaching last mile clients is rising. The driver of this is fintechs taking advantage of a business opportunity, and the prospect that if you offer clients much-needed credit at a lower cost than the alternative, they will be better off.</span>

But is this necessarily true? Are these start-ups offering solutions to the credit needs that many small and medium African businesses have, and are clients better off with these solutions? Or is the fintech digital credit hype attracting lenders that offer credit in the wrong places – and for the wrong reasons? What is needed to ensure that digital credit is provided responsibly, for the benefit of clients?
<h4><strong>Start-ups are at risk of accelerating over-indebtedness by supplying credit to clients without conducting appropriate repayment capacity analysis.</strong></h4>
Some estimate that digital technologies have cut the cost of providing financial services by 80-90 percent (<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">McKinsey Global Institute, 2016, PDF</a>). Africa is taking the lead in the rise of mobile technology, and the opportunities are promising. Start-ups in this space are making big strides. Those involved in digital credit either deliver digital credit directly or enable its delivery through downstream product servicing. The number of fintechs – startups offering these services – in Africa is growing daily (<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">Mesropyan, 2016</a>).

Technology well used offers opportunities not previously available. However, two key issues need to be recognized and addressed in order to generate long-term benefits for both clients and providers.
<ol>
 	<li>Provider and client interests must be aligned. If providers profit while clients are experiencing stress in repaying, defaults will catch up with the client or the institution, and the client will no longer be able to borrow. Aligning interests requires providers to think of client benefits as well as their own, from the start.</li>
 	<li>A well-designed loan should match the ability to repay. Well-designed loans are a blessing, for example, helping a small business; yet loans that do not consider clients’ capacity to repay sets them up for failure. Even if they repay in the short term – which is often why default rates stay low – it can be at the cost of extreme hardship, making it a poor predictor of over-indebtedness. It may take some time before the debt stress of clients affects providers.</li>
</ol>
<h3><strong>"Instant": an Opportunity and a Risk for Consumers</strong></h3>
A key attribute digital lenders advertise is speed of access. Where traditional loans could take weeks for approval, with many requirements, this is a plus from the perspective of clients. But the automation and speed raises concerns: are decisions made too quickly, and are risks adequately measured and mitigated, especially from the clients' perspective?

Other aspects of digital credit lead to <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">new risks</a> compared with analog lending: start-to-finish digitization; the move from high to low touch processes; small credit amounts that grow; short-term loans; reliance on alternative data analytics; and decentralized support workforces.
<h3><strong>What Could Go Wrong?</strong></h3>
With analog credit, prevention of over-indebtedness centered on adequate repayment capacity, and on growth not taking place at the expense of quality.

In the digital context, the following major categories of risk have been identified (Center for Financial Inclusion, 2017/2018. See References):
<ul>
 	<li>Limited – if any – debt capacity analysis</li>
 	<li>Products that do not match client needs</li>
 	<li>Lack of credit reporting</li>
 	<li>Automatic renewals</li>
 	<li>Aggressive sales and marketing</li>
 	<li>Disproportionate consequences of late payments that lead to a cycle of debt.</li>
</ul>
<h4><strong>Algorithms are institution centric, not client centric. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting.</strong></h4>
Alternative credit scoring methods – often using elaborate algorithms that predict the probability of repayment – help to include people who have thin credit files and who would otherwise have been excluded. However, these models are a poor replacement for the repayment capacity analysis previously conducted by lenders serving vulnerable excluded populations. While the algorithm may predict whether or not an institution will be repaid, it does not consider clients' situations and needs, and therefore, the sacrifices that clients might have to make in order to repay. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting. Algorithms are institution centric, not client centric. They are meant to learn over time, becoming refined and better predictors; yet they do so at the expense of early clients who enabled the algorithm to become better fine-tuned, as they have a higher probability of defaulting and suffer dire consequences (<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Ngigi, 2016</a>).

The promise of well-tuned algorithms saving costs and managing institutional risk is unfortunately skewing attention away from client risks. Over-indebtedness needs to be reframed from a client perspective: can clients afford the loan? Even if they can repay, what sacrifices are they making? Are they at risk of not being a client ever again in the future (which would hurt both the client and the provider)?
<h3><strong>Mitigating Over-Indebtedness in a Digital World</strong></h3>
Over-indebtedness is a multi-stakeholder issue, and is linked to the client protection issues summarized in the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>. Prevention of over-indebtedness is a particularly tricky one, in that it requires the concerted effort of a wide range of stakeholders.

Providers have a responsibility to ensure that their practices do not lead to an oversupply of credit to clients who are unable to meet their payment obligations, and digital lenders will need to adopt a more client-centric approach to understand the risks of over-indebtedness from a client perspective. Algorithms need to evolve to take this into account.

Digital lenders need to understand the risks of over-indebtedness from a client perspective, and algorithms need to evolve to take this into account. Regulation also must guide good practice for fintech digital lenders<strong>.</strong>

Because only one irresponsible lender is needed in terms of over-indebtedness to negatively affect clients, it is necessary that financial consumer protection regulation evolves to guide the practices of otherwise unscrupulous digital lenders.

Investors can, and should, use their leverage to encourage good practices by digital lenders, as they have for analog lenders. They can reward digital lenders who design and deliver appropriate products, are transparent about terms and conditions, explain to clients the risks of over-indebtedness, adopt fair and responsible practices during repayments, and help clients who cannot, but want to, repay.

Importantly, digital providers can leverage the same technology used to deliver products to educate and empower clients. Clients have rights and responsibilities. Informed consumers are better able to protect themselves and avoid becoming victims of predatory lenders.
<h3><strong>Over-Indebtedness Is Multidimensional and Dynamic</strong></h3>
In the interest of long-term mutual benefits for both providers and clients, providers need to move away from a uni-dimensional definition of over-indebtedness that overly emphasizes repayment as the proxy for whether or not a client is indebted, towards <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/201-over-indebtedness-of-microborrowers-in-ghana-an-empirical-study-from-a-customer-protection-perspective">client-focused definitions of over-indebtedness</a>.

Digital credit providers need to complement credit bureau data with disbursement and repayment data on digital loans so that a fuller financial picture can emerge for digital borrowers.

Over-indebtedness is not a steady state. As the lives of vulnerable clients evolve, so do their needs and challenges. A client who may have received a loan from a responsible lender in the past may suddenly not be in a position to repay. We need to develop ways to monitor whether clients are showing signs of financial stress. Responsible institutions should be able to identify this, and work with clients until it is resolved.

The role of responsible providers goes beyond providing loans to ensuring that clients are supported, if needed. <a href="https://www.microfinanceopportunities.org/">Microfinance Opportunities</a>, in collaboration with <a href="http://socialperformance.net/">Social Performance Solutions</a>, has been developing a stress assessment tool that enables providers to monitor whether borrowers are incurring stress after having received a loan. Such tools are extremely important to have a full picture of over-indebtedness, and a broader suite of tools needs to be available to responsible providers.
<h3><strong>Fintech Protects Against Over-Indebtedness</strong></h3>
Fintech digital credit providers need to unite and agree to collective measures to tackle the problem of over-indebtedness. This will entail defining responsible digital underwriting, leveraging technology, while learning from the past, expanding credit bureau reporting, and agreeing on common practices for the benefit of clients. Some fintechs are already taking the lead, and through the Smart Campaign’s <a href="http://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>, they are working together to define and implement responsible practice. The body of evidence around risks is growing. Now is the time to define the guidelines of good practice for fintech digital lenders and identify solutions that work for clients.

<strong>References</strong>

McKinsey Global Institute, “<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">Digital Finance for All: Powering Inclusive Growth in Emerging Economies</a>,” September 2016.

Elena Mesropyan, “<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">63 Companies Shaping Africa’s FinTech Ecosystem</a>,” Fintech Ranking, December 2016.

Alexandra Rizzi, Isabelle Barrès, Elisabeth Rhyne, “<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">Tiny Loans, Big Questions</a>,” Center for Financial Inclusion at Accion.

John Owens, “<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/783">Responsible Digital Credit</a>,” Center for Financial Inclusion at Accion. Forthcoming, 2018.

George Ngigi, “<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Pain of Kenyans Blacklisted for Amounts as Small Sh100</a>,” <em>Business Daily Africa</em>, September 2016.

&nbsp;

&nbsp;

&nbsp;

&nbsp;

Start-Ups and Digital Innovation: Are Fintechs in Africa Over-Indebting their Customers?

Sub-Saharan Africa

Customer Centricity

Delivery Channels

Digital Credit

Over-indebtedness

<em>This is the second in <a href="https://cfi-blog.org/tag/smart-100-blog-series/">a series of blog posts</a> exploring the impact of Smart Certification on the financial inclusion industry.</em>

Smart Certification recently reached the milestone of 100 certified financial institutions, which collectively serve 42 million clients around the world. Among our lessons learned along the way: consumer protection starts with listening.

When the demonetization crisis struck India in 2016, many clients were left with currency that was no longer valid and had no means to repay their loans. They worried that their financial institutions would treat them harshly. Sulthana, who owns a small shop in India, had a different experience with <a href="http://smartcampaign.org/certification/certified-organizations/certified-profiles-ujjivan">Ujjivan</a>, a Smart-Certified small finance bank: “When demonetization happened…we told Ujjivan that we needed a few more days to repay it. They were very considerate and understanding, spoke politely and gave us a few more days [to repay the loan].”

While demonetization was a unique shock for clients and lenders in India, the empathy described by Sulthana reflects the importance that Ujjivan places on respectful communication and customer service. As it has done for many of the certified providers, the certification process helped Ujjivan formalize its client-centric approach. Ujjivan has established a separate service quality department with dedicated customer care representatives at all branches, with the responsibility of proactively seeking customer feedback and resolving complaints.

By promoting <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">principles</a> such as fair and respectful treatment of clients, transparency, and mechanisms for complaint resolution at financial institutions around the world, the Smart Certification program works to ensure that clients are heard and kept at the center of the financial inclusion industry. The Smart Campaign conducts research to determine what people really care about and identify risks that disproportionately affect low-income clients. Through projects like the <a href="http://smartcampaign.org/tools-a-resources/1089">Client Voice</a> and <a href="http://www.smartcampaign.org/tools-a-resources/1030">What Happens to Clients Who Default</a>, the Campaign studies what risks and challenges clients face as they gain access to fast-changing financial services. This knowledge informs the design of the Smart Certification standards and industry best practices for responsible financial inclusion.

In its Client Voice research to-date, the Smart Campaign asked clients in four countries (<a href="http://smartcampaign.org/tools-a-resources/1087">Peru</a>, <a href="http://smartcampaign.org/tools-a-resources/1076">Benin</a>, <a href="http://smartcampaign.org/tools-a-resources/1088">Georgia</a> and <a href="http://smartcampaign.org/tools-a-resources/1077">Pakistan</a>) to describe their experiences with financial providers. The results showed that clients shared similar complaints across geographies:
<ul>
 	<li>Clients had an inadequate understanding of the basic attributes of their products, such as loan terms and conditions.</li>
 	<li>Clients said they had unpleasant experiences with financial institution staff members, who often treated them poorly and with disrespect. One client from Pakistan said, “They don’t think that we can genuinely have problems… They don’t try to understand.”</li>
 	<li>Mechanisms for filing a complaint at the studied institutions were lacking.</li>
 	<li>Clients were making unreasonably large sacrifices to repay their loans. For instance, borrowers in Ghana reportedly skipped meals, sold their possessions, or took their children out of school when they were about to default. Clients who actually default are often pushed into taking more desperate measures, like some in Uganda who fled town or changed their names.</li>
</ul>
These findings demonstrate that when financial service providers do not prioritize client protection their customers can suffer, which jeopardizes the sustainability of their business. Smart Certification aims to mitigate client harms by listening to clients and supporting institutions to create good communication channels with their clients.

Hearing directly from clients provides information that enables policy makers and product designers to improve their offerings. The findings of the Client Voice research in Peru had a major impact on the Superintendency of Banking, Insurance and Private Pension Funds of Peru (SBS), the country’s primary financial regulator SBS, leading them to <a href="https://cfi-blog.org/2017/11/13/how-smart-campaign-research-is-influencing-client-protection-policy-in-peru/">adapt the market’s regulatory framework</a> to better meet the needs of clients:
<ul>
 	<li>Clients told us that they didn’t understand how credit bureaus or credit reporting worked; SBS worked with the credit bureau system to develop a simplified credit report that motivated users to look up their credit information.</li>
 	<li>We found that 40 percent of respondents in Peru didn’t understand their loan terms; SBS started testing ways to clarify the information on loan terms and conditions, and required insurance companies to explain the scope and characteristics of product coverage to potential clients.</li>
 	<li>A quarter of clients in Peru reported that microfinance providers discriminated against those of lower socioeconomic status. SBS implemented new regulations on market conduct, incorporating detailed responsibilities and obligations for financial institutions to improve their business practices and advance equal treatment of clients.</li>
</ul>
Smart Certification raises the client voice within financial institutions by promoting timely and responsive mechanisms for client complaints and problem resolution. In this way, clients’ concerns are better heard and institutions get the feedback they need to improve their products and services. Smart Certified institutions affirmed the benefits of this feedback loop <a href="http://smartcampaign.org/tools-a-resources/1149">in a recent survey</a> with 86 percent attesting that achieving certification helped them better understand client risks and allowed them to better serve their clients. This is sorely needed when access to financial services worldwide is growing, but <a href="https://qz.com/1260139/india-has-the-highest-number-of-inactive-bank-accounts-in-the-world/">usage is stagnant</a>.

Empathy matters. In the Smart Campaign’s direct conversations with clients, they tell us that they value transparent and respectful service above all else. Empathy and compassion for a borrower who is struggling to make a payment, like Ujjivan client Sulthana, go a long way in increasing client retention and loyalty. So as we celebrate what 100 Smart Certifications means for the industry, let’s not forget what it means to the clients the industry serves.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2018/05/16/100-smart-certifications-a-milestone-for-responsible-financial-inclusion/">100 Smart Certifications - A Milestone for Responsible Financial Inclusion</a>

<a href="https://cfi-blog.org/2016/09/28/fintechprotects-prioritizing-responsible-agent-management-at-oxigen/">#FintechProtects: Prioritizing Responsible Agent Management at Oxigen</a>

<a href="https://cfi-blog.org/2015/03/26/smart-certification-kashf-foundation-takes-the-lead-in-pakistan/">Smart Certification: Kashf Foundation Takes the Lead in Pakistan</a>

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&nbsp;

Where Does Consumer Protection Begin? Start with Listening

Keeping Clients First

Smart 100 Certifications

Default

Smart Certification

<em>The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting views from participants in the </em><a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf"><em>Africa Board Fellowship</em></a><em> (ABF).</em>

Two experiences with interest rate caps – in Kenya and Zambia – demonstrate the power of political forces to shape financial inclusion policies and may hold lessons for MSME lenders in other countries.

In a recent unpublished study, the <a href="https://responsiblefinancialinclusion.org/">Partnership for Responsible Financial Inclusion</a> (formerly the Microfinance CEO Working Group) examined commonalities in the origins of interest rate caps in these two countries. In both cases, signs were clear that the general public was upset about the current state of loans and interest rates. Approaching elections increased the will among political leaders to make regulatory changes that would appeal to the public.

In Zambia, a populist president, Michael Sata, was the surprise victor in 2011’s elections. In his first days in office, Sata announced his priority of cutting the cost of credit for Zambians, a move in opposition to the country’s dominant banks. His remarks sent the domestic currency into a spiral. Inflation soared, and interest rates rose. These events helped create a sense of urgency for both consumers and legislators, propelling the caps through the legislative process. In 2012, Sata led the government in successfully passing his proposed law, which capped commercial banks’ loan interest rates at 18.25 percent.

In 2013, the interest rate caps were also imposed on microfinance lending. The maximum rate was set at 42 percent for a select group of microfinance institutions and 30 percent for other non-bank financial institutions. Following Sata’s death in 2014 and the election of his replacement, the interest rate caps were removed in 2015. The government’s approach in this area now focuses on pricing transparency.

Zambia’s interest rate caps were not particularly effective. To compensate for lower interest income, the banks began to charge more fees, keeping effective prices more or less the same for consumers. The caps did not create an effective solution, and ultimately banks, microfinance institutions and regulators agreed on ending the caps. Instead, strong regulations on pricing transparency were put into law.

A similar story has been unfolding in Kenya, which introduced an interest rate cap of 4 percent above the Central Bank of Kenya Policy Rate for regulated financial institutions in September 2016. The measure was viewed as a populist move. However, in the short time since the law’s enactment, signs <a href="http://africanbusinessmagazine.com/african-banker/kenya-interest-rate-cap-coming-off/">suggest</a> it is doing more harm than good to the overall economy, including the exclusion of “higher risk” borrowers like MSMEs, decreased levels of lending, and lower profits and stock values among banks. It seems the government is now looking to remove the caps given the impacts on the economy and financial services sector.

However, there have been some positive outcomes for the Kenyan financial inclusion industry – such as more innovations, especially in digital lending, because the banks are restricted in lending, creating an opening for non-bank lenders. Some Kenyan banks have also started to buy MFIs in order to lend through them in smaller amounts. The caps have caused banks to diversify their product offerings more – to insurance and leasing.

We interviewed two alumni of the CFI’s Africa Board Fellowship (ABF) to share their experiences about the politics and practice of interest rate caps.

<img class="wp-image-25583 alignright" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/jacqueline_musiitwa.png" alt="" width="387" height="500" /><em>Jacqueline Musiitwa is the Executive Director of FSD Uganda and a board member of Microcred Zimbabwe and the Central Bank of the Republic of Zambia. </em>

<strong>ABF:</strong> Can you share your perspective on the decision to implement, and subsequently remove, the interest rate caps in Zambia?

<strong>Jacqueline Musiitwa</strong>: "The Zambian experience seems to be similar to Kenya’s case – a populist approach with the hopes of encouraging lending to the masses. Then, quickly learning that the opposite actually happens: interest rate caps cause banks to stop lending, and the people don’t benefit. The first thing the current governor of the Central Bank did in office was reverse the caps. Increasing lending was a top priority. The Central Bank also had conversations with banks at that time about keeping interest rates low. The Central Bank learned that rate cap regulation hasn’t worked well historically, so they wanted to figure out how to work together with banks to find a solution.

Stepping back, the question is: how do banks charge interest in a way that makes sense for the population being served? Some people are unbanked for fear of charges. The Central Bank in Zambia is looking at how to get banks outside their comfort zone to serve new clients. How can they create a system of mutual trust?

Ultimately, you take a few steps forward and then a few steps back. Public trust in banks has everything to do with the safety of savings. In Zambia, the numbers were going well in terms of signing clients up at non-banking financial institutions and then in December 2016, a bank closed for three months during which time shareholders injected money into it. Clients reacted with: ‘You see, this is why we are going to put our money under the pillow’. The bank is now back but now there is still a fear of depositing in banks, so it is hard to get people to increase savings.

Regulators wrestle with how to communicate market stability when there is even just one weak link. You saw it with banks in Kenya. Dubai, Imperial, and Chase banks all went down in Kenya, and the reaction was the same. People either don’t trust banks or move to the biggest banks. Zambia is pushing through a law for a deposit protection scheme."

<em>The full interview with Musiitwa can be read <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/jacqueline_musiitwa_interview.pdf"><strong>here</strong></a>.</em>

<img class="alignleft wp-image-25584" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/ivan-mbowa.png" alt="" width="317" height="476" /><em>ABF Alumni Ivan Mbowa, CEO of Umati Capital, offers a perspective on interest rate caps from his experience in Kenya.</em>

<strong>ABF:</strong> Kenya’s government introduced an interest rate cap for banks, but not for non-bank financial institutions like Umati. How has Umati been affected?

<strong>Ivan Mbowa</strong>: "At Umati we’re seeing a lot more interest in our services. About half of our clients are new to formal finance. They could never get money from a bank in the first place. The other half are coming to us for additional financing, because they don’t have the collateral to get more from banks.

The funny thing is that the clients don’t always understand the nuances between a non-bank financial institution and a bank, so when they see our rates, the first impression is, ‘You guys are just flouting the law—it’s supposed to be capped.’ We have to explain that the cap doesn’t apply to Umati. A good outcome has been that there seems to be a lot more awareness and questioning from clients on, 'What is the cost of your product?'

It’s also been easier to make the argument that even if you can access bank credit, it’s good to be multibanked, so that the next time there’s a freeze or a crunch, you’re not fully exposed. Savvy clients understand that working with Umati can be a hedging mechanism."

<em>The full interview with Mbowa can be read <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/ivan_mbowa_interview.pdf"><strong>here</strong></a>.</em>

In one more example, the West Africa Economic and Monetary Union (WAEMU) implemented more stringent caps in 2015, reducing the cap from 27 percent to 24 percent for MFIs and from 18 percent to 15 percent for banks. In the time before the new cap was implemented, the trend in bank interest rates had been downward, as a result of competition. According to reports from ABF Fellows on the ground, the lower caps did not have a very big impact on banks, especially considering all the fees they were generating. However, caps have inhibited lending to micro and small enterprises because, for the most part, banks were already limited in their lending to this customer segment. Private investors who are interested in serving micro and small enterprises have avoided the region, given that the caps lengthen the time to break even for a fledgling greenfield financial institution. Several studies indicated that many MFIs have been unable to achieve adequate scale and efficiency in their respective business environments to be profitable and sustainable.

Given the diverse outcomes interest rate caps can have, we’d love to hear more from our readers about their experiences with interest rate caps.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/02/01/are-banks-the-future-of-banking-africa-board-fellows-deliberate/">Are Banks the Future of Banking? Africa Board Fellows Deliberate</a>

<a href="https://cfi-blog.org/2017/10/20/the-board-should-not-be-the-last-to-know-why-mfis-need-independent-internal-auditors/">The Board Should Not Be the Last to Know: Why MFIs Need Independent Internal Auditors</a>

<a href="https://cfi-blog.org/2017/10/04/how-can-microfinance-institutions-in-the-middle-east-and-north-africa-manage-risk-and-meet-client-demand-governance-is-key/">How Can Microfinance Institutions in the Middle East and North Africa Manage Risk and Meet Client Demand? Governance Is Key!</a>

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&nbsp;

The Politics (and Varied Experiences) of Interest Rate Caps

Regulators

Africa Board Fellowship Program

Partnership for Responsible Financial Inclusion

Kenya

Zambia

ABF Spotlight

Governance

Interest Rates

Microfinance Institutions

Risk Management

<em>&gt; Posted by <a href="http://ifmrlead.org/anisha/">Anisha Singh</a> and <a href="http://ifmrlead.org/suraj-nair/">Suraj Nair</a>, Senior Research Associate and Research Manager, IFMR LEAD</em>

Patel, 62, father of two, spends an hour learning how to use mobile money wallet A from his daughter. The interface, navigations and services offered are all quite new to him. The next day, he tries to pay for a taxi but finds the taxi provider only accepts mobile money wallet B. He’s quite confident he should be able to use wallet B as the knowledge of how to use A is still fresh in his mind. However, he struggles with navigating the new platform and is unable to locate certain payment options. He’s also apprehensive to try out different keys as he wants to be careful not to transfer money incorrectly. Giving up, Patel pays in cash and waits for his daughter to return home to teach him how to use mobile money wallet B.

In India, in both urban and rural settings, among men and women, this challenge is all too common, especially among older adults. <a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/">New research</a> from IFMR LEAD and J.P. Morgan finds that while digital literacy is a massive obstacle to financial inclusion, so is applying already gained skills to unfamiliar products; digital literacy does not necessarily transfer well from one platform to another.

<a href="http://businessworld.in/article/Digital-India-A-Stepping-Stone-Towards-Digital-Economy-Financial-Inclusion/20-02-2017-113183/">Ongoing efforts</a> toward increasing adoption are in vain without ensuring the usability of products and services. Usability centers on the product’s interface and how intuitive and convenient it is. Accordingly, supply-side efforts have focused on building interactive interfaces with the latest features to streamline and digitize everyday payment needs. On the other side of the coin, perhaps most important of all, is consumer digital and financial literacy. The Reserve Bank of India and the Indian Government have taken certain measures to enhance digital literacy, such as the National Digital Literacy Mission (NDLM), which provides digital literacy training to citizens across the country, and the National Centre for Financial Education (NCFE), which works to expand financial education in schools, workplaces, and the general population through awareness-building and trainings.

Despite these measures, Patel’s inability to successfully transfer digital skills between platforms is mirrored by many across the country today. This challenge is amplified when extended beyond mobile money wallets to between different types of digital applications.

A <a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/">recent pilot</a> aimed to assess transferability of skills for smart-phone owners with varying levels of mobile money usage. The pilot assessed transferability across age groups, gender, urbanicity (rural and urban) and levels of income volatility. Participants were provided extensive training on one mobile wallet (including on how to create an account, send money, collect money, and scan and pay), with the ability to freely navigate the application themselves, and then tested on their ability to perform core platform functions. Afterwards, participants were introduced to a new mobile money platform and asked to perform the same functions.
<h2>What did we find?</h2>
Building digital literacy skills by on-boarding users to one particular application is not adequate, the pilot uncovered. Participants in the 40+ age bracket, across gender, urbanicity, and income volatility levels found it difficult to transfer their knowledge from one digital platform to another. Participants in younger age brackets found it relatively easier, but still struggled with certain functionalities such as transferring money and scanning to pay. This has significant implications, not just for the individuals involved but also for the goal of a less-cash and digital India.
<h2>What should be done?</h2>
Digital literacy training initiatives, whether through common services centers, community gatherings, or other human touch agents, should consider imparting wider ICT skills rather than product or even device-based knowledge. Imparting digital literacy the way it is approached today for existing technologies such as mobile wallets runs the risk of losing effectiveness with the constant roll-out of newer features, technologies, and products. Additionally, training for older population segments should make more resources available to enhance their confidence and comfort with digital technologies, thus encouraging them to experiment with new features.

Of course, training requirements are easier to talk about than to implement, especially when considering a wide-ranging population such as that of India. All the more, service providers need to incorporate usability and digital literacy-building into product design. Training can be built into the product and customer experience. Whilst maintaining unique interfaces, each application can include short tutorials upon installation highlighting navigation patterns and features, as well as more detailed and accessible tutorials and FAQ sections. Ultimately, more digitally capable customers will mean more active customers.

Beyond the provider level, product development guidelines can be formulated to ensure basic transactional aspects are consistent across all mobile money and other digital application interfaces. In terms of standardization, whilst developing applications in regional languages is important, specific icons can be developed and used consistently across platforms to depict the basic transactions. This also helps to ensure that individuals with low literacy or who are unable to read in English can still navigate their way around and perform transactions successfully across different applications.

Finally, for all interventions, investments into understanding what consumers prefer and find easiest to use in terms of product design would go a long way.

<em>For more details on this research and its findings, please visit the </em><a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/"><em>IFMR LEAD website</em></a><em>.</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/12/18/how-successful-are-banking-agents-in-bringing-digital-financial-services-to-new-customers-in-india/">How Successful Are Banking Agents in Bringing Digital Financial Services to New Customers in India?</a>

<a href="https://cfi-blog.org/2017/11/27/whats-in-it-for-me-increasing-the-value-proposition-of-fintech-for-merchants-in-india/">What's In It For Me? Increasing the Value Proposition of Fintech for Merchants in India</a>

<a href="https://cfi-blog.org/2016/05/17/for-successful-financial-inclusion-in-india-build-customer-financial-capability/">For Successful Financial Inclusion in India, Build Customer Financial Capability</a>

&nbsp;

&nbsp;

&nbsp;

The Flip Side of Digital: Are Customers “Interoperable”?

India

South Asia

In recent years, Peru has called for our attention not only for being at the top of the Global Microscope’s international country rankings for the <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">most conducive environment</a> for financial inclusion, but also for its historic collaborative effort to establish a <a href="https://cfi-blog.org/2017/01/30/modelo-peru-unique-model-unique-challenges-bright-future/">fully-interoperable nationwide digital payments platform</a> (Bim) to support the supply of financial services. But buckle up, there is more.

The country’s regulator, the Superintendency of Banking, Insurance and Private Pension Fund of Peru (SBS Peru), has taken client protection very seriously, and despite already having very robust systems (on grievance redress and dispute resolution, for example), it continues to lead with groundbreaking policy changes based on evidence and research to ensure that regulation is aligned with the needs and capabilities of the end client. The Smart Campaign is proud to have collaborated with the SBS on these policy changes.
<blockquote>“The risk is to regulate by anecdotes and not by evidence.” - Mariela Zaldivar, Deputy Superintendent, Insurance and Private Pension Fund of Peru (SBS Peru)</blockquote>
<a href="http://smartcampaign.org/tools-a-resources/1087">Client Voices</a> was a research project of the Smart Campaign that directly asked clients in four countries (Peru, Benin, Georgia and Pakistan) about their experiences with financial providers and what they thought constituted good and bad treatment. In Peru, the project was made possible through strong support from the SBS, which was involved from the very beginning, providing substantive inputs to all project phases. However, their engagement did not stop there. The SBS is also committed to implementing the client protection recommendations arising from the project.

Here is how the SBS turned the major findings of the research into an opportunity for policy improvement in the area of financial consumer protection.
<h2>Understanding Credit Bureaus and Credit Reporting</h2>
<em>High-level finding </em>– Client Voices found that clients did not understand how credit bureaus work, or the consequences of having a negative credit record. Clients seemed to be unaware that credit bureaus now keep positive as well as negative information. To combat these shortcomings, the SBS took the following steps:
<ul>
 	<li><strong>Presenting credit histories as a potentially positive asset</strong>: Through their media campaign and financial education training programs, the SBS is raising awareness to help clients understand that they can build and invest in their credit histories through good repayment behavior. The credit bureau does not just offer negative outcomes or punishment for nonpayment. “Clients need to be aware that credit histories can result in positives like facilitating access to better interest rates,” says Mariela Zaldivar, Deputy Superintendent of SBS Peru.</li>
 	<li><strong>Non-payment warning</strong>: In the country’s 2012 transparency regulation, the warning to clients about negative reporting in the credit bureau in the case of non-payment was suppressed. The new regulation on market conduct - published in August 2017 - has reestablished this warning for clients as a preventive measure. Now, clients receive this non-payment warning in their contract summary sheets, where most relevant terms and conditions of loans are explained.</li>
 	<li>
<div class="mceTemp"></div>
<strong>Simple and accessible credit report</strong>: In 2015, Peru’s credit bureau system developed a simplified credit report to motivate users to look up their credit information. Today, credit reports are accessible virtually (web or app) and there has been a media campaign to encourage people to use the report. Credit ratings are presented with an easy-to-understand red, yellow and green light coding, and legal jargon has been minimized. “In the past 30,000 reports were accessed every year. Since our recent changes, over 1.5 million reports are accessed per year,” states Mariela Zaldivar. For this development, the SBS was recognized with the Best Practices in Public Management Award organized by the non-profit <a href="http://www.premiobpg.pe/es/">Ciudadanos al Día</a>, which encourages efficient, successful and innovative public programs that benefit citizens.</li>
</ul>
<h2>Understanding Loans and Insurance Products</h2>
<em>High-level finding</em> - Approximately 40 percent of respondents in Peru did not fully understand their loan terms. Clients were especially confused about the insurance policies linked to their loans. They did not know what insurance products they currently had or how they worked. Overall, we estimated that about 30 percent of all clients in Peru were not aware that they even had insurance tied to their loans, let alone what the insurance covered. The SBS addressed these findings with the following:
<ul>
 	<li><strong>Loan terms and conditions</strong>: In incorporating the results of the Client Voice report, the SBS started testing how to prioritize the information provided to clients in their contract summary sheets. The new regulation on market conduct reduced the potential items to be included in the summaries, from 12 to 7, in order to promote clarity and simplicity of the information. Moreover, the following items are published in a highlighted, salient way: 1) how much you pay, and 2) what happens if you do not pay on time. Contracts cannot be eliminated, but more client-centered summaries are being implemented.</li>
 	<li><strong>Marketing of insurance</strong>: In 2017, a <a href="http://busquedas.elperuano.com.pe/normaslegales/aprueban-el-reglamento-de-comercializacion-de-productos-de-s-resolucion-no-1121-2017-1498132-1/">new regulation</a> for insurance commercialization was approved. Under this regulation, companies are required to explain the scope and characteristics of product coverage to potential clients. Providers are also required to have insurance agents, which are bank employees whose role is to be the link between institutions and insurance companies, to promote better coordination between them. The insurance agent is in charge of training the staff on insurance and is responsible for sales and post-sale services.</li>
</ul>
<h2>Market Conduct</h2>
<em>High-level finding</em> - Clients are generally satisfied with microfinance services in Peru. However, 26 percent of clients report that microfinance providers do not treat clients equally, discriminating against those of lower socioeconomic status. To advance equal treatment of clients, the SBS took action by:

<strong>Market conduct regulation</strong>: In order to strengthen the Consumer Protection in Financial Services System, earlier this year the SBS changed its legal regulatory framework on market conduct. It now incorporates new <a href="http://ima01.gestion.pe/doc/0/0/2/4/3/243991.pdf">detailed responsibilities and obligations for financial institutions to improve their business practices</a>. It outlines requirements for how financial providers interact with their clients in three main areas: 1) offering of products and services, 2) transparency of information, and 3) claims management. The attention-grabbing fact here is that the board of the institution is now held responsible for the interaction with the client throughout the lifecycle of the product. Positive and responsible interaction with the client becomes an institutional goal and must be clearly outlined in an annual work program, presented by a full-time market conduct officer, and approved by the board each year.

It has been exciting to witness how the SBS uses evidence to help it establish effective consumer protection policy in Peru. The Smart Campaign encourages actors in the financial inclusion sector, both policymakers and providers, to keep learning from research that reveals the voice of the client.

<em>Learn more about Client Voices and its broad array of recommendations to advance consumer protection at <a href="http://smartcampaign.org/tools-a-resources/1075">the Smart Campaign website</a>.</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2016/02/22/borrowing-blind-in-peru-findings-from-the-client-voices-project/">Borrowing Blind in Peru: Findings from the Client Voices Project</a>

<a href="https://cfi-blog.org/2017/01/30/modelo-peru-unique-model-unique-challenges-bright-future/">Modelo Peru: Unique Model, Unique Challenges, Bright Future</a>

<a href="https://cfi-blog.org/2017/02/07/modelo-peru-whats-next-for-the-groundbreaking-mobile-money-platform/">Modelo Peru: What's Next for the Groundbreaking Mobile Money Platform?</a>

&nbsp;

How Smart Campaign Research Is Influencing Client Protection Policy in Peru

Peru

The recent <a href="https://www.nbcnews.com/tech/security/massive-equifax-data-breach-could-impact-half-u-s-population-n799686">security breach of credit reporting agency Equifax</a> exposed birth dates, social security numbers and credit card information of up to 143 million consumers. The hackers will likely sell this personal information which could result in financial and medical identity left, and fraudulent credit card activity and tax reporting, along with a slew of other activities. Earlier this week <a href="https://www.nytimes.com/2017/09/26/business/equifax-ceo.html?mcubz=3">Equifax announced</a> their CEO, Richard Smith will be retiring and could walk away with $18 million in pension benefits. The Massachusetts Attorney General, Maura Healey <a href="http://www.npr.org/2017/09/14/550949718/after-equifax-data-breach-consumers-are-largely-on-their-own">called it</a> “the most brazen failure to protect consumer data we have ever seen.” As a result, the Federal Trade Commission, members of Congress and multiple states’ authorities are looking into criminal investigations. However, the burden of this breach will fall primarily on individual consumers to ensure they are protected, and only <a href="https://qz.com/1079138/whats-the-worst-that-can-happen-with-the-equifax-breach-a-lot-especially-if-youre-poor/">10 percent</a> of the potential 143 million affected have even checked the Equifax site to see if their information was compromised. (You can check to see if you may have been impacted <a href="https://www.equifaxsecurity2017.com/am-i-impacted/">here</a>.)

The precautionary recommendations put forth have been to: 1. Check your credit score regularly (which can only be done for free once a year); 2. Freeze your credit; and 3. Purchase credit monitoring services. (Freezing your credit means establishing a “lock” that prevents opening new forms of credit in your name, while monitoring your credit is the process of periodically reviewing your credit reports for accuracy and changes that might be the result of fraudulent activity.) The irony of these suggestions is that you have to rely on the three major credit bureaus (Equifax, Experian and TransUnion) to perform these consumer protection activities. How can we know we are safe from fraud when our recourse requires trusting the entities that have been compromised? What’s more, why should we pay additional fees to correct the credit bureau’s mistake?

The Equifax breach affects consumers at all levels of the socioeconomic landscape, and unfortunately those with fewer financial resources and capability will be affected the most. Correcting identity theft can be a time consuming and financially burdensome endeavor. For many it is challenging to come up with emergency cash to cover legal fees to prove identity theft or restore credit, recover stolen assets and pay for additional credit monitoring services. And sadly, we haven’t seen strong consumer protection support on behalf of the credit bureaus and formal financial service providers in the wake of this breach -- support like educating the public about monitoring credit, providing more than one free credit report annually or offering free/discounted credit monitoring for more than one year. Thomas Hinton, CEO of the consumer advocacy non-profit American Consumer Council, <a href="https://qz.com/1079138/whats-the-worst-that-can-happen-with-the-equifax-breach-a-lot-especially-if-youre-poor/">said</a> he “is deeply concerned that Equifax – and all credit reporting companies – are not doing enough in a timely manner to protect under-served consumers who have been victimized by this data breach and stand to suffer the most.”

Such massive security breaches erode the public’s trust in the financial system, particularly among the unbanked already skeptical of entering the formal financial fold. The <a href="http://www.usfinancialdiaries.org/issue">U.S. Financial Dairies</a> showed that many Americans don’t trust the financial system because of unexpected bank fees – like overdraft fees – and because banks provide little or no social support, which many people get with informal group lending and savings options.

This isn’t the first major data breach in U.S. history and it won’t be the last. Last year when Yahoo was in negotiations to be bought by Verizon, it came out that <a href="https://www.csoonline.com/article/2130877/data-breach/the-16-biggest-data-breaches-of-the-21st-century.html">1.5 billion</a> user accounts were compromised between 2013 and 2014. And we can’t forget the 2013 Target breach that compromised credit/debit card and contact information of up to <a href="https://www.csoonline.com/article/2130877/data-breach/the-16-biggest-data-breaches-of-the-21st-century.html">110 million</a> customers.

So, what can be done? How can anyone feel comfortable about the protection of personal information?

Financial service providers are looking to biometric data as a secure identification source for financial services. Over the past seven years, <a href="https://uidai.gov.in/about-uidai/about-uidai.html">the Unique Identification Authority of India (UIDAI)</a> has issued over <a href="https://uidai.gov.in/about-uidai/about-uidai.html">one billion</a> Unique Identification Numbers (UID), also known as Aadhaar numbers, which are verified and authenticated with biometric data via finger prints or iris scans. This identification system is a part of <a href="http://indiastack.org/about/">India Stack</a> that uses four distinct technology layers – including simplified payments addressing and interoperability – to provide digital financial services across governments and businesses in India.

The technology already exists to use finger print and facial scans to unlock our phones or log into personal banking apps, and there is even the potential of using <a href="https://www.wired.com/2016/03/biometrics-coming-along-serious-security-concerns/">ear scans and heart beat identification</a> as biometric identification sources. But so far biometric identification is fairly unregulated, some consider the security to not yet be airtight and there are additional privacy concerns with using bodily identifiers. Hackers are already finding ways to spoof biometric identification. Recently, the security firm Vkansee was able to <a href="https://www.wired.com/2016/03/biometrics-coming-along-serious-security-concerns/">break into Apple’s Touch ID system</a> with a small piece of play doh. But we will see rapid improvements in Apple’s security, particularly with the new iPhone X Face ID technology.

In the case of India’s Aadhaar scheme, there is robust opposition to the program, with concerns including the perceived ease of forging fingerprints, the program’s potentially inadequate digital security, and its ubiquity. Some opponents of the program believe that if the Aadhaar numbers are widely integrated and linked between previously-siloed databases, it expands the opportunity for citizen profiling and surveillance. In August, India’s Supreme Court <a href="https://www.theatlantic.com/technology/archive/2017/09/aadhaar-worlds-largest-biometric-database/538845/">issued a ruling</a> enshrining the fundamental right to privacy. The anti-Aadhaar movement in the country celebrated the ruling, asserting that the program is in conflict with this fundamental right. Soon the Supreme Court will indeed assess if Aadhaar does violate Indian citizen’s privacy rights.

Regardless of how our information is authenticated, it is becoming increasingly important for consumers to protect and regularly track their financial information. Consumers should be concerned about the potential threats and take appropriate action by checking their credit score and monitoring credit card activity. But we can also realize that, at least as of now, security breaches are mostly out of our hands.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/05/01/how-secure-is-data-used-in-digital-credit/">How Secure Is Data Used in Digital Credit?</a>

<a href="https://cfi-blog.org/2017/05/05/demonetization-brought-out-the-best-in-indian-microfinance-clients/">Demonetization Brought Out the Best in Indian Microfinance Clients</a>

<a href="https://cfi-blog.org/2017/06/28/why-do-privacy-policies-matter-for-digital-credit/">Why Do Privacy Policies Matter for Digital Credit?</a>

&nbsp;

In the Wake of the Equifax Breach, Are Biometrics the Answer?

North America

Challenges and Crises

Financial Technology

Privacy

Underwriting

Dwijo Goswami

Esteban Altschul

Kathleen Yaworsky

Paul Lamont

Prateek Shrivastava

East Asia and Pacific

Europe and Central Asia

Latin America and The Caribbean

Nigeria

Advisory Services

Alternative Data

Appropriate Product Design and Delivery

Banks

Data Analytics

Impact Investing

Microfinance

Partnerships

Risk and Credit Analysis

Article

Case Study

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

Accion Microfinance Bank (Accion MfB), founded in 2006, is one of Nigeria’s most successful microfinance institutions. Headquartered in the capital city of Lagos and with more than 130 locations across the country, Accion MfB provides loans and savings products to low-income customers. Much of its clientele is made up of microentrepreneurs running small businesses, such as retail shops, in urban and peri-urban settings.

Accion Microfinance Bank adopts risk management systems in Nigeria

Accion Microfinance Bank

Accion Global Advisory Solutions

<p class="graf graf--p graf-after--figure">I am continually impressed by the innovation of digital financial services in emerging markets. This innovation is often assumed to be solely the work of fintechs, but we are increasingly seeing that regulated financial service providers (FSPs) are playing a pivotal role in driving financial inclusion through their own digital initiatives. This development is typically driven by their regulatory licensing, access to low-cost funding, and strong brand and distribution networks they have developed in their respective regions.</p>
<p id="09be" class="graf graf--p graf-after--p">To help such institutions think about their digital strategy and plan a roadmap for digitization, my colleague <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/digital-maturity-financial-service-providers/" target="_blank" rel="nofollow nofollow noopener noreferrer">Amy Stewart recently discussed the Digital Maturity Matrix</a> (<a class="markup--anchor markup--p-anchor" href="https://www.surveymonkey.com/r/Y8N7F83" target="_blank" rel="nofollow nofollow noopener noreferrer">take the quiz</a> to see your institution’s digital maturity). Our latest paper <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/demystifying-digital-lending/" target="_blank" rel="nofollow nofollow noopener noreferrer">Demystifying Digital Lending</a> examines digital lending in detail and how financial institutions can implement their digital offering.</p>
<p id="ec82" class="graf graf--p graf-after--p">As FSPs look to digitize, the natural first question to ask when applying the Digital Maturity Matrix is <em class="markup--em markup--p-em">How should we develop our digital maturity, and to what extent?</em> The matrix speaks of three different levels of digital maturity — Early Stage, Base Level, and Digital Plus — and it is important that institutions aim to develop to a digital maturity that drives sustainable growth and is appropriate given their specific context.</p>
<p id="3bb9" class="graf graf--p graf-after--p">It is our view that <em class="markup--em markup--p-em">FSPs should not necessarily aim to develop their digital maturity to Digital Plus, the highest level on the matrix. </em>Most can benefit significantly and compete in the changing lending landscape by reaching Base Level maturity and perhaps selecting elements of Digital Plus maturity.</p>
<p id="6bb0" class="graf graf--p graf-after--p">But even reaching Base Level maturity requires FSPs to fundamentally change their products and the way they are offered to customers. This is no easy task, and it’s understandable that many FSPs may get overwhelmed with where to start. And so, I would like to introduce five fundamental principles that can help FSPs when applying the Digital Maturity Matrix as they develop their digital capability:</p>

<h4 id="ccf3" class="graf graf--p graf-after--p">1. <strong class="markup--strong markup--p-strong">Digital happens throughout the organization — including the C-Suite</strong></h4>
<p id="e1d3" class="graf graf--p graf-after--p">This one sounds obvious, but for digital transformation to be genuinely effective, digital initiatives must be able to integrate across all functional teams to deliver a fluid customer experience. A good example would be that if an applicant for a digital product needs to use a lender’s physical branch network to register Know Your Customer (KYC) details, this means that branch staff must be familiar with this new digital product to assist the customer as per the planned customer journey. In the pilot phase of launching a digital product, we have seen FSPs successfully silo the launch within a small team. While this can be effective to quickly prove commercial feasibility, ultimately scale cannot be achieved without full buy-in and collaboration across all functions.</p>
<p id="e9e8" class="graf graf--p graf-after--p">To achieve this digital scale, full support from the CEO and C-suite are paramount. Ensuring that the C-suite has the requisite digital skills can significantly influence the execution of digital initiatives. The way the digital team is structured (for example — across functional teams, as a separate digital team, or even as a separate “fintech subsidiary”) also affects the capacity of the institution to digitize effectively.</p>

<h4 id="d452" class="graf graf--p graf-after--p">2. <strong class="markup--strong markup--p-strong">Developing digital readiness is a prerequisite to digital lending</strong></h4>
<p id="6802" class="graf graf--p graf-after--p">Before FSPs can offer digital products, they must ensure that their systems and processes can support a digital transformation. This includes building scalable and interoperable systems that can organize and visualize data, having intuitive and clearly defined and mapped business processes before they are digitized, and developing a deep understanding of existing and potential customer segments to allow lenders to design products to meet specific needs.</p>
<p id="1802" class="graf graf--p graf-after--p">Without these in place, we often see FSPs with ambitious digital plans forced to delay product launches and revert back to the basics first.</p>

<h4 id="5c6b" class="graf graf--p graf-after--p">3. <strong class="markup--strong markup--p-strong">Digital products can be varying levels of digital</strong></h4>
<p id="7727" class="graf graf--p graf-after--p">Once FSPs have developed their Digital Readiness they can start digitizing their existing product range or developing new digital products with more personalized propositions. But these options can have very different demands for a lender:</p>

<ul class="postList">
 	<li id="4cb4" class="graf graf--li graf-after--p"><strong class="markup--strong markup--li-strong">Digital Propositions </strong>speak to the use of digital tools to digitize an existing product range. This would include, for example, using USSD or a mobile app to enable digital application. This improves the customer experience in piecemeal additions, without offering a fundamentally different product.</li>
 	<li id="07b1" class="graf graf--li graf-after--li"><strong class="markup--strong markup--li-strong">Digital Products</strong> introduce fundamentally new business models enabled by digital tools, and allow lenders to offer new products to serve the specific needs of customers.</li>
</ul>
<p id="6f35" class="graf graf--p graf-after--li"><em class="markup--em markup--p-em">The reason why this is so important is that many FSPs think of the most digital version of a product and aim to go there first.</em><strong class="markup--strong markup--p-strong"> </strong>However, there is often a more gradual path to offering a fully digital product which frequently involves digitizing parts of existing products first. This route also allows for quick wins which management teams are often in need of to show progress to the board before investing heavily in newer digital technologies.</p>
<p id="202d" class="graf graf--p graf-after--p">In this sense, planning different types of products with varying levels of digital capability over time can be an easier and less complex way of building an FSP’s digital product offering. We encourage FSPs to develop multi-year digital roadmaps beyond 12-month budgetary cycles, to allow for momentum in planning key digital milestones.</p>

<h4 id="a4b6" class="graf graf--p graf-after--p"><strong class="markup--strong markup--p-strong">4.</strong> <strong class="markup--strong markup--p-strong">Human touch will remain relevant in several markets when implementing digital lending</strong></h4>
<p id="e5db" class="graf graf--p graf-after--p">As discussed in a <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/human-touch-place-age-digital-financial-services/" target="_blank" rel="nofollow nofollow noopener noreferrer">recent Accion blog</a>, human touch will remain crucial for many FSPs given their legacy of high-touch customer acquisition as well factors such as customer preferences and sophistication, larger loan sizes, and to facilitate cash transactions in markets where this is preferred. This means that FSPs should not think that digital no longer requires investment in physical distribution; it will more likely require an explicit design of the customer journey to balance tech and touch points. Furthermore, the need to enable remote support to customers will naturally mean that decentralized touch points such as call centers and mobile-based platforms will require significant investment to support efficient scale. Institutions will need to start planning for these touch points in terms of skills and systems.</p>
<p id="9621" class="graf graf--p graf-after--p">5. <strong class="markup--strong markup--p-strong">Partnerships are a key enabler of digital product launches</strong></p>
<p id="12be" class="graf graf--p graf-after--p">For FSPs, driving digital maturity can be a time-consuming and expensive process, and in some instances, they will not have the skills or systems to fully execute on a desired product offering. Partnerships with fintechs that have the technology and skills to execute a specific product or functionality can significantly reduce time-to-market and decrease the risk of failure for a digital product launch. A recent <a class="markup--anchor markup--p-anchor" href="http://www.centerforfinancialinclusion.org/storage/CFI_IIF_FI_Fintech_Partnerships_Report_2017.07.pdf" target="_blank" rel="nofollow nofollow noopener noreferrer">paper by the Center for Financial Inclusion</a> concluded that partnerships can be an effective strategy for FSPs to gain access to new market segments, create new offerings for existing customers, enable data collection and management, and deepen customer engagement and usage.</p>
<p id="b8f4" class="graf graf--p graf-after--p">There is no guaranteed formula for digital transformation, but the above principles are a helpful start to promoting meaningful planning and collaboration within lending institutions (and externally, where required) as they look to transform their business models.</p>
<p id="45f6" class="graf graf--p graf-after--p">And to those FSPs out there already starting their journey — good luck, the future looks bright!</p>
<p id="d74b" class="graf graf--p graf-after--p"><em class="markup--em markup--p-em">Looking for more guidance on how your institution can enable digital lending? </em><a class="markup--anchor markup--p-anchor" href="http://www.accion.org/webinar-demystifying-digital-lending/" target="_blank" rel="nofollow nofollow noopener noreferrer"><em class="markup--em markup--p-em">Watch our recent webinar.</em></a></p>

5 key principles for financial service providers looking to go digital

Demystifying digital lending

While access to financial services has steadily increased, three billion people are underserved by the world’s financial sector, with limited or no access to quality savings, credit, insurance, and payments. This Accion Insights paper sets out to help providers begin to address these complex challenges by providing a case for change and outlining the initial strategic and tactical steps a financial service provider can take to first assess and then enhance its data capability. This guide breaks down the multiple components required for a financial service provider to strengthen its data capabilities, while referencing the growing number of specific use cases for data-driven innovations in fostering a financially inclusive world.

Accion’s Global Advisory Solutions team developed this report with the support of the Citi Foundation.

Unlocking the Promise of Big Data to Promote Financial Inclusion - Chinese

Unlocking the Promise of Big Data to Promote Financial Inclusion

Citi Foundation

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.

Accion and <a href="http://www.ifmr.co.in/">IFMR</a> share a common vision: an abiding belief that everyone should have access to the financial services they need to protect their families, send their children to school and build better lives. One of the IFMR Holdings companies, IFMR Capital, works to channel funds from a wide range of investors to over 80 different financial inclusion intermediaries across multiple asset classes (microfinance, small business loans finance, affordable housing finance, vehicle finance, and agribusiness) throughout India. In its eight-year lifetime, the company has enabled over $3 billion worth of financing for these institutions which together serve over 20 million clients. Another Group company, IFMR Rural Channels, known by the brand <a href="http://ruralchannels.ifmr.co.in/kgfs-model/about-kgfs" target="_blank" rel="noopener">KGFS</a>, delivers complete and tailored financial services in untapped remote rural markets, empowering low-income households with financial access to savings accounts, pensions, insurance, and loans. After a <a href="http://www.accion.org/ifmr-holdings-raises-25m-accion-leapfrog-lok/">recent investment from Accion and others into IFMR Holdings,</a> IFMR Capital’s CEO Kshama Fernandes stopped by our office to speak with me about lessons learned from IFMR’s successes and challenges.
<h4><strong>Q: Can you give us some background on IFMR?</strong></h4>
<strong>A:</strong> IFMR Trust was set up about eight years ago. The idea was to build financial institutions that would enable the entire process of efficient and reliable access to finance for all. The purpose of IFMR Trust was to ensure that every single individual and every single enterprise had access to financial services.

If we really want to reach the population of India, where hundreds of millions of people still continue to live in rural areas, we need high quality local institutions with a deep understanding of the requirements of their customers plus an understanding of the economic environment in which they live, and an ability to provide them with requisite financial products and services in a sustainable manner. The role of building the last mile deep linkages to rural households and borrowers was played by our many KGFSs - our retail outreach arms. We today have 6 KGFSs across 12 districts serving 620,000 underlying customers. We simultaneously looked at the quantum and nature of requirements of capital across India and found that a significant proportion of funding those days came from grants or donations. Banks, too, were active lenders, however, funding from banks was rather lumpy and the much sought charitable contributions were simply not adequate to meet the vast requirement.

Building a sustainable financial ecosystem at the grassroots requires a steady and well-distributed supply of capital flowing into sectors and geographies across the country via high-quality originator financial institutions. Where could such a steady and sizable supply of capital come from, we asked ourselves? The capital markets seemed the obvious choice. Large, mainstream financial institutions with deep pools of capital such as mutual funds, insurance companies, pensions funds, private wealth managers and the like could be sources of this capital if we could tap into them in a sustainable manner. The big question was — how? How could we then connect MFIs and other local originators to these mainstream financial institutions? That’s where IFMR Capital’s role of a bridge between these originators and mainstream commercial capital markets investors came in.

<img class="aligncenter size-full wp-image-315" src="http://blogs.accion.org/wp-content/uploads/2015/12/rural-india-ifmr-accion-client-at-a-market-financial-inclusion.jpg" alt="rural-india-ifmr-accion-client-at-a-market-financial-inclusion" width="776" height="518" /><em>IFMR Holdings enables Indian entrepreneurs to pursue their goals.</em>
<h4><strong>Q: In 2010 you were responsible for creating a new financial structure that allows smaller MFIs to get money from large, traditional investors by lowering the risk. This type of transaction, called </strong><a href="http://economictimes.indiatimes.com/markets/stocks/in-a-first-securitised-debt-listed-for-trading-on-bse/articleshow/18026922.cms"><strong>multi-origination securitization</strong></a><strong>, is now becoming more popular in India. Can you explain how it works and why you did it?</strong></h4>
<strong>A:</strong> As they say - necessity is the mother of invention. It was the nature and requirements of our client originators that gave birth to the MOSEC<sup>TM</sup>. We were working with a large number of small and mid-sized MFIs who needed capital round the year. None of these had ever accessed capital markets before because standalone they neither had the size nor the ability to tap these markets. We decided to take multiple such originators to the market in a single structure. We pooled together many loans from multiple MFIs, the average loan size being anywhere between $200 to $300, till obtained a transaction size that made sense. This achieved two purposes – one, we got the critical size of a deal that made sense to these large investors. And two, we got all the benefits of diversification across geographies, across underlying individuals and businesses, and across managements of these originators. The big challenge was on how to convince investors who had never invested in these sectors or in such structured finance transactions, to come in and participate. We realized early on that the only way to really build this market was to lead the way by being investors ourselves and demonstrating our skin-in-the-game. It made a big difference to say “We’re not purely an arranger; we’re not only a structurer. We’re all of that and more. We are primarily an investor in all underlying originators we take to capital markets.” Putting the investor hat transformed the way we looked at these originators and sectors. It incentivized us and aligned us with investors we were trying to attract. We build a detailed underlying framework for identifying high-quality originators, we designed structures that would allow us to attract investors with varying risk and ratings appetite and importantly, allow us to participate as principals. And we put in the monitoring and surveillance framework in place for all the investments we made.

IFMR Capital began by investing in the subordinated tranches of all transactions it structured and took to market. It changed the way the market looked at these underlying sectors and borrowers, at the investment opportunities therein and at us at IFMR. Suddenly large financial institutions were willing to speak to us and listen to our story of why traditionally excluded sectors could actually make for high-quality investments. It wasn’t easy at all. But nothing of great significance comes easily, does it?  We encountered a world of skeptics.  A lot of people said it wouldn’t work. We were told that the MOSEC<sup>TM </sup>was a great one-off exotic structure. The numbers speak for themselves. We’ve structured, invested in and placed more than a 100 MOSEC<sup>TM</sup> transactions directly enabling a large number of institutions and indirectly enabling millions of underlying borrowers to access capital on tap.
<h4><strong>Q: How does IFMR define success and impact, and what has been IFMR’s greatest success?</strong></h4>
<strong>A:</strong> We measure our impact in terms of the number of lives impacted — directly through our retail KGFS network at IRCS and indirectly through our wholesale originator network at IFMR Capital.

Another way we measure impact is by measuring the amount of capital flow enabled by us. Creating an enabling financial market infrastructure is yet another way to create impact. The creation of a strong ratings framework and a ratings track record across originators and sectors has resulted in the ability to benchmark the sectors we work in using a framework well understood and accepted by capital market investors.  The listing of many of our transactions, including that of the MOSEC<sup>TM</sup> on the Bombay Stock Exchange is another mark of impact on market development for our sectors. The listing of paper backed by microloans made to women across remote corners of the country was a demonstration of the fact that credit originated to these borrowers could adhere to the high standards of commercial viability, transparency and reporting that is a prerequisite for listing.
<h4><strong>Q: What are some of your lessons learned from your eight years with IFMR?</strong></h4>
<strong>A:</strong> (1) When somebody tells you an idea is not going to work simply because others tried it and failed, don’t listen to them! (2) When it comes to building new products/markets/ideas, it helps to think big – to think through every aspect carefully and believe that this isn’t going to be a one-off deal but one that will grow into a full-fledged sustainable, scalable business. Working on one-off deals may give a sense of achievement, but it is the scale and the sustainability that will really create lasting impact. (3) Finally, lending to excluded sectors, geographies or communities is not necessarily risky. “Poor borrower” does not necessarily mean “Poor credit”.  Many individuals and businesses across the world are excluded from the formal financial sector not because they are risky, but because people like us haven’t yet found ways to provide them access to capital in a way that is most suited to their needs. The problem is with us, not with them.

<img class=" wp-image-317 alignleft" src="http://blogs.accion.org/wp-content/uploads/2015/12/Kshama_Fernandes_IFMR_Capital_CEO_works_in_rural_india.jpg" alt="Kshama_Fernandes_IFMR_Capital_CEO_works_in_rural_india" width="163" height="163" />

<em>Kshama Fernandes</em> <em>is one of India’s outstanding young business leaders. As CEO of IFMR Capital, she is leading a company that is transforming the very fabric of finance in India.</em> <em>Before joining IFMR Trust, she was the Head of the Finance faculty at the Goa Institute of Management. She has also been a driving force in committees set up by the Government of India related to the development of capital markets and the advancement of financial inclusion.</em>

IFMR: From rural India to the Bombay Stock Exchange

IFMR