<span data-contrast="auto">A decade ago, </span><a href="https://www.cgap.org/topics/collections/digital-credit" target="_blank" rel="noopener noreferrer"><span data-contrast="none">digital credit models</span></a><span data-contrast="auto"> that catered to low-income consumers were relatively unknown and untested. A lot has changed since then. Data from the </span><a href="https://ccaf.io/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Cambridge Center for Alternative Finance</span></a><span data-contrast="auto"> shows that between 2011 and 2021, the number of digital lenders -- including those catering to low-income consumers -- has grown nearly ten-fold globally. </span><a href="https://www.imf.org/en/Publications/WP/Issues/2021/03/19/Digital-Financial-Inclusion-in-Emerging-and-Developing-Economies-A-New-Index-50271" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Economies in Africa and Asia</span></a><span data-contrast="auto"> have significantly driven this growth within the emerging market context. This rapid growth has been accompanied by a rise in consumer protection challenges, which have been studied and </span><a href="https://www.cgap.org/topics/collections/digital-credit" target="_blank" rel="noopener noreferrer"><span data-contrast="none">reported extensively in the East African context</span></a><span data-contrast="auto">. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">Catalytic capital — debt, equity, guarantee, or other instruments that assume disproportionate risk to return — is often seen as an important signaling device to attract further, timely investment in the target. As such, it can facilitate innovation and help organizations and companies build a track record in underserved markets.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<blockquote class="pullquote--right"><span data-contrast="auto">Catalytic capital has spurred rapid growth in digital credit, but at the same time, digital credit has created significant concerns over consumer protection.</span></blockquote>
<span data-contrast="auto">However, the role of catalytic capital in influencing market-level incentives for digital credit has been less studied. In multiple markets, catalytic capital has spurred rapid growth in digital credit, resulting in an influx of investment. At the same time, digital credit has created significant concerns over consumer protection, and the supervisory capacity of local regulators has failed to keep pace with the risks emerging from the rapid growth of digital credit. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">In our research, we focus on the role of catalytic capital in shaping market incentives as they attract capital to digital credit models. We conclude that the role played by catalytic capital differs depending on the stage of market development. At an early stage, catalytic capital investments can help prove business models, expand services to newer consumer segments, and/or attract capital to underserved geographies. As the supply of capital increases, markets shift to a growth stage. Catalytic capital investors, who are more impact-oriented, need to shift their roles as markets grow to one that addresses consumer risks that accompany an increased supply of capital. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h1><b><span data-contrast="auto">A helpful case study: Kenya -- the birthplace of digital credit </span></b><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></h1>
<span data-contrast="auto">Our research traces the role played by catalytic capital investments, mapping consumer risks that evolved to missed signals that catalytic capital investors could have used to build guardrails. We hope other markets on a similar growth path as Kenya can use this guidance.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">Consumer risks rising from digital credit can be influenced through investor incentives, and they fall into three broad categories:</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">High interest rates, indebtedness, and default risks</span></b></h3>
<span data-contrast="auto">Financial service providers often cite the high cost of funds in emerging markets as the underlying driver for high interest rates. Catalytic capital investors can play a crucial role in reducing the cost of funds by deepening domestic capital markets. As one positive example, Lendable and other funders, including FSD Africa, set up a fund offering a first-loss default guarantee. This structure mobilizes domestic debt investors, increases transparency, and reduces the cost of funds for end borrowers as the supply of on-lending funds in emerging markets becomes less constrained.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">Aggressive sales practices, exploitative terms and conditions, and deceptive fees</span></b></h3>
<span data-contrast="auto">As investments in digital credit models rise, there is a need to establish responsible market practices. Catalytic capital providers can play a role in working with industry associations and regulators to establish responsible market practices, and advocacy is one of the most powerful tools they can use. For example, community Investment Management (CIM) is an institutional impact manager that began operations in mature markets and is now expanding to emerging markets. CIM co-founded </span><a href="http://www.borrowersbillofrights.org/bill-of-rights.html" target="_blank" rel="noopener noreferrer"><span data-contrast="none">the Small Business Borrowers’ Bill of Rights</span></a><span data-contrast="auto">, identifying six fundamental financing rights of all businesses. The Small Business Borrowers’ Bill of Rights has now been adopted by the </span><a href="https://www.aspeninstitute.org/programs/business-ownership-initiative/small-business-borrowers-bill-rights/#:~:text=The%20Small%20Business%20Borrowers%E2%80%99%20Bill%20of%20Rights%20identifies,in%20order%20to%20uphold%20and%20protect%20those%20rights." target="_blank" rel="noopener noreferrer"><span data-contrast="none">Responsible Business Lending Coalition,</span></a> <span data-contrast="auto">a network of for-profit and non-profit lenders, brokers, and small business advocates.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">Data privacy issues</span></b></h3>
<span data-contrast="auto">With the emergence of technology-driven business models, using data to innovate is a crucial part of the DNA of digital financial services. Catalytic capital providers have a role in ensuring that companies respect data privacy without constraining innovation.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h1><b><span data-contrast="auto">Complementing catalytic capital investments for responsible market development</span></b><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span></h1>
<span data-contrast="auto">While catalytic capital is crucial for innovations and expanding access, not everything is attributable to catalytic capital investors. While catalytic capital may enable market development, as the case of digital credit demonstrates, responsible market development does not automatically follow. Several other factors must be supported to complement investor incentives for responsible market development. Responsible market development needs investments beyond the firm level to enable market information, consumer awareness and capability, regulatory and supervisory capacity, and various other measures that can serve as checks and balances on firm behavior. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">While investors can conduct firm-level due diligence to ensure client protection principles are respected, two of the three legs of the consumer protection stool require grant funding: regulation/supervision and building consumer awareness. Market actors need access to timely information and market research that informs them about potential market risks and which consumer segments might be particularly vulnerable. In addition, market conduct supervision that facilitates consumer protection needs investment that allows actors to test and invest in new tools that can capture consumer risks as they evolve. Therefore, traditional grant funding is needed to support responsible market development along with catalytic capital investments.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">As a complement to catalytic capital investments, our research highlights six key lessons that can help support responsible market development:</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">1. Recognize market growth indicators.</span></b></h3>
<span data-contrast="auto">This requires infrastructure investments that can contribute to responsible market development. Catalytic capital investors face four strategic decisions that will shift their role as the market develops: when to exit an investment, who would replace them, how will the investee company continue responsible behavior post-exit, and how to balance financial and social returns at the time of exit. Answers to these questions require agreement on a common set of indicators for market growth.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">2. Support initiatives that can help source market-level data.</span></b></h3>
<span data-contrast="auto">Surveys that provide information on trends in funding and areas of concentration are crucial to support funding decisions for underserved areas. We need investments in sector-level evidence gap maps and systematic data on the volume of investments made in digital credit by funders and instruments. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">3. Design Digital Public Infrastructure (DPI) that respects users’ privacy and security.</span></b></h3>
<span data-contrast="auto">This will have a cascading effect on newer business models because those using digital rails tend to build on existing infrastructure. Responsible market development can result from investing in the inclusive design of public infrastructure, respecting users’ privacy and security, and supporting regulations that ensure accountability.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">4. Invest in industry associations and networks to complement regulatory capacity.</span></b></h3>
<span data-contrast="auto">Industry associations and networks can play the role of effective shadow regulators, often with the ability to monitor and identify emerging risks with market development. However, building this ecosystem requires investments beyond catalytic capital.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">5. Build regulatory/supervisory capacity.</span></b></h3>
<span data-contrast="auto">Expanding new models requires testing tools that can detect new risks and initiatives that can bring together regulators to learn from “sister” networks in other markets. These initiatives can help augment the capabilities of market conduct supervisors but require traditional grant funding. </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>
<h3><b><span data-contrast="auto">6. Invest in mechanisms enabling consumer awareness.</span></b></h3>
<span data-contrast="auto">Consumer awareness is crucial to reinforce consumer protection, but extant investment instruments may lack the incentives to support such initiatives.</span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

<span data-contrast="auto">The detailed report can be accessed </span><a href="https://www.centerforfinancialinclusion.org/the-role-of-catalytic-capital-in-digital-markets-successes-pitfalls-and-lessons-learned"><span data-contrast="none">here</span></a><span data-contrast="none">,</span><span data-contrast="auto"> and a discussion on the role of catalytic capital in digital credit at Financial Inclusion Week can be </span><a href="https://www.youtube.com/watch?v=7y8x44tLk2I&amp;list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY&amp;index=5&amp;t=5s" target="_blank" rel="noopener noreferrer"><span data-contrast="none">accessed here.</span></a><span data-contrast="auto"> </span><span data-ccp-props="{&quot;201341983&quot;:0,&quot;335559739&quot;:160,&quot;335559740&quot;:259}"> </span>

Catalytic Capital and Its Role in Digital Credit

In 2022, advances in artificial intelligence captured our collective imaginations in unprecedented ways. Whether it was the artistic text-to-image renderings of <a href="https://openai.com/dall-e-2/" target="_blank" rel="noopener noreferrer">Dall-E2</a> shown in this blog post or in-depth conversations with <a href="https://openai.com/blog/chatgpt/" target="_blank" rel="noopener noreferrer">ChatGPT</a>, the implications of data advances in analysis, prediction, and generation became clearer than ever to the “non-techy” public. Last year, governments around the world raced to stay on top of data advances through various data governance approaches, such as <a href="https://www.dlapiperdataprotection.com/" target="_blank" rel="noopener noreferrer">data protection legislation</a>, or draft approaches to regulating AI including the <a href="https://www.whitehouse.gov/ostp/ai-bill-of-rights/" target="_blank" rel="noopener noreferrer">White House’s AI Bill of Rights</a> and the <a href="https://artificialintelligenceact.eu/" target="_blank" rel="noopener noreferrer">EU’s AI Act</a>. What has become very clear is that there is both tremendous excitement at the promise of these advances, as well as significant concern.

Several sessions at <a href="https://financialinclusionweek.org/" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a> (FIW) 2022 focused on data-driven advances in inclusive finance that grappled with the duality of exciting opportunity and concerning risk – particularly with regards to low-income and vulnerable consumers, like female-owned MSEs and migrants.
<h1>Data Opportunities</h1>
A few sessions shared how customer data is helping to shape product design for traditionally underserved consumers. The UN Capital Development Fund hosted a session on <a href="https://www.youtube.com/watch?v=g15noAC2vWU&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=5" target="_blank" rel="noopener noreferrer">Driving Women’s Financial Inclusion and Resilience</a>, with a focus on how consumer data, whether administrative or survey based, can drive innovative financial products for women. In this session, a speaker from <a href="https://imeremit.com.np/" target="_blank" rel="noopener noreferrer">IME Nepal</a> talked about how the company is leveraging remittance transaction data during COVID to better understand consumers and expand its digital offerings, including a wallet. UNCDF highlighted demand-side research that showed the challenges women face in onboarding to digital remittance services. My colleague <a href="https://www.centerforfinancialinclusion.org/bio/anindita-chakraborty">Anindita Chakraborty</a> contributed to the discussion with insights from CFI’s research on the difficulties <a href="https://www.centerforfinancialinclusion.org/research/covid-19-and-msmes-data-and-analysis-to-understand-impact">female-led MSEs</a> faced during the pandemic, and how that data should inform products to help MSEs be more resilient in future shocks.
<blockquote>Customer data is helping to shape product design for traditionally underserved consumers.</blockquote>
In addition to leveraging consumer data, looking at data on a larger scale can have significant benefits. In a <a href="https://www.youtube.com/watch?v=F0aZV-Zfzd0&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=5" target="_blank" rel="noopener noreferrer">short session by Principal Financial Group</a>, the Principal team shared the launch of the Global Financial Inclusion Index, a ranking of 42 markets based on what governments, financial systems, and businesses are doing to advance financial inclusion for their populations. This index aims to give investors insights into the strength and resilience of these markets.

Several fintechs and providers shared insights on their data-driven business models. A <a href="https://www.youtube.com/watch?v=WwecOBYOyi4&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=6" target="_blank" rel="noopener noreferrer">session</a> hosted by Korean fintech giant <a href="https://www.sentbe.com/" target="_blank" rel="noopener noreferrer">SentBe</a> presented how its cross-border money transfer services leverage data on traditionally underserved consumers – including migrants from Bangladesh and Cambodia working in Korea – to provide customer-centric receipt options. Senegalese fintech <a href="https://www.lebfay.com/" target="_blank" rel="noopener noreferrer">LebFay</a> presented <a href="https://www.youtube.com/watch?v=DA8wqNKl2f4&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=7" target="_blank" rel="noopener noreferrer">its business model</a> that uses an app and artificial intelligence-driven scoring model to lend to traditionally underserved MSEs and tradesmen. And, <a href="http://imbita.org/" target="_blank" rel="noopener noreferrer">Imbita Swaziland Women’s Finance Trust</a> spoke about the digitalization journey in offering its savings and credit cooperative society (SACCO) members a USSD-based platform to save, borrow, and make mobile payments.
<h1>Data Risks</h1>
<blockquote class="pullquote--right">Challenges, including privacy, bias, and other human rights issues, can stem from the exponential growth of digital lending.</blockquote>
At the same time, several sessions highlighted the risks around data-driven innovation and what inclusive finance stakeholders need to do about it. <a href="https://aapti.in/" target="_blank" rel="noopener noreferrer">Aapti Institute</a>, an India-based think-tank that conducts research at the intersection of technology and digital rights, hosted a session <a href="https://www.youtube.com/watch?v=lXLY7BsG_fg&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=3" target="_blank" rel="noopener noreferrer">on AI and Financial Inclusion</a>, discussing risks and opportunities for risk mitigation with representatives from <a href="https://www.dvara.com/research/" target="_blank" rel="noopener noreferrer">Dvara</a>, <a href="https://rbihub.in/" target="_blank" rel="noopener noreferrer">RBI Innovation Hub</a>, and <a href="https://www.undp.org/india" target="_blank" rel="noopener noreferrer">UNDP</a>. This session raised challenges, including privacy, bias, and other human rights issues, that could stem from the exponential growth of <a href="https://www.centerforfinancialinclusion.org/digital-credit-algorithms-in-india-expanding-access-or-cementing-exclusion">digital lending in India</a>. I was honored to moderate a session on the <a href="https://www.youtube.com/watch?v=J0QaPM6sDDk&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=2" target="_blank" rel="noopener noreferrer">Potential of Privacy by Design for Inclusive Finance</a> with inputs from <a href="https://www.paypal.com/us/home" target="_blank" rel="noopener noreferrer">PayPal</a>, <a href="https://foundation.mozilla.org/en/" target="_blank" rel="noopener noreferrer">Mozilla Foundation</a>, and the <a href="https://www.dlak.co.ke/" target="_blank" rel="noopener noreferrer">Digital Financial Services Association of Kenya</a>. Representatives from PayPal and Mozilla discussed how Privacy by Design has been implemented in their business models, and Kevin Mutiso of DFSAK shared how startup fintechs can integrate and benefit from strong privacy practices.
<h1>Looking Ahead</h1>
As we look ahead to 2023, CFI will be monitoring how advances in AI are integrated into the inclusive finance space. Will there be chatbots or financial capability curricula that use ChatGPT? We’ll also be watching for countries to codify the use of AI and enforce data protection legislation. With so much happening in this space at the moment, there is a lot to pay attention to as we continue to grapple with the duality of data opportunities and risks.

View the full <a href="https://www.youtube.com/playlist?list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb" target="_blank" rel="noopener noreferrer">Data Risks &amp; Opportunities</a> Playlist from FIW 2022.

Financial Inclusion Week 2022 had over 3,300 registered participants from 2,000 organizations across 148 countries. With almost 400 speakers and 125 sessions, FIW 2022 was the largest event to date. All sessions from FIW 2022 can be viewed here.

And be sure to save the date for FIW 2023 which will take place October 16-19, 2023.

FIW Recap: Grappling with Data Opportunities and Risks in Inclusive Finance

Privacy choices are inherently <a href="https://www.ariewaldman.com/book-industry-unbound" target="_blank" rel="noopener noreferrer">contextual</a>, and individuals make different privacy calculi from one situation to another, deciding each time what and how much to share. The boundaries we negotiate depend on our expectations of what will happen to our information in each situation and how much we trust the recipient. For instance, you probably wouldn’t share the same information about your financial status with an acquaintance at work as you would with your tax advisor.
<blockquote class="pullquote--right">Negotiating privacy boundaries in the digital world, including inclusive finance, has become increasingly difficult.</blockquote>
The trouble is that negotiating privacy boundaries in the digital world, including inclusive finance, has become increasingly difficult. <a href="https://www.ipsos.com/en-us/news-polls/trust-in-the-internet-2022" target="_blank" rel="noopener noreferrer">Trust in digital providers</a> has dropped amidst well-documented data breaches and abuses. Trust is also challenged by consumers’ <a href="https://www.youtube.com/watch?v=lXLY7BsG_fg&amp;list=PL30fMMRd3G_4MWcg0tioe63vFk1WA8Clb&amp;index=3" target="_blank" rel="noopener noreferrer">surprise</a> over what data is collected about them. CFI’s <a href="https://www.centerforfinancialinclusion.org/trust-of-data-usage-sources-and-decisioning-perspectives-from-rwandan-mobile-money-users">research in Rwanda</a> found that mobile money users who had applied for digital credit were upset that inputs such as airtime top-ups might be used as part of the underwriting process.

All of this is why, in honor of Data Privacy Week, which is celebrated every year in late January, we’re calling for the inclusive finance field to rethink privacy – specifically to shift it to the left.  Shifting privacy left means bringing up privacy considerations early on in the product lifecycle and paying attention to privacy concerns from the outset, rather than just a final box to check for compliance once a product is already created.
<h1><strong>Focus on Privacy by Design</strong></h1>
One of the ways that people are rethinking privacy in inclusive finance is through an approach called Privacy by Design (PbD). The premise behind PbD is that because privacy is a core property of an IT system, it should influence the underlying system design, rather than be bolted on as an afterthought. In PbD, privacy considerations must therefore start at the ideation phase and be maintained throughout the product lifecycle. This stands in contrast to the compliance-driven approach that typically brings privacy into the discussion after all major design decisions have been made. Popularized by Dr. Ann Cavoukian in 2009, Privacy by Design is most notably mentioned in <a href="https://gdpr-info.eu/art-25-gdpr/" target="_blank" rel="noopener noreferrer">Article 25 in the GDPR</a>.

Despite enthusiasm for the approach and privacy as a value-proposition to consumers, there are limited resources to operationalize Privacy by Design, particularly for organizations like inclusive finance fintechs operating in emerging markets and serving low-income consumers. Last year, CFI conducted a literature review to better understand how PbD has been implemented and its potential for inclusive finance. The results, shared in a report entitled <a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/12/Potential-of-Privacy-by-Design-in-Inclusive-Finance-3.pdf">Embedding Trust: The Potential of Privacy by Design in Inclusive Finance</a>, landscape the various approaches to PbD in the legal, engineering, UX/UI, and academic fields. While each of the approaches, <span class="ui-provider wc b c d e f g h i j k l m n o p q r s t u v w x y z ab ac ae af ag ah ai aj ak" dir="ltr">outlined in the graphic below, </span>provided valuable tools, there were few examples of holistic approaches that product teams could use to embed privacy throughout the design and development processes.

<img class="wp-image-45694 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/02/Screenshot-2023-02-02-at-9.19.21-AM.png" alt="" width="904" height="570" />

&nbsp;

CFI believes that five key considerations should guide any applications of PbD in inclusive finance:
<h3><strong>1. PbD should be positioned as business-enhancing.
</strong></h3>
Because privacy has historically been seen as a compliance-related cost, to encourage private companies and fintechs to employ PbD techniques, PbD needs to be presented as a business-enhancing design benefit.
<h3><strong>2. PbD needs to be adapted to work for resource-constrained companies and emerging markets. </strong></h3>
Because PbD has been developed and largely implemented in developed countries, little work has been done to date to make PbD approachable and operational outside of those contexts.
<h3><strong>3. PbD should incorporate low-income and vulnerable consumers’ offline privacy needs in addition to privacy for their digital data.</strong></h3>
In considering the user and his/her privacy capacities and needs, PbD can bring customer-centricity into the data-intensive aspects of digital financial products.
<h3><strong>4. PbD must balance consumer privacy preferences with companies’ needs.</strong></h3>
When implementing PbD, it will be important to consider both the information that companies must collect to be able to perform their work, as well as the privacy preferences of consumers. A balance must be found to ensure that a product will function without compromising consumer privacy.
<h3><strong>5. PbD must articulate privacy responsibilities across disaggregated value chain and partnerships.</strong></h3>
Consumer data can sit and be shared across multiple organizations in today’s modularized fintech ecosystem, and not all actors in the value chain have equal power and influence.

&nbsp;

Moving forward, CFI is working to create a PbD playbook for fintech product teams to embed and position privacy as a core value proposition to consumers. The playbook aims to help product managers – in their role of facilitating product development by technical staff (data scientists, engineers, UX/UI, etc.) -- define the user journey and set metrics for product success, and ultimately present a strong opportunity to embed privacy. While product teams are key to executing Privacy by Design, a fintech’s executives and leadership must also recognize the business value of investing in privacy for it to succeed. Similarly, investors and funders need to prioritize privacy and realize the value of embedding privacy into design from the outset, not only because it is the right thing to do for consumers, but also because it is increasingly important to their bottom lines. By increasing awareness of Privacy by Design in the inclusive finance space, we can make strides in ensuring that consumers are protected and help build trust in digital finance.

In Honor of Data Privacy Week, Let’s Rethink Privacy in Inclusive Finance

The pandemic <a href="https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments" target="_blank" rel="noopener noreferrer">accelerated the adoption of digital financial services</a>, especially in emerging economies, largely due to the number of people who <a href="https://www.un.org/sustainabledevelopment/blog/2021/12/as-internet-user-numbers-swell-due-to-pandemic-un-forum-discusses-measures-to-improve-safety-of-cyberspace/" target="_blank" rel="noopener noreferrer">began using the internet for the first time</a>. The <a href="https://www.worldbank.org/en/publication/globalfindex" target="_blank" rel="noopener noreferrer">Global Findex 2021</a> found that of the adults in developing countries who paid utility bills directly from an account, one-third did so for the first time during the pandemic. In India, more than 80 million adults made their <a href="https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments" target="_blank" rel="noopener noreferrer">first digital merchant payment</a> after the start of the pandemic; in China, over 100 million adults did the same. However, the Findex 2021 data also showed a rise in consumer protection risks and cautioned that less experienced financial consumers were more vulnerable to such risks.

As digital financial services proliferate, new risks emerge. One of these risks is known as <a href="https://www.deceptive.design/" target="_blank" rel="noopener noreferrer">deceptive designs</a>, which are tricks used by companies when designing user interfaces that have the effect – either deliberately or otherwise – of obscuring, subverting, or impairing consumer autonomy, decision making, or choice. In other words, deceptive designs are used to manipulate people into making decisions that may not be in their best interest. Deceptive design is all around us and is increasing with rapid digitalization.

Those most vulnerable to deceptive designs are consumers with low digital capability, low financial means, or are those who are vulnerable because of life events or mental health issues. The use of deceptive designs in financial services, especially when catering to low-income and vulnerable consumers, can cause harm such as loss of agency and risks of data privacy, and can extend to financial losses that increase vulnerabilities and erode trust in the usage of digital financial services.

While the implications of deceptive designs on user privacy and data protection are beginning to be discussed among regulators, consumer protection concerns have yet to be addressed. This is partly because design is hard to regulate, and manipulative design can exploit existing laws and legal loopholes.
<h1>Deceptive Design Patterns Are Ubiquitous</h1>
In the last week, how often have you used an app on your smartphone or a website to order groceries? To shop for clothes? Or logged in to read online news? Chances are at least once. It is also likely that you encountered several deceptive designs during that time. Harry Brignull, who raised awareness of deceptive design, features nearly <a href="https://www.deceptive.design/hall-of-shame/all" target="_blank" rel="noopener noreferrer">400 examples of deceptive design practices</a> on his website. The New York Times, a publication that was one of the earliest to speak about deceptive designs, uses deceptive designs to make their paywall “smarter” and <a href="https://www.techdirt.com/2022/08/19/when-tech-companies-do-it-the-ny-times-calls-it-dark-patterns-when-the-ny-times-does-it-its-called-being-smart/" target="_blank" rel="noopener noreferrer">make it difficult to cancel subscriptions</a>.

In Kenya and Tanzania, <a href="https://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf" target="_blank" rel="noopener noreferrer">CGAP’s research</a> found several challenges with how digital lenders disclose actual pricing to consumers, using monthly or weekly interest rate figures instead of a standardized calculation like an annualized percentage rate (APR). <a href="https://wiredspace.wits.ac.za/server/api/core/bitstreams/d6e32783-24e7-4e50-8bcf-8c58f84bd872/content" target="_blank" rel="noopener noreferrer">Research by Mazer and Rowan (2016)</a> also found that some digital lenders only disclosed the price after consumers clicked the “I accept” button and the loan was executed. Insurance, a financial product that often is accused of mis-sale, can also use deceptive designs when sold online. In the UK, Currys, a well-known retailer, <a href="https://twitter.com/darkpatterns/status/1561031067334844418" target="_blank" rel="noopener noreferrer">nudges online shoppers during check out</a> by preventing them from moving forward unless they choose to buy insurance. In India, until laws changed recently to prevent the mis-sale of travel insurance, it was common to see travel portals use <a href="http://rsrr.in/wp-content/uploads/2021/04/UNPACKING-DARK-PATTERNS-UNDERSTANDING-DARK.pdf" target="_blank" rel="noopener noreferrer">pre-checked buttons to bundle travel insurance</a> with ticket purchase.
<h1>Focus on Consumer Protection by Design</h1>
The nature of these emergent risks requires new partners to work together – including designers, researchers, technologists, civil society actors, and lawyers who work on consumer rights, along with regulators, supervisors, investors, financial service providers, and tech-based providers. To kick off this work, CFI and <a href="https://www.credit-suisse.com/us/en.html" target="_blank" rel="noopener noreferrer">Credit Suisse</a> are partnering to leverage the diverse talent and expertise of Credit Suisse employees through the Innovation for Impact series, a spinoff of the bank’s <a href="https://www.credit-suisse.com/careers-news/en/articles/careers/spark-ideas-explore-new-trails-202012.html" target="_blank" rel="noopener noreferrer">Future of Banking Hackathon</a>. Applying Credit Suisse’s Fresh Perspectives! Framework, the bank’s innovation lifecycle approach, teams of Credit Suisse employees will be guided through addressing the challenges that low-income consumers can face from the use of deceptive designs in financial services. The teams will work together to generate novel ideas, and rapidly test, learn, and adapt their solutions to address the presented challenges.

Through its <a href="https://www.credit-suisse.com/about-us/en/our-company/corporate-responsibility/economy-society/financial-inclusion.html" target="_blank" rel="noopener noreferrer">Financial Inclusion Initiative</a> (FII), Credit Suisse has partnered with Accion for over a decade, including as a founding supporter of CFI. Through the FII, Credit Suisse aims to support the availability of innovative and financially inclusive solutions to help advance progress towards the UN Sustainable Development Goals (SDGs) by providing both financial as well as human resources. The Innovation for Impact series provides a win-win opportunity for Credit Suisse employees to leverage and develop their expertise and innovation capabilities while at the same time contributing to an important challenge facing the inclusive finance sector.

The partnership between Credit Suisse and CFI is a way to begin generating awareness of deceptive designs with investors and financial service providers, and the harms they can cause to low-income consumers. The work on deceptive designs is part of a larger body of work that CFI is developing that looks at how to embed consumer protection by design for systemic change to create digital, inclusive financial systems that are more equitable, less discriminatory, and more empowering.

CFI is launching a strategic area of work around ‘Consumer Protection by Design’ to identify and address newer risks that emerge as inclusive finance is digitalized. This area of work will define the term consumer protection by design, identify newer risks (including deceptive designs), and assess whether these risks tend to be prevalent in specific geographies, industries, and company stages, and if they target specific user groups that are more susceptible. CFI will also conduct a landscape analysis of the specific harms posed to vulnerable consumers with a focus on identifying market monitoring tools and regulatory solutions that can be used to mitigate these harms.

The Hidden Traps of Deceptive Design: Embedding Consumer Protection into DFS

India’s fintech lending industry has grown rapidly since 2014, with the evolution of new models and approaches to lending. This rapid growth offers the potential for many upsides in the form of <a href="https://www.cgap.org/blog/indian-start-for-digital-credit" target="_blank" rel="noopener noreferrer">easier access to much needed credit and including hitherto excluded consumer segments</a> who may not have the ability to prove their ‘creditworthiness’. In India, as in other parts of the world, the growth in digital lending has been accompanied by a variety of risks. Some of these risks – such as over-indebtedness, poor market practices of aggressive marketing and collection, and pricing – have long been associated with lenders and need to be addressed as a market conduct issue. However, the digital nature of fintech lending poses several new risks that, combined with traditionally known risks, create an environment of poor consumer outcomes and mistrust of the industry.
<h1><strong>Fintech Risk Barometer Study</strong></h1>
While there has been extensive media coverage around several of the fintech lending risks, these cases tend to be anecdotal and do not provide a sense of which risks are highest priority as the industry evolves. To better understand the multitude of risks the Indian fintech lending industry faces, the <a href="https://faceofindia.org/" target="_blank" rel="noopener noreferrer">Fintech Association for Consumer Empowerment</a> (FACE) and CFI partnered to conduct a risk barometer study. The resulting <a href="https://www.centerforfinancialinclusion.org/fintech-lending-risk-barometer-2022-2023">fintech lending barometer report</a> is the first attempt at identifying how risks are perceived by various stakeholders associated with the fintech lending industry in India and is a crucial first step to documenting how risks evolve.

For fintech lenders, this report presents an opportunity to understand the landscape, identify the opportunities and dangers, and plan or correct their course of action. For regulators, supervisors, and policymakers, the survey findings signal what areas within the Indian fintech industry need to be more closely examined and addressed with urgency.

The fintech lending barometer study followed a mixed methods approach. First, a survey was used to gather initial perceptions of risks, which then was followed by a series of qualitative interviews with select respondents to further understand how emerging risks impact consumer lives. For each risk, the survey asked participants to rank 23 risks on a scale of 1-7, with one being the lowest severity risk and seven being the highest. The survey also captured comments and feedback from survey participants on these risks and the top three opportunities.

<em>Top 10 Risks Identified by Survey Respondents</em>

<img class="alignnone wp-image-45643" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2023/01/Screenshot-2023-01-13-at-2.02.11-PM.png" alt="" width="666" height="775" />

The top three risks identified were unscrupulous fintech lenders, rising cyber fraud and crime, and issues around data privacy. The report is being released at the <a href="https://inclusivefinanceindia.org/" target="_blank" rel="noopener noreferrer">Inclusive Finance India Forum 2023</a> and can be accessed <a href="https://www.centerforfinancialinclusion.org/fintech-lending-risk-barometer-2022-2023">here</a>.
<h1><strong>Consumer Protection Implications</strong></h1>
<blockquote class="pullquote--right">Industry associations have an inherent advantage in gathering early insights on consumer complaints and experiences from their members and in getting inputs on market trends.</blockquote>
Kate McKee, former senior policy advisor at CGAP, who pioneered thinking on consumer protection for inclusive finance, often referred to the three legs of the ‘<a href="https://www.mfw4a.org/sites/default/files/resources/Kate_McKee_english.pdf" target="_blank" rel="noopener noreferrer">consumer protection stool’</a> –  regulation, market monitoring and self-regulation, and building consumer awareness – where each of the three legs must be stable in order to responsibly and reliably provide for consumers. While the Reserve Bank of India has been proactive as a regulator in issuing guidelines on digital lending, there is a role to be played by industry associations like FACE and others in enabling market monitoring. Industry associations have an inherent advantage in gathering early insights on consumer complaints and experiences from their members and in getting inputs on market trends. For instance, they may hear about specific instances of fraud from their members which can erode the reputation of the industry in general. This provides associations with a unique opportunity to identify emerging risks and either escalate them to supervisors or establish responsible market conduct. This in turn can boost trust in businesses and offer long term value. For supervisors, this interaction with industry associations can help them stay abreast of market developments and assists with considerations for investing in appropriate suptech tools depending on the nature of risk identified.

A host of market monitoring tools exist and several are summarized in <a href="https://www.cgap.org/topics/collections/market-monitoring-tools" target="_blank" rel="noopener noreferrer">this toolkit</a> by CGAP. However, effective market conduct supervision depends on timely identification of market risks and reviewing how these risks evolve with market growth. CFI’s consumer protection strategy focuses on strengthening market conduct supervision by researching emerging risks and working with partners who can elevate these risks to supervisors. This partnership with FACE is a step towards this goal and offers insights for industry associations of digital lenders in other markets.

Matters of Urgency: Insights From a Fintech Risk Barometer Study

Consumer privacy risks have proliferated in the last decade in parallel with the increased adoption of digital technologies and the availability of consumer data. The great onboarding onto digital finance necessitated by COVID-19 also opened up vulnerable consumers to data misuse through scams in markets like the Philippines, Kenya, and India, among many others. Privacy violations can also have serious long-term consequences for financial inclusion and, even as access has improved, trust remains a critical ingredient in translating that progress into sustainable gains for consumers.

Evidence shows that when consumers fall prey to privacy-related harms, the loss of trust dissuades them from the opportunities afforded by digital finance. Privacy implications not only affect consumers but also impact businesses. While compliance with new data protection regulations has brought stronger safeguards, the rapid speed at which consumer data is collected, used, and shared in digital finance has far outpaced consumers’ understanding. For low-income digital financial consumers, the limits of informed consent and choice are even starker.

This report is intended to be an introduction to Privacy by Design (PbD) and to review the main PbD approaches in literature and wider market practice for their potential applications in the inclusive finance sector. The analysis is based on a literature review and key informant interviews with privacy and inclusive finance experts conducted by the Center for Financial Inclusion (CFI) between May and August 2022. The paper groups findings into four approaches to PbD, each of which attempts to embed privacy through different means, often by combining various tools, methods, and areas of application. The paper also identifies a series of gaps and barriers that limit the potential of PbD, particularly in emerging markets and developing economies. The report closes with considerations for the adaption of PbD for fintechs working with low-income and vulnerable consumers. CFI aims to build off this initial report to develop practical guidance on PbD for fintech product teams.

Embedding Trust: The Potential of Privacy by Design for Inclusive Finance

Privacy Perceptions, Attitudes, and Behaviors: Perspectives from Indonesian Smartphone Users

<em><span class="TextRun SCXW233993774 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun" data-ccp-charstyle-defn="{&quot;ObjectId&quot;:&quot;8eed487e-3b20-4552-bee3-737de11680fa|42&quot;,&quot;ClassId&quot;:1073872969,&quot;Properties&quot;:[469775450,&quot;normaltextrun&quot;,201340122,&quot;1&quot;,134233614,&quot;true&quot;,469778129,&quot;normaltextrun&quot;,335572020,&quot;1&quot;,469778324,&quot;Default Paragraph Font&quot;]}">In honor of</span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun"> International Women’s Day 2022</span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun"> and </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">this year’s</span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun"> IWD theme of </span></span><a class="Hyperlink SCXW233993774 BCX0" href="https://www.internationalwomensday.com/" target="_blank" rel="noreferrer noopener"><span class="TextRun Underlined SCXW233993774 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="none"><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="Hyperlink">#Break</span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="Hyperlink">T</span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="Hyperlink">heBias</span></span></a><span class="TextRun SCXW233993774 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">, </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">CFI is </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">focused on shedding light on the </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">biases that hinder the advancement of <a href="https://www.centerforfinancialinclusion.org/research/womens-financial-inclusion">women’s financial inclusion</a>.</span> <span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">CFI applies a gender lens across all </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">its</span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun"> research, </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">working to </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">understand and address </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">barriers to </span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">women’s financial inclusion and economic empowerment</span><span class="NormalTextRun SCXW233993774 BCX0" data-ccp-charstyle="normaltextrun">.</span></span></em>
<h2><b><span data-contrast="auto">Online Safety and Security Risks Present Barriers for Women’s Financial Inclusion</span></b></h2>
<span data-contrast="auto">Although the pandemic has </span><a href="https://www.centerforfinancialinclusion.org/yes-covid-is-the-big-bang-of-digital-payments"><span data-contrast="none">accelerated the use of digital financial services</span></a><span data-contrast="auto"> and mobile phones provided opportunities to pivot businesses, stay connected, and continue working, </span><a href="https://www.gsma.com/r/wp-content/uploads/2021/06/The-Mobile-Gender-Gap-Report-2021.pdf" target="_blank" rel="noopener noreferrer"><span data-contrast="none">mobile ownership remained flat</span></a><span data-contrast="auto"> among women in low- and middle-income countries during COVID. As we look to make progress on women’s financial inclusion, we must also look at what is needed to help women feel safe and able to use mobile financial services.</span><span data-ccp-props="{&quot;134233117&quot;:true,&quot;134233118&quot;:true,&quot;201341983&quot;:0,&quot;335559740&quot;:240}"> </span>

<span data-contrast="auto">Safety and security are crucial components for online gender equity. And are a necessary and first step to using digital financial services. The </span><a href="https://www.gsma.com/r/wp-content/uploads/2021/06/The-Mobile-Gender-Gap-Report-2021.pdf" target="_blank" rel="noopener noreferrer"><span data-contrast="none">GSMA Mobile Gender Gap Report 2021</span></a><span data-contrast="auto"> reported safety and security in accessing mobile internet as the third barrier to women’s mobile internet access, behind literacy and affordability. As digital financial services become commonplace, ensuring safe and secure online spaces is a crucial first step towards inclusive finance for women. However, safety and security risks present barriers to mobile adoption for many women, ultimately impeding women’s access to and trust in mobile financial services.</span>
<h2><span class="TextRun MacChromeBold SCXW68164729 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun SCXW68164729 BCX0" data-ccp-charstyle="normaltextrun" data-ccp-charstyle-defn="{&quot;ObjectId&quot;:&quot;8eed487e-3b20-4552-bee3-737de11680fa|42&quot;,&quot;ClassId&quot;:1073872969,&quot;Properties&quot;:[469775450,&quot;normaltextrun&quot;,201340122,&quot;1&quot;,134233614,&quot;true&quot;,469778129,&quot;normaltextrun&quot;,335572020,&quot;1&quot;,469778324,&quot;Default Paragraph Font&quot;]}">Why </span><span class="NormalTextRun SCXW68164729 BCX0" data-ccp-charstyle="normaltextrun">Digital Safety and Security Are Especially </span><span class="NormalTextRun SCXW68164729 BCX0" data-ccp-charstyle="normaltextrun">Concerning</span><span class="NormalTextRun SCXW68164729 BCX0" data-ccp-charstyle="normaltextrun"> for Women</span></span></h2>
<span data-contrast="auto">While there are risks to online environments that can make anyone – man or woman – feel unsafe, it is important to understand that these risks can often be heightened for women. </span><a href="https://pollicy.org/resource/alternate-realities-alternate-internets-feminist-research-for-a-feminist-internet/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Online environments</span></a><span data-contrast="auto"> can mimic and exacerbate risks in the physical environment that stem from offline gender norms and discrimination against women. The internet poses numerous risks – ranging from a higher potential for fraud, surveillance, and identity theft, to targeted violence, misuse of personal images and data, and sharing inappropriate content or behavior. The fear of being unable to cope with any of these – combined with the lack of redressal options and the absence of affordable legal recourse mechanisms – can lead to feeling unsafe.</span>
<blockquote class="pullquote--right"><span data-contrast="none">Online environments</span><span data-contrast="auto"> can mimic and exacerbate risks in the physical environment that stem from offline gender norms and discrimination against women.</span></blockquote>
<a href="https://gh.bmj.com/content/6/Suppl_5/e005596" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Cultural norms and ideologies</span></a> <span data-contrast="auto">that limit women’s freedom of movement often translate into restrictions in accessing the internet, or even having access to a mobile phone. </span><a href="https://dai-global-digital.com/cybersecurity-frontier-insights-findings-user-perceptions-of-trust-and-privacy-on-the-internet.html" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Others face consequences, or social censure from having an online presence</span></a><span data-contrast="auto"> reinforcing norms experienced in the real world. These barriers shape women’s online behavior and create significant obstacles for usage, exacerbating the mobile gender gap.</span>

<span data-contrast="auto">In addition to mimicking and exacerbating risks online, gender norms in the real world can shape one’s online behavior. </span><a href="https://www.dai.com/fi-cyber-user-trust.pdf" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Research in India</span></a><span data-contrast="auto"> showed that the very act of going online can violate expectations of a woman’s behavior in society. Women are told they should not talk to men outside their family or be accused of “improper” behavior. The fear of being discovered online by family or extended family forces women to minimize their online footprint and reduce their internet usage.</span>
<blockquote class="pullquote--left"><span data-contrast="auto">In societies with hegemonic gender ideologies, the woman is almost always blamed for everything that goes wrong.</span></blockquote>
<span data-contrast="auto">Furthermore, the perception of women being more vulnerable is reinforced by a lack of clarity on recourse mechanisms, which often do not exist. If recourse mechanisms do exist, in some cultural contexts, women may be blamed for putting themselves in a compromising situation or may not have the courage to speak up. Finally, countering online harassment can be harder for women because it is often subversive, can be conducted through one-on-one interactions, and is difficult to track and trace since abuser identities are often hidden or fake. In societies with hegemonic gender ideologies, the woman is almost always blamed for everything that goes wrong.</span>
<h2><span class="TextRun MacChromeBold SCXW65126004 BCX0" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun" data-ccp-charstyle-defn="{&quot;ObjectId&quot;:&quot;8eed487e-3b20-4552-bee3-737de11680fa|42&quot;,&quot;ClassId&quot;:1073872969,&quot;Properties&quot;:[469775450,&quot;normaltextrun&quot;,201340122,&quot;1&quot;,134233614,&quot;true&quot;,469778129,&quot;normaltextrun&quot;,335572020,&quot;1&quot;,469778324,&quot;Default Paragraph Font&quot;]}">What Can Be Done to Support a </span><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun">S</span><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun">afe and </span><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun">S</span><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun">ecure </span><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun">Online E</span><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun">nvironment for </span><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun">W</span><span class="NormalTextRun SCXW65126004 BCX0" data-ccp-charstyle="normaltextrun">omen</span></span></h2>
<span data-contrast="auto">Creating a safe and secure online environment for women to transact will need cross-sector collaboration and will require efforts from multiple stakeholders. Below are a few ideas for ways to better support women with online and digital services.</span>
<ol>
 	<li data-leveltext="%1." data-font="" data-listid="3" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">
<h3><b><span data-contrast="auto">Financial service providers or fintechs that develop apps have a responsibility to ensure that principles of necessity and </span></b><a href="https://edps.europa.eu/data-protection/our-work/subjects/necessity-proportionality_en" target="_blank" rel="noopener noreferrer"><b><span data-contrast="none">proportionality</span></b></a><b><span data-contrast="auto"> are followed when seeking user data. </span></b></h3>
<span data-contrast="auto">Requesting access to photographs on phone galleries, or getting access to phone contacts should not be automatic, and must be restricted for access and use by employees of a fintech who use this to </span><a href="https://www.icirnigeria.org/nigerian-fintech-companies-shame-threaten-customers-for-late-payment-of-loans/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">collect overdue loans</span></a><span data-contrast="auto">, or follow up on payments. This can prevent </span><a href="https://www.wired.co.uk/article/google-loan-apps-india-deaths" target="_blank" rel="noopener noreferrer"><span data-contrast="none">misuse and harassment</span></a><span data-contrast="auto"> that specifically targets women.</span></li>
 	<li data-leveltext="%1." data-font="" data-listid="3" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">
<h3><b><span data-contrast="auto">Design easier complaint processes.</span></b></h3>
<span data-contrast="auto">IPA’s </span><a href="https://www.poverty-action.org/publication/nigeria-consumer-protection-digital-finance-survey" target="_blank" rel="noopener noreferrer"><span data-contrast="none">research in Nigeria</span></a><span data-contrast="auto"> shows that even with digital products, customers tend to resolve challenges in person. And when complaints remain unresolved, usage tends to drop. Apps should have easy-to-access safety mechanisms that can help them block calls or alert the provider through a help button, in case of an emergency. Additionally, customers who have </span><a href="https://www.poverty-action.org/publication/nigeria-consumer-protection-digital-finance-survey" target="_blank" rel="noopener noreferrer"><span data-contrast="none">lower income and education levels</span></a><span data-contrast="auto"> are </span><a href="https://www.centerforfinancialinclusion.org/client-voices-rwandans-speak-on-digital-financial-services"><span data-contrast="none">less likely</span></a><span data-contrast="auto"> to use formal redress channels. Initiatives like ‘</span><a href="https://www.digitalsafetea.com/" target="_blank" rel="noopener noreferrer"><span data-contrast="none">Digital Safe-tea’</span></a><span data-contrast="none">,</span><span data-contrast="auto"><span data-contrast="auto"> an interactive fiction game about digital safety issues, can help alert women on rules to follow in an online or digital world. Using peer learning mechanisms also could help women learn how to navigate digital environments safely.</span></span></li>
 	<li data-leveltext="%1." data-font="" data-listid="3" aria-setsize="-1" data-aria-posinset="1" data-aria-level="1">
<h3><b><span data-contrast="auto">Create a conducive policy and legal environment for data rights.</span></b></h3>
<span data-contrast="auto"> Sharing information may be crucial to enable access to digital financial services. However, FSPs, MNOs and other actors involved should have data sharing policies and be held accountable when this data is misused by their employees or agents, or when there are data breaches. When customers receive calls from people who claim they are from a specific company or have access to personal information, there should be a way to verify the information or report it to the company and a central authority that can adjudicate on the breach of rights.</span></li>
</ol>
<blockquote class="pullquote--right"><span data-contrast="auto">Women will only trust the digital environment if they feel safe enough to report online incidents and if these reports are acted upon.</span></blockquote>
<span data-contrast="auto">Women will only trust the digital environment if they feel safe enough to report online incidents and if these reports are acted upon. Inclusion can only take place if there is a common culture that respects all customer voices. We need to better encourage women, or anyone facing abuse and discrimination, that if they see something, they need to say something. As we work to break the biases that hinder women’s financial inclusion and, ultimately women’s economic empowerment, ensuring safe and secure online spaces is a crucial first step.</span>

If You See Something, Say Something

When Goldman Sachs came under fire for offering women lower lines of credit than men on the now <a href="https://www.nytimes.com/2019/11/10/business/Apple-credit-card-investigation.html" target="_blank" rel="noopener noreferrer">infamous Apple Card</a>, they defended the product against charges of sexism by explaining that gender had not been an input to the credit scoring model. If an applicant’s gender was never fed into the algorithm, how did credit decisions end up discriminating against women who had similar credit histories as men?

Gender-blind credit scoring is an example of what many AI bias researchers call “fairness through unawareness,” an approach that intentionally excludes data on sensitive attributes like race, ethnicity, religion, or sex with the goal of reducing discriminatory outcomes. Behind this approach is the idea that eliminating markers of different group identities will prevent basing decisions on those characteristics. This has led to failures in the past, notably <a href="https://cpb-us-e1.wpmucdn.com/sites.suffolk.edu/dist/3/1172/files/2014/01/Rice-Swesnik_Lead.pdf" target="_blank" rel="noopener noreferrer">redlining</a>. Recent research has shown it can also make <a href="https://arxiv.org/abs/2009.06251" target="_blank" rel="noopener noreferrer">discrimination harder to detect and address</a> in the era of algorithmic decisions.
<blockquote class="pullquote--right">“Fairness through unawareness” intentionally excludes data on sensitive attributes like race, ethnicity, religion, or sex with the goal of reducing discriminatory outcomes.</blockquote>
As algorithms <a href="https://www.centerforfinancialinclusion.org/the-stories-algorithms-tell-bias-and-financial-inclusion-at-the-data-margins" target="_blank" rel="noopener noreferrer">transform the financial sector</a>, we need a better understanding of how to mitigate against discriminatory outcomes to ensure that those left out of the digital ecosystem today do not face further financial exclusion. Otherwise, we may not know how many Apple Card equivalents exist in inclusive finance.

This post explores the challenges and tradeoffs of using sensitive attribute data for detecting discrimination in the context of evolving data protection norms and regulations.
<h2>The Perils of Fairness through Unawareness</h2>
The idea may seem counterintuitive: if you remove gender from the data inputs of a credit model, how does the algorithm consistently assign a lower limit to women? The reason is that credit scoring algorithms are crunching larger amounts and new sources of data, which means that the model can inadvertently use proxies for sensitive attribute data in decisions, even if that was not the intention of the model developers. For instance, the <a href="https://journalofbigdata.springeropen.com/articles/10.1186/s40537-019-0180-9" target="_blank" rel="noopener noreferrer">type of phone</a> someone uses or the <a href="https://dl.acm.org/doi/10.1145/2721896.2721908" target="_blank" rel="noopener noreferrer">apps a person installs on their phone</a> can act as proxies for gender, age, or other characteristics.
<blockquote class="pullquote--left">Models can inadvertently use proxies for sensitive attribute data in decisions, even if that was not the intention.</blockquote>
A very simple method for testing algorithmic bias within a credit scoring model requires only a few variables like the actual default rate, the actual score of the individual when approved, and the variable you want to test with your algorithm, such as gender or race.
<h2>Data Tensions: Privacy vs. Anti-Discrimination</h2>
So, why isn’t this done? The answer lies in data limitations, sometimes based on very legitimate concerns about histories of injustice. It illustrates one of the challenges of detecting and monitoring for bias in algorithmic systems without infringing on privacy rights.

Many countries around the world prohibit collecting sensitive data or basing credit decisions on protected categories either under their banking regulations or under new data privacy legislation. In India, lenders are prohibited from discriminating on the <a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=764" target="_blank" rel="noopener noreferrer">grounds of sex, caste, or religion</a>. In the U.S., the Equal Credit Opportunity Act (ECOA) made it illegal for credit providers to discriminate based on sex, race, national origin, and other protected characteristics in response to widespread denials of credit to women and people of color. ECOA prohibits lenders from collecting this data in the first place, even for the purpose of detecting discrimination, because of fears it will be used improperly to further perpetuate bias in consumer lending. Research in the US shows that discriminatory trends have been <a href="https://arxiv.org/pdf/1912.06171.pdf" target="_blank" rel="noopener noreferrer">hard to detect in consumer lending</a> and that a lack of sensitive attribute data has also created enforcement challenges.

While not all lending regulations prohibit the collection of sensitive data, data privacy legislation introduces new limits on this data. The General Data Protection Regulation (GDPR), which has become the model for legislation in many developing markets, bars certain sensitive data from being collected or processed -- including data on race and ethnic origin, political opinions, philosophical beliefs, sexual orientation, and biometrics -- without individual consent.
<blockquote class="pullquote--right">Concerns about safely and properly using sensitive attribute data are valid given histories of discrimination and surveillance of minority groups in both wealthy and developing countries.</blockquote>
On top of GDPR, the European Commission has recently put forward <a href="https://digital-strategy.ec.europa.eu/en/library/proposal-regulation-laying-down-harmonised-rules-artificial-intelligence" target="_blank" rel="noopener noreferrer">draft legislation to regulate artificial intelligence</a>, with specific provisions for AI systems classified as high risk, which includes credit scoring. The draft legislation suggests that AI providers should process “special categories of personal data” to monitor and correct for bias in the public interest, but does not clarify collection practices or consent processes for such data. Concerns about safely and properly using sensitive attribute data are valid given histories of discrimination and surveillance of minority groups in both wealthy and developing countries. Changes in regulatory frameworks to allow for use of this data to mitigate against further discrimination require public trust bolstered by technical solutions that protect against misuse. Depending on a country’s history or in places experiencing active or simmering conflict, technical solutions may not be enough. For example, in a country like Rwanda where <a href="https://www.nytimes.com/2004/04/09/world/a-decade-after-massacres-rwanda-outlaws-ethnicity.html" target="_blank" rel="noopener noreferrer">ethnic distinctions are banned</a>, the tensions around sensitive identities make it difficult to fathom collecting and using such information, especially by the government.
<h2>Data Ecosystems in Emerging Markets: It’s Complicated</h2>
This tension between privacy and anti-discrimination may be exacerbated in developing markets by the <a href="https://centerforfinancialinclusion.org/rethinking-financial-inclusion-at-the-data-margins/" target="_blank" rel="noopener noreferrer">limited digital footprints</a> of customers at the data margins, as well as paltry knowledge on how data trails and protected groups intersect.

Sex-disaggregated data is still <a href="https://data2x.org/wp-content/uploads/2020/03/MappingGenderDataGaps_Economic.pdf" target="_blank" rel="noopener noreferrer">largely unavailable</a> in the financial sector and for many economic indicators in developing markets. Beyond availability, there is less understanding of how women’s lives and the barriers that shape their economic behaviors are reflected in data used for credit decisions. The reality is that gender, ethnic, or religious identities interact with other indicators (like income, asset accumulation, or technology use) and will impact individuals’ data trails in ways that may misrepresent individuals’ potential and result in disparate outcomes (i.e. access to a financial product). Fairness through unawareness approaches are blind to this intersectionality.
<h2>Where Do We Go From Here?</h2>
As an industry, we can do more to understand the data inputs for digital financial services and how socioeconomic realities present in these datasets, especially for traditionally excluded groups. There will still be tradeoffs between privacy and anti-discrimination, but managing those tradeoffs requires a conversation between providers, regulators, donors, and the public to identify what is possible and explore the right balance.

These conversations can start with the many open questions that exist from a technical perspective. For instance, can <a href="https://ieeexplore.ieee.org/document/8970908" target="_blank" rel="noopener noreferrer">third parties</a> play a role in securely storing sensitive data, or are there options to use <a href="http://proceedings.mlr.press/v80/kilbertus18a/kilbertus18a.pdf" target="_blank" rel="noopener noreferrer">encryption</a> or <a href="https://spectrum.ieee.org/artificial-intelligence/machine-learning/engineering-bias-out-of-ai" target="_blank" rel="noopener noreferrer">synthetic data</a> techniques? Can regulators develop tools that allow them to estimate the demographic characteristics of a dataset, like the <a href="https://www.consumerfinance.gov/data-research/research-reports/using-publicly-available-information-to-proxy-for-unidentified-race-and-ethnicity/" target="_blank" rel="noopener noreferrer">Consumer Financial Protection Bureau has done</a> in the U.S.? Can investors encourage investees to design monitoring and evaluation indicators to help answer questions about how their algorithms perform on inclusion?

While the road ahead may be complex, starting these conversations and bringing the public into them, especially those whose lives will be affected by algorithmic decisions, will be crucial for building trust. We need to engage with emerging research on possible solutions to see what might be appropriate in developing markets. At the very least, financial inclusion stakeholders should know enough to respond to any gender-blind or fairness through unawareness approaches in digital finance with healthy skepticism.
<blockquote>Starting these conversations and bringing the public into them, especially those whose lives will be affected by algorithmic decisions, will be crucial for building trust.</blockquote>

Reducing Bias in Algorithmic Decisions Cannot Rely on “Blind” Approaches

This report, the third in a <a href="https://www.centerforfinancialinclusion.org/series/municipal-cash-transfer-programs-design-ids-and-data-protection">series</a> on municipal cash transfers in the U.S., focuses on data protection for undocumented or mixed-status beneficiary households. In the context of cash-based assistance (CBA) programs, poor data protection practices could add additional risks for low-risk individuals by providing data trails that could pave the way for unauthorized access to applicant or beneficiary data or leakage of personally identifiable information. These could leave a digital footprint that can make it easier for law enforcement to target undocumented individuals.

Considering these risks, we have identified and detailed approaches and strategies used to protect applicant and beneficiary data through four programmatic phases: targeting beneficiaries, outreach and onboarding, disbursement and distribution, and ongoing monitoring and data storage/retention. Insights in this report are gleaned from CFI interviews with cities, community-based organizations (CBOs), debit card providers, and privacy advocates.

This report and the others in this series are intended to guide municipal officials and CBOs considering or developing programs to support undocumented or mixed-status households. The insights may also be of interest to organizations advocating for and supporting the rights of undocumented populations, students and academics, and anyone <span data-contrast="auto">interested in </span><span data-contrast="auto">access to financial and</span> <span data-contrast="auto">public</span> <span data-contrast="auto">services</span><span data-contrast="auto"> for all members of U.S. communities. </span>

Protecting Beneficiary Data: Guidance for Municipal Cash Transfer Programs Responding to COVID-19

Michael Schlein

Kathleen Yaworsky

Coryell Stout

Mona Kapoor

Prateek Shrivastava

Iain Brougham

Priya Punatar

Latin America and The Caribbean

India

South Asia

Kenya

Sub-Saharan Africa

Europe and Central Asia

Access Usage Gap

Challenges and Crises

Customer Centricity

Data Privacy

Data Transparency

Digital Financial Services

Digital Transformation

Enabling Environment

Financial Health

Financial Inclusion Strategy

Fintech

Impact Investing

Microfinance Institutions

Mobile Banking

MSME/SME Finance

Partnerships

Personal Financial Management

Responsible Digital Finance

Responsible Product Design and Delivery

Savings

Small Business Owners

Underserved Groups

Women

Agricultural and Rural Finance

Alternative Data

Consumer Protection

Credit

Agent Banking

Digital Payments

Financial Capability

Human Centered Design

Resilience

Fintechs

Tech-Touch Balance

Policy, Regulation and Government Initiatives

Article

Report

At Accion, we know financial services are powerful tools to help reduce poverty and create opportunity. We work to create a fair and inclusive economy where underserved people have quality financial choices and opportunities. And in our recently published <a href="https://www.accion.org/2022-impact-report" target="_blank" rel="noopener noreferrer">Impact Report</a>, we dive into how we translate our vision into action — and impact.

We support innovative companies. We create responsible digital financial solutions. And we conduct rigorous research toward building a fair and inclusive economy for underserved people globally. Since our founding in 1961, we have helped build 235 financial institutions across 75 countries, and our work reached 106 million people <a href="https://www.accion.org/2022-annual-report/" target="_blank" rel="noopener noreferrer">last year, </a>helping them secure a brighter future.

That’s only a snapshot of our impact. To understand exactly how our work is making a difference in people’s lives — and how to maximize our impact — we systematically gather feedback from our partners and their clients so we can quickly learn what is and isn’t working, and share and promote best practices across our global networks.

By doing so, we’re able to learn and respond quickly to insights as they arise, which is key to equipping the people we serve — who are largely small business owners, smallholder farmers, and women — with financial tools that answer their unique needs and enable them to make better financial decisions. We also advocate for progress across the field of inclusive finance to elevate responsible impact measurement and customer-oriented solutions everywhere.
<h3>To understand impact, listen to clients</h3>
For a clearer picture of our impact, we need to listen to clients. This means looking beyond their ability to <em>access</em> new financial solutions and learning more about how they are <em>using</em> new tools to improve their lives. For example, are they saving money for the future? Are they able to respond to unexpected emergencies? Are they investing in and growing their businesses?

We integrated these questions into our first four-year partnership with Mastercard, which drove the digital transformation of small businesses and their financial service providers around the world. <a href="https://www.accion.org/the-impact-of-digital-transformation-on-underserved-microbusinesses-findings-from-accions-partnership-with-mastercard" target="_blank" rel="noopener noreferrer">Our impact research</a> showed 5.6 million microentrepreneurs started using new digital financial products on a regular basis. Critically, rates of 30-day usage increased by roughly four times the initial rate, showing how clients are making good use of new digital financial tools. Three-quarters of digital product users are women, and nearly 80 percent of users reported improved financial health thanks to digital solutions. This means being able to pay bills on time, having access to funds when they need them, and strengthening their finances against economic shocks.

To further center client voices, we became a founding partner of <a href="https://60decibels.com/insights/microfinance-index/" target="_blank" rel="noopener noreferrer">a new index</a>, released last year, which shows the impact of inclusive financial services on customers around the world. Created by the firm 60 Decibels, the index includes data from more than 18,000 customers from 72 microfinance institutions globally, many of them Accion partners.
<h3>Promoting transparency and standards across the industry</h3>
According to <a href="https://thegiin.org/assets/documents/pub/2023-GIINsight/2023%20GIINsight%20%E2%80%93%20Impact%20Measurement%20and%20Management%20Practice.pdf" target="_blank" rel="noopener noreferrer">a recent report</a> by the Global Impact Investing Network, 94 percent of surveyed impact investors assess their impact at least once per year, and 76 percent are aligning their impact priorities with the UN’s Sustainable Development Goals. But only 15 percent of impact investors can compare their impact results to peers, and 76 percent consider this a major challenge.

In short, we need better, more transparent, more universal standards. And as more companies orient toward impact, they must back up their claims with evidence and align their impact reporting with common practices and metrics.

To promote progress across the field, Accion recently signed up to the <a href="https://www.impactprinciples.org/" target="_blank" rel="noopener noreferrer">Operating Principles for Impact Management</a>, joining a global community of impact investors who commit to bringing greater transparency, credibility, and discipline to the impact investing market.

We are also harmonizing our impact measurement practices and priorities with those of our partners. This helps ensure that our diverse network of partners around the world are doing their best to periodically evaluate the quality and effectiveness of their solutions for their clients and their communities.

You can read more about Accion’s impact framework, our legacy of impact, and our ongoing commitment to creating locally led, systemic change in our just-released <a href="https://www.accion.org/2022-impact-report" target="_blank" rel="noopener noreferrer">2022 Impact Report</a>.

Strengthening our impact requires rigorous measurement

<h2>At Accion, we know financial services are powerful tools to help reduce poverty and create opportunity.</h2>
Since our founding in 1961, we have helped build 235 financial institutions across 75 countries. Last year, our work to create a more fair and inclusive economy reached 106 million people. And in our recently published <a href="https://content.accion.org/wp-content/uploads/2023/09/Accion-2022-Impact-Report.pdf" target="_blank" rel="noopener noreferrer">Impact Report</a>, we dive into how we translate our vision into action — and impact.

<a href="https://content.accion.org/wp-content/uploads/2023/09/Accion-2022-Impact-Report.pdf" target="_blank" rel="noopener noreferrer">Download our report</a> to read more about Accion’s impact framework, our legacy of impact, and our ongoing commitment to creating locally led, systemic change.

2022 Impact Report

<em>This article is the fourth of a six-part series on scaling financial inclusion to accompany our <a href="/the-digital-transformation-guide-six-strategies-to-scale-financial-inclusion" target="_blank" rel="noopener noreferrer">digital transformation guide</a>.  </em>

Data capabilities are essential to an organization’s digital transformation: from informing strategies that increase efficiency and revenue to creating new business models where data assets become products. In today’s world, where financial service providers (FSPs) must make unprecedented and rapid decisions, adjust business strategies, segment customers to understand portfolio risks, rethink credit models, and reach customers and staff remotely, data capabilities go hand-in-hand with digital transformation.

The explosion of available data, data-analytics services, and a growing digital ecosystem <a href="https://www.centerforfinancialinclusion.org/data-for-inclusive-finance-delivering-on-the-promise-for-consumers" target="_blank" rel="noopener noreferrer">creates unprecedented opportunities</a> for underserved communities and FSPs alike. The potential to unlock <a href="https://www.centerforfinancialinclusion.org/data-for-inclusive-finance-delivering-on-the-promise-for-consumers" target="_blank" rel="noopener noreferrer">greater financial health</a> for FSP customers is extraordinary, from prospecting and credit scoring for thin-file consumers to well-timed nudges for saving to intelligent chatbots, personalized recommendations, and remote client onboarding.

<img class="aligncenter wp-image-24081 size-large" src="https://content.accion.org/wp-content/uploads/2021/04/Accion-MAP-report-graphics-WEB_11-Using-data-1024x512.png" alt="Using data to drive financial inclusion (examples)" width="1024" height="512" />

However, many organizations become overwhelmed by all the different ways they can use data and lose alignment when creating a focused data strategy. FSPs can take several steps to integrate data and analytics activities with their digital transformation goals:
<h3>Start with existing data</h3>
In the early stages of developing a digital loan product, Accion Microfinance Bank (Accion MfB) in Nigeria explored potential data-sharing partnerships to build a robust credit scoring model. But they struggled to find the right third-party data provider, so Accion MfB decided to look inwards at the lending data they had already amassed. For example, using what they knew about customers’ willingness and capacity to pay, they designed a pilot digital loan product and created a benchmark profile to compare incoming data against when onboarding new customers. Using their own internal data involved fewer operational and commercial complications, which helped Accion MfB quickly launch a viable pilot.
<h3>Be practical in moving from insights to action</h3>
Similarly, our longtime partner BancoSol, one of Bolivia’s largest banks, realized that leveraging their untapped data could uncover insights to help address four key challenges: driving digital adoption and improve usage, increasing cross-product usage, increasing savings balances, and maintaining customer relationships. A <a href="https://nextbillion.net/covid19-small-businesses-digital-financial-services-data/" target="_blank" rel="noopener noreferrer">36-hour datathon organized in partnership with Accion and Mastercard</a> yielded three key recommendations to tackle these challenges:

<strong>1. Start by understanding your typical digital customer.</strong> Analyzing customer demographic data and banking patterns can help identify, prioritize, and nudge those customers who are most likely to go digital. BancoSol learned that their typical digital app customer is more likely to be female and younger than the average BancoSol client.

<strong>2. Equip loan officers with insights to match customers with products that meet their needs.</strong> The datathon revealed that app users made nearly twice as many deposits as other users, linking digital adoption with increased use. As <a href="https://www.centerforfinancialinclusion.org/data-for-inclusive-finance-delivering-on-the-promise-for-consumers" target="_blank" rel="noopener noreferrer">research has shown</a>, greater use of financial products makes small businesses more resilient to shocks.

With these insights, BancoSol developed clear messaging for loan officers about the benefits of going digital and respecting privacy and security measures and implemented continuous testing and streamlining to improve the app experience so it matched customer expectations.

<strong>3. Retain customers by being proactive, not reactive</strong>. The datathon also showed that when customers stop saving or communicating with the bank, their risk for a loan default rises, while those who used digital channels maintained consistent relationships with the bank. With that in mind, data analysts created a risk propensity score, which BancoSol can use to intervene before a customer begins to disengage.

Having dedicated resources skilled in data analytics embedded within the product innovation team is crucial to jumpstarting a virtuous cycle of data-driven design.
<h3>Prioritize data management and governance</h3>
To derive value from data and ensure customers’ privacy is protected, microfinance institutions need to invest in structuring their data appropriately and maintaining deliberate data governance (policies and procedures) and management (use of data in decision-making).

While many institutions know they possess valuable data, it’s often stored in various places and multiple formats, leaving the organization to only manage the limited data they are required to, or that is easily accessible. To get ahead of the curve before messy data accumulates, Annapurna Finance Limited in India invested heavily in data management solutions that improve data reporting, data migration, and data storage for new digital platforms and products.

Nearly every financial institution struggles to maintain accurate customer contact information, a simple yet critical example of data management. For microfinance institutions with high-touch models whose loan officers regularly visit their customers, having a current phone number on file seemed like a low priority. But when lockdowns brought on by the COVID-19 pandemic began, Annapurna’s loan officers found themselves unable to communicate critical loan information — like payment dates, updates on moratoriums, or even introduce new loan offers via SMS to their group lending customers — without up-to-date contact details.

To address this challenge, Annapurna introduced a standard process to ensure that at every customer touchpoint — from field visits from a loan officer to customer visits to a branch — bank staff would confirm the customers’ phone numbers to ensure a high-quality database. In parallel, they implemented a new communication system that integrates their SMS system with their loan origination system. These two initiatives standardize communications with customers, create greater engagement, and ensure a more transparent flow of information.

A clear data strategy can help inclusive FSPs accelerate their digital transformation, make organizational changes to better leverage their data and become more customer-centric, and ultimately set low-income households and microentrepreneurs on a path toward greater financial health.

To assess your organization’s current data capabilities and gain insights into priority areas, take our <a href="/you-cant-go-digital-without-the-right-data-strategy" target="_blank" rel="noopener noreferrer">Data Maturity Diagnostic</a>. <a href="https://www.accion.org/advisory-contact">Reach out to us</a> to see how we can help plan a roadmap of strategic data initiatives to support your institution’s digital transformation journey and business goals.

<em>Malavika Krishnan contributed to this article.</em>

Devise a clear data strategy to unlock financial inclusion

The pandemic has severely affected the world’s low-income populations. But by accelerating the pace of digitization, it has opened doors to financial services and the security and opportunities they provide. Digital financial services—and the tools needed to use them—are now vital for low-income families and small businesses to make it through this crisis and build resilience to future challenges.

Digitization is integrating financial services into nearly every aspect of life. <a href="https://www.accion.org/what-does-embedded-inclusive-fintech-look-like">Financial services can be embedded</a> into anything from utility payments to crop fertilizer subscriptions, which can help more people access credit, save money, and build credit histories that are essential for growth.

But digitization also risks worsening inequality, invading clients’ privacy, and taking advantage of people with less digital experience or poor access to the right tools, like mobile phones. Underserved people need new skills and expertise to successfully navigate the digital economy, and they need products that protect their privacy and personal information.

Accion has been working to ensure that innovations driving digital transformation and migration are inclusive, safe, and effective. Based on our experiences, here are three ways to ensure customers aren’t left behind amid accelerating digitization.
<h2>1. Expand digital access, fluency, and trust</h2>
Building customers’ trust in digital financial services, as well as their digital fluency, will be foundational an effective customer experience. It matters less where clients live, while it’s more important that providers can reach and stay in contact with them. Financial services providers need to rethink the purposes of physical interactions versus digital interactions so that the former occur less often and the latter become more frequent and more personal.

EdTech (education technology) can help underserved clients gain digital familiarity and learn how to accomplish a range of tasks, like setting up an online wallet or listing a product for sale. Accion has <a href="https://www.accion.org/how-the-pandemic-is-spurring-microentrepreneurs-to-go-digital">developed and deployed an interactive EdTech platform</a> called Ovante to help underserved entrepreneurs gain the management, financial, and digital expertise they need to succeed in our increasingly digital world. Ovante can help clients expand on their existing knowledge of social media to open new digital channels to selling their products and services.

Digital channels are a key conduit for financial service providers to improve their customer experience, and sometimes this means totally rethinking the customer experience. For example, many of Accion’s partners use group lending models to serve clients without any credit history by allowing people in the same communities to guarantee each other. Eighty percent of group lending participants are women, and 65 percent live in rural areas with few or no banks. Group lending has historically relied on frequent in-person interactions. But as social distancing became a necessity, our partners leveraged digital platforms to <a href="https://www.accion.org/can-group-lending-work-in-a-socially-distant-world">reimagine the group lending process</a> for the digital age.
<h2>2. Answer clients’ needs</h2>
As lockdowns end, low-income families will find their savings exhausted, their businesses stalled or bankrupt, and their future incomes uncertain. People will need new income streams and financial services to build resilience, restart their businesses, and establish new ventures.

Digitization means that more clients will use digital tools to rebuild their livelihoods, but providers must answer their needs by <a href="https://www.accion.org/to-succeed-innovative-financial-products-must-be-desirable-feasible-and-viable">crafting truly meaningful, customer-centric value propositions</a> that help them build resilience today and for the future.

To do that successfully during the pandemic, Accion has helped providers conduct interviews and surveys remotely to ensure that they capture the insights they need. Using client insights, we help institutions develop products and services that are desirable to clients and solve their specific problems. These offerings must also be feasible for the institution, given their capacity and operating models, and viable for the long term. Here, digital channels and platforms make a huge difference, and adopting them has become an urgent priority.

It’s so important to help people build financial resilience, and the customer experience needs to reflect that. If vulnerable clients’ unique needs aren’t sought out, understood, and addressed, their entire livelihoods could collapse and the economic recovery will be more difficult. Financial service providers must <a href="https://www.accion.org/win-from-within-how-fintech-startups-can-grow-by-building-value-for-existing-users">grow along with their clients</a> by understanding their needs, crafting products that meet those needs, and keeping them engaged throughout their journey as customers.
<h2>3. Ensure clients’ data and privacy stay protected</h2>
Digitized data can unlock more personalized and effective financial products that can help low-income people improve their lives and achieve their goals. Yet many emerging markets have weak effective consumer data protection regimes. When rules do exist, people with low levels of digital and financial sophistication may, in their eagerness to receive financial services, sign away their rights without even fully understanding them.

Protecting the privacy and security of customer data includes cultural and technical aspects, and vulnerabilities often lie at the intersection of the two. A provider can install best-in-class privacy and security software, but they must also build in privacy through a culture of protecting customer data. For example, providers can ‘right size’ their data collection methods to focus only on what is needed, implement strong and ethical data governance policies, and have dedicated staff responsible for their consistent application and use.

Accion is also focused on increasing transparency in providers’ data practices. We are analyzing how financial service providers use algorithms, which can be biased against underserved populations, in automated decision-making. We are monitoring emerging frameworks around the world to see what does and doesn’t work to advance financial inclusion while safeguarding data privacy, portability, and other consumer rights.

Cyber threats have also become a growing concern in emerging markets. Digital innovations, new products, and new processes are moving ahead at breakneck speed, but they’re leaving cyber security considerations in the dust, bringing new risks to financial inclusion-focused providers and to low-income and newly-banked customers. This makes it harder for people to trust digital financial services. We are working with our partners to <a href="https://www.accion.org/reimagining-cyber-risk-for-financial-inclusion-in-an-increasingly-digital-world">put in place cyber risk mitigation strategies</a> to ensure that the most underserved are protected.

Accion is engaging the industry to ensure that innovation doesn’t simply expand access to financial services—but also creates financial services that are safe, high quality, and designed to meet customers’ needs. These efforts are essential to ensure that the world’s three billion financially underserved people can build resilience to today’s challenges and threats arising in the future.

Three ways to ensure people aren’t left behind in the rush to go digital

At Accion Venture Lab, we work with fintech startups, most of them in emerging markets. The majority of their customers haven’t worked with any kind of financial service provider before, and so our portfolio companies are the first (and probably sole) holder of these individuals’ financial information. What’s more, many fintech startups have developed innovative ways to use alternative sources of data for determining customers’ creditworthiness, so in addition to records on assets, business revenues, and payment history, the company may also have mobile phone records, housing information, and so on.

In the rush of launching a new fintech, protecting client data may not be top of mind. But this data is both valuable and sensitive — and any fintech firm is only one data breach away from losing customer confidence. We advise our portfolio companies to take steps to safeguard their customers’ data sooner rather than later — and certainly before a crisis occurs. For inclusive fintechs, protecting customers is even more important because of the vulnerable populations they serve. For a smallholder farmer, microentrepreneur, or any other low-income individual, a data breach that drains a savings account, damages a credit score, or exposes confidential information is not just an annoyance — it can be an insurmountable setback.

So, where to begin? To help answer that question, we’ve developed a <a href="https://www.accion.org/data-protection">Data Protection resource</a> that will guide you through the process of assessing your company’s risks, understanding the various policies, protocols, and practices you can adopt to address those risks, and taking steps to implement a plan that fits your company’s needs.

We use the term “data protection,” as it encompasses both data privacy and data security. Data privacy focuses on which parties have authorized access to user data, and for what purpose. The data’s owner should always have control over what information is available and understand how it is to be used. On the other hand, data security relates to the systems in place to keep unauthorized entities from accessing and exploiting the data. So a complete data protection plan will cover everything from user transparency to technical solutions to regulatory compliance.

Our Data Protection resource contains not only a thorough explanation of how and why to put a data protection plan into place, but also an assessment to identify your company’s most urgent needs, a template to use in developing a data policy, options for taking this on in-house or hiring specialists to help, and much more. You’ll learn how often to update your plan, how to foster a staff-wide culture that supports data protection, ways to ensure your partners don’t expose you to vulnerability, and more.

And, if you do experience a data breach, the resource offers a response plan to help you identify the source of the problem, limit the damage, prevent it from happening again, and repair customer confidence.

How startups can both empower customers and protect their data

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.

Since 2012, the government of India has been driving forward the idea of a “Digital India” with a vision to transform the country into a digitally empowered society. A unique digital identity for every person — universally acceptable and accessible — was core to this vision. This twelve-digit identity number, based on biometric data, is called “Aadhaar,” and it has been issued to over 1 billion residents of India by the Unique Identification Authority of India (UIDAI). This number has been leveraged by financial service providers, utility companies, and mobile operators to make it simple for customers to register for services. It reduces the cost of identification for individuals and has enabled many millions of underserved people and businesses to access financial and other services more efficiently.

In August of this year, <a href="https://www.thehindu.com/news/national/privacy-is-a-fundamental-right-under-article-21-rules-supreme-court/article19551224.ece">the Supreme Court of India upheld</a> that the government can mandate the need for an Aadhaar number to distribute subsidies and benefits and require that it be linked to the individual’s tax ID number. However, they also ruled that an Aadhaar number cannot be required by private entities to provide services. Therefore, Aadhaar can no longer be mandatory for opening bank accounts or mobile phone sim cards.

At Accion, we have developed a significant body of work on <a href="https://www.accion.org/webinar-indiastack-the-change-catalyst">IndiaStack</a>, <a href="https://www.accion.org/aadhaar-demonetization-financial-inclusion-in-india">Aadhaar</a>, and <a href="https://www.accion.org/digital-identity-for-financial-inclusion-webinar">digital identity</a> more broadly. We believe that IndiaStack, as was initially intended, would bring <a href="https://www.accion.org/the-game-changing-innovation-that-could-bring-financial-services-to-millions-in-india">millions of Indians</a> into the formal economy by breaking down the barriers that kept them out.

While the Supreme Court aimed to safeguard data and protect customer interests, it may unintentionally tarnish the goal of a “Digital India” and curtail the promise of IndiaStack for financial inclusion. Initial reactions from the financial services industry agree that this ruling may move India back to an era of manual entries and paper-based systems. Many inclusive fintech companies and financial institutions have developed products and services that use the Aadhaar identification service to reduce the cost of onboarding customers, targeted at more marginalized communities. However, now, these organizations will need to adopt in-person verification systems in addition to their digital identification processes, for clients that do not want to share their Aadhaar number. This will drive up costs, potentially making these new business models unfeasible.

While the full results of this ruling are still unraveling, the increased cost of operations will likely dissuade service providers from targeting the underserved with newer technology-driven models, making it difficult for these individuals and small businesses to access financial services. The ruling states that customers may offer their Aadhaar number voluntarily when registering for a service, but it remains to be seen whether they will be willing to provide the information. Despite new challenges, we hope that the providers who have made remarkable progress in driving financial inclusion can continue to find innovative ways to bring underserved Indians the financial tools they need. While this ruling may make it harder to sustain <a href="https://www.accion.org/accion-in-india-advancing-financial-inclusion-in-one-of-the-worlds-fastest-developing-economies">the pace of progress in India</a>, it’s crucial that policymakers, financial institutions, and entrepreneurs don’t give up on achieving a “Digital India.”

Is a ‘Digital India’ still possible?

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

Kenya leads the world in mobile money as nearly three-quarters of adults have an account, and most of them are actively using those accounts. The growth of digital financial services in Kenya has ushered in significant opportunities and some challenges. As the chief operating officer for <a href="https://www.accion.org/how-we-work/invest/accion-venture-lab">Accion Venture Lab</a> portfolio company, <a href="https://kopokopo.co.ke/">Kopo Kopo</a>, Peace Osangir has tackled these opportunities and challenges firsthand. Ahead of the panel at <a href="https://registration.european-microfinance-week.eu/ehome/emw2018/758262/">European Microfinance Week</a> (Nov. 14-16) on client protection and digital finance practices from Kenya, Peace answered our questions on her work in inclusive fintech for Kopo Kopo, client protection, and making sure small and medium businesses can benefit from Kenya’s mobile money revolution.
<h4><strong>Q: Before coming to Kopo Kopo, you worked in the formal financial sector. What led you to leave that space and come work for a startup serving the small business market?</strong></h4>
<strong>A:</strong> The startup environment provided the opportunity for creativity and innovation that sometimes may be lacking in a formal financial sector. The desire to demystify the challenges of extending credit to small business owners and the interest in testing the applicability of microlending models for individuals on businesses made the venture into the startup world intriguing.
<h4><strong>Q: Kenya is a model of success when it comes to digital financial inclusion. What lessons can other countries learn from Kenya about how to make the digital revolution in financial services work for everyone?</strong></h4>
<strong>A:</strong> The regulatory environment needs to be favorable to foster innovation and product enhancements in response to market needs.

Product access channel needs to be simple and available to a majority of the population. In Kenya, USSD is the most preferred channel to reach the greatest percentage of the population due to usability on both feature phones and smartphones.

The product design needs to be intuitive and solve a problem in the market.

Investment in brand building and adhering to service standards is critical in gaining the trust of the market and product adoption.

Cultural fit and cost are also key in driving product usage and growth in digital financial services.
<h4><strong>Q: How does the highly digital nature of Kenya’s financial system create unique challenges for client protection?</strong></h4>
<strong>A:</strong> Digitization has made it easier for customers to apply for a service or product without fully understanding the terms and conditions.

Customers are prone to defaulting on credit products due to the faceless nature of the lender, resulting in a high number of customers with adverse listing with the credit reference bureau.

Sharing of login credentials by less tech and information security savvy persons has increased the exposure of individuals and business to fraud.
<h4><strong>Q: What steps does Kopo Kopo take to ensure that its customers are protected?</strong></h4>
<strong>A:</strong> Kopo Kopo clearly displays the cost of each service to avoid any surprises. In addition, Kopo Kopo engages the customers in verbal conversations to gauge understanding of its terms and conditions of service.

Kopo Kopo also carefully handles customer data by employing high-level data security protocols.

Kopo Kopo also ensures that all customers are the actual business owner, verifies all instructions on account changes in order to minimize instances of fraud by rogue employees.

All changes to our terms of service are clearly communicated to the customer prior to implementation.
<h4><strong>Q: Kopo Kopo works specifically with small business owners. How has Kenya’s digital transformation in financial services affected this segment?</strong></h4>
<strong>A:</strong> Digital transformation has positively affected small business owners, and they are now able to build digital footprints of their business, thus making it possible for the small business owners to access value-add services such as loan and loyalty program.

Digital transformation has also increased the average spend size at business locations as the customer is not limited to cash on hand.
<h4><strong>Q: Are there different concerns about client protection serving the small business segment rather than individual consumers?
</strong></h4>
<strong>A:</strong> Yes, verification of Know Your Customer details is a bit challenging for small businesses compared to individual customers due to a lack of a centralized validation system. Small business owners are also prone to sharing business registration documents with friends and family, thus further complicating the authentication process.

Small business owners who are not technologically savvy may also share sensitive account management information with other persons to help with using the technology services. This practice makes the customer susceptible to fraud.
<h4><strong>Q: We’ve seen that </strong><strong><a href="https://www.accion.org/the-tech-touch-balance/">balancing technology with human interaction</a></strong><strong> can often create a better user experience for clients of inclusive fintechs. How does Kopo Kopo integrate human interactions to make the customer journey more accessible for its clients?</strong></h4>
<strong>A:</strong> Kopo Kopo has invested in a Merchant Engagement team that is solely focused on interacting with the customers in their first 180 days to ensure that they fully understand our products, services, and terms of service. In addition, we ensure that all Cash Advance applications are followed up with a phone call to gauge the merchant’s understanding of the credit terms prior to approval. Our dedicated in-house customer support team is always on standby to respond to merchants requests in the shortest time possible. Our goal is to always have an informed and empowered customer.

Insights from a Kenyan fintech leader

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

Is data privacy in emerging markets feasible?

<p class="graf graf--p">Have you ever opened a savings account? Taken out a loan? Used a credit card? “I bank, therefore I am,” oversimplifies the connection, but your ability to prove you are who you say you are is a prerequisite for your ability to access the financial services you need to live a stable life, support your family, and follow your dreams.</p>
<p class="graf graf--p">Roughly 1.1 billion people have no formal identity, <a class="markup--anchor markup--p-anchor" href="http://blogs.worldbank.org/ic4d/counting-uncounted-11-billion-people-without-ids" target="_blank" rel="noopener noreferrer">according to the World Bank</a>. This can prevent people from getting an education, owning land, and even voting. In financial services, imposing regulations mandate providers to formally verify users to a high “level of assurance” which creates a lot of friction and costs. Fortunately, technology is opening up new pathways for people to more easily establish their identities and gain access to social benefits, education, and financial services. Advanced biometrics, blockchain-backed ID systems, and user-controlled ID are <a class="markup--anchor markup--p-anchor" href="https://www.usaid.gov/digital-development/digital-id/report" target="_blank" rel="noopener noreferrer">transforming the ID landscape</a>, but also raising important questions around privacy and control of personal information.</p>
<p class="graf graf--p">To understand the challenges and opportunities digital innovation brings to identity, we have to look first at the foundational concept of identity. What makes you, you? Each person is multi-faceted — you’re a composite of your biological, behavioral, personality, and character traits. In a publication titled “<a class="markup--anchor markup--p-anchor" href="https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2189989" target="_blank" rel="noopener noreferrer">Minding the Identity Gaps</a>,” authors Ignacio Mas and David Porteous take a two-pronged approach to identity:</p>

<ol>
 	<li class="graf graf--p">Identity based on intrinsic uniqueness: This is the idea that you’re unique on a biological level, proven by your fingerprint, birth certificate, and other methods. This aspect of identity helps us differentiate one individual from another, and it’s the traditional basis of formal identity.</li>
 	<li class="graf graf--p">Identity based on behavior: This gets to the composite of actions and character traits that paint the full picture of who you are — even though you won’t find room for these qualities on a passport application. This aspect of identity is typically used to provide more information about you as an individual, but it doesn’t necessarily differentiate you from everyone else in the world.</li>
</ol>
<p class="graf graf--p">Although these definitions are not mutually exclusive, they do serve to place the different aspects and applications of identity in a straightforward context. They also introduce some of the challenges financial service providers face when taking into account either of these aspects of identity.</p>
<p class="graf graf--p">For example, proving <strong class="markup--strong markup--p-strong"><em class="markup--em markup--p-em">intrinsic uniqueness</em></strong> depends on the quality of the mechanism used to differentiate one individual from another. Financial service providers should carefully consider the methods by which they enable customers to establish, prove, and use their identity (we’ll dive deeper into the differences between these steps in a later post). For instance, while a thumbprint can be an efficient and secure way to establish and verify identity for mobile banking, it can present challenges for people who engage in manual labor, according to the <a class="markup--anchor markup--p-anchor" href="http://www.dematerialisedid.com/PDFs/role_of_biometric_technology_in_aadhaar_jan21_2012.pdf" target="_blank" rel="noopener noreferrer"><em class="markup--em markup--p-em">Unique Identification Authority of India’s biometrics standards committee</em></a>. That’s because fingerprint readers may be inadequate if someone’s fingerprints are worn or otherwise affected<em class="markup--em markup--p-em">.</em></p>
<p class="graf graf--p">In the case of <strong class="markup--strong markup--p-strong"><em class="markup--em markup--p-em">identity based on behavior</em></strong>, context is everything. The extent to which we express certain character traits is often relative to immediate environmental, social, and cultural influences. For example, you behave differently at work than you do at home. This inconsistency can be a challenge for financial service providers, who might use this information to evaluate someone’s creditworthiness or tailor products and services to specific preferences and needs. While an individual’s Facebook data may flag them as someone unlikely to stick to a repayment schedule, it may not be representative of how likely they are to repay a loan arranged through <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/human-touch-place-age-digital-financial-services/" target="_blank" rel="noopener noreferrer">face-to-face interaction</a>.</p>
<p class="graf graf--p">No matter how you look at identity, it’s clear that innovative identification methods have the power to transform how individuals establish themselves and how financial services providers acquire and engage with their customers. In fact, a <a class="markup--anchor markup--p-anchor" href="http://cariboudigital.net/new-research-digital-identity-emerging-markets/" target="_blank" rel="noopener noreferrer">Caribou report</a> states that the most prominent use cases of digital identity are within financial services given the increasing complexity and range of financial products. As Iain Brougham, with <a href="https://www.accion.org/content/microfinance-services">Global Advisory Solutions at Accion</a>, puts it, “The capture and exchange of personal digital data for both intrinsic uniqueness and behavioral insight opens up prospects for reduced friction in the onboarding process and better customer acquisition through an enhanced understanding of customer wants and needs.” To properly explore the opportunities and challenges of digital identity in financial services, we’ll be diving deeper into this topic over the next few months. We hope by examining how financial service providers can approach digital identity, we can help bring high-quality, affordable financial services to more people around the globe.</p>
<p class="graf graf--p">Our next blog will explore why identity is critical to enabling greater financial inclusion and how financial providers should be thinking about identity.</p>

What is identity and why does it matter?

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

Data Privacy

Filter

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Strengthening our impact requires rigorous measurement

2022 Impact Report

Devise a clear data strategy to unlock financial inclusion

Three ways to ensure people aren’t left behind in the rush to go digital

How startups can both empower customers and protect their data

Is a ‘Digital India’ still possible?

Insights from a Kenyan fintech leader

Is data privacy in emerging markets feasible?

What is identity and why does it matter?

Is India better off without Aadhaar?

From the Center for Financial Inclusion

Catalytic Capital and Its Role in Digital Credit

FIW Recap: Grappling with Data Opportunities and Risks in Inclusive Finance

In Honor of Data Privacy Week, Let’s Rethink Privacy in Inclusive Finance

The Hidden Traps of Deceptive Design: Embedding Consumer Protection into DFS

Matters of Urgency: Insights From a Fintech Risk Barometer Study

Embedding Trust: The Potential of Privacy by Design for Inclusive Finance

Privacy Perceptions, Attitudes, and Behaviors: Perspectives from Indonesian Smartphone Users

If You See Something, Say Something

Reducing Bias in Algorithmic Decisions Cannot Rely on “Blind” Approaches

Protecting Beneficiary Data: Guidance for Municipal Cash Transfer Programs Responding to COVID-19

Insights from a Kenyan fintech leader

Is data privacy in emerging markets feasible?

What is identity and why does it matter?

Is India better off without Aadhaar?