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

Client Voices: Rwandans Speak on Digital Financial Services

Laterite Ltd

Mastercard Foundation

The Smart Campaign

Rwanda

Sub-Saharan Africa

Keeping Clients First

Agent Banking

Appropriate Product Design and Delivery

Client Treatment

Complaint Resolution

Consumer Protection

Credit

Credit Provision

Delivery Channels

Digital Credit

Digital Financial Services

Financial Service Providers

Mobile Banking

Payments

Privacy

Telcos

Underserved Groups

Report

Digital lending has the potential to close the credit demand gap for unbanked, low-income customers, but the rapid growth of the sector has raised consumer protection concerns.

In Kenya alone, a leading testing ground for the digital credit sector, there are more than 50 providers and an estimated<a href="https://www.cgap.org/blog/kenyas-digital-credit-revolution-five-years"> one in four</a> Kenyans have taken a digital loan. With <a href="https://www.gsma.com/mobileeconomy/wp-content/uploads/2018/05/The-Mobile-Economy-2018.pdf">mobile phone ownership saturating</a> developing markets, we can anticipate similar acceleration in the digital lending space globally.

<a href="https://www.cgap.org/blog/its-time-slow-digital-credits-growth-east-africa">Recent findings</a> have generated debate over whether or not these new products are translating into real benefits for base of the pyramid consumers. Demand is rising from investors, regulators, and providers for ways to demonstrate responsible practices in digital lending.

To fill the gap, the Smart Campaign has undertaken research to better understand risks and benchmarks for responsible digital financials services. In partnership with <a href="https://www.mf-rating.com/">MFR</a>, we’re working with providers to conduct field assessments that identify best practices and help us to determine where to set the bar for responsible behavior. These field assessments, industry research, and engagement with DFS providers in Smart’s <a href="https://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a> will lead to standards for responsible digital credit that are sustainable for the industry while keeping client needs as the central focus.

<a href="http://www.4g-capital.com/">4G Capital</a>, a digital MSME lender in East Africa and a member of Fintech Protects, recently <a href="https://africanbusinessmagazine.com/company-profile/4g-capital/4g-capital-together-with-the-centre-for-financial-inclusion-smart-campaign-defines-standards-for-client-protection/">partnered with the Smart Campaign</a> to conduct a field assessment. We asked 4G Capital CEO Wayne Hennessy-Barrett for his take on responsible digital lending and the value of industry standards for consumer protection.
<h4>Q: Tell us about the origins of 4G Capital and its products.</h4>
WHB: We began operations in Kenya in 2013, starting with microloans for enterprises using only mobile money. As our relationship with our customers grew, we began informal coaching and mentoring of clients to improve their performance. This evolved quite quickly into a program of enterprise-skills trainings packaged with each loan. We now have a number of different working-capital credit products which are the right size and timed according to the specific needs of the business user, and we’re also scaling with partners to reach tens of thousands of new clients each month.
<h4>Q: What was your motivation for joining Fintech Protects and inviting the Smart Campaign to work with 4G in a field assessment of responsible practices?</h4>
WHB: We have always been a mission-driven business. As a fintech lender, Fintech Protects was the perfect forum to share our experiences and learn from others to find ways to close the finance gap, which leaves so many businesses and families excluded.

The field assessment was a rigorous, end-to-end audit of whether we were able to ‘walk the talk.’ It is nearly impossible to self-assess with the right level of accuracy. Either you’re too hard on yourself, or you get distracted by successes and don’t zero in on the things that need to be fixed.
<h4>Q: What did the field assessment confirm about your business? What surprised you?</h4>
WHB: I was delighted, but not surprised, by the level of professionalism and rigor exercised by Smart and MFR. It was encouraging to get positive feedback on the positive customer outcomes we continue to see consistently – that really is the most important thing that we need to reinforce and protect.
<h4>Q: How do you think about scale and growth of your business in the context of a blended high-touch/high-tech model?</h4>
WHB: Accounting for inflation, forex risk and future value of money, this is the $64 Billion Question!

We need to scale to reach more excluded people, catalyze more value chain growth, and, of course, grow our own business. Our transformation program (which is a continuously evolving cycle) sees our AI and technology developing to continue to improve predictive underwriting to further deliver value to our clients as part of supporting their overall financial health. This should free our people to really focus and excel at what they’re good at: relationships, customer care, and contributing their own experience and knowledge to help us evolve with our clients’ needs.
<h4>Q: Of all the areas that the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> cover, what do you think will be the single most important issue digital lenders must contend with over the next five years?</h4>
WHB: It has to be data protection. There are a ton of fintech lenders who are trying to do good things at the moment, but where data can sometimes be gathered in a way clients, if fully aware, would find really intrusive. We need to reset the conversation about data and the way businesses conduct themselves so that even the most remote and excluded have digital self-sovereignty and power over their own data.
<h4>Q: How do the client protection standards provide value to you as a business?</h4>
WHB: Happy clients = happy business. It really is that simple.

Partnering with Providers to Set DFS Standards for Client Protection

Kenya

Responsible Digital Finance

Blog Post

This webinar features CFI Fellow Patrick Traynor — Professor in the Department of Computer and Information Science and Engineering (CISE) at the University of Florida. Our conversation will provide an overview of data privacy and security issues in online lending, highlight specific deficiencies as identified in our three-pronged analysis of over 50 digital finance providers, and provide recommendations for providers so they can ensure that consumers have the best possible protections of their personal data.

This research raises important concerns about how digital finance companies currently address data privacy and security issues and points to areas for improvement when creating strong defense mechanisms and privacy policies that protect consumer data. By examining digital lenders’ privacy policies, the mechanisms for securing the connections between customers’ mobile devices and the internal servers that process and store that data, and the terms of service of their offerings, Patrick's report aims to identify how well providers are addressing these data privacy and security vulnerabilities and lays the groundwork for future research that can assist companies, consumers, and regulators in improving security standards for digital finance.

Webinar: Digital Finance and Data Security

CFI Research Fellows Program

Data Analytics

Financial Technology

Fintechs

Webinar

Mobile phones and networks are transforming the world of finance, creating opportunities  for widespread financial inclusion, especially among neglected regions and groups. Security and privacy should be among the most important considerations when building digital finance systems.
Credit decisions are often based on sensitive information and online finance offerings are no exception. The sensitivity of this information gives rise to a series of critical questions for customers:
<ul>
 	<li>To whom am I giving my data? And who else do they allow to access it? For what purposes?</li>
 	<li>How do the companies protect data so that people who do not have legitimate access cannot use or steal it?</li>
 	<li>What rights and options do I have if something does go wrong?</li>
</ul>
The goal of this research, conducted by CFI Fellow Patrick Traynor, is to examine how well digital lenders are responding to these questions.

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&nbsp;

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Digital Finance and Data Security

Consumer Credit

Nano Loans

<em>This post was originally published on the <a href="http://www.cgap.org/blog/financial-inclusion-glass-half-empty-or-half-full-pt-2">CGAP Blog</a> and is re-published here with permission.</em>

As I stated in my <a href="http://cfi-blog.org/2018/08/09/financial-inclusion-is-the-glass-half-empty-or-half-full-part-1/">previous blog</a> on the debate over the latest <a href="https://globalfindex.worldbank.org/">Findex</a>, we continue to make important progress toward the goal of universal financial access. Progress is uneven and the timeline uncertain, but we have a pretty clear idea of what to do. Unfortunately, the picture is less clear on the important question of usage, and CFI is right to raise high dormancy rates as a concern in its report, “<a href="https://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/996-financial-inclusion-hype-vs-reality">Financial Inclusion: Hype vs Reality</a>.” As with the access data, however, disaggregating the figures on account usage reveals differences across countries that offer more encouraging signals than the aggregated figures, albeit with one very important caveat.

Findex shows we still have a lot of work to do on usage: 25 percent of account holders in the developing world haven’t used their accounts for a single deposit or withdrawal in the past year (as shorthand, I will refer to these as dormant accounts). Part of the challenge in the Findex data, however, is that backsliding or slow progress in a few big markets is drowning out progress in the rest of the world. The primary reason is India, which is skewing the account dormancy figures significantly because of its large population and extraordinarily high levels of inactivity — at 48 percent of account holders in 2017. If we take India out of the equation, the percentage of inactive account holders in the developing world comes down from 25 to 16 percent.

If, however, we look at the change in dormancy rates for individual countries, rather than the aggregate, a more nuanced picture emerges. Findex collected data on dormant account holders for 87 low- and middle-income countries in 2014 and 2017. Of these countries, 46 saw their dormancy rates go down by an unweighted average of 14 percentage points, 12 saw their dormancy rates go up by an average of 10 percentage points, and 29 had no discernable change (as the difference was within the 3.5 percent margin of error in either direction).

<img class="size-full wp-image-32066 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/gretabullchangesininactivityrates-1.png" alt="" width="632" height="318" />

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But here’s where the caveat comes in. Findex’s dormancy and usage numbers are not quite what they seem. To ensure greater accuracy in capturing mobile money accounts, respondents are not asked if they have a mobile money account; they are asked if they have used a mobile money account in the past year. In other words, Findex counts only active mobile money accounts. For financial institution accounts, respondents are asked if they have an account and then whether they have used it in the past year, so a clear distinction can be made between active and inactive accounts (see the Findex glossary for details). The net effect is to understate the number of account holders added in Sub-Saharan Africa and to overstate the activity rates for these accounts.

Given the prevalence of mobile money in Sub-Saharan Africa, this has a significant impact on Findex’s activity rates for the region. A back-of-the-envelope exercise using GSMA’s supply-side data (which correlate closely with those of Findex), helps illuminate the degree to which this affects Africa’s dormancy data. According to GSMA, there were 338 million registered mobile money accounts in Sub-Saharan Africa in 2017. If we add these accounts to the 195 million financial institution accounts from Findex, we can infer that there are roughly 533 million registered accounts in the region (the number of account holders will be lower because of people holding both mobile money and financial institution accounts, which Findex accounts for). This means that roughly 232 million accounts have been added since the last Findex, not the 72 million that you would get from doing the math with the Findex data.

That’s potentially good news, but with this increase in number of accounts comes an increase in the overall inactivity rate in Africa. Roughly 64 percent (216 million) of the mobile money accounts reported by GSMA were considered inactive. If we combine the GSMA and Findex data on inactivity, the 2017 dormancy rate in Sub-Saharan Africa shifts from 13 percent of account holders (in Findex) to 49 percent of accounts (combining the two data sets). This adjusted dormancy rate is now roughly equivalent to dormancy rates in India and represents a significant increase from the inferred rate in 2014 of 41 percent (again, based on accounts, not account holders). This adds approximately 129 million dormant accounts back into the global total, raising our developing country dormancy rate sharply back in the direction of the 25 percent mark.

<img class="size-full wp-image-32067 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/greta-bull-financial-accounts-dormancy-rates-1.png" alt="" width="629" height="255" />

The point of this exercise is not to provide an exact estimate of dormancy rates in Africa, but to demonstrate that we have a pretty serious usage challenge and that it is concentrated in India and Sub-Saharan Africa, where the denominator of new accounts has grown the most. Not coincidentally, they are also the two regions with the highest rates of extreme poverty. India increased access to accounts from 53 to 80 percent of adults from 2014 to 2017, adding 290 million account holders. In Africa, we have inferred that 232 million accounts were added in the same period. If the Africa data are normalized for inactivity, then India and Africa together would account for roughly 77 percent of all people accounts added between 2014 and 2017. But a large portion of them are inactive. It seems intuitive that, with the addition of accounts at this pace, there might be a delay between opening an account and using it, but we will have to wait until the next Findex to properly test this assumption.

CFI is right to point out dormancy as a problem, but it missed a big part of the challenge in its analysis: high dormancy in Sub-Saharan Africa, which barely registers in Findex, and the fact that mobile money accounts are measured differently means it is difficult to compare inactivity rates across regions. But I am not sure this means we should ignore the registered account numbers entirely, as CFI suggests. They are important because they show progress in giving people access to accounts. But activity rates matter, too, and the clear challenge now is to stimulate usage of those accounts in Africa and South Asia. This is a more complex undertaking because it involves behavior changes for new account holders and the testing of different value propositions for providers — and both of these challenges take time to address. But there are hints about how this can be done. GSMA, in its latest <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2018/05/GSMA_2017_State_of_the_Industry_Report_on_Mobile_Money_Full_Report.pdf">State of the Industry Report on Mobile Money</a>, focused on four factors that are closely associated with high activity rates: a robust agent network, enabling mobile money regulation, a digital account-based model and providers serving as integrated platforms for the wider payments ecosystem. It provides the example of MTN in Ghana, where activity rates went from 7 percent in June 2012 to 73 percent in June 2017. Understanding the factors that created the change at MTN in Ghana will provide valuable insights into what it will take to move inactivity rates, which have been stubbornly sticky in the mobile money industry since 2011.

Beyond overall account dormancy, the CFI report raises interesting questions about important use cases that deserve brief examination — savings, credit and payments.

On savings, it is disappointing that the number of survey respondents in developing countries who reported saving in the past year came down from 53 percent in 2014 to 43 percent in 2017. Unfortunately, Findex doesn’t tell us why this might be happening. While customers not perceiving the value of their accounts is one possible explanation, factors like inflation, the availability of alternatives, economic stagnation or other disruptions could be affecting the amount of money people are able to save. What is encouraging is that more of those who did save used a financial institution: this figure grew from 42 percent in 2014 to 47 percent in 2017.

On credit, I am more sanguine for a couple of reasons. First, we can’t draw any real conclusions from the Findex data. For developing countries, the number of respondents who reported borrowing in the previous year dropped from 47 to 44 percent, which is just outside the margin of error for the sample size and not a particularly strong signal. And Findex may or may not capture data on credit provided via mobile money accounts, depending on whether people consider this a loan, so it is potentially missing some digital credit borrowing. But more to the point, credit is a financial product where more isn’t necessarily better. The main constraint to accessing credit shouldn’t be whether someone has an account. It should be whether they can afford it.

Digital payments are the real story in Findex, and it is no surprise that this number is going up. Many accounts in places like India and Africa were established expressly to facilitate payments. In the developing world, the proportion of respondents who reported sending or receiving a digital payment in the past year went from 32 to 44 percent, and this growth was consistent across all markets. It makes sense. Just think about the way you use your bank account: you might save, and you may or may not have a loan for a house or a car, but you almost certainly make regular payments from your account. A mobile or low-value bank account in many ways mimics a current account. It is a store of value from which payments can be sent and received. You don’t expect to get a return on it, but you might use it to help establish a credit rating.

Payments seem to me to be a foundational product, especially for people with very little money, who may not have enough to save consistently and may not be creditworthy. Comparing payments usage in developing countries to high-income OECD countries puts this issue in perspective. In high-income OECD countries, 92 percent of respondents reported making or receiving a digital payment in the past year. The figure for low income countries was only 26 percent, a gap of 66 percentage points. The usage gaps between OECD countries and low-income countries was less pronounced for both savings and credit (45 and 49 percentage points, respectively). This is primarily because credit and savings products were not as widely used in rich countries as payments: only 56 percent of account holders reported saving in a financial institution in the past year, and only 20 percent borrowed from a financial institution (although this rose to 57 percent when credit cards were counted). The concept of “universal usage” is best applied to payments services rather than the other financial services where customers’ needs are more varied.

<img class="size-full wp-image-32068 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/08/greta-bull-usage-gap-oecd-and-low-income-1.png" alt="" width="617" height="365" />

For me, the jury is still out on usage. We have seen massive growth in accounts in the past three years, but dormancy rates have remained stubbornly steady, particularly in markets with rapid account growth. The trick will now be to activate all of those newly opened accounts, and we will have to wait until the 2020 Findex (and perhaps beyond) to understand whether we are simply dealing with a time lag or whether we have a bigger problem on account usage. What I would expect to see is a gradual improvement in activity rates for accounts in India and Sub-Saharan Africa, and payments will be key to that story. Payments are a gateway use case. Over time, they can create a foundation for other use cases to emerge through improved data on customer activity and by creating trust in formal financial services.

But we should not necessarily expect to see other use cases grow in proportion to payments, not least because it takes time to build data trails and the level of trust required for more habitual use of financial services. Nor should we expect it to happen quickly. Financial inclusion, as opposed to just financial access, is and has always been a long-term endeavor.

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Financial Inclusion: Is the Glass Half Empty or Half Full? (Part 2)

Global Findex

Access Usage Gap

Enabling Environment

Resilience

Saving

Trends

The <a href="http://www.smartcampaign.org/">Smart Campaign</a> recently released a paper by digital financial inclusion expert and CFI Fellow John Owens: <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/1036-responsible-digital-credit">Responsible Digital Credit: What does it look like?</a> The paper lays out the variety of digital credit models and, using the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> (CPPs) as a framework, enumerates emerging risks and suggests good practices and mitigating steps that providers, regulators and even clients can take.

The paper is a helpful addition to the Smart Campaign’s work on a number of fronts. First, it has sharpened our ability to distinguish various digital credit models. “Digital credit” has become a hot topic in financial inclusion, but the term is often used without understanding the diversity of credit providers. The paper defines digital credit as “loans that are accessed via a digital channel either online, via a mobile device or via a third-party agent that facilitates digital credit processing remotely.” John provides a helpful taxonomy of the types of providers, ranging from non-bank marketplace P2P lenders, to fintechs that provide tiny mobile loans; to tech giants leveraging their massive data streams to offer consumer loans; and platforms that support SME financing through purchase orders, invoices, receivables, and processes between buyers and sellers along the supply chain. The paper presents the client protection risks inherent in all these digital credit products.

It is important to understand the differences among the business models to be able to identify the best ways for providers to mitigate the risks. For example, responsible underwriting might need to look very different at an e-commerce tech giant like Alibaba versus a mobile loan provider like M-Shwari. The two businesses use different kinds of customer data, have different pre-existing relationships with customers, interface with customers differently, and operate in markets with different levels of development (for example, whether credit bureaus can be relied on). As the Smart Campaign seeks to develop practical guidance for digital credit, this diversity presents a challenge.

The paper was also helpful in validating the seven CPPs as a framework for identifying and pin-pointing client protection risks in a digital world. John proposes one significant change. He writes, “To this list, however, we add an eighth concept: security and fraud protection, which is especially salient for digital financial services.” While on the one hand, the concepts of security and fraud could be housed under the existing Principles “Privacy of Client Data” and “Fair and Respectful Treatment,” <strong>given the importance of data security and fraud protection in a digital world, the Smart Campaign will consider it as a potential addition.</strong>

The paper takes the conversation about responsible digital credit an important step forward. So far, much of industry discussion has been about enumerating risks through research. Now the time is ripe for recommending practices that can be applied in real time by providers, regulators, industry and even clients. <strong>Moving from risk identification to practical guidance is an absolutely necessary next step in making responsible digital credit a reality.</strong> Actually, this process has already begun, in various places. John cites examples of guidance from existing industry associations and regulator groups, as well as the many <a href="http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf">solutions proposed by CGAP</a>. For example, the Online Lenders Association in the United States has requirements for its members in the areas of advertising and marketing. One such requirement is for disclosure of conditions whenever “trigger” terms such as down payment, APR, variable interest rate, and the like appear. Overall, however John’s paper notes that implementation is still at a nascent stage.

At the end of the paper, John makes recommendations, including a few specific ones for the Smart Campaign. <strong>He strongly endorses the development and implementation of standards of practice that adapt the Client Protection Principles for digital credit. Through the <a href="http://smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>, the Smart Campaign and a group of enthusiastic digital lenders are working towards that end.</strong> The community of practice includes both mobile credit providers and tech-enabled financial institutions.

John also notes the value of recognition and certification programs for digital credit providers that meet these standards. The Smart Campaign’s <a href="http://smartcampaign.org/certification/all-about-certification">Certification Program</a>, which has certified over 100 financial service providers serving more than 42 million clients worldwide, is <strong>being extended to recognize client protection achievement for mobile credit providers, with an expected debut in 2019</strong>.

John is personally excited about the potential of new communications technologies such as chatbots to improve consumer protection in digital settings where face-to-face interactions with customers are infrequent or non-existent. He recommends this approach in the paper, and he is developing opportunities to apply digital communication tools. This is promising not only for providers, but also for regulators wishing to strengthen complaint resolution procedures or monitor a market.

As John writes, it will take a village to ensure that digital credit clients are protected with providers, consumer advocates, regulators, donors and investors all working together. The Smart Campaign is delighted to contribute to this effort.

<strong><em>Alex and John led a <a href="http://www.centerforfinancialinclusion.org/events-a-presentations/1034-webinar-responsible-digital-credit">webinar</a> in July 2018 about responsible digital credit and what providers need to do to ensure that their customers are protected and empowered—<a href="http://www.centerforfinancialinclusion.org/events-a-presentations/1034-webinar-responsible-digital-credit">check it out</a>. </em> </strong>

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Roadmap for Responsible Digital Credit—What We're Doing at the Smart Campaign

Smart Certification

This webinar features CFI Fellow John Owens and Smart Campaign Senior Director Alex Rizzi. This conversation highlights the risks that consumers of digital credit face, using the Smart Campaign Client Protection Principles as an organizing framework, identify existing best practices and standards for responsible digital credit, and provide relevant recommendations for stakeholders seeking guidance on how to best navigate the intersection of digital financial services and consumer protection issues.

<em>This report is published jointly with the Smart Campaign and was made possible by support from Mastercard Foundation and other partners.</em>

Webinar: Responsible Digital Credit

As digital credit providers have grown exponentially over the past few years, and as digital products and models have proliferated, so too have concerns around consumer protection. In the recently published report, <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/1036-responsible-digital-credit">Responsible Digital Credit</a>, I argue that ensuring that digital credit customers receive responsible treatment requires more than enhanced consumer protection laws and regulations. It also requires strong commitment from the digital credit industry. Finally, it needs consumers who are empowered to play a more proactive role in managing their digital credit responsibly.

Over the past year, I have interviewed digital credit industry associations, credit providers and their third-party data analytic providers, regulators, policy makers, and various consumer protection leaders. Many of these groups are working to develop responsible digital lending principles. With their input, my report proposes a guiding framework for responsible digital lending.  The framework uses the Smart Campaign <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> as a basis for grouping the issues. In addition, I propose an eighth principle: security and fraud protection.

Digital credit, and especially the use of mobile phones, significantly alters interactions between borrowers and lenders. Lenders utilizing the mobile channel to advertise, acquire and transact with customers must pay particular attention to the limitations of mobile interaction with customers and follow industry <a href="http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf">mobile best practices</a>. While many of the standard consumer protection practices continue to apply, new concerns, or more accurately, new faces on older concerns, have emerged. In this post, I want to highlight several of the considerations I found most important and relevant for the digital lending industry.
<h2><strong>Responsible Algorithms</strong></h2>
Many digital credit models rely on algorithms to process data about clients and make credit decisions. Because most lenders consider their algorithms proprietary, it is difficult for observers to know on what basis credit decisions are actually made. This opaque situation raises the spectre of discrimination. Attributes that are considered inappropriate bases for differentiation, such as religion, language, gender, or ethnic origin, are areas of particular concern with regard to algorithm-based lending practices. As highlighted by a Smart Campaign <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">report</a>, while credit offers may differ based on risk analysis, such differentiation should be consistently applied, stated in advance, and made with the goal of benefitting clients. To prevent discriminatory digital credit practices, some recommendations include:
<ul>
 	<li><a href="https://www.whitecase.com/publications/insight/algorithms-and-bias-what-lenders-need-know"><strong>Pretest, test and retest for potential bias</strong></a><strong>.</strong> Digital credit providers and third-party data analytics providers should continuously monitor the outcomes of their algorithmic programs to identify potential problems. Such testing could involve running scenarios to identify unwanted outcomes and developing and building controls that prevent adverse outcomes.</li>
 	<li><a href="http://www.ijmo.org/papers/43-A10212.pdf"><strong>Document the rationale for algorithmic features</strong></a><strong>.</strong> Digital credit providers should be able to provide visualization and a decision tree for the factors their algorithms analyze, as well as the justification for relying on these factors. The rationale should address how borrower debt capacity is assessed, given the importance of this concept in traditional underwriting.</li>
 	<li><strong>Independent review</strong> of companies' proposed data sets and/or algorithms.</li>
</ul>
A self-regulatory approach could be used to develop best practices guidelines for data inputs and the development of nondiscriminatory artificial intelligence systems, following the model that has been successful for the Payment Card Industry Security Standards Council.
<h2><strong>Indebtedness Monitoring</strong></h2>
Because digital lending is often based on non-traditional underwriting criteria, to prevent over-indebtedness among digital borrowers it may be relatively more important to monitor outcomes at the portfolio level. Some of the ways to do this include:
<ul>
 	<li><strong>Avoidance of debt traps</strong> by ensuring that clients are not forced into automated repeat loans.</li>
 	<li><strong><a href="http://www.responsiblebusinesslending.org/">Responsible credit reporting</a></strong> – Better compliance with reporting strengthens markets and leads to better client protection practices.</li>
 	<li><strong><a href="http://www.centerforfinancialinclusion.org/storage/documents/Smart_Brief_Tiny_Loans_Big_Questions_Final_092617.pdf">Monitoring digital credit provider’s portfolio quality</a></strong> – Industry benchmarks for portfolio quality can help to advance the understanding of risks and avoid business models that rely for their success on high default rates.</li>
</ul>
<h2><strong>Digital Transparency </strong></h2>
Digital credit platforms allow for 24/7 communications with clients that, if harnessed properly, can assist them with immediate technical support, remind them about upcoming payments and even identify counselors or resources for clients in financial stress. However, when communication is totally digital, there are heightened concerns about ensuring that clients really know what they are signing up for. Disclosure must lead to client understanding. Borrower disclosure standards should address:
<ul>
 	<li>Standards for <strong>honest advertising</strong> and penalties for misleading marketing materials of credit products. Furthermore, providers should advertise the name of the financial regulator they report to in all advertising materials.</li>
 	<li><strong>Readability</strong> and format – Disclosures need to be easy to comprehend, available in the customer’s local language, and provided in print and digital formats.</li>
 	<li><strong>Comparative tools</strong> – Standard summary disclosure documents would allow borrowers to compare credit offers, both digital and traditional.</li>
 	<li><strong>Adequate notice periods</strong> – Consumers should be notified in advance of changes to interest rates, fees or terms and conditions.</li>
</ul>
A somewhat different but related and relevant concern, often overlooked in this context, is the vulnerability of individual investors who put their money into pure peer-to-peer (P2P) lending platforms. Protections need to be extended to them as well, with a focus on ensuring that they receive the information they need to evaluate risks and that they have recourse channels when something goes amiss.
<h2><strong>Data Privacy and Usage Standards</strong></h2>
While many regulators and most industry groups agree that it is important to protect the confidentiality and security of customers’ information, data use and the level of disclosure about its use are challenging topics. In the <a href="http://ec.europa.eu/justice/data-protection/reform/index_en.htm">EU</a> and in countries such as <a href="https://www.pc.gov.au/inquiries/completed/data-access/thedraft">Australia</a>, regulators are enacting rules mandating that individuals be notified about the use of their personal data and allowed to opt out. Opt-out rules should be considered as a potential requirement for all digital credit providers, especially in markets where mobile push-marketing has become problematic.

Over the next several years it will be important for laws or regulations to be put in place to protect consumer data privacy and guide information sharing. The rules need to:
<ul>
 	<li>Provide for informed consent, such that customers explicitly permit electronic data collection prior to its collection and use, and are given the option to consent or not.</li>
 	<li>Require providers to have a clear data collection and handling policy which limits the amount of data collected as well as the timeframe it is stored.</li>
 	<li>Inform clients about their data trails and credit histories, including the ability to ensure accuracy and correct for any errors or discrepancies.</li>
 	<li>Give regulators the power to discipline providers who repeatedly allow personal data to be misused.</li>
</ul>
<h2><strong>Fraud Prevention and Security </strong></h2>
New security vulnerabilities arising from digital credit strongly point to fraud and cyber-security as consumer protection concerns. It is increasingly urgent for digital credit providers to adopt standard security compliance measures and then to regularly test and update them. Providers must also be responsible for ensuring that the third-parties they use, including lead generators, brokers, agents, and data analytics providers, also have adequate security in place. Ultimately, providers need to be responsible for the actions of their third-parties (e.g., agents, contractors, lead generators, brokers and collectors).

Consumers should be made aware of the potential for fraud and encouraged to report suspected fraud cases or security breaches. Consumer awareness campaigns on the most common incidents of fraud (via the internet, SMS alerts, signage at agent kiosks, etc.) can help with this.

While the recommendations just listed do not apply in all markets, they do point to the urgent need for regulators, industry bodies, individual providers and consumers to work together to construct the ground rules for responsible digital credit that will ensure that consumers are adequately protected.

<em>Editor's Note: This research was made possible by support from Mastercard Foundation and other partners.</em>

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A Framework for Responsible Digital Credit

Fraud

Over-indebtedness

Policy, Regulation and Government Initiatives

Transparency

<em>This is the fourth in a <a href="https://cfi-blog.org/tag/smart-100-blog-series/">series of blog posts</a> exploring the impact of Smart Certification on the financial inclusion industry.</em>

Since launching <a href="http://smartcampaign.org/certification/all-about-certification">Smart Certification</a> in 2013, we’ve witnessed rapid changes in the financial inclusion space driven by digitization of financial services and fragmentation of traditional business models. Nearly <a href="https://newsroom.accenture.com/news/global-venture-capital-investment-in-fintech-industry-set-record-in-2017-driven-by-surge-in-india-us-and-uk-accenture-analysis-finds.htm">$100 billion in investment</a> has flown into the global fintech market since 2010, creating an explosion of digital innovations and provider models. Our <a href="https://cfi-blog.org/2018/05/31/financial-inclusion-hype-vs-reality-deconstructing-the-2017-findex-results/">analysis of the Global Findex data</a> shows that recent gains in inclusion have been largely driven by the rise of mobile money and digital payments.

Digital financial technology is central to making financial products more accessible to underserved people around the world. This is an exciting moment for digital finance, and an equally important for time for client protection. The industry has the opportunity to marry the client-centric approach embraced by so many fintechs and the industry-accepted <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">consumer protection standards</a> to develop quality products, build trust, and encourage usage. The Smart Campaign will leverage its experience to help lead the charge on this.

As we <a href="https://www.youtube.com/watch?v=-gKZ7YIHWHQ&amp;feature=youtu.be">celebrate 100 Smart Certifications</a>, we look forward to the next 100. Looking to the future requires defining responsible practices and standards given the technological advances that allow nearly instant access to credit, payments, savings, and insurance. The standards and the certification program must become more agile, mirroring the fast pace of change. We envision an adaptable approach that takes into consideration the product and client delivery mechanism, as well as the provider’s function in the value chain. The flexibility of this framework could eventually allow any type of provider to seek certification, but the process will begin with a focus on digital lenders and expand to encompass additional business models on a demand-driven basis.

Let’s take a look at credit products to see how both access and the customer experience are changing. Just a few years ago, when a client sought a loan from a financial service provider, the provider would be responsible for all of the functions needed to deliver that loan, starting with design and pricing of credit products, to the determination of creditworthiness, disbursement, collection, and continuing customer service. The model relied heavily on in-person client interactions. Today, a client can take out a micro-loan with a few clicks on a phone, without any human interaction, and without knowing what companies – other than the one they are interfacing with – are involved in making the transaction possible. In some cases, the provider may rely on another company to handle key functions, such as assessing creditworthiness or loan underwriting.

[caption id="attachment_25643" align="aligncenter" width="799"]<img class="aligncenter size-full wp-image-25643" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/06/charactersitics-of-aanalog-vs-digital-credit.png" alt="Charactersitics of Aanalog vs Digital Credit" width="799" height="530" /> Image credit: Center for Financial Inclusion at Accion[/caption]

As the Smart Campaign identified in <a href="http://smartcampaign.org/tools-a-resources/1136"><em>Tiny Loans, Big Questions</em></a>, new models present new potential consumer risks. Mobile loans may unintentionally encourage reckless borrowing due to their near instantaneous speed. And when there are multiple firms involved in the value chain, there can be a lack of clarity over which company is responsible for addressing client complaints. By no means are these the only risks, but a closer look at new lending models in the digital age illustrates that client protection is as important as ever.

The Smart Campaign is conducting targeted research with digital financial service providers to adapt Smart standards in light of the new business models. Before launching Smart Certification five years ago, we collaborated closely with the industry to understand the risks and develop consensus about benchmarks for client protection. We’re replicating this process with digital finance providers, and our engagement with the <a href="http://smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a> will similarly incorporate the industry perspective into more adaptive client protection guidelines and standards.

We have already had a <a href="https://cfi-blog.org/2016/10/25/building-trust-and-growing-digital-financial-services-a-look-at-jumo/">chance to confirm</a> that the Client Protection Principles continue to offer a relevant framework for Smart Certification, whether working with fintechs or MFIs. Consumers have the same interest in transparency, prevention of over-indebtedness, and availability of complaint resolution for a digital provider as they would have for a credit union. Yet, best practices and benchmarks for digital services will differ, just as their product details and client interactions differ from analog financial services.

Many fintechs already adopt a client-centric approach in their business models, but as we’ve seen from working with socially-driven financial institutions over the years, <a href="https://cfi-blog.org/2018/05/30/the-business-case-for-smart-certification/">formalizing client protection practices in an organization’s business operations</a> cements trust between a provider and its customers, and can lead to higher retention and more sustainable portfolios. The path for building trust in this evolving financial services ecosystem is collaborating with digital providers to determine appropriate standards and best practices that protect clients while enabling the industry’s growth. The Smart Campaign invites more of this collaboration with providers as we work together to extend the impact of digital financial services for financial inclusion.

&nbsp;

The Next 100 Smart Certifications

Smart 100 Certifications

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

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

Customer Centricity

Amee Parbhoo

Director of Investments

Coryell Stout

Portfolio Engagement Manager

Matthieu Albrieux

Senior Investment Officer, Latin America

Robert Ongodia

Senior Director

Shweta Pereira

Director, India Program Management

Amy Stewart

Kathleen Yaworsky

Maria Camila Gomez	Silva

Megan Peterson

Michael Schlein

Paarul Dudeja

Paul Lamont

Prateek Shrivastava

Priya Punatar

Scott Stefanski

India

Mexico

South Africa

Advisory Services

Agricultural and Rural Finance

Alternative Data

Banks

Entrepreneurs of MSMEs

Financial Capability

Financial Health

Financial Inclusion Strategy

Governance

Human Touch

Impact Investing

Insurtech

Microfinance Institutions

MSME/SME Finance

Partnerships

Personal Financial Management

Rural Populations

Supply Chain Finance

Article

Case Study

Toolkits and Guides

Video

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.

Today, India is the center of innovation in the global effort to create a financially inclusive world. India’s government, fintech sector, investors, and financial service providers are making remarkable progress: the country’s pro-financial inclusion policies and the growing use of <a href="https://www.gsma.com/newsroom/press-release/china-and-india-to-account-for-half-of-all-new-mobile-subscribers-added-by-2020/">mobile phones</a> have connected more people to inclusive financial services than ever before. According to the World Bank’s Global Findex, only 35 percent of India’s adults had access to an account in 2011. In 2017, 80 percent did. Access alone is just a start. It’s an important first step toward a world where everyone has the broad array of basic financial tools they need to help themselves.

I recently met with Accion staff, partners, and the clients who we serve in India to see the difference that inclusive financial services make and the ways that we can help more families and businesses there. By prioritizing the following four issues in India and working with local partners throughout the country, we aim to create a financial sector that works for everyone:
<h2>Inclusive fintech helps India’s micro, small, and medium enterprises thrive</h2>
India’s micro, small, and medium enterprises (MSMEs) employ roughly 120 million people, making them the second largest ‘sector’ in India’s economy by employment, following agriculture. But despite their importance, these businesses often struggle to obtain the financing they need to hire, expand, or purchase inventory.

[caption id="attachment_18098" align="alignleft" width="500"]<img class=" wp-image-18098" src="https://content.accion.org/wp-content/uploads/2019/04/India-Trends-Aye-Finance-1024x768.jpg" alt="" width="500" height="375" /> <em>Visiting Accion partner Aye Finance in the Shadhara area of Delhi to see how Aye is creating opportunity for cluster-based clothing and shoemaker businesses.</em>[/caption]

The Indian government is addressing this issue through its <a href="http://www.makeinindia.com/about">Make in India</a> program and by offering <a href="https://www.mudra.org.in/">MUDRA loans</a> to small businesses. Accion’s local partners are also supporting India’s MSMEs: <a href="https://www.accion.org/clients/aye-finance">Aye Finance</a> studies small business clusters like brass works and garment weavers to understand how these businesses work and their typical financial performance. This information helps Aye acquire, vet, and lend to underserved customers quickly: Aye has grown from a startup to serve more than 60,000 clients, most of whom would not have received formal credit from any other lender.

Likewise, Accion partner <a href="https://www.accion.org/these-women-leaders-show-that-balance-is-better-part-two">Northern Arc</a> lends to nearly 200 microfinance institutions and inclusive fintech startups that, in turn, help more than 30 million clients send their children to school, launch businesses, and more.
<h2>Financial services should work everywhere — not just major cities</h2>
In 2018, India had the world’s largest rural population: <a href="https://www.un.org/development/desa/publications/2018-revision-of-world-urbanization-prospects.html">893 million</a> people. In the past, it has been very challenging to reach rural communities and provide them with savings, credit, insurance, and payments. But financial services should work everywhere — not just in major cities.

That’s why we’re working with financial service providers to find new ways to help rural areas. For instance, Accion partner <a href="https://www.accion.org/instead-sending-people-bank-sub-k-brings-banking-people">Sub-K</a> uses a banking correspondent model to reach the last mile for extremely remote customers: correspondents are small shop owners and other retailers who work where financial service providers typically don’t. They can transfer money, take deposits, and accept documentation on behalf of a bank, ensuring that customers can use financial services anywhere. Sub-K has used this network and its relationships with third-party banks to provide more than 2.2 million rural customers with credit, savings, payments, and other financial services.

We also work with Dvara KGFS, which provides a wide range of wealth management services to meet more than 320,000 rural clients’ needs. It uses a combination of back-end technology and <a href="https://www.accion.org/does-human-touch-still-have-a-place-in-a-high-tech-world/">human touch</a> to reach out to clients and provide them with individual advice and assistance, no matter where they live or work.
<h2>Financial advisory services help build financial health</h2>
[caption id="attachment_18102" align="alignright" width="375"]<img class=" wp-image-18102" src="https://content.accion.org/wp-content/uploads/2019/04/India-Trends-B-768x1024.jpg" alt="" width="375" height="500" /> <em>India is a global role model in digital innovation and inclusion.</em>[/caption]

Financial advisory services help families plan ahead and develop the skills needed to develop their <a href="https://www.accion.org/topics/financial-health">financial health</a>. But these services typically aren’t affordable for underserved customers: it can cost too much to provide low-income people with personalized financial advice.

But by using technology, we can provide everyone with individual financial insights that promote their long-term financial health. Accion portfolio partner Fisdom assesses users’ information to deliver unique tax, investing, and savings recommendations that help customers make informed financial decisions. Fisdom also offers insurance and pension products to help its clients prepare for the future. Fisdom is reaching clients who have never invested before with initial investment amounts of just a few rupees.

Likewise, Accion’s <a href="https://www.accion.org/classroom-phone-new-digital-training-program-entrepreneurs">Dialogue on Business</a> program with Standard Chartered UK has trained thousands of entrepreneurs on business management skills. We’ve also worked with Axis Bank to offer our Money Plan program to 30,000 people, helping families budget and use financial services to reach their goals.
<h2>Insurtech protects the world’s most vulnerable people</h2>
In the past, it cost insurance providers too much to sell, collect payments for, and administer policies to the underserved. But without insurance, many families live one illness, injury, or natural disaster away from financial ruin.

Accion’s <a href="https://www.accion.org/how-can-we-bring-insurance-to-those-who-need-it-most">insurtech</a> partners are using technology to protect some of the world’s most vulnerable people. They’re also demonstrating that insurance has immediate value and application. For instance, our partner <a href="https://www.accion.org/four-innovations-making-insurtech-more-inclusive">Toffee Insurance</a> sells health, personal accident, and lifestyle policies targeted to specific customer needs, such as accident insurance for bicycle commuters or dengue or seasonal disease insurance. By making insurance affordable and relevant, Toffee provides the policies that help more people recover from hardships.
<h2>Looking ahead</h2>
Accion will continue contributing to India’s remarkable progress promoting financial inclusion. By prioritizing these four issues and working alongside our local partners, we’ll help more Indian families and businesses access, use, and benefit from the formal financial sector.

India, fintech, and new trends accelerating financial inclusion

Getting a loan has traditionally been a hefty process, including cumbersome paperwork, multiple visits to a bank branch, and credit checks that can disqualify applicants without an extensive formal credit history. This process isn’t useful for people who just need help making ends meet or paying for small everyday expenses, and they often end up going without the funds they need or turning to predatory lenders.

Accion portfolio company <a href="https://www.smartcoin.co.in/" target="_blank" rel="noopener">SmartCoin</a> aims to help more people get the funds they need quickly and securely using a mobile app. Their platform seamlessly empowers customers to build their financial health and their credit score throughout the lending process. We talked to a few of SmartCoin’s customers who shared how SmartCoin has benefitted them.

<img class="size-large wp-image-16724 alignnone" src="https://content.accion.org/wp-content/uploads/2019/01/Lower-Res-145-of-236-1-1024x669.jpg" alt="Prashanth B S" width="1024" height="669" />

Coffee? Tea? Biscuits? The small store that Prashanth B S runs in Bengaluru has everything you need for an afternoon pick-me-up. He’s been managing the shop for eight years, but growing his business is difficult. When he decided to take out a loan to boost his business, he was surprised by how straightforward SmartCoin’s process was. He applied online, uploaded his documents, received a quick call to discuss details, and within a few days, he had the funding he requested. As his shop thrives, he’s interested in opening a second location in a different part of town, and he’s confident SmartCoin will be there for him as he expands.

<img class="size-large wp-image-16726 alignnone" src="https://content.accion.org/wp-content/uploads/2019/01/Lower-Res-143-of-236-1-1024x683.jpg" alt="Janani Priya " width="1024" height="683" />

Janani Priya found SmartCoin in the Google Play store, and she downloaded it to help her pay for travel expenses and other costs that crop up at the end of the month. “It’s quite easy since it’s tech-based,” she says. In addition to appreciating how straightforward using the app is, she liked that she could contact someone at SmartCoin and get help if she needed. It made it easier for her to trust the company with her finances. While she hopes to one day not need loans for everyday expenses, Janani’s happy to know she can count on SmartCoin if she ever needs emergency funds.

<img class="size-large wp-image-16727 alignnone" src="https://content.accion.org/wp-content/uploads/2019/01/Lower-Res-128-of-236-1024x671.jpg" alt="Manjunath S" width="1024" height="671" />

Manjunath S just earned an MBA in finance, and now he’s set to take on the world. As he gets ready to transition to a new job, he needs a little extra money to help with day-to-day expenses, from household needs to gas costs to dinner money. He found that banks would only offer large loans, not small loans to cover miscellaneous costs and make ends meet. SmartCoin helped him get the amount of money he needed in just a few steps. “Seriously, this app is a tremendous resource,” he says. Someday Manjunath hopes to be able to start his own business, and knowing he can get funding when he needs it puts him in an excellent position to pursue his entrepreneurial dreams.

This mobile app helps people in India manage everyday expenses

SmartCoin

Impact Investor

Social Good

Accion Venture Lab

The real impact of financial inclusion

<h3><em>Executive Summary</em></h3>
<em>Supply chain finance (SCF) offers high-quality, low-risk financing to the small merchants that tend to be underserved by traditional lenders. These microentrepreneurs often lack the credit data traditional lenders need and are seen as too costly to serve at scale. SCF leverages data generated by businesses when they buy from suppliers and sell to customers, using this information to evaluate the creditworthiness of small merchants. It is a useful tool to expand financial inclusion for the 141 million microenterprises in developing countries and to promote inclusive economic growth globally.  </em>

<em>SCF benefits merchants with timely access to credit; it also benefits merchants, suppliers, and fast-moving consumer goods companies (FMCGs) with higher sales, faster turnover, and more efficient operations. Lenders benefit as well: SCF reduces risk and costs, allowing financial service providers (FSPs) to cater to new markets.</em>

<em>We believe that platform-based models, those that consolidate data produced by the movement of money and goods in the supply chain, are best suited to deliver SCF. Platform-based SCF models can satisfy the interdependent needs of multiple stakeholders simultaneously and facilitate coordinated decision-making. FSPs and FMCGs are well positioned to develop SCF platforms. </em>

<em>This brief discusses how SCF platforms can help small merchants, FMCGs, suppliers, and FSPs realize their economic potential. For institutions interested in developing an SCF solution, access our recent in-depth guide and playbook, <a href="https://www.accion.org/how-digitized-supply-chain-finance-can-help-small-merchants-grow/"><strong>How digitized supply chain finance can help small merchants grow.</strong></a></em>

&nbsp;

Small merchants such as grocery shops, corner stores, and other micro-retailers employ <a href="https://www.smefinanceforum.org/sites/default/files/analysis%20note.pdf">more than half</a> of the world’s labor force and contribute significantly to global GDP. These merchants rely on personal savings, family and friends, and sometimes personal credit to meet cash flow needs, but collectively these businesses face an <a href="https://www.smefinanceforum.org/sites/default/files/Data%20Sites%20downloads/MSME%20Report.pdf">$8.1 trillion credit gap</a>, creating a significant barrier to inclusive growth.  This global credit gap is almost entirely a supply-side problem, as micro, small, and medium entrepreneurs’ (MSMEs’) demand for financing is significant. Serving this market is challenging for lenders. Small merchants have little to no business documentation, are often unable to provide high-quality collateral, operate primarily in cash, and require loan sizes that are not always worth the operational cost of serving them, making it difficult to assess credit risk and sustainably offer products that meet small merchants’ needs.

By addressing this problem and helping MSMEs obtain the financing they need when they need it, we help microentrepreneurs restock their shelves, expand operations, and hire more employees. By addressing this credit gap, we can help more people around the world realize their economic potential.

The supply chain finance opportunity

Citi Foundation

Financial Inclusion Practitioner

Financial Service Provider

Accion Global Advisory Solutions

Supply chain finance

<em>This guide is for institutions interested in developing a supply chain finance solution. For those interested in better understanding how supply chain finance can help small merchants, fast moving consumer goods companies (FMCGs), suppliers, and financial service providers (FSPs) realize their economic potential, access our report, the  <a href="https://www.accion.org/the-supply-chain-finance-opportunity">Supply Chain Finance Opportunity.</a></em>
<h3>Executive Summary</h3>
Supply chain finance (SCF) is the use of financing mechanisms that can optimize the management of liquidity tied up in supply chain processes. SCF solutions have long been offered by big banks to large corporations, such as fast moving consumer goods (FMCG) companies and manufacturers, to support trade.

However, today SCF techniques are being transformed by technology, expanding the addressable market to include micro, small, and medium size enterprises. Improved connectivity, increasingly available customer data, and new technologies lower the cost and make it possible to extend digital SCF solutions to the small merchants at the end of global supply chains.

By tying credit to the flow of goods, SCF facilitates more efficient business operations and cash flow management for all actors along the chain – resulting in higher sales, faster turnover – and ultimately, increased profitability and growth.

A platform-based model that satisfies the interdependent needs of multiple stakeholders simultaneously using digital innovations is well suited to provide SCF solutions. Platform models consolidate digitized data produced by the flows of goods and money throughout the supply chain, building trust and facilitating coordinated decision-making. The net effect is to provide deeper insights into merchant and consumer behavior.

We believe independent third-party technology providers are best positioned to mediate between multiple stakeholders and take the lead in operating a flexible and scalable SCF solution. We also see a major opportunity, particularly for FSPs and FMCGs, to lay the groundwork for such a platform approach to succeed.  A digitized SCF solution will not only help merchants to grow their business but will drive meaningful financial inclusion for the millions left un- or underserved by the status quo. With nearly 141 million microenterprises in developing countries, digitized supply chain finance represents a scalable solution to drive greater sales through the supply chain, which will propel inclusive growth.

<img class="aligncenter" src="https://content.accion.org/wp-content/uploads/2018/09/Citi-Foundation.png" width="240" height="162" />

<em>Accion would like to thank the Citi Foundation for supporting this report. The Citi Foundation works to promote economic progress and improve the lives of people in low-income communities around the world. The Citi Foundation invests in efforts that increase financial inclusion, catalyze job opportunities for youth, and reimagine approaches to building economically vibrant cities.</em>

&nbsp;

How digitized supply chain finance can help small merchants grow

Tienda Pago

Investing in <a href="https://www.smartcoin.co.in/">SmartCoin</a> was an opportunity for us to <a href="https://www.accion.org/smartcoin-brings-financial-health-low-income-indians">help fund tech</a> that’s enabling a faster way for people to get the funds they need to manage their everyday cash flow imbalances. When we visited SmartCoin’s office in Bengaluru, we talked to some of the employees about what it’s like to work for an innovative and inclusive fintech company.

With more than eight years of experience in data analytics, Mayank Aggarwal is confident working on the analytics team and processing the vast amounts of data that go into SmartCoin’s alternative credit assessment. “Anything and everything related to data and numbers is all taken care of by my team members and me,” he says. Mayank appreciates being able to turn data into insights about customers so they can get a loan. “That I’m able to contribute in my way to this cause of helping someone in need is quite satisfying,” he says.

SmartCoin’s proprietary score takes into account the borrower’s financial profile, as well as alternative data from social networks and behavior data. From a customer’s initial contact with SmartCoin to the loan disbursement, the whole process is digital, and people like Mayank on the back-end help the process run smoothly for customers using the app.

Even in the most high-tech loan process, sometimes customers need a human touch. That’s where Piyush Pandey comes in. He leads the customer support team to make sure that anytime a customer has an issue, SmartCoin can resolve it quickly and effectively. Customers can contact support through chat, email, or phone, and Piyush’s team will make sure they get the help they need in whichever form is convenient for them.

[caption id="attachment_16718" align="alignleft" width="501"]<img class="wp-image-16718" src="https://content.accion.org/wp-content/uploads/2019/01/Lower-Res-151-of-236-1-1024x663.jpg" alt="Piyush Pandey" width="501" height="324" /> <em>Even in the most high-tech loan process, sometimes customers need a human touch. Piyush leads SmartCoin’s customer support team.</em>[/caption]

Convenience is a significant factor in SmartCoin’s success. As Piyush pointed out to us, a vast number of people in India already have smartphones, so having a financial tool they can access from an app makes it easy to use. It’s a smart business strategy, but it’s also about helping people, Mayank emphasizes. People often need loans quickly and only need small amounts for basic needs, but banks either won’t loan to them or require too much time and documentation to process a loan. Many of the customers who come to SmartCoin are students or other people who just need a few necessities, especially at the end of the month. SmartCoin can get those funds to them quickly, and people in need don’t have to turn to predatory lenders.

SmartCoin even goes a step farther by building financial health tools into the app so that customers can build their credit profiles and learn healthy financial habits as they repay their loans. This gives borrowers a strong foundation for interacting with financial services in the future.

In addition to the job satisfaction that comes from having a career that makes a social impact, Mayank and Piyush both appreciate the benefits that come with working at a growing startup. Having worked at startups before, Mayank was drawn to the innovative and fast-paced culture of the industry and jumped at the chance to work at SmartCoin. For Piyush, SmartCoin’s rapid growth has been a springboard for his career. In just a year, he has been able to move up the ladder and take a leadership position on his team. “It’s quite a good opportunity for me,” says Piyush.

Combining the experience of working at a technology-focused startup with a mission to do good is an opportunity that neither Mayank or Piyush takes for granted. As Mayank told us, recalling why he decided to work at SmartCoin: “They were doing something really unique and very helpful for society. I decided that I wanted to be a part of it.”

What’s it like to work in a startup transforming finance in India?

Have you heard? Fintechs and traditional financial institutions don’t have to be enemies anymore. In fact, we’re seeing time and again that <a href="https://www.centerforfinancialinclusion.org/how-financial-institutions-and-fintechs-are-partnering-for-inclusion-lessons-from-the-frontlines-2">these businesses are often stronger when they partner together</a>. Partnerships between fintechs and traditional financial institutions offer advantages for both parties, and they also provide the vital benefit of better serving people who have been left out of the financial system.
<p class="graf graf--p">We recently caught up with our portfolio partner <a class="markup--anchor markup--p-anchor" href="https://www.creditmantri.com/" target="_blank" rel="noopener">CreditMantri</a> and one of the financial service providers that they’re partnering with, <a class="markup--anchor markup--p-anchor" href="https://www.shriramcity.in/" target="_blank" rel="noopener">Shriram City Union Finance Limited</a>, to see what they’ve learned about partnerships from working together.</p>


[caption id="" align="alignleft" width="599"]<img class="graf-image" src="https://cdn-images-1.medium.com/max/1200/1*fuF1zNguUL5X8Zhv2fjdHw.jpeg" alt="Y.S. Chakravati at the CreditMantri office" width="599" height="399" /> Y.S. Chakravati is the chief operating officer of Shriram City Union Finance Limited[/caption]
<p class="graf graf--p">Y.S. Chakravati, the chief operating officer of Shriram City Union Finance Limited, explains that his business’ core mission is to provide credit to informal businesses and self-employed people. He decided to work with CreditMantri when he met the fintech’s founders. He was impressed by their thorough understanding of the market they served, and he appreciated their concern for both sides of the equation: the customer and the business.</p>
Today, CreditMantri provides data to help Shriram make better decisions, says Rupa Rajamani, who heads digital lending at CreditMantri. In addition to using information from credit bureaus, CreditMantri also processes data from government records and user-generated data, such as social media, SMS data, and calling records to give a full picture of a borrower.

“It’s a good product that is useful to the specific community of first-time borrowers,” says Chakravati. Alternative data allows CreditMantri and Shriram to help people with little to no credit history. Reputable institutions like Shriram were usually unable to evaluate and serve this segment in the past, Chakravati explains. People without credit histories often go without the funds they need or depend on expensive private lenders. CreditMantri’s technology enables them to get reasonable loans and build a credit history, which will allow them to borrow at a lower rate in the future.

In addition to empowering Shriram to serve more customers, CreditMantri helps them serve their clients faster. CreditMantri’s platform analyzes applicants and shortlists leads for Shriram. These leads reach a branch manager within one day, and they can quickly reach out to the customer and approve the requested loan.

Rupa and Chakravati both agree that CreditMantri and Shriram gain equally from the partnership — it’s not a one-way relationship. By working together, they’re able to scale faster, and they can serve more of the underserved customers who haven’t had access to quality financial tools in the past.

More proof that fintechs and traditional financial institutions work better together

CreditMantri

<span style="font-weight: 400">Swadhaar FinAccess was established in Mumbai, India in 2005 as a nonprofit entity offering microcredit. Since then, it has grown and expanded its offerings, and currently operates as a subsidiary of RBL Bank, an Indian commercial financial institution, providing loans and savings products to low-income households and entrepreneurs.</span>

<span style="font-weight: 400">Swadhaar’s founder, Veena Mankar, remembers her parents often saying that she had “an obligation to open doors for those less fortunate.” After four decades of working in the financial services industry, she started Swadhaar to fulfill her dream of using her experience to expand financial inclusion. </span>

<span style="font-weight: 400">Swadhaar started by offering need-based loans with a group guarantee to women microentrepreneurs. In 2008 it sought to also serve the “missing middle,” businesses that are traditionally ignored by larger financial institutions, with a capacity-based individual loan product. </span>

<span style="font-weight: 400">This addition was not easy, as individual lending products were fairly new to the Indian microfinance market. The higher level of risk associated with underwriting individual loans increased transaction costs and interest rates. When a 2010 microfinance industry crisis in the Indian state of Andhra Pradesh led to increased regulation of interest rates, Swadhaar had to halt serving the “missing middle,” as the new requirements no longer made the product it offered viable. It needed to develop a new business model.   </span>

<span style="font-weight: 400">Meanwhile, RBL Bank, wanting to build on its success in micro, small, and medium-sized enterprise (MSME) loans by expanding its reach into the microenterprise segment, turned to Swadhaar to form a strategic business correspondent relationship through which it could source microloans. </span>

<span style="font-weight: 400">Faced with so many changes, Swadhaar, which had a longstanding relationship with Accion, asked Accion’s advisory team to help evaluate institutional readiness. Before introducing new products and partnerships, Swadhaar needed to build capacity, standardize its appraisal methodology, and streamline labor-intensive procedures. </span><b>Creating efficiencies in internal processes was key to lowering operational costs and offering new financial products.</b>

&nbsp;

Swadhaar transforms its lending model in India

Swadhaar

This toolkit is for analysis of the regulatory, technological, competitive, and collaborative opportunities, as well as demographic and cultural factors that will help drive the adoption of a financial institution's target channels.

Digital financial services toolkit: External analysis

Regulators

This template lays out the initial project planning phase and outlines objectives, budget, and roles and responsibilities, to ensure internal alignment and cross-departmental buy-in.

Digital financial services toolkit: Draft project charter

This toolkit helps financial institutions review the readiness of existing policies, technology, and business operations to support the channel methodology, outline required additions or changes to successfully launch the channel, and assess stakeholder buy-in and human resources capacity to support implementation and launch.

Digital financial services toolkit: Internal analysis

This toolkit aims to help microfinance institutions plan, pilot, roll-out, and operate digital delivery channels for financial services.

Digital financial services toolkit: Channels methodology

This toolkit facilitates assessment and diagnosis of existing digital channels and identifies how a proposed new channel will complement current offerings.

Digital financial services toolkit: Channel diagnosis framework

This template summarizes high-level results of the feasibility study (see separate template) and guides the recommendations to make “go/no go” and “how to go” decisions regarding a potential new channel deployment.

Digital financial services toolkit: Go/How-to-go decision tool

This template summarizes activities completed in the feasibility study phase of new digital financial system channel deployment or enhancement. This document can be used to present results and provide recommendations to senior management or the board.

Digital financial services toolkit: Overview of feasibility study findings

<p class="graf graf--p graf--startsWithDoubleQuote"><em class="markup--em markup--p-em">“</em>We should go digital” is often proposed by financial service providers with the assumption that it will make life easier for everyone involved. But digital transformation is a challenging process, requiring both a strong structural and cultural foundation to be successful. To make the process as smooth as possible, lenders must take the crucial first steps of assessing and building their digital readiness, as we wrote in our recent publication <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/demystifying-digital-lending/" target="_blank" rel="noopener noreferrer"><em class="markup--em markup--p-em">Demystifying Digital Lending</em></a>.</p>

<h2 class="graf graf--h4"><strong class="markup--strong markup--h4-strong">Build your digital readiness — and avoid a ‘digital mullet’</strong></h2>
<p class="graf graf--p">One of the most common mistakes financial service providers make when going digital is giving themselves a “digital mullet” — they look digital in the front, with fancy mobile applications or automated credit distributions, but they have a lot of labor-intensive work happening on the back-end, which fails to deliver on the expected benefit of greater operational efficiency.</p>
<p class="graf graf--p">Building digital readiness means putting in place the core processes and systems that will ultimately support end-to-end digitization of lending products and the customer experience as a whole. For example, to help streamline operations, reduce costs, and increase scale, financial service providers (FSPs) can deploy digital channels and tools, such as <a class="markup--anchor markup--p-anchor" href="https://www.centerforfinancialinclusion.org/new-case-study-provides-evidence-on-the-impact-of-digital-field-applications" target="_blank" rel="noopener noreferrer">digital field applications </a>(DFAs) or cloud-based core banking systems — but deploying such tools is just a small part of the broad range of activities required to build digital readiness.</p>
<p class="graf graf--p">A baseline of digital readiness can help mitigate common digital lending <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/5-key-principles-for-financial-service-providers-looking-to-go-digital-d9fb58b07816" target="_blank" rel="noopener noreferrer">implementation challenges</a>, including data quality and availability, building strong partnerships, and change management.</p>

<h2 class="graf graf--h4"><strong class="markup--strong markup--h4-strong">In digital lending, the whole is greater than the sum of its parts</strong></h2>
<p class="graf graf--p">To become a digital lender, a traditional financial service provider must undergo a comprehensive digital transformation to create an integrated digital product proposition that improves the customer experience. This draws a useful line in the sand — digital lending isn’t just doing the same thing better, but rather creating something new. It implies an end-to-end process of developing and delivering a data-driven financial product that is applied for, disbursed, and managed through digital channels, and ultimately improves the customer experience.</p>
<p class="graf graf--p">As we note in the report, FSPs should understand the distinction between digital readiness (the ability to offer existing products in a digital format, typically enabled by a number of digital tools) and a digital product proposition (the launch of an end-to-end digital product). Many FSPs plan to launch digital products <a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/5-key-principles-for-financial-service-providers-looking-to-go-digital-d9fb58b07816" target="_blank" rel="noopener noreferrer">without realizing the time required to build their digital readiness first</a> — this often involves multi-year planning to develop systems and skills to enable the delivery of digital products before actual digital products are launched.</p>
<p class="graf graf--p"><strong class="markup--strong markup--p-strong">At its core, much of digital readiness is about building the institutional capacity to </strong><a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/implementing-big-data-10-tips-from-financial-service-providers-11b30dbee1a" target="_blank" rel="noopener noreferrer"><strong class="markup--strong markup--p-strong">use data effectively</strong></a><strong class="markup--strong markup--p-strong">, which is a prerequisite for launching a successful digital lending product.</strong> The diagram below, from our publication <a class="markup--anchor markup--p-anchor" href="http://www.accion.org/unlocking-the-promise-of-big-data-to-promote-financial-inclusion/" target="_blank" rel="noopener noreferrer">Unlocking the Promise of (Big) Data to Promote Financial Inclusion</a>, depicts a simple diagnostic framework for understanding an institution’s data capacity.</p>
<p class="graf graf--p"><img class="alignnone size-large wp-image-8443" src="http://blogs.accion.org/wp-content/uploads/2018/07/Screen-Shot-2018-07-26-at-9.11.58-AM-1024x790.png" alt="Data continuum diagnostic framework for companies at different levels of data maturity and digitization." width="1024" height="790" /></p>
<p class="graf graf--p">As the diagram above illustrates, digital readiness can be broken down into three broad categories — people, systems, and strategy:</p>

<ul class="postList">
 	<li class="graf graf--li"><strong class="markup--strong markup--li-strong">People — ensuring the business is ready for scale from an organizational culture and internal capacity perspective. </strong>This includes reviewing the skills, capacity, and commitment of the institution at all levels, and assessing whether existing team structures and individual incentives are suitable for delivering a digital proposition.</li>
 	<li class="graf graf--li"><strong class="markup--strong markup--li-strong">Systems — ensuring the core infrastructure is in place to scale the business, such that information flows smoothly and is used effectively across the organization. </strong>This includes an institution’s core banking system, electronic document management system (EDMS), data warehouse, middleware, and reporting dashboards. The systems required to offer digital lending are comparable to a CRM (customer relationship management) system in which the institution can disaggregate customer-level information from the lending process and ultimately build a comprehensive, 360-degree digital view of individual customers over time.</li>
 	<li class="graf graf--li"><strong class="markup--strong markup--li-strong">Strategy — ensuring the business is ready for scale from a strategic and operational perspective. </strong>This includes data and channels strategy, customer segmentation and understanding, and process reengineering. An essential step in building digital readiness is taking stock of current processes and identifying opportunities to streamline and leverage data.</li>
</ul>
<p class="graf graf--p">To quote J.R.R. Tolkien — “the road goes ever on and on…” — but by keeping this framework in mind, combined with a Bezos-like <a class="markup--anchor markup--p-anchor" href="https://www.cnbc.com/2016/05/13/5-key-business-lessons-from-amazons-jeff-bezos.html" target="_blank" rel="noopener noreferrer">obsession</a> with customer needs, financial service providers can position themselves for a successful digital transformation.</p>
<p class="graf graf--p"><em class="markup--em markup--p-em">This post is part of our </em><em class="markup--em markup--p-em">series on digital lending</em><em class="markup--em markup--p-em">.</em></p>
<p class="graf graf--p"><em class="markup--em markup--p-em">Accion has developed many tools and resources to support FSPs in these first critical steps to build digital readiness, including a </em><a class="markup--anchor markup--p-anchor" href="https://www.accion.org/content/new-case-study-impact-digital-field-applications" target="_blank" rel="noopener noreferrer"><em class="markup--em markup--p-em">case study</em></a><em class="markup--em markup--p-em"> on the use of DFAs, </em><a class="markup--anchor markup--p-anchor" href="http://www.accion.org/content/tool-and-resources" target="_blank" rel="noopener noreferrer"><em class="markup--em markup--p-em">tools</em></a><em class="markup--em markup--p-em"> on credit scoring and operational risk management, and a </em><a class="markup--anchor markup--p-anchor" href="https://medium.com/accion/implementing-big-data-10-tips-from-financial-service-providers-11b30dbee1a" target="_blank" rel="noopener noreferrer"><em class="markup--em markup--p-em">guide</em></a><em class="markup--em markup--p-em"> on developing the operational capability and infrastructure required for the strategic use of data.</em></p>

The biggest mistakes lenders make when going digital

Demystifying digital lending

<p class="graf graf--p">Bhuvanesh V grew up in a family of teachers outside of Chennai in Southern India. He’s since moved to the city, where he carries on this educational legacy in his work as a programmer for a learning company. He’s still close to his family, and when the time came for his sister to get married, he jumped at the chance to pay for her wedding. Unfortunately, banks weren’t as eager to work with him to make his sister’s dream wedding a reality.</p>
<p class="graf graf--p graf--startsWithDoubleQuote">“When you physically approach a bank, you won’t get a loan if you’re a new customer,” Bhuvanesh explains. Multiple banks denied him because he lacked a credit history, but seeing his sister happily married was worth the effort — so he persevered.</p>
<p class="graf graf--p">Bhuvanesh heard that our portfolio partner <a class="markup--anchor markup--p-anchor" href="https://www.creditmantri.com/">CreditMantri</a> could serve people even if they didn’t have a formal credit history. He downloaded the app, and a representative contacted him as soon as he logged in. Bhuvanesh was impressed with how friendly and helpful the people at CreditMantri were. They walked him through the process to help him take out the funding he needed and build his credit score</p>
<p class="graf graf--p graf--startsWithDoubleQuote">“I’m really happy about CreditMantri’s service,” he said. Bhuvanesh is glad to know that whatever his plans are for the future, he won’t be locked out of the financial system again. Thanks to CreditMantri, he’ll be able to get the financial services he needs for all of life’s celebrations and complications.</p>

He just wanted to give his sister a beautiful wedding

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

5 key principles for financial service providers looking to go digital

[embed]https://www.youtube.com/watch?v=vSCLwJHOwZU[/embed]

Digital lending can be a powerful force for financial inclusion. Innovations in digital lending are enabling financial service providers (FSPs) to offer better products to more underserved clients in faster, more cost-efficient, and engaging ways. Governments are increasingly incentivizing the growth of digital lending models as a way to promote greater financial inclusion and extend high-quality financial services to underserved communities and businesses.

<a href="http://www.accion.org/demystifying-digital-lending/">Download the full report here</a>.

Webinar: Demystifying digital lending