How Will You Do Digital Finance Right?
A massive data breach at All-In-Pay, a digital payments provider has resulted in $15 billion loss of customer funds: government inquiry forthcoming.
This is the hypothetical news headline most feared by participants at CGAP’s June 30th event, which released Doing Digital Finance Right, a focus note which explores how and why low-income customers of digital financial services (DFS) perceive and experience a variety of risks of financial loss and other harm. These risks include fraud perpetuated on the customers, poor and confusing interfaces, opaque disclosures, poor or no access to recourse, inability to transact from network downtime, agent misconduct or mismanagement, and even (as feared above) weak data privacy and protection.
The evidence reveals a clear tension: while DFS customers appreciate and want accessible digital financial services, a variety of customer risks negatively impact confidence, uptake and usage; limit financial inclusion achievements; and threaten to derail progress toward financial inclusion. It also reveals an urgent need: DFS stakeholders— from providers to policymakers to researchers, funders and advocates— must do more to ensure DFS enhance consumer financial well-being and mitigate potential customer risks.
Photo Credit: Deba Prasad Roy
But in the vast and fast-paced world of DFS, what are the priorities for ensuring responsible digital financial services innovation at scale, and who is responsible for enacting them?
We have been exploring many dimensions of this question in an ongoing blog series on the risks and opportunities of digital finance. And while the CGAP focus note considers several core priorities for industry action, in particular, the reality is that DFS providers cannot and should not be expected to act alone.
Here are 5 initial food-for-thought ideas for the four core DFS stakeholder groups to consider:
- Providers: Concentrate now on improving agent management and monitoring, and develop more effective recourse mechanisms. To get to the core of the issue, start by defining and mapping customer risks by service, channel, and industry in order to understand the dynamics of both the incidence and consequences of risks throughout provider and service types. This would likely require both industry to industry and industry to regulator collaboration. Finally, consider how to leverage these new technologies and emerging evidence on consumer behavior to embed financial capability into the design of new products and services.
- Policymakers: You also need to understand the incidence and consequences of risks in order to build the most innovation- and consumer-friendly regulatory environments for DFS. So, work with providers on the mapping exercises mentioned earlier. Also, take advantage of these new digital tools, too: build or enable mechanisms for mobile-based recourse, monitoring and supervision. And now that central bank, telecommunication and competition regulators all have some component of DFS in their purview, increased intra-regulatory dialogue and debate is in due order.
- Researchers: Help us all understand even better the nature and impact of customer risks of digital financial services. For example, what design and delivery elements will help low-income DFS clients build trust & confidence to transact correctly? What are the most effective user interfaces on both feature phones and smart phones for understanding and using DFS? And finally, can you please quantify the business case for providers to mitigate customer risks? For example, are there small, low-cost tweaks that can have a really big impact?
- Donors and Development Partners: In many ways, you provide or enable a bridge between the three stakeholder groups above. Concentrate, for now, on leveraging your resources and energy to support building the evidence base for understanding risks and measure effectiveness of solutions. That also means working to improve collaboration, dialogue and learning between all stakeholders, both globally and in key markets.
- All: Continually seek ways to collaborate and find collective solutions that leverages the strengths of all groups while sharing the responsibility of responsible digital finance equitably. Indeed, there are already existing platforms for this: The global community of practice and platform, Responsible Finance Forum, brings together these core stakeholder groups annually to discuss inclusive and responsible finance issues, both at hand and on the horizon, and work together to develop solutions.
Ultimately, this complex question posed above will require a complex answer. Yet there this is one simple truth we should embrace: we are all responsible for responsible digital finance. And although it is difficult to define our individual and collective priorities in order to set concrete agenda for action, failing to take on this hard task increases the risk of opening tomorrow’s paper to a headline none of us want to see.
So, let’s talk: What are your top priorities for “doing digital finance right”?
Many of the above suggestions emerged from a small stakeholder workshop of 35 experts from these four stakeholder groups. In just one week, in Antalya Turkey and kicking off a week of G20 Global Partnership for Financial Inclusion event, 125 of the world’s leading DFS providers, policymakers, researchers, funders, development partners and advocates will convene and the 6th Annual Responsible Finance Forum to develop sector-specific and collective pathways to responsible digital finance. This year, RFF is teaming up with IPA to ensure that discussions on responsible innovation in financial services are grounded in the last evidence from financial-services impact research. You can follow and contribute to the discussion on Twitter at #2015RFF.
I would suggest there are two specific areas which can provide part of the solution and where we can help. They are:
1/. Family remittances, along with targeted aid for the poor, suffer from high currency costs, in particular when they are between developing countries' currencies. The problem for an agent to have updated rates for 200+ currencies is obvious, with all the dangers of getting the wrong rate of a rupiah for a rupee.
The solution we have built, initially for the Asian countries within the AIIB region (i.e. over 4 billion people in all) is a single digital currency, the ACU, which is fully convertible into the 35 fiat currencies, but enables a single point of delivery.
We are working on the other regions, immediately for Africa and Latin America as the next two, with a total of just six digital currencies to cover the whole world. This simplification for agents, and our ability to hedge the value of the digital currencies against the relevant fiat currencies, means we are able to cut the cost of remittances dramatically, certainly below the G20 target of 5%.
In order to help as many recipients as possible, we are offering usage of this service to any remittance company - at zero cost - so they can build this into their systems as they see fit.
We are also looking to help worldwide merchants improve their sales to this vast number of potential buyers by selling in the digital currency, rather than having to price separately for each of the 35 individual currencies. Again, this is done without any fee attached.
2/. While we want to enable any remittance company to set its own terms, we are particularly keen to have one factor provided into the cost of the remittance, namely an initial insurance premium on behalf of the recipient. The insurance can be cover against crop failure, bad health or a life policy - and (an important feature) would be for a value in the digital currency, rather than the relevant fiat currency.
In this way we can achieve a number of values:
a/. an introduction to micro financial services; the remitter can also add further funds to go directly to supporting higher values of cover, either on a one-off basis or, even better, as a regular premium payment
b/. protection against devaluation of the fiat currency - this is something that is very topical at the moment, with some currencies going down by 20% or more this year. The digital currency is an amalgam of the value of all of the currencies, thereby dramatically reducing the impact of devaluations
c/. good data on the recipient - they need to provide accurate data in order for the insurance to be valid, so it is in their interest to make sure it is
The above areas are where we can help - and are happy to do so for everyone who wants to use this service. But there are some important areas where we see a great need for all involved to work together, particularly in how to manage the risks of compliance and reporting.
There are many undocumented people wanting to send small amounts to their families, but there are unacceptable risks for all remittance companies. They are effectively forced to use the criminal networks (the Hawala system), thereby assisting the money launderers, tax evaders and terrorist groups we are all trying to bring down.
In conclusion, building a strong reporting engine for digital finance is both an important achievement in itself as well as being a way to dramatically reduce costs for the poor - and add extra value. The simple appeal of just six digital currencies (all immediately transferable into the relevant fiat currency of the recipient), is something we can offer to anyone to build into their offering now.
What we need is a way to have a more flexible approach to allow everyone to access the legal markets - and cut out the source of funds for Hawala. And, of course, as noted in the article above, there are many other areas of digital finance to address.
We are a non-profit group - happy to help anywhere we can - contact me on [email protected] if you want more details or to work with us.
My present writing project reviews and accentuates many-faceted costs germane to transaction and administration incurred by financing strategies of a microfinance institution. I propose a prototype model that can use the digital devices to reduce various costs involving social capital, surveillance and sanctions. The project postulates that this prototype can be an alternative avenue for financial inclusion and repayment success of lending institutions at the least expense of transaction and administration cost.