Why Don’t MSEs Trust Digital Credit Providers?

Blog Series

Ibrahim* is a small business owner in Nairobi. He makes metallic gutters and sells them to local construction projects. The COVID-19 pandemic wrecked his livelihood, and he doesn’t have easy access to finance to rebuild his business. Acting on a friend’s advice, he borrowed 1,000 Kenyan Shillings (less than $10) from a leading fintech lender. When he couldn’t meet the repayment deadline, Ibrahim requested more time, but instead of empathy, he was met with indifference. Unlike his neighborhood chama (savings group), the fintech lender refused to reschedule the loan and threatened to report Ibrahim as a defaulter to the Kenyan Credit Reference Bureau (CRB) if he didn’t pay on time, which would jeopardize further access to loans. Embarrassed, Ibrahim repaid this loan by borrowing from his friends, and has since remained skeptical of fintech lenders.

Ibrahim’s experience is not isolated. CGAP’s primary research with nearly 400 micro and small enterprises (MSEs) across India, Kenya and Peru finds that lack of trust in formal financial service providers (FSPs) among MSEs – especially the smallest, poorest and women-owned enterprises – is a looming concern . Digital business models like fintechs seem to exacerbate this distrust due to the risks they pose and limited number of recourse mechanisms in place for users to enforce their rights. 

There is growing consensus that technology-enabled business models can help FSPs expand access to finance for underserved and excluded MSEs, supporting their growth and resilience. But while technology offers hope, more needs to be done to gain the trust of customers at the last mile. 

CGAP’s research finds four reasons driving this trust deficit: 

1. Preference for informal finance: MSEs have a long history of exclusion and intimidating experience interacting with FSPs. Despite operating basic accounts for long periods of time and building relationships with providers, they are often rejected in their credit applications and rarely provided with clear reasons why, or actionable guidance to improve their chances the next time they apply. Besides, MSEs access desired finance from informal providers in a timely and reliable manner, without cumbersome documentation and collateral requirements and often at lower interest rates. This creates a value proposition that is hard to match for formal providers, creating an enduring preference among MSEs to borrow from informal sources. 

“I tried raising money from the bank, but they rejected me application for not being credit worthy because I have a blue-collar job, although I have been steady in this job for 10 years. I simply don’t trust banks to serve me anymore.”

Transport business owner, Kenya

2. Lack of transparency: MSEs frequently noted a lack of transparency on the part of DFS providers on loan terms like annualized rates of interest, incidental costs and fees, repayment schedules and consequences of default. This lack of transparency makes it difficult for MSEs to compare costs and benefits across FSPs and make prudent borrowing decisions, leading to delinquency . CGAP’s survey of digital credit borrowers in Kenya and Tanzania found that around half of all borrowers repaid a loan late, and 12 to 31% of them defaulted. This correlated with poor transparency – nearly a third of borrowers reported that they did not fully understand the costs and fees associated with their loans. 

Moreover, MSEs (especially recently digitized ones) are concerned by a perceived lack of data privacy. They lack clarity on the impact of sharing their identity and data with DFS providers and the broader financial services ecosystem, and most borrowers are not aware of who owns their data or how they use it, and what mechanisms exist to protect their data. They also report signing up to terms and conditions that they do not fully understand. Lackluster communication from providers, including the use of jargon, leads MSEs to believe that privacy is a vague term used deceptively and that DFS providers are unsafe and unreliable. 

3. Poor user experience: MSEs have accelerated their embrace of digital technologies like social media, e-commerce, and mobile applications, and digital payments solutions like digital wallets and QR codes – partly in response to evolving customer and supplier preferences, and partly to keep business going during the pandemic. This doesn’t necessarily mean they are enthusiastic users, however. MSEs affix trust to providers and not products and prefer to use one provider at a time. They struggle to operate multiple digital wallets and channels to engage with customers and find the À la carte nature of unbundling financial services burdensome. 

Additionally, most DFS products are not designed to suit the needs of MSEs with low digital literacy. Several MSE owners that CGAP spoke with rely on their children or younger acquaintances to navigate digital services, making them feel helpless and resistant to change . In India, many MSEs reported their money was ‘lost or stuck’ due to delays in transferring money from mobile wallets into their bank accounts, and that they lack timely, accessible customer support to resolve such issues. Consequently, they prefer to use cash even when they have access to DFS. MSEs also continue to maintain a manual ‘backup’ version of their digitized transactions and operations due to the fear of a system crash or data loss, leading to more work and costs.

MSEs recognize that digital technologies are constantly changing, and believe that poorly regulated DFS providers can disappear, abandoning valued products. This lack of agency and control over technologies central to their businesses makes MSEs reluctant to adopt DFS. 

“These Apps should be in local, regional languages so less educated people like me can do their business in a language they are comfortable in."

Beauty parlor owner, India

4. Fears of aggressive collection practices: There are widespread concerns over aggressive collection practices of fintech lenders, stemming from MSEs’ personal experiences and that of their social networks. There is a belief that DFS providers scrape users’ data and resort to contacting their personal acquaintances in the event of delayed repayments, leading to cynicism about digital credit. Several Kenyan MSEs shared stories of DFS credit providers calling friends and close relatives in the event of late payment, harassing borrowers by threatening their social standing.

“Those (DFS) providers have access to your contact list. Once you delay payment, they will start calling people from your contact list. Imagine them calling your mother-in-law and asking for money. The Government has been trying to blacklist these providers, so I am trying to stay away from them."

Firewood delivery business owner, Kenya

Concerted efforts from sector stakeholders can help build trust among MSEs. DFS providers can embrace customer-centric approaches that communicate value proposition and terms and conditions in a transparent and intuitive manner, and intentionally design for low digital literacy customers. Regulators can champion new approaches to data privacy and protection, shifting the onus from customers onto providers and data processors, and adopt market monitoring tools to track customer experience and risks. Funders can support programs to build the financial and digital literacy of vulnerable MSEs, increase awareness of DFS and leverage their convening power to foster dialogue and knowledge exchange between providers, regulators, customer advocacy groups and other sector stakeholders. 

If MSEs’ trust in digital credit providers erodes, it risks restricting usage for emergencies, not enterprise needs like liquidity and growth capital. This is a missed opportunity to advance financial inclusion by serving excluded MSEs and enabling their growth. 

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