My colleagues Michelle Kaffenberger and Patrick Chege recently shared a blog on digital credit in Kenya that has generated quite a lot of interest and social media discussions around what it means to have high-cost digital credit expanding so fast in Kenya. In a subsequent blog, Patrick and Sarah Achieng shared a particularly egregious “name and shame” practice by digital lender Kopa Leo. These blogs highlight two important issues in digital credit market development:
Digital credit has low barriers to entry and can expand so fast it is hard to keep track of who is lending to whom. This is made even more complicated with the high number of unregulated lenders operating in this space and the range of channels used, such as SIM Toolkit, USSD, app, and web browser.
There are some practices that raise serious market conduct concerns — Kopa Leo’s name and shame policy being an extreme example — yet very limited oversight of market conduct in this sector to date. Together with the Alliance for Financial Inclusion, we highlighted some of the main consumer protection aspects these models raise in a recent policy brief.
Given the pace of growth in digital credit and the history of consumer credit bubbles in emerging markets, this lack of visibility into — and market conduct oversight of — digital credit markets needs to be addressed.
In the long run, we can hope for consumer protection authorities like CONDUSEF in Mexico, or the Consumer Financial Protection Bureau in the United States, to emerge in markets with digital credit. These types of authorities could have mandate over diverse types of lenders and the supervisory capacity necessary for market monitoring.
Developments such as the proposed Financial Sector Authority in Kenya hold promise. But we may be waiting quite some time for the equivalent of a CONDUSEF in these markets and cannot wait for this to happen before acting on digital credit.
Even with limited or dispersed authority, here are three first steps policy-makers could take to better understand and manage consumer protection and other risks in emerging digital credit markets.
Leverage payments data to monitor market growth and portfolio quality. Digital credit often relies on digital payments channels such as mobile money for disbursements and payments riding. Policy-makers could therefore use mobile money payments data to construct snapshots of digital credit portfolios, including those of unregulated digital lenders using this regulated payment channel. For example, a supervisor could ask an electronic money issuer to provide a report of all payments made on a paybill number or bulk payment account used by a digital lender. This would show all transactions, time-stamped and linked to individual borrowers’ accounts, offering insights on the number of borrowers, loan amounts, and repayment rates and patterns via existing oversight authority.
Gather demand-side evidence on digital borrowers. To complement payments data, authorities should ask consumers about their experiences with digital credit. This could be done either as a stand-alone survey or by adding a few digital credit-specific questions to national surveys. The questions could help answer how many consumers are borrowing from multiple digital lenders, what consumers use these loans for, and how well they understand costs and key terms.
Coordinate across authorities to address primary consumer protection risks. Coordination across financial sector, telecommunications, ICT, and competition authorities can help to piece together authority to act on key consumer protection issues. For example, applying pricing transparency rules in digital credit is challenging when the financial sector regulator only oversees some of the lender types in a market. Yet it is quite common for competition authorities to have transparency within their mandate. In Tanzania, “The Standard Form (Consumer Contracts) Regulations, 2014” enables the Fair Competition Commission to review and enforce standards of transparency and price disclosure for standard form contracts, which could be applied to all digital lenders in a market. Similarly, where there are concerns how consumers’ phone and internet data is being collected and sold for lending purposes, data privacy mandates could ensure minimum standards for data collection and usage. In Ghana there is a new Data Privacy Commission under the Ghana Data Protection Act 2012. This Commission was “established to protect privacy by regulation of the processing of information and by providing a process for collecting, using and disclosing personal information.” This type of authority could coordinate with financial and telecommunications authorities to monitor data privacy in digital credit products.
Digital credit is still in its early stages, with much more to learn about which models will succeed, what benefits consumers will derive from the instant loans, and what the most important risks will be in these lending models. However, the pace of growth and experiences in similar industries such as microfinance and payroll lending mean we cannot wait to implement minimum market conduct standards. Even when actors are diverse and jurisdictions incomplete, with the right coordination across authorities, policy-makers could play a more active role in shaping market development without even issuing any new laws or regulations.
This blog is available in Mandarin on the World Bank's Voices blog.
Totally agree with this post. Without monitoring the market we won't be able to identify the risks of these new business models. In the case of Peru, it's very hard to manage consumer protection for digitally delivered credits (especially crowdfunding or P2P lending platforms) without issuing any new laws or regulations. The more players appear on the market, the more difficult it will be to oversight the market conduct. However, before the issuance of any law or regulation, it would be helpful to coordinate not only across authorities, but also with the players on the market. Gathering demand-side evidence it's also very helpful in order to incorporate the client voice in the policy-making process.
Thank you so much for share your work with us. Let's keep working together.
All the best