The explosion of digital financial services (DFS) is bringing low-income people into the formal financial sector. While DFS unlock life-changing opportunities by helping consumers save, borrow, and receive remittances, CGAP’s research shows that the nature and scale of DFS are evolving and growing. Is it time to step up financial consumer protection? We think so, and we believe that implementing a responsible digital finance ecosystem vision is the way forward.
CGAP and other industry players have already developed various solutions that can help address DFS consumer risks. We believe that implementing a responsible digital finance ecosystem vision is the way forward.
What have we learned so far about consumer risks in digital finance?
Consumer protection efforts have struggled to keep track of a fast-evolving DFS market where risk exposures are growing faster than the increase in DFS usage and faster than the remedies. The Global Findex 2021 uncovered concerning insights into potential users’ lack of trust in financial systems and existing users’ financial worry. CGAP has identified more than 60 kinds of consumer risks facing DFS users around the world. Digital consumer credit is of particular concern, according to CGAP’s research. Also, with financial services providers rapidly expanding consumers’ digital footprints to develop and deliver new products, people are increasingly exposed to risks, such as data misuse and cybercrime.
Why is effective consumer protection rooted in building a responsible digital finance ecosystem?
Despite all the progress made in the past few years in the consumer protection space, the rapid digitization of financial services, the arrival of many new types of providers, the limited financial and digital literacy of consumers, and loopholes in the regulatory and supervisory frameworks require a more holistic framework.
Consumers, DFS providers, financial and non-financial authorities, consumer representatives, market facilitators, funders, and global bodies are all important actors in a digital finance ecosystem. They all play key roles by interacting in ways that safeguard consumers from potential harm and ensure positive outcomes for customers using financial services, especially vulnerable consumers. While a responsible digital finance ecosystem requires regulatory and supervisory foundations to ensure its success, CGAP calls for action around four key components (4 Cs) that we believe are necessary to building this ecosystem: a Customer-centric approach, where all actors have the necessary Capability to ensure customers are served responsibly, facilitated through structured Collaboration mechanisms, and a Commitment from all actors to take action towards responsible digital finance.
Photo by by Vikash Kumar
In addition to the 3 Cs, CGAP aims to explore different kinds of solutions leveraged by different actors within the ecosystem that aim to address key stages of consumer risk management, such as prevention, identification, and mitigation. While many new tools are available to assess the situation and mitigate consumer risks in digital finance—and notable progress has been made by all the key actors—we believe we need to connect all the dots, rather than continue with a piecemeal approach. We began piloting this approach in the region of West African Economic and Monetary Union (WAEMU) through a Digital Finance Consumer Protection Lab that has started work in Côte d'Ivoire, Senegal and Burkina Faso.
How can we foster a responsible financial ecosystem and monitor progress?
Ensuring the success of a responsible digital finance ecosystem entails integrating consumer voices into financial regulations, particularly the voices of vulnerable consumers, which can be accomplished by engaging consumers associations, analyzing social media, and setting up consumer panels within regulatory authorities. It also entails new approaches to data privacy and protection in addition to monitoring collective progress and measuring success. A customer outcomes-based approach is emerging as promising consumer protection frameworks where the regulatory focus shifts from provider compliance with prescriptive check-the-box rules to customer results or outcomes achieved through provider actions.
CGAP works with financial authorities to help them understand the risks generated by service providers through market monitoring tools and collaborates with the providers on monitoring customer outcomes throughout the customer's financial journey. We also work with DFS providers who have a critical role to play—either individually or through industry associations—to adopt customer-centric business models that create more value for customers while improving their bottom line. Our collaborations with several international funders as well as international partners, such as AFI, FinCoNet, SPTF, GSMA, Toronto Centre, Dvara Holdings, and the Responsible Finance Forum, are essential to enhancing knowledge and supporting capacity building in the ecosystem.
CGAP's Market Monitoring Toolkit aims to help supervisors identify, understand, and track financial consumer risks, behaviors, and outcomes which allow for more preemptive and forward-looking supervisory work.
How can financial consumer protection authorities bridge the regulator-consumer gap and ensure the financial marketplace is fair and balanced for all consumers? One promising solution is consumer advisory panels.