Consumer Protection CGAP

An Ecosystem Approach to Consumer Protection: What, Why and How?

Digital credit is fast, private, and convenient for consumers. It is also potentially risky. 

In Kenya and Tanzania, millions have borrowed small amounts with a quick tap on their mobile phones since 2012, making the region the first to achieve high penetration rates for digital credit. Meanwhile, in Côte d’Ivoire—where less than 8% of adults borrow from a formal source—digital credit has presented an important opportunity since 2018 for many Ivorians to borrow formally for the first time. In India, about 500 legal digital lending apps were already available in the market by 2021, making it easier for consumers to borrow money. 

While digital credit can help people living in poverty meet their short-term household or business needs, it could potentially lead to a range of risks—such as fraud, data misuse, and lack of transparency—which could, in turn, result in overindebtedness, financial losses, and other negative experiences for consumers. CGAP’s research over the years has found that around three-quarters of digital borrowers in Cote d’Ivoire and around half in Kenya and Tanzania are repaying their digital loans late. In India, our research has identified several risks related to hundreds of digital credit apps that have entered the market, such as lack of transparency on pricing and abuse of personal data for debt recovery. 

More needs to be done to protect consumers from irresponsible digital credit practices and ensure the market develops in a way that supports low-income users. Several innovative approaches to digital lending show that providers can improve the customer experience and better protect consumers from risks while delivering better business value. CGAP is currently exploring practical solutions that can help guide financial sector authorities and providers in addressing consumer risks in digital credit and contributing to a responsible digital finance ecosystem.

What do we know about digital credit usage?

Borrowers turn to digital credit for quick and ready access to short-term loans, which financial service providers disburse to the mass market at scale. Borrowers leverage digital credit largely to meet household and small business needs, but they often find themselves at risk of fraud, data misuse, indebtedness, and other risks. These are among the findings from CGAP’s analyses of social media and transactional data on millions of digital loans and customer surveys. 

How can we strive for responsible digital credit?

The proliferation of digital credit products by new market players, consumers’ limited financial and digital literacy, and loopholes in regulatory and supervisory frameworks require a more deliberate and holistic approach to consumer protection and responsible lending.  

CGAP's Market Monitoring Toolkit aims to help supervisors identify, understand, and track financial consumer risks, behaviors, and outcomes, allowing for more preemptive and forward-looking supervisory work. Other actors can also implement several market monitoring tools in the digital credit ecosystem, which can, in turn, share findings with supervisors. Market monitoring findings can subsequently inform actions by regulators, providers, consumer representatives, and funders. 

For example, regulators may require clear, easily understandable, and accessible disclosures to consumers of the total cost of credit and consequences of early or late repayment. Regulators may also establish product governance and suitability requirements and strengthen information sharing without harming borrowers. Funders can support efforts to improve credit reporting systems, transparency, suitability, and responsible lending practices.

What actions can providers take?

While regulators, supervisors, and other government authorities play an essential role in building responsible finance ecosystems, ensuring that digital credit is offered responsibly also requires the active engagement of financial service providers. Associations in the digital financial services space play a key role in setting key principles, good practices, and quality standards in the early stages of industry development where providers of digital credit are not fully regulated or supervised. Also, developing and implementing tools that estimate financial stress before borrowers, lenders and the overall financial sector are harmed would make it possible to take more pre-emptive action.