For the last decade, responsible financial service providers and funders have been working hard to mitigate consumer risks. Given the accelerating pace of deployment of digital financial services across emerging markets, it is time to review and update existing guidance.
Digitalization is moving at unprecedented rates and is continually innovating. Over the past decade, the number of mobile phone users across emerging markets in Asia, Africa and Latin America increased significantly. This enabled the steep rise of inclusive digital financial services. A similar revolution has been unfolding in the off-grid electricity sector, with pay-as-you-go (PAYGo) models.
However, financial services must meet client needs at fair prices and transparent offerings. Standards are continually evolving to protect consumers from increasing risks such as data theft, privacy loss, algorithmic bias and more. Because of this, FMO recognizes the need to future proof its approach towards consumer protection as we continue to expand and invest in FinTech companies, off-grid electricity companies and VC Funds.
To this end, FMO worked with experts, Isabelle Barrès and Hema Bansal, to better understand and address risks faced by consumers in these sectors. The final report, which is based on research conducted by FMO in 2021, provides various actions that stakeholders can implement directly. Accordingly, FMO will also be integrating this new guidance and recommendations into its own consumer protection framework.
A shift to a digital environment profoundly affects consumer risks in four main areas: product, partners & agents, technology, and data.
One important factor that distinguishes digital financial productsfrom analog services is the shift from clients interacting with the staff of financial providers to interacting directly with the product or with agents. While interacting directly with the product has many benefits (such as correcting human flaws), digital financial products run the risk of not meeting client needs and may not include protection by design or default. Another key risk for clients derives from the product development process. This is the case for digital credit business models that rely on early default rates to refine the scoring model, which could negatively impact early defaulters. Embedding a client-centered approach within all steps of product development is therefore critical.
Digital financial services require increased collaboration between financial service providers and external partners and agents, creating more dependencies in the process. It is crucial to properly protect and train agents to interact with clients appropriately, while also implementing know-your-supplier standards and work with responsible, certified partners wherever possible.
The innovative technologies that digital financial services are built on - i.e., Distributed Ledger Technology or Artificial Intelligence are quite promising for deepening financial inclusion but also introduce a number of new risks. These include being leveraged for unethical purposes or not being client-centric, or potentially backfiring, such as in the case of discriminatory algorithms.Awareness of technology-related risks and evaluation of the suitability, feasibility and appropriateness of a given technology can help mitigate these consumer risks.
Finally, digital financial services require a world of data, for machines to operate without human involvement, and personal client data is at the heart of this. This poses many severe risks, such as cybercrime and fraud risks, or compromising privacy. Responsible data protection policies are the bare minimum. It is crucial to go beyond policies and ensure that these are effective in protecting the privacy and integrity of client data.
Additional recommendations for funders trying to address increasing consumer risks in a digital age.
The digital finance environment is both full of promise and risks for consumers. Funders should use their influence to foster a responsible ecosystem and encourage responsible practices by providers. In addition, it is recommended that funders:
Continually analyze the context. Understanding the market conditions for digital financial services is critical to identify where funding can be most catalytic. This can involve analyzing the digital readiness of targeted clients, landscape of partners, market saturation, or funding landscape
Build knowledge. Upholding sound consumer protection practices in a fast-evolving digital environment requires on-going learning:documenting learnings, sharing knowledge, and requiring transparency and clearly stating expectations with investees.
Support and leveraging industry efforts. Improving consumer protection is a collective effort which funders can support by supporting industry initiatives. filling research gaps, supporting cyber risk mitigation, or encouraging investees to contribute to initiatives that develop the consumer protection guidance and standards.