Addressing the Crisis of Customer Harm from Digital Finance

This is an era of great opportunity but also great risk in the financial inclusion sector. Technology has enabled significant progress in financial inclusion, and it can make financial services safer, more transparent, and more efficient, but the risks are staggering.

So too is the level of harm that customers are already experiencing from digital financial services (DFS). Problems range from cyber criminality, fraud, inadequate recourse mechanisms, over-indebtedness, and lack of transparency, among many others. The Consultative Group to Assist the Poor (CGAP) research carried out in three West African countries showed that between 68% and 90% of users faced risks from using DFS in the past year, and that these risks led to financial loss for between 16% and 40% of the users, depending on the country.  In the same vein, research from the Center for Financial Inclusion with small businesses found that, “business owners did not fully understand the costs associated with mobile money, and 42% of the respondents with a mobile money account said they did not know about all the fees associated with their accounts.” Research from Innovations for Poverty Action (IPA) is similarly alarming. In Kenya, for example, IPA found “phishing scams were the most common challenge faced,” but recourse is poor, partly because “most consumers do not report having fallen victim to these attempts.” Additionally, the IPA research revealed “poor customer care and unexpected charges,” “many consumers send money to the wrong person,” and “several concerns” about digital loans and over-indebtedness, including that a majority of borrowers reported reducing consumption to pay debt, and 77% of customers at some point had not repaid a loan.

Over the past several years, Cerise+SPTF has been working on a solution to this crisis of customer harm from digital financial services. The result is the DFS Standards, which are a set of management practices that digital financial service providers of all types can implement in order to mitigate the risks of customer harm and promote customer benefit. The DFS Standards use the Universal Standards for Social and Environmental Performance Management as a foundation, adapting existing indicators to a digital context, and then add new indicators to address risks that are specific to digital finance.

The process to build the DFS Standards was collaborative, detailed, and grounded in lessons learned from the field. Cerise+SPTF began by reviewing existing guidelines and principles for the responsible provision of digital services. These provided a useful framework in which to classify the specific management practices that the DFS Standards would ultimately recommend. Next, the team interviewed about fifty experts around the globe, from a variety of stakeholder groups, to understand what has and has not worked so far. From this, Cerise+SPTF compiled an extensive list of management practices that the experts had recommended, grouped them by topic, and launched a working group to discuss these individual ideas with the broader financial inclusion community.

After about nine months of working group debate, Cerise+SPTF synthesized a final set of recommended management practices into an evaluation tool and launched a pilot project. The pilot involved 28 different financial service providers (FSPs), 7 of which were purely digital and the remaining 21 of which offered both analog and digital financial services. The group was diverse in terms of geography, size, methodologies, and product types. Each of the pilot institutions worked with an external assessor to evaluate its level of implementation of the pilot version of the DFS Standards. All also participated in an exit interview to provide feedback on which indicators were relevant or not to them, and to explain how they implement good practices within their respective institution. Finally, Cerise+SPTF management formed a standards review committee to analyze pilot results and revise the DFS Standards accordingly.

The DFS Standards Evaluation Tool is a free public good whose purpose is to promote more responsible and inclusive digital finance. The tool is currently available in English, French, and Spanish and is organized in five dimensions, covering strategy, governance, product design, customer protection, and human resources. With 184 scored indicators, it is a comprehensive resource that both promotes a deeper understanding of what good practice is and gives financial service providers actionable information about their areas of strength and weakness.

• For example, in the area of fraud mitigation, the DFS Standards identify management practices related to defining a strategy, being informed on the current prevalent types of fraud, putting fraud risk mitigation strategies into place, and providing assistance to customers who were victims of fraud.
• A second example is complaints handling. Research shows that many customers do not use existing complaints mechanisms for a wide variety of reasons, including cost, mistrust, inaccessible channels, lack of awareness, and customers airing their complaints to agents rather than to the FSP. Furthermore, the partnerships that are so common in DFS often create an accountability vacuum, where customers do not know to whom to complain, or if they do try, they hear from each partner that it is the other partner’s problem to solve. The DFS Standards on complaints handling therefore go beyond simply having a mechanism in place, but specify practices that ensure the channels are easily accessible to all, that customers know about them, that customers can afford to use them, that customers can escalate a complaint if they are not satisfied with the initial solution offered, that FSPs help customers even when the complaint involves services provided by an external partner, and that the FSP analyzes whether certain customer segments are not using the complaints mechanism and conducts outreach to these segments to understand their needs and challenges.