Page 102 - ITU-T Focus Group Digital Financial Services – Recommendations

ITU-T Focus Group Digital Financial Services
Recommendations

Title of recommendation Harmonize market conduct rules for credit products
Working Group Consumer Experience and Protection

Theme Digital credit
Audience for recommendation Regulators

Regulators should take steps to identify gaps and establish adequate market conduct and consumer protection
rules for digital credit products with the goal of harmonizing market conduct rules for all comparable credit
offerings, regardless of the type or location of the provider, or the channel/method by which the product is sold.

Digital channels have the potential to fill a range of unmet credit needs of consumers and very small businesses.
These small-value, short-term (typically one-to-three month), and often unsecured loans are “instant,
automated, and remote” as described by CGAP . Product and delivery innovations target a wide range of
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customers by linking to mobile money accounts and bank accounts, and utilize a range of communication
channels such as social media, SMS, and the internet. Loans may be offered directly by a lender or indirectly
through a merchant acquirer/distributor or other value chain actor, and are serviced entirely via mobile or
online channels rather than through branches or physical premises.
Many digital credit customers are new to formal finance and lack conventional credit histories. Digital lenders
commonly assess potential borrowers and manage risks using scores based on alternative data such as call
detail records, mobile payments transactions, and social network profiles, instead of or in addition to data
available through more conventional means such as credit bureaus. Credit scoring allows for instant decision-
making with limited or no in person interactions which can allow digital credit to reach scale relatively quickly
compared to traditional lending programs.

Digital credit models involve multiple participants subject to varying degrees of oversight, including banks,
nonbank credit providers, MNOs, EMIs, payment services providers, and peer-to-peer platforms. Inconsistent
oversight elevates risks to customers and can lead to an un-level playing field. Typically, disclosure, underwriting,
data handling, and reporting requirements, for example, are more rigorous for regulated lenders. In addition,
consumer protection rules may not adequately address issues raised by digital channels. For example, disclosure
may be challenged by the use of a small screen, menu-driven process, as well as lack of consumer digital and
financial literacy. Scoring algorithms may not accurately predict ability to repay, unfairly profile or discriminate,
or lack adequate informed consent by the consumer for data collection and usage.

Regulators should harmonize market conduct rules and oversight for all comparable credit offerings, regardless
of the provider and channel. This is in line with the G20 High-Level Principles on Financial Consumer
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Protection emphasizing the need for cooperation by regulators of different segments of the financial and non-
financial (e.g., telecommunications) sectors. This will help to avoid regulatory gaps and inferior treatment for
borrowers taking loans via digital versus non-digital means. The Competition Authority of Kenya, for example,
has established common transparency and price disclosure requirements for all DFS providers including digital
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lenders not subject to regulation by financial authorities. AFI describes the case in Zambia, where non-bank
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DFS providers are not allowed to extend credit but can partner with an institution licensed to provide credit.

65 CGAP, An Introduction to Digital Credit: Resources to Plan a Deployment (2016) http:// www. slideshare. net/ CGAP/ an- introduction-
to- digital- credit- resources- to- plan- a- deployment
66 Mazer, R., CGAP, Kenya Ends Hidden Costs for Digital Financial Services (2016) http:// www. cgap. org/ blog/ kenya- ends- hidden-
costs- digital- financial- services
67 Digitally Delivered Credit Policy Guidance Note and Results from Regulators Survey, Consumer Empowerment and Market Con-
duct (CEMC) Working Group (2015) http:// www. afi- global. org/ sites/ default/ files/ publications/ guidelinenote- 17_ cemc_ digitally_
delivered. pdf

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