Page 68 - ITU-T Focus Group Digital Financial Services – Recommendations

ITU-T Focus Group Digital Financial Services
Recommendations

Title of recommendation Fee disclosure prior to completion of transaction with standard pricing
definitions

Working Group Consumer Experience and Protection
Theme Contracts/Disclosure

Audience for recommendation Regulators

Regulators should require disclosure of fees prior to the completion of a transaction, with the option to cancel
the transaction after the disclosure. Regulators should also establish standard definitions for costs and fees, and
require disclosure in line with these standard definitions to ensure consistency across offerings (e.g., how to cal-
culate and disclose interest and fees for credit products).

The price of a financial service, particularly a credit or insurance product, can be very difficult for a consumer
to determine. If the providers use different pricing terminology or varying definitions for their costs and fees,
this furthers the confusion and makes it difficult for consumers to compare products, potentially harming
competition. For example, for years the microcredit sector made no reference to whether they were charging
a flat interest rate for loans or charging interest on a declining balance. The former was much more common
in practice, as well as more expensive for the borrower. However, microcredit consumers were generally not
aware of the distinction, and were frequently misled as to the true cost of a microloan. An organization called
MicroFinance Transparency was established to bring more clarity to the issue of pricing in the microfinance
industry and developed an app for the calculation of microcredit interest rates.
Transparency is critical for consumers, and many financial sector regulators globally have rules pertaining to
it. In the U.S., the Truth in Lending Act went into effect in 1969 mainly as a response to murky sales tactics
in the consumer goods and auto industry with regard to selling on credit. Various ways of obfuscating the
true price of financing led Congress to develop the annual percentage rate (APR) as the standard acceptable
calculation and means of communicating interest rates to consumers. A review conducted by the University
of Washington’s Evans School of Policy, Analysis and Research Group (EPAR) for ITU concluded that 18 of 22
countries reviewed had enacted regulations which mandate the transparent communication of costs of DFS. As
an example, recently the Competition Authority of Kenya directed that by the end of 2016, DFS cost disclosures
must be a priori, and that costs for all transactions, including loans, must be displayed on the consumer’s
mobile screen before the consumer hits ‘accept.’

Rules for transparency and disclosure in other sectors also provide apt examples. The U.S. Federal Communication
Commission’s (FCC’s) recent transparency rule on internet privacy mandates that U.S. providers of fixed and
mobile broadband internet publicly disclose accurate information regarding network management practices,
performance, and commercial terms of their services sufficient for consumers to make informed choices. The
FCC highlights what substantive information must be conveyed to the consumer and further requires that
communications be accurate. The FCC also specifies that all the provider’s consumer-facing communications,
including advertising mailings, advertisements on buses, web banners, as well as information available in their
retail stores, must match what actually occurs during services provision. Violations of this rule are subject to
significant fines ranging from USD 16 000 to USD 1.575 million per single violation by a provider.

Similar to an APR as a standard way to disclosure the price of credit, regulators should establish standard
definitions for other DFS transactions, including for money transfers, loans, insurance, fees associated with
savings accounts (such as withdrawal fees), and any others relevant in a market. Regulators should then require
providers to provide meaningful disclosure and true transparency, including accurate, consistent information to
the consumer at the time when the consumer can best utilize the information (i.e., prior to making a financial
commitment).

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