Technology Can Decrease Fraud and Increase Protection
Digital payments protect customers from the theft of cash, and the increased traceability of the payment process also helps to protect senders and receivers from fraud. The Better Than Cash Alliance has dramatic stories about the ways biometric identification linked to G2P payments have eliminated “ghost” beneficiaries from the system and decreased leakage (payments that do not reach the recipient in full). Evidence from India shows that making social security pension payments digitally via smart cards compared to manual cash payout by a government official results in a 47 percent decrease in bribe demands in addition to reducing ghost recipients. South Africa eliminated 850,000 bogus social grant recipients—out of 16 million—when the government began delivering the grants through the MasterCard SASSA card in 2012.
Technology also brings about the potential for the democratization of client protection. The web platform I Paid a Bribe leverages the transparency and anonymity of the Internet to encourage private citizens in India who have been the victims of corruption to self-report details of bribes. The website came on strong when it launched in 2011 and gave a lift to anti-corruption efforts, but traffic has fallen off since then. The Voice of the Client project tested the use of mobile phones as a source of client feedback for financial services in Uttar Pradesh. Three different survey modes were tested: call center, face-to-face interview, and an Interactive Voice Response (IVR) automated survey, pre-recorded in the local language. On the most sensitive questions – such as, "Do you ever face mistreatment by your loan officer?" - the automated mobile survey had nine times more respondents answering "Yes," compared with call center or face-to-face interview.
Many on-line platforms are available to help middle-class customers in high income countries compare services, and rate the quality of services they receive. Yelp and Trip Advisor offer crowd-sourced reviews mainly for the hospitality industry. In 2014, NerdWallet offered comparison shopping tools on financial products, from health insurance, to credit cards, and college loans to 30 million site visitors. Credit Karma is a free credit and financial management platform for U.S. consumers.
But what about the base of the pyramid? Will a platform emerge that can help BoP consumers navigate financial services? Service Info, a “Yelp for refugees” in Lebanon, is a new pilot website for refugees to find out about, and rate, resources to ease the transition to life a new country. The hope of the sponsors, the International Rescue Committee and USAID, is that feedback will improve the quality of services, as well as broadcast the services that are available. We would like to see more investment in platforms that give consumers a voice.
At the same time, channels such as these have a different function from and are therefore not a substitute for the grievance channels that providers and governments create to address and resolve individual customer complaints.
Yet Technology Brings New Dangers
Despite actual and potential benefits to client protection, the introduction of digital financial services also brings new problems. In Doing Digital Finance Right, CGAP identifies the following problems:
- Inability to transact due to network/service downtime
- Insufficient agent liquidity or float, which also affects ability to transact
- User interfaces that many find complex and confusing
- Poor customer recourse
- Nontransparent fees and other terms (for example, only available through a website, but not on the phone itself)
- Fraud that targets customers
- Inadequate data privacy and protection
Everyone in the system is scrambling to address data security. The risk of stolen identities is just one of many. A Gallup Poll found that U.S. consumers are not adopting digital wallets due to security concerns and lack of confidence in the apps.
And going digital can obfuscate as well as clarify: for some digital products in Kenya, Tanzania, and the Philippines, the terms and conditions are not built into the platform, requiring people to visit a separate website to review them, creating a barrier rather than using technology to make it more user-friendly.
Agent Banking Challenges
A favorite vision for financial inclusion enthusiasts, including banks, card providers (MasterCard and Visa), and mobile network operators is that the owners of mom-and-pop stores around the world will become ambassadors of financial inclusion for their communities. This may be one of the best bets for bringing a human touch to digital financial services. Yet agent banking also introduces the possibility of agents failing (due to lack of knowledge, lack of availability, or fraud), technology failing (e.g connectivity problems), and consumers failing (due to lack of capability). In addition to inconveniences such as service downtime and agent illiquidity (which prevent customers from transacting and accessing their money), customers are vulnerable to the risk of agents sending money to the wrong number (and thus losing it). A risk mapping study showed that customers have often given their PIN numbers to agents to do transactions for them when the service is down. Transparency is also an issue, with many agents charging fees on top of the official tariff rate (which is often not displayed at agents’ outlets) or compromising the confidentiality of their customers’ PINs. (See MicroSave’s A Question of Trust: Mitigating Customer Risk in Digital Financial Services for more.) Aside from the potential for abuse by agents, connectivity failures mean that customers may not even know if their transactions have been completed.
Many of these issues are solvable. CGAP notes that providers can work on improving service reliability, the customer interface, and the quality and liquidity of agents—all issues directly affecting the user experience. Providers can directly fight fraud, both through building customer awareness and through improved systems. And, as always, recourse is important for resolving problems and restoring trust.
Big Data Raises New Questions
Data is constantly emerging as transactions of all kinds are digitized, but there is no clarity about who owns it and who has the rights to monetize it. The data is so desirable to companies that some offer free services in order to get access to it. A whole industry has risen around the need for a stewardship model to identify, define, and protect client data and for data custodians to oversee the safe transport and storage of data. But this kind of data governance—widely found among large corporations--is hardly on the radar for BoP customers nor for microfinance institutions and many others that serve them.
The image of many in financial inclusion is that regulators are the great protectors against abuses by the private sector. Yet government access to financial data can also make consumers vulnerable. It’s not hard to imagine a scenario in which some governments use financial data about their citizens for political ends, or, more likely, simply don’t do a good job of safeguarding the data they collect. This possibility is heightened in countries where state banks are major providers.
China’s e-Finance Explosion
The International Institute for Finance reported in November 2014 on the particular challenges of exponential growth in financial services through e-finance in China. The report lauded the great promise of e-finance for improving financial inclusion, but noted concerns about consumer protection. In the midst of stratospheric growth of P2P lending, China has seen many P2P lenders abruptly closing shop and vanishing. In 2014 alone, 275 P2P platforms in China failed. China has proposed regulations designed to crack down on platforms that are not sufficiently capitalized or are at higher risk of default. In the meantime, individual investors are at risk. In some of the most egregious cases, P2P fraudsters absconded with investors' money on the first day that they opened for business.
Keeping Pace with the Changes
It’s a challenge for regulators to keep up with the consumer protection implications of digital innovation—even for basic issues such as safeguarding customer money. The balancing act of access and protection continues, only now they are being played out on new channels.
Bangko Sentral ng Pilipinas (BSP) has adopted a “watch, dialogue, and learn” approach regarding the e-money industry and non-banks providing these services. BSP engages with the private sector to understand the practical issues of implementation and has invested in learning about technology, for instance through a well-regarded training delivered by Bankable Frontier Associates. Nigeria and Kenya have developed deposit insurance for e-money and stored value—but they are currently the only two countries that have done so. In many cases, new providers of digital financial services may be unregulated.
We don’t yet know the impact of access through new channels—agents, mobile financial services, crowdfunding—on consumer behavior, and how that affects consumer protection. But we do know the link to financial capability is especially important with digital financial services, as consumers encounter barriers to their safe use. And electronic transactions come with transparency challenges. Pervez Goiporia, a vice president at Oracle, highlighted the challenges of bringing 75 million unbanked households into the banking system through India’s Jan Dhan Yojana scheme: “The biggest gap is going to be the lack of familiarity with the technology and processes—both for banks and the end customer.” Banks are more familiar with an educated, urban clientele, and rolling out mobile and other digital channels to less experienced groups creates a “a vector for social engineering attacks.” In the context of cyberattacks on every kind of database—payroll systems, credit card holders, health care providers—the fact that millions of new and vulnerable customers are entering a porous system needs to be addressed.
No matter what technology is involved, the bottom line is that customer protection policies need to develop alongside technology innovations. And if the first experience of a new customer is negative—whether due to a serious issue such as fraud or an inconvenience such as lack of connectivity—it may take a long time to restore trust. In a rapidly changing world, we simply don’t know the impacts of the new technologies and new actors. The good news is that solutions are emerging, and that groups such as the Alliance for Financial Inclusion (AFI), CGAP, GSMA, GIZ, the Microinsurance Network, MicroSave, the International Telecommunication Union (ITU), the World Bank, and many others, are developing insights, guidelines, and tools to address consumer protection issues related to digital financial services.