Consumer Protection in Digital Credit

Digital credit is a fast-growing phenomenon in many emerging markets. These tiny loans are having a large impact, allowing millions of low-income consumers to borrow money with just a few taps on a phone menu or clicks on an app screen. 

But digital credit also raises serious consumer protection concerns. Will borrowers really think through their decisions to borrow or just borrow on impulse because access is easy and payment instant? Do we really know enough about consumers to make sure we are sending the right offers to the right borrowers, and not encouraging reckless borrowing? Are we okay with loans that have annual interest rates above 100 percent? 

This publication presents both the consumer protection risks and the opportunities for improved consumer use of digital credit. There is not enough being done to implement minimum standards in consumer protection for digital credit, and this exposes the industry and consumers to risks such as credit bubbles and mass-blacklisting of consumers in credit bureaus for just a few dollars of debt. 

Yet there is also a growing number of providers that are developing innovative new approaches to consumer protection for digital credit products. This Focus Note highlights evidence from CGAP experiments with a diverse range of digital credit providers, and provides clear and direct evidence that consumer protection is not only the right thing to do, but often a wise business decision:

• Improving transparency of costs can improve borrower decision-making. A lab experiment with digital lender Jumo found simple changes to how costs are presented reduced default rates from 29 percent to 20 percent. These changes were then integrated into its messages to borrowers on its lending platform. This same experiment also found that making consumers actively opt out of viewing a summary of product terms and conditions increased viewership from 9 percent to 23 percent, and resulted in fewer loan defaults. 
• Providing additional educational content can improve portfolio performance. A simple set of SMS-based educational programs for M-Pawa borrowers in Tanzania had wide-reaching impact on borrowing and savings activity, including borrowers paying their loans back 5.5 days earlier than they had before accessing the learning content. 
• Consumers need greater control of their digital credit history. M-Kopa provided its customers with access to—and ability to correct to—the credit history being generated from their digital loans. Those who accessed their credit history made more payments to M-Kopa and had lower rates of default.
• Framing of repayment messages with the right context can reduce late payments. Experiments with Jumo and Pesa Zetu in Kenya found that simple changes in repayment messages can have powerful impact on repayment rates. Jumo found that messages sent in the evening had 8 percent higher repayment rates than morning reminders. Simlarly, Pesa Zetu leveraged its peer-to-peer lending model in its repayment messages, finding that messages emphasizing the peer lenders funding the loans were more effective in encouraging repayments. 

These research findings offer hope for improved consumer protection in digital credit that still allows for providers to expand and innovate their products. There is much more that lenders and policy makers should do to standardize these promising findings, and this Focus Note proposes several simple but important actions the digital credit industry should take right now.