It’s Time to Change the Equation on Consumer Protection

Whenever we sign up for financial services online, we are asked to sign “I agree” to terms and conditions that most of us scarcely understand. Usually these are couched in complex legal language and presented in small print or hidden behind a link, making them especially difficult to read on small mobile devices. Imagine the absolute challenge if you are functionally illiterate, or unfamiliar with financial terms, as is the case for many poor people in developing markets who use mobile devices to manage their financial lives. You would miss the reams of rules, warnings and essential information about the product or service that you are accessing. Why is the information presented in this way? I would argue it is not intended for the customer, rather the financial service provider (FSP) is solely concerned about legal compliance.

Imagine if the intent was to inform and empower the customer how different the experience would be. I once saw financial information presented in a comic strip. Quirky characters demonstrated the product functions, terms of use, and two or three core conditions. It was easy to understand. It gave me the impression that the FSP cared that I read and grasped the essentials, allowing me to determine whether the product would be of value to me. The FSP had made an effort to inform me and empower me to make a decision, which led to a good customer outcome.

A positive experience like this could become commonplace if we changed the equation and took an alternative approach to consumer protection, one that focuses on customer outcomes rather than on meeting legal obligations. I define customer outcomes as what clients take away from their interactions with and use of financial products and services and engagement with FSPs. It is an approach that goes beyond “do no harm” to customers and considers instead how access to and use of high-quality and responsibly delivered financial products and services can create value for customers and lead to positive outcomes for the consumer. I would argue it is a goal well worth policy makers and FSPs pursuing collectively, in order to both strengthen the financial sector and advance inclusive finance.

Let me delve more deeply into the link between value, customer outcomes and the role of the financial service provider. Customers seek two types of value when they make access and use choices - functional value and experiential value. Functional value focuses on the question “can the product or service offered do the job required?” For example, I want to send money to you: Is the service easy to understand? Is it easy to sign up for and send money? How affordable is the service? Are both parties protected against fraud and predatory practices during this transaction? If the answer is ‘Yes’ to all these questions, the service has good functional value for the customer and thus delivers positive customer outcomes. Experiential value focuses on how we felt during the transaction. What did we experience? Was it stressful? Did it empower us? Did it improve our confidence in dealing with FSPs? If it increased our confidence and our trust in the financial system and gave us more agency, it had positive experiential value and contributed to a positive customer outcome.

In both instances, the provider has direct influence over creating value for the customer, which in turn can lead to positive customer outcomes. There are a range of different factors that customers consider when interacting with financial products and services, and a number of different ways that providers can ensure a positive experience. Let us explore some:

• Choice as a customer outcome - I can make an informed choice among a range of products, services and providers, based on appropriate and sufficient information and advice available in a transparent and easy-to-understand way. This empowers me to choose the best product or service for my circumstances. For example in the Philippines, the government conducted behavioral research and designed loan cost and terms disclosure forms that were easy for customers to understand. Customers were better able to make informed decisions about the products. In Tanzania, a service provider used SMS messages to educate customers on how to check digital loan limits or use a cost calculator tool. This approach improved customer engagement and armed with more knowledge, customers chose to increase their total average digital savings. In each case, helping to motivate and enhance choice delivered good outcomes for the customers.
• Safety and Security as an outcome - My money and information are kept safe, and the provider respects my privacy and gives me control over my data. I can rely on my money and data being safe from theft or security breaches. I always have control over my data and remain fully informed about the implications of sharing it. For example M-Kopa, a PAYGo solar energy provider in Kenya, provided its customers with access to and the ability to correct their credit histories, which M-Kopa had generated from the customers’ use of digital loans. FirstAccess, an alternative data-analytics and credit-scoring firm for FSPs in emerging markets, uses SMS messaging to explain their services to customers and seek customer consent to sharing their data, assisting them in deciding what to disclose to providers. By exercising care in protecting and informing their customers, these providers offer a service that leads to good outcomes for customers.
• Voice as an outcome - I can communicate with the provider through a channel of my choice and get my problems resolved quickly at minimal cost to me. I know where to go when I have questions or concerns or when something goes wrong, and I am being heard. My problems are resolved quickly. The provider also solicits my feedback and shares how it uses my comments to improve products or practices. An example is Tigo Ghana, who uses WhatsApp, email, Twitter, Facebook, Instagram, YouTube, and LinkedIn, as well as a call center to ensure that customers can voice their opinions, ask a question or lodge a complaint. The company further instills values in its agents and call center employees to listen to customers and treat them with dignity and respect. The results are that customers have a voice, they are listened to and they get a response from the provider.
• Meets my purpose as an outcome - By accessing and using products designed and delivered in this way and by getting the services I need, I am in a better position to control my financial life, manage a shock or attain other goals. An example is responsibly delivered digital credit, the microloans offered instantly on mobile phones. Research in Kenya shows that many customers borrow early in the morning to buy inventory for their small businesses or fuel for their taxis. They often repay the digital loans the same day or within a week. The ease and convenience of accessing funds remotely at the moment the person needs the money makes a difference in running and growing a small business. It adds value and creates a good customer outcome.

In all of these examples, the efforts of the FSPs to understand the customers and their needs and to act on those insights to provide valuable products and services are instrumental in delivering positive customer outcomes. At the same time, it becomes evident that protecting the consumer is integral to the process and deeply embedded within a customer-outcomes approach. In other words, the FSP who designs products and services from the perspective of whether this will ensure good outcomes for the customer is at the same time making sure that the consumers interests are protected, as we depict in this diagram.  

Why are these elements so integrally related? Because when consumer protection fails, it destroys both functional and experiential value causing negative outcomes for customers. One vivid example is when digital credit fails. Easy to access digital loans, as we have seen, can be very beneficial to poor customers. But most digital lenders’ practices fall short on transparent, timely and sufficient disclosure, a shortcoming that all too often leads to negative customer outcomes. CGAP research found that roughly half of all digital credit customers in Tanzania and Kenya are behind on their loan payments, and up to 31 percent default entirely. Many of these customers are listed as bad credit risks by credit bureaus, sometimes for failing to repay amounts as low as $0.20 (USD) because they did not understand the terms and conditions of the loan. This often has lasting consequences for the borrowers who may be charged higher rates or excluded from the financial system for years to come, preventing them from using financial tools to build assets, invest in education, housing and improving their livelihoods. The short-term effects also can be severe. Researchers found people cutting back on daily meals and not paying health expenses in order to repay loans. Without adequate consumer protection in place for digital credit, customer value can be destroyed, resulting in negative customer outcomes.

How do we move toward achieving customer outcomes-driven financial inclusion?

Given the interdependencies of customer value, customer outcomes and consumer protection, CGAP is exploring a Customer Outcomes Framework that can be practically applied for FSPs and regulators as an alternative consumer protection regime.  It would go beyond the traditional approach of “doing no harm” to customers and consider instead how access to and use of high-quality, affordable and responsibly-provided financial services can create value for customers and thereby contribute to positive outcomes. From our early research, it is clear that this will require a shift in focus by regulators as well as financial service providers, and a willingness to work collectively toward new solutions.

For financial service providers

A customer-outcomes approach means asking different questions when considering their business models and practices. They must understand the linkages between positive customer outcomes built on customer value, and business models built on sustainable delivery of revenue over the long term. If businesses pursue short-term gains and use predatory practices, they risk destroying customer value, creating negative customer outcomes, and destroying future revenue for their firms. Good outcomes for poor customers in contrast produce long-term value for the individual and the business alike. Once the concept of customer outcomes is understood and firms realize that there is a positive correlation with business value, we observe significant results. In Haiti, Digicel moved from 40,000 active mobile money customers to over 800,000 within two years after management realized that the company was not delivering value to customers. Digicel was using agents to train individual customers on the functions and options of the mobile money menu. This failed as the agents were time constrained and never really reinforced the training the customer received. Customers felt disempowered and embarrassed to acknowledge that they did not understand the instructions. After field research with customers, Digicel changed to group-based training in the communities. Groups consisted of all community members, including younger more tech-savvy people and other early adopters of technology. This meant that training could be reinforced for those that did not grasp it the first time, as they could ask for help within the community until they mastered the technology. This led to high adoption and use rates as Digicel empowered people based on choice and use outcomes. In the Philippines, Pioneer insurance tripled its customer sign-up and nearly doubled its revenue over three years, when the company invested in understanding what created customer value and led to good customer outcomes. One example is a basic product comparison map that helped customers to choose the right insurance product for their specific needs. This helped to diminish product confusion and empowered customers to make product choices, a vital customer outcome.

For policy makers

The change in approach means connecting the dots between customer outcomes, consumer protection and financial stability, and positive developmental outcomes. Consumer protection efforts so far in the regulatory sphere have been rules based and largely focused on doing no harm to the customer with insufficient attention paid to the outcomes. Doing no harm is necessary, but it is not enough. To achieve positive results for customers at scale, policy makers must incentivize FSPs to deliver positive outcomes for the customer.  A new regulatory approach can emphasize doing good for the customer, in the knowledge that it serves the interests of the customer as well as delivers value for the firm, and in the final analysis for society.

Innovation in digital financial services is moving at such a fast pace that it is virtually impossible for regulators to keep up and applying the rules-based approach developed for another era is challenging. A customer outcomes-based approach allows regulators to adapt by balancing a combination of rules-based (by which I mean prescriptive, sometimes called tick-the-box approaches), principles-based (broad guidance with limited or no specific rules provided) and outcomes-based regulation to embed a corporate and regulatory culture that aims for better customer outcomes. Rules are still important, but they are not the be-all and end-all. Consider instead an approach where the regulatory objective is not only to make sure that the FSP provides product information to the customer, but also that the information is relevant and presented in an easy-to-understand manner. An outcomes-based approach would focus on whether the customer understood what was presented, not on whether the information was provided, and the provider is incentivized by the policy maker to support a positive customer journey.

Some jurisdictions already are embracing the approach. The Conduct of Financial Institutions, recently published in South Africa, is one example. It identifies a range of outcomes that could contribute to the financial resilience of South Africans. Let me quote a few examples from the bill. It requires that “Customers are provided with clear information and kept appropriately informed before, during and after point of sale, and, products perform as firms have led customers to expect, …” FSPs have to report to the regulator on these customer outcomes. It follows that providers and the regulator must agree on what will be good indicators and how it will be measured and reported. The regulatory examples we see in our research internationally focus on conduct and culture governance, as well as on customer understanding, assessment and engagement as essential building blocks for a customer outcomes-focused approach. It echoes our proposed outcomes described earlier, with one difference, that is the addition of an outcome that goes to the next level, ‘meets the purpose’ for the customer.

Let us return to the concept of partnerships between regulators and FSPs. In most jurisdictions this concept of a partnership is somewhat counter-intuitive as the regulator is the guardian of the rules, and the FSP monitored for adherence. An FSP leader told me recently “the relationship is so bad, I do not speak to a regulator without my lawyer present.” Many regulators can share real stories of predatory practices and customer neglect unearthed at FSPs. The 2007-2008 financial crisis is still fresh in our memories where we saw what can go wrong when FSPs only focus on what is best for shareholders and management, to the absolute detriment of customers.

Imagine a world where regulators and FSPs jointly focus on customer outcomes. A few years ago, CGAP did exactly that, convening regulators and FSP leaders from across the Southern African Development Community (SADC) through a joint effort with FinMark Trust in South Africa for a workshop. The first day was a field immersion exercise in which they formed groups, each composed of two FSP leaders and one regulator, and visited customers. Some groups visited the homes of microenterprise owners. Other groups interviewed the local informal moneylenders known as mashonisas. Some interviewed the clients of money lenders, and others interviewed people waiting in line to receive social grants.

They returned in the evening for a joint debrief. We only had one request – define the main challenge customers faced in accessing and using financial services and products, and describe the challenge through the eyes of the customer. We heard many problems, from lack of information and lack of understanding of products to difficulties with access, lack of documentation, disrespect and more. The next morning, we challenged the FSPs and regulators to design solutions to the customer challenges identified. Regulators contributed ideas and information on product design, and FSP leaders cautioned where the concept would contravene the rights of the customer or be unsafe. They discussed where practices could be improved and how rules could be adjusted, in light of the specific challenges faced by the client segments they had observed. I would argue that the experience and the stories merged into a customer- outcomes based approach, rather than the FSP leaders and regulators defaulting back into looking at the obstacles narrowly through their own lenses.

A customer outcomes focus can be the cement that constructs a different conversation between regulators and FSPs. At a higher level, FSPs should connect the dots between positive customer outcomes and sustainable business models, and regulators should strive to contribute to a different culture of cooperation towards achieving customer outcomes.  This culture can only be the result of change management and is indeed one of the main challenges of a customer outcomes-based approach.

Many more challenges remain, especially over what to measure that can serve as proxies for customer outcomes, and how to measure them. Many insights are needed on what could be plausible and measurable indicators that can be applied by FSPs, and how regulators should support this process. However, the good news is that industry stakeholders are not starting from ground zero. Some microfinance practitioners use customer outcome-focused approaches (think about the Progress out of Poverty Index, a simple poverty measurement tool), though the concept is more recent for the wider financial inclusion community and financial sectors across the globe. In addition the Social Performance Task Force and the Smart Campaign are researching customer outcomes approaches and measurement tools. In a few countries, regulators and FSPs already are pioneering customer outcome-based regulatory approaches. The United Kingdom implemented Treating Customers Fairly in 2003, while South Africa tested the approach from 2008 and recently published the Conduct of Financial Institutions Bill for comment. In India, policy makers have drafted suitability rules, while Australia has enacted rules on the conduct of providers of consumer credit.

CGAP’s initial research shows that the approach has found resonance at the level of international standard-setting bodies. In its core principles for conducting business, the International Association of Insurance Supervisors’ (IAIS) cites treating customers fairly as foundational and includes achieving outcomes that are aligned with customer choice, protection, use, and voice – similar to those we discussed earlier. Our remaining research will examine what the proxy indicators for customer outcomes might be, and how these could be measured at the firm level. What is emerging is a new framework that has the potential for driving forward financial inclusion. I believe the customer outcomes-focused approach is critical for achieving our overall goal of financial services as a pathway toward financial well-being, economic growth and poverty alleviation. Customer outcomes is an intermediary step along this pathway that is vitally important to address to achieve the higher-level outcomes. This is not a linear process, as life itself is not linear. Instead, it is the product of intertwined iterations achieved through the collaboration of providers and policy makers of which customer outcomes is a part, not easy to simplistically define or place in a comprehensive framework that builds over time toward financial inclusion. However, unless we pay attention to these basic outcomes for the customer, I doubt we can succeed in reaching the higher-level goals to which we aspire of empowering poor people through financial services.