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Consumer Protection in Digital Financial Services – What should I do about it?

In December 2016 I published an article Your Top 10 Things to get Right in a Digital Financial Services Business summarizing responses to a short survey asking that very question. The resulting DFS Framework outlines what you should focus on from launch to maturity, and the post provides several links to freely available material to help you understand the DFS Focus Areas in more detail.

Figure 1: DFS Framework –Focus Areas for a successful DFS Business

In this article, I will be introducing a topic that was not explicitly listed but permeates throughout the DFS Framework, and is a regulator and customer priority, that is Consumer Protection.  My objective is to help you understand consumer protection, and what you should be doing about it as a Manager in a DFS business. It is not just something for the Regulatory, Research and Risk and Compliance professionals to care about, consumer protection is a critical component of customer centricity and will help you drive your business to success.

Why is Consumer Protection important?

In a word: Sustainability.

As practitioners, you know that in financial services, even more so in new innovative digital financial services, and especially in unbanked markets where you are driving financial inclusion, consumer confidence and trust are essential to acquiring and retaining users and increasing transaction volumes to get to scale.  In your DFS business scale and volume are what you are aiming for.

You are asking people to trust you with all their money, and that by using your services their lives will change for the better. For that privilege, you are hoping to build a sustainable business which makes money now and in the future.  Helping you gain consumer confidence and trust in a stable and growing market is what consumer protection is all about. It’s what you want, it’s what regulators want and most importantly it’s what your customers want.

If you are not Safaricom (launching M-Pesa in Kenya) with an already established and strong brand that consumers trust implicitly, then how do you go about creating the consumer confidence and trust you need, what processes can you put in place and what KPI’s can you measure to provide you with some comfort that you will succeed.

Key themes

Strangely enough the need for consumer protection exists because your DFS business exists. Yes, your great product is removing risks associated with cash, but you are also introducing many new risks to customers that never existed before you came along. The more successful you are, the more risk you create for your customers, as they become more dependent on your services.  Additionally, increased competition within the DFS industry simultaneously reduces and increases risk.

In a nutshell, consumer protection aims to benefit your customers by ensuring that they:

  • Do not experience harm or loss by using your services
  • Are empowered to make informed choices according to their needs
  • Have access to redress mechanisms in the event of any issues

But that is easier said than done.  As well as improving your customer’s welfare, effective consumer protection standards assist in creating a level playing field in the DFS industry, helping to improve overall investor confidence and management certainty.

Regulatory focus

Apart from the lessons learnt after the global financial crisis, more countries are now expanding financial inclusion efforts (creating enabling regulatory licensing frameworks to do so), and recognize that the risk of loss to or exploitation of consumers increases as they are often starting to use financial services for the very first time.  In order to minimize these risks and to ensure fair competition and treatment of customers by DFS providers, regulators are developing and incorporating consumer protection requirements into both general and specific new legislation.  There are also a number of international guidelines and tools that have been developed to help regulators design appropriate consumer protection frameworks.

Regulators do however recognize the need to carefully balance the need to protect consumers without imposing high compliance costs on DFS providers, but this is often difficult to do and the question most often on DFS managers lips is – how practical is this all to do?

United Nations UN Guidelines for Consumer Protection (UNGCP)
G20 Principles on Financial Consumer Protection
World Bank Good Practices for Financial Consumer Protection
CGAP Consumer Protection Regulation in Low-Access Environments
OECD Report on Consumer Protection in Online and Mobile Payments
OECD Consumer Policy Guidance on Mobile and Online Payments
AFI Consumer Protection in Mobile Financial Services
BTCA Responsible Digital Payments Guidelines
CFPB Consumer Protection Principles
Smart Campaign Client Protection Principles
ITU Regulation in the Digital Financial Services Ecosystem
GSMA Code of Conduct for Mobile Money Providers
UNSW The Regulatory Handbook: The Enabling Regulation for DFS

Figure 2: International Guidelines on Consumer Protection

Kenya Central Bank The National Payment Systems Regulations
Bank of Indonesia Consumer Protection in Payment System Service Regulations

Figure 3: Examples of Country Regulations including Consumer Protection issues

While guidelines and regulations may have originally been written for a specific industry (for example Microfinance Institutions or Mobile Money operators), the frameworks apply broadly to any financial services provider.  As such the standards (and their authors) are evolving as new providers, products and types of entrants (e.g. Fintech companies) emerge, as can be seen from the recent update to many of the guidelines listed above.

Many financial services providers also recognize the benefits that Certification against these standards can provide to brand value and investor, regulator and consumer confidence. An example of a successful certification program can be found on the Smart Campaign website.

How could you approach Consumer Protection in your DFS business?

Reading all of the consumer protection guidelines (if you have the time!), and your country relevant consumer protection regulations, will give you a good overview of what the topic covers, but it will likely leave you with a practical question: So how am I supposed to deal with all of that so that I earn my customers and regulators trust?  Is this a really separate issue to deal with or is it already part of everyone’s job, so much of it really looks like business as usual and stuff that I focus on anyway.

Like so many cross functional initiatives you already deal with (think customer obsession, compliance, risk management or employee empowerment programs) in order to effectively implement consumer protection as a part of your company culture I believe you should use the following approach:

The programme:

  • Evaluate how it links to and incorporate it into your company’s purpose and values statement, and determine how this will support your brand
  • Identify an executive sponsor, ideally the CEO or another Board member
  • Determine what you want success to look like and how you will measure it
  • Allocate roles and responsibilities, identify a champion and create shared targets among staff
  • Allocate budget to the program, and create feedback and review processes
  • Determine internal and external communications mechanisms (staff, customers and regulator).

The scope of work:

  • Have a framework (sub-projects if you like) within which to implement your consumer protection initiatives,
  • Perform an assessment of risks facing your customers within each area of your framework,
  • Create consumer protection processes and controls to address each risk (either new processes or by incorporating a consumer protection focus into existing),
  • Identify an existing or establish a new compliance or certification process by which you can be assessed (either internal or external),
  • Incorporate consumer protection and consumer “confidence / trust” feedback into your regular qualitative and quantitative customer research and satisfaction surveys (e.g. NPS).

Implementing such a program, with practical and measurable steps, will truly put the customer at the heart of your DFS business, and ensure that not only are you changing people’s lives with your amazing innovative technology, but you are also visibly caring for the welfare of your community, and be seen to be doing so by your investors, regulators, employees and customers.  And that is sustainable.

Where to next

I will most certainly not be leaving you on the journey here.  In follow up articles to this one I will be using the DFS Framework introduced at the beginning of this article to perform a deeper analysis of the risks facing customers in each DFS Focus Area and how these relate to the consumer protection guidelines and regulations (which you may or may not have read by then!), together with some discussion on practical implementation options.  A further post will look into the business case and how I might go about setting up a consumer protection program.  I look forward to taking the next step with you.

Switch overview

This article is written as a part of a research and education program on consumer protection in digital financial services for the Digital Frontiers Institute (DFI).

As a professional Institute, one of DFI’s core functions is the establishment of a platform that fosters the professional development of our members. One that keeps them informed about global developments and emergent ideas and trends in our domain, as well as providing them with continued opportunities to learn and grow through mentor programs and further training.

We have created a unique interactive platform where our members are able to connect and collaborate across countries, time zones, cultures, languages, domain challenges and are able to celebrate the progress we make together. Our members will have access to monthly webcasts, a platform for digital discussions through blogs, forums and live chats and access to our data repository of materials, including ongoing research and case studies as contributed by faculty and community members.

Our digital community is complimented by physical meetings such as an annual global gathering with selected thought leaders as well as local meetings in the form of Communities’ of Practice (CoP’s) or gatherings facilitated and sponsored by affiliated organizations.

By Dylan Lennox

Cleo Turner
Cleo is DFI's CDFP coach and helps our students with the apply section of the Certified Digital Finance Practitioner (CDFP) program. As part of her role Cleo shares useful resources and insights from a wide variety of sources and authors with our community.

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