MICROFINANCE PAPER WRAP-UP: “Translating Digital Credit Transaction Data Into Consumer Protection Supervision,” by Daniel Putman, Published by Innovations for Poverty Action

The adoption of digital financial services (DFS) has increased significantly in lower- and middle-income countries in recent years, specifically the usage of digital credit via mobile phone messaging, mobile apps and web browsers. Among the benefits of digital loans is the “nearly instant” speed of loan disbursement and repayments as well as the automation of tasks and enabling of services away from branches and agents. These factors can result in lower travel and other transaction costs, expanded access to formal credit, increased financial health and resilience, and improvements in well-being such as decreased stress levels.

Despite the potential benefits, adequate supervision of digital credit is critical due to risks such as customers’ present bias, bias in credit scoring, low levels of financial literacy, fee complexity, market concentration and the difficulty of deploying the needed data management systems.

To protect consumers, supervisory authorities will need to collect and analyze digital credit data, such as credit application data, loan sizes, loan periods, interest rates, fees, repayment behavior, frequency of borrowers switching to different lenders, levels of competition among lenders, multiple borrowing and over-indebtedness. The author also notes the importance of consumer segmentation, such as by gender, to understand more about “which consumer groups have a higher concentration of risks.” Elements of the needed information span four “levels”: provider/product data, account data, loan data and transaction data.

When collecting, using and storing information, security of the data is critical. The author cites the Five Safes, a framework developed by the UK government that addresses issues such as the appropriateness of choices of which data to collect, trustworthiness of the individuals given access to the data, removal of identifying data such as names and account numbers, and the steps taken to block unauthorized access.

When supervisory authorities formulate requests to financial services providers for data, the author highlights the importance of: (1) preliminary information gathering – understanding what data the organizations collect and store; (2) creating planning documents for pre-analysis and data security – to minimize misreporting and improve research transparency; and (3) following protocols to protect data – such as de-identification and encryption.

This is a summary of a paper by Daniel Putman, published by Innovations for Poverty Action, March 2022, 77 pages, available at https://www.poverty-action.org/publication/translating-digital-credit-transaction-data-consumer-protection-supervision.

By Arin Atluri, Research Associate

Additional Resources

Innovations for Poverty Action homepage
https://www.poverty-action.org/

UK Office for National Statistics description of the Five Safes framework
https://blog.ons.gov.uk/2017/01/27/the-five-safes-data-privacy-at-ons/

More MicroCapital paper wrap-ups
https://www.microcapital.org/?s=wrap

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