Feb
Consumer Protection: Key to Digital Financial Inclusion
Three aspects that actors must take into account to improve the sense of security and usage of their digital financial products.
According to Global Findex1, account holding globally grew by 50% in ten years, between 2011 and 2021. In turn, from 2017 to 2021, the percentage of adults with an account at a bank, mobile money provider, financial institution, or credit union grew by an average of 8 percentage points in developing countries, from 63% to 71%. In many countries, such as those in sub-Saharan Africa, the growth in account holding stemmed from the adoption of mobile money accounts. The supply of digital financial services meant that institutions were able to have greater reach and penetration in the economy. In developing economies the percentage of adults who received or made a digital payment grew from 35% in 2014 to 57% in 2021. While this expansion was happening, the risks associated with digital products began to come into view and evolve, due to the way technology was incorporated into finance.
This growth is a challenge for digital financial services providers to get their customers to use their own platforms with confidence and security, and to access the entire range of products that these offer, in a competitive context and with the inherent risks they deal with.
The following article demonstrates how companies can generate added value for their customers based on three aspects: trust, security, and financial health. According to research done on consumer protection, this is how companies can become leaders in the process of financial inclusion of their customers and at the same time promote their continuity as such.
1. The importance of trust
According to Global Findex, 24% of unbanked people in the world said a lack of trust in institutions is one reason why they do not have an account. This barrier is stronger in the regions of Latin America and the Caribbean, Europe, and Central Asia, where 30% of the unbanked reported this reason. Countries like Argentina, Bolivia, Bulgaria, Colombia, Jamaica, and Russia are among those where the percentage is slightly higher.
In a digital context, it is much harder to build the trust that customers need for them to decide to hand over their money to financial institutions and use their products. It is far harder to maintain a close relationship with the customer and answer all their questions.
2. The importance of security
Technology has created new opportunities for financial services to grow. However, at the same time, risks have arisen. According to research by CGAP, all forms of consumer risks with digital financial services have increased since 2015, and online crime now accounts for about half of all property crimes occurring around the world. The types of risks observed are fraud, lack of data protection and confidentiality, lack of transparency in the information provided, and weak mechanisms for help and redress.
According to a study on the impact of COVID-19 in the Fintech sector presented by the Cambridge Centre for Alternative Finance (CCAF) at the end of 2020,2 cybersecurity risks grew at a higher rate than the volume of transactions of all financial services except for digital payments. Latin America, primarily, is a hotspot for fraud in the creation of accounts, with around 20% of the total volume, compared to an industry average of 12.2% (IDB, OAS, 2020).
Cybersecurity policies are essential for protecting customers in the digital area and safeguarding their privacy and property. They are also key to increasing customer confidence in digital tech and making them feel comfortable in using it in this way.
3. The importance of financial health
Financial well-being or health are one of the dimensions of financial inclusion that are hardest to measure. It concerns the impact of financial products and services on their life, their daily economy, and their future prospects.
To achieve financial health and for this to give way to greater inclusion, it is imperative for people to have financial capabilities, i.e., knowledge, behaviors, and attitudes that enable them to make good financial decisions and control their financial future.
There is so much work to be done. According to Global Findex, one in four people worldwide with a mobile money account cannot use it without the help of a family member or customer service personnel. People who lack financial education and information are unable to benefit from holding digital accounts if they do not know how to use financial services in a way that leads to good and responsible financial decisions. If people do not know what the institutions offer, they will not trust them and will prefer to keep their money at home or use informal financial services that are more familiar to them. In addition, lack of financial education leads to the existence of inactive accounts and more fraud.
Businesses can take active steps against these problems by developing educational programs to promote good financial health among their customers. Providing digital financial services with interventions that will promote financial education in a digital context is relevant and necessary not only for them to be better prepared to use their services, but also to create familiarity, instill trust, and, at the same time, reduce exposure to cyber fraud.
Actions to protect financial customers
Companies have much to do to excel in consumer protection, quite apart from the regulation in each country. Below is a list of different actions:
To provide fair and transparent information: offering clear and timely information about the features of products and services, in appropriate, easily understood language.
To encourage responsible lending practices: incentivizing access to responsible credit and avoiding overindebtedness is crucial to providing resources that can change the circumstances of the most vulnerable.
To have Effective avenues for help and redress: providing the necessary customer service channels so that customers can file whatever claims they need to.
To protect data and information confidentiality: providing secure systems that will protect customers’ information from threats of cybercrime or fraud.
To develop financial education programs: building the financial capabilities of the customers will enable them to use their financial products more frequently, leading to greater well-being.
There has already been progress in this area:
In Uganda, with respect to consumer protection, mobile money agents and providers like MTN and Airtel have joined forces to take a proactive approach to protecting their customers’ information and implementing the Privacy and Data Protection Act enacted in 2019.
In terms of financial education, numerous programs in Latin America have been shown to improve the financial capabilities of their customers. For example, there is Adopem in the Dominican Republic; Bancamía in Colombia; Pro Mujer in Argentina, Bolivia, Mexico, Nicaragua, and Guatemala; and alliances between financial institutions and UNDP for the creation of digital savings products with financial education in Mexico, to name a few.
Consumer protection and customer empowerment is a key starting point for true commitment to financial inclusion for the customers of financial services and for them to be consolidated as such.
Next Steps
Contact us to delve into the development of financial inclusion in specific markets, especially if your company aspires to reach the unbanked or underbanked population. At PCMI, we conduct market research in payments and commerce that helps companies make strategic decisions with a significant impact on the adoption of their products and services.
Please explore our services.
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Fuentes
- The World Bank, 2021. The Global Findex Database 2021. ↩︎
- World Economic Forum, 2020. Global COVID-19 Fintech Market Rapid Assessment Study. ↩︎
