Consumer Protection in Digital Credit
While digital credit allows millions of low-income consumers to borrow money with just a few taps on a phone menu or clicks on an app screen, it 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 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. The paper further explores new approaches to address risks and problems in five areas:
- Disclosure of loan terms and conditions;
- Marketing approaches to promote responsible borrowing;
- Appropriate and tailored products to meet the needs of specific consumer segments;
- Repayment and collections;
- Credit reporting and information sharing.