MICROFINANCE PAPER WRAP-UP: “Doing Digital Finance Right: The Case for Stronger Mitigation of Customer Risks”

“Doing Digital Finance Right: The Case for Stronger Mitigation of Customer Risks;” by Katherine McKee, Michelle Kaffenberger, Jamie Zimmerman; published by CGAP (Consultative Group to Assist the Poor); June 2015; 40 pages; available at: http://www.cgap.org/publications/doing-digital-finance-right

Digital financial services (DFS), which allow the use of cellular devices to make and receive payments without travelling to a brick-and-mortar bank branch, are believed by some to be a pathway toward financial inclusion for low-income people. According to a report by the US-based research and policy center CGAP (Consultative Group to Assist the Poor), these services are expanding in emerging markets but remain underutilized due to consumers’ perceived risks. To address this issue, the authors seek to offer DFS providers with a consumer perspective and to promote risk mitigation practices.

As of 2015, approximately 120 mobile financial service companies serve 300 million people in developing markets. DFS accounts outnumber bank accounts in 16 countries. However, perceived risks cause DFS consumers to decrease usage in favor of over-the-counter services, resulting in two thirds of global DFS accounts being inactive. The report highlights some of the risks posed by the current state of digital financial ecosystems, the consequences posed by these risks and how to address them.

The authors cite evidence from consumer research in 16 markets to identify seven consumer risk areas in the DFS industry: (1) inability to complete transactions due to network downtime; (2) insufficient agent liquidity; (3) complex user interfaces; (4) consumer fraud; (5) lack of recourse for fraud victims; (6) lack of transparency in fees and other terms of service; and (7) inadequate data protection. Those surveyed stated that the user interface was difficult to operate, with some fearing costly mistakes from keystroke errors. Furthermore, customers cited inadequate channels for recourse in cases of fraud, vulnerability to agent misconduct and concern over hidden fees and other unclear terms. The report suggests that these risks curtail initial DFS uptake as well as lead participating consumers to drop out of the market.

The report identifies five priorities for DFS providers to sidestep these obstacles: (1) improve service reliability through regular network system testing; (2) create a more user-friendly interface that reduces exposure to keystroke errors; (3) develop more stringent agent management and oversight practices; (4) combat consumer fraud by increasing awareness of phishing, fraud and identity theft; and (5) improve channels for customer recourse by establishing a systemized and monitored process.

By Meraj Husain, Research Associate

About CGAP (Consultative Group to Assist the Poor)

CGAP (Consultative Group to Assist the Poor) is a US-based nonprofit policy and research center dedicated to increasing financial access worldwide. It is supported by approximately 40 development agencies and private foundations in its mission to provide market intelligence, promote standards and offer advisory services to governments, microfinance providers, donors and investors. CGAP reported annual expenses of USD 22.4 million as of June 2014. CGAP is co-located with the offices of the World Bank Group in Washington DC.

Sources and Additional Resources:

[1] CGAP: Doing Digital Finance Right: The Case for Stronger Mitigation of Customer Risks

MicroCapital, July 8, 2015, 2015 CGAP (Consultative Group to Assist the Poor) Microfinance Photo Contest Accepting Entries Through September 9

MicroCapital, June 3, 2015, CGAP (Consultative Group to Assisting the Poor) Seeks Partners for Customer-Centric Financial Services Project

MicroCapital, October 30, 2014, CGAP, MasterCard Foundation Award $500k for Behavioral Research to Freedom from Hunger, IFMR, Innovations for Poverty, the MicroInsurance Centre

MicroCapital Universe Profile: CGAP (Consultative Group to Assist the Poor)

MicroCapital Universe Profile: GSMA (Global Systems for Mobile Association)

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