Digital credit is a fast-growing phenomenon in many emerging markets. These tiny loans are having a large impact, allowing millions of low-income consumers to borrow money with just a few taps on a phone menu or clicks on an app screen. But digital credit 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 publication presents both the consumer protection risks and the opportunities for improved consumer use of digital credit. There is not enough being done to implement minimum standards in consumer protection for digital credit, and this exposes the industry and consumers to risks such as credit bubbles and mass-blacklisting of consumers in credit bureaus for just a few dollars of debt. Yet there is also a growing number of providers that are developing innovative new approaches to consumer protection for digital credit products. 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.
This publication was originally published by CGAP.