Social performance in Fintech
- Laura FOOSE, Social Performance Task Force (SPTF)
- Ana Ruth MEDINA ARIAS, ACCION
- Caterina GIORDANO, Alterfin
- Lonneke NOTEBOOM, FMO
- Cameron GOLDIE-SCOT, Musoni System
PRESENTATIONS
Laura FOOSE introduced the session by noting that industry stakeholders are trying to better understand how to evaluate FinTech opportunities for risks and benefits to clients. Industrywide standards1 for evaluating social performance management (SPM) practices of traditional financial service providers already exist, but stakeholders are increasingly asking how we must adapt these to address FinTech providers. As an industry, we need to ask: how do we evaluate client protection risks in various FinTech models, and how do we assess the value for the end consumer?
Ana Ruth MEDINA ARIAS, of ACCION, opened her presentation by summarizing the 7 Client Protection Principles (CPPs) developed by the Smart Campaign, noting that nearly 100 financial institutions have been certified for adhering to those principles. She explained that the first step in identifying client protection risks in FinTech happens at the product level, and involves its designing, pricing, and marketing. After those risks are identified, financial institutions (FIs) need to find ways to operationalize them into their management systems. Questions that need to be considered at this stage include: Are providers overly aggressive in pushing out the loans? Do providers consider consumers' financial situations when lending? Do clients understand the terms and conditions of their credit? How secure and protected are client data used to make lending decisions? Do consumers know where to turn if they have a complaint?
Medina then provided some of the outcomes discussed in The Smart Campaign's new publication, ‘Tiny Loans, Big Questions: Client Protection in Mobile Consumer Credit2', which outlines the various consumer protection issues that arise with digital credit. For example, a client's digital credit can quickly escalate, as there is sometimes no mandatory waiting period between different loans and no mandatory procedure to assess the need for new credit. Moreover, many FinTechs use alternative data for credit capacity decisions; while the use of such data (transaction amounts, airtime usage, ratio of talk to text, etc.) makes credit decisions faster and easier, the traditional debt-to-income client evaluation is often skipped as providers do not have the information. Additionally, many of these models are looking only for client willingness to repay and use imprecise proxies for capacity to repay. All of these practices can lead to client over-indebtedness, or, in some cases, clients being "blacklisted." Medina gave the example of mobile credit clients being excluded from future credit for not repaying very small amounts of money, such as USD 5.
Lonneke NOTEBOOM opened her presentation by stating that FinTech is an important means to connect underserved clients with financial services. She explained that FMO uses the current CPP tools when evaluating FinTech investments, but that FMO explores adding some further topics to tailor the CPP tools to FinTech / start-up companies. The first stage of the CPP evaluation is desktop research to determine the depth of the client protection evaluation. Risk assessment is conducted in four main areas: 1) Ownership and mission; 2) Business environment and model; 3) Profitability and pricing; and 4) Regulatory environment. For Fintech companies, in-depth (personal) interviews take place with the FinTech founders to better understand if the product is tailored to client needs, testing whether the company has benchmarked the APR against other FinTech companies in the industry, and whether there is self-regulation and CPP certification. The second stage of the risk assessment procedure is done during due diligence. FMO focus includes lending practices, and whether the end client trusts and values the product. Potential additional topics to cover during the second stage of risk assessment include: evaluation of privacy and security of client data, the ethics around data analytics and credit algorithms, transparency of brokers or third-party providers, and sustainability of the technology stack.
Caterina GIORDANO briefly introduced the work of Alterfin, which has been an active impact investor for more than 23 years. Giordano also noted that technology can unlock a great potential to fulfil the mission of financial inclusion. However, she added that technology is a means to an end and should not become an end in itself. In this context, Giordano explained that Alterfin started working with Musoni in 2013 to increase the provision of flexible, data-driven and client-centric products.
Cameron GOLDIE-SCOT presented Musoni System, a cloud-based core banking system that helps MFIs improve efficiency, reduce costs and increase outreach. Currently, Musoni supports over 100 MFIs across 15 different countries. Goldie-Scot talked about hybrid MFIs - organisations that are using technology to enhance the client experience, but which also focus on human touch points for their clients. He explained that once an MFI has a modern core banking system, it can start leveraging technology to enhance client experience. This can happen with automated SMS messages and tablet apps, for example. Goldie-Scot then emphasised that technology should not replace human interaction, but should be used to remove inefficiency and bureaucracy in microfinance. This can give field officers more time to interact with and understand their clients. He added that there are still many occasions where clients prefer to interact with a human. This is substantiated by the recent Accion CSFI paper on ‘Uniting Tech and Touch'3, which showed that customers are most comfortable conducting regular transactions on their phones, bur prefer receiving information about a product from a person. Customers also prefer speaking to a person when resolving problems or filing a complaint. To conclude, Goldie-Scot mentioned that Musoni has helped MFIs: expand in rural areas and increase rural outreach with the use of technology; better target low income customers; increase transparency and safeguard access; and reduce fraud and increase convenience and safety for clients through mobile payments.
DISCUSSION
Following the presentations, a member of the audience asked the panellists if technology is becoming an end in itself. Giordano said providers can experience mission drift when they focus on keeping up with new technologies and forget the social mission of microfinance. She added that it is our responsibility to make sure we are not driven by technology, but that we use it as a means to an end. The audience also showed concerns on how to protect MFIs from client data hacking. On this subject, Goldie-Scot mentioned that client data hosting systems are very safe, but emphasised that nothing is impregnable. He added that in traditional MFIs where client data are stored on paper, the second cause of fraud is data manipulation by MFI staff.
The discussion then shifted to the use of technology to free up loan officers' time. Noteboom mentioned that many of FMO's MFI clients describe increased efficiency and improved product offering to be the highest values that FinTech can bring to their institution. Loan officers can free up time and focus on customer engagement. Goldie-Scot mentioned that the actual use of time depends on the mission of the institution. Evidence shows that loan officers spend this time by doing more customer appraisals or by trying to expand into new areas.
Another question from the audience addressed the existence of Client Protection Certifications for FinTech providers. Medina Arias explained that there are different initiatives aiming at creating such a framework for FinTech or mobile credit providers, but these need yet to reach industry consensus; nevertheless, there are best practices readily available. She added that it is very important for FinTech providers to identify the risks in their operations, which will make it much easier for them to effectively create a plan of action to manage them.
Foose closed the session with a call to action for participants. She noted that investors should participate in a FinTech webinar series which has been developed by SPTF and the CDC Group. The series focuses on how investors can take consumer protection risks into account during due diligence and monitoring of FinTech investors. It will examine these risks through specific issues, such as pay-as-you-go models, pricing transparency and predatory marketing. While this series is open to investors only, the presentation, recording, and summary brief from each webinar are available on the webinar series page4.
Foose also welcomed all stakeholders to join SPTF's Learning Event 20185, which will be held in India in February 2018. The event will focus on Customer Centricity and feature various sessions on SPM in FinTech.
1 https://sptf.info/universal-standards-for-spm/universal-standards
4 https://sptf.info/working-groups/investors/spm-and-fintech