It’s time for evangelising fintech governance
Customer empowerment — commonly known as customer protection — boils down to five fundamental principles in the lending world: fair treatment; offer of suitable and affordable products; loans on clear terms and conditions; privacy and security of information; and adequate complaint redress.
Over time, an evolving body of principles, rules and standards, and outcome-based approaches has brought increasing attention to customer protection. Still, market conduct needs to see better adoption.
Fintech lending, while creating a new market from scratch, brought a refreshing approach to the customer-protection narrative. The passion for delighting customers (beyond a privileged minority) with new products and seamless customer journeys focused on their demands, preferences and convenience, brought a paradigm shift to how traditional lenders thought about the customer experience.
New-age lenders reached out to new segments that were largely overlooked and unaddressed, even as more customers turned to them for their need for niche products and convenience. For these customers, lending through mobile apps gave unmatched dignity, convenience, customised products, and privacy in borrowing. Loans through lending apps mean control over finances, real-time access to information, and much more.
No more queues and questions, nor unspoken judgments on what applicants’ looks, language and dress say about their backgrounds. Unsurprisingly, the latest World Bank data (FINDEX Report 2021, released in June 2022) tells us that just 12 per cent of customers borrowed from formal sources.
In fairness, the newness of the fintech lending model, combined with its complexity, distribution and speed, threw up new challenges and risks for customers. Earlier this year, our survey showed that nearly half of customers struggled to identify genuine lending apps. One in four found it hard to read the terms and resolve their complaints; and more than a tenth were unsure about what data apps are taking and sharing. Clearly, fintech lending needed to catch up when it came to customer protection; and the Reserve Bank of India’s digital lending guidelines charted a road map.
But the experience of customer protection regulation in India and elsewhere shows its limitations. The average customer finds it hard to exercise the rights in a borrowing relationship and be the “caveat emptor” she’s expected to be. We all receive long intimidating terms, or a binary take-it-or-leave-it approach in the consent framework.
So, how can fintech lenders combine passion with prudence?
Governance is the heart of a company and, in the broadest sense, ensures protection of stakeholders through well-defined rules and processes, and a system of accountability and oversight. We have increasingly seen regulations entrusting governance with greater responsibilities to the company’s financials, risk framework, IT infrastructure, and compliance. Customer protection regulations on grievance redress and pricing bring governance into play, but half-heartedly.
The governance framework should have full awareness of the vulnerabilities of customers and the powerful role of digital credit in making them better or worse. Our data shows that most digital lending customers are low-income, young, slightly new to credit, and use digital lending to meet unexpected, small and short-term credit needs. A related point is their vulnerability to digital fraud. Super-fast digital credit, often from dubious apps, lure customers into taking on unsustainable credit, raising risks for lenders and undermining the ecosystem.
Then there are problems of technology as it intersects with customers, through data trails. Comprehensive technology governance with a customer lens as set out in the General Data Protection Regulation is critical. It should recognise customer rights for nondiscrimination, privacy, security, transparency, and consent; and create the framework for obligations and accountability (also covering the third-party-backed model).