Building Financial Systems for the Poor Consumer Protection at the Bottom of the Pyramid BOP: Striki

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Building Financial Systems for the PoorConsumer
Protection at the Bottom of the Pyramid
(BOP)Striking the right balance between access,
protection and innovationKate McKee, Senior
Policy AdvisorGlobal Seminar on Consumer
Protection and Financial LiteracyWashington, DC
September 3, 2008
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Four key messages

• Low-income and first-time financial consumers
  face specific risks gtconsumer protection policy
  and regulation should consider needs of different
  client segments
• Different financial products also raise distinct
  risks gt product-specific regulation may be
  appropriate
• With the huge growth projected in branchless
  banking, specific channel risks need attention
• A light-touch approach to regulation can permit
  evolution of standards as risks evolve --
  enabling regulators to encourage innovation,
  access and protection

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The market at the bottom of the pyramid Whats
different?

• The demand side clients tend to have lower . .
  .
• Income and assets
• Levels of literacy, education and financial
  capability
• Experience with formal providers and products
• The supply side BOP providers
• Typically, the poor rely more on non-bank
  providers,
• use a more limited product range (each with
  distinct protection concerns) payments, credit,
  deposit, insurance and are
• likely to depend more on branchless banking
  models for future access

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Consider the CP issues for a low-income consumer
. . .

• Looking for a safe place to save
• Trying to get cash for a remittance transferred
  from a relative working overseas
• Opening her first basic banking account
• Shopping around for a business loan
• Going into a community retailer to send money to
  his mother in the village
• Deciding whether to permit her MFI to report
  payment info to the credit bureau
• Receiving his social payment (pension, child
  allowance, etc.) via a card linked to an account

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Lets look at branchless banking . . .
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The logic of branchless banking a low-cost
transactional channel
1. Use existing retailers shops, lottery, POs
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Any store can potentially be an agent
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The power of using existing infrastructure
3bn
25m
Worldwide points of presence
1m
600k
500k
250k
Union
Bank
Mobile Phones
Western
Post Offcs
ATMs
POS
branches
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Experience to date with branchlessbanking

• Promising strategy to extend access to those
  currently unserved, by driving down costs
• Typical models use mobile phones, cards, and/or
  POS devices
• Alliances between Mobile Network Operators and
  financial institutions common
• Partnerships with non-bank agents (e.g.,
  neighborhood shops, airtime dealers, even lottery
  outlets) also often in the mix to reduce costs
  and reach lower-end and more remote clients

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Consumer protection issues in branchless banking

• What concerns arise?
• Distance between bank HQ or branch and point at
  which financial services are delivered
• Use of non-bank agents introduces additional
  issues of service quality, error resolution,
  fraud and abuse
• Use of technology (mobile phone, cards, POS
  devices, biometric) including potentially much
  larger data footprint and wider data access
• Note, however, that branchless models also can
  offer some consumer protection advantages over
  conventional delivery (real-time info,
  traceability for errors/disputes) trust through
  technology

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Key consumer protection issues in branchless
banking

• Transparent pricing -- of players in chain,
  service bundling, agent corruption
• Service quality, incl. agent training, consistent
  availability of cash-in/cash-out services
• Complaints and error resolution Who is
  responsible? What is the process? ADR vs. courts?
• Data quality, privacy and security
• Note some financial services raise more consumer
  protection issues than others, e.g., deposits,
  credit

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What can go wrong? Who is responsible?

• Customer shares his mobile phone and PIN and it
  is used malevolently
• Fraudster manages to electronically intercept the
  clients PIN
• Client is robbed inside agents store
• The agents store is robbed and the cash is
  stolen
• Client makes a deposit, and value credited to his
  account is less than what he paid in and also
  less than what is shown on the receipt
• Using P2P transfer capability on mobile phone,
  the client sends money to the wrong phone number
  ( bank account number)
• Client makes a deposit, but the account is empty
  when the customer goes to withdraw
• Fraudulent agent is set up

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Which regulatory tools to use?

• Prudential and market conduct regulation, e.g.,
• Agent licensing/training/monitoring outsourcing
  rules
• Disclosure requirements plain language
  --agent/bank relationship, pricing, product terms
  
• Prohibited products (e.g. credit) and/or
  practices (e.g., steering, cross-selling,
  unauthorized data sharing)
• Required practices, e.g., standard contracts or
  provisions

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Which non-regulatory tools to use?

• Recourse/redress mechanisms
• Market-based mechanisms (e.g., quality seal,
  satisfaction index, publish data)
• Self-regulation, e.g., voluntary codes of conduct
• Consumer awareness, education and financial
  literacy
• Note that regulators may need to define the rules
  of the game for these tools

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Closing thoughts on consumer protection in BOP
markets

• Keep regulation light-touch and focused on most
  important products, providers and delivery
  channels
• Consider regulatory capacity constraints and
  ability to enforce
• Need to leave space for market innovation and
  experimentation
• Balance protection and access policy goals

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Building Financial Systems for the Poor
Thank you!