A Fair Digital Finance Market Failure: What a Recent Consumer Protection Index Reveals

All around the world, technology is revolutionizing the way we interact with financial services. In 2021, 57 percent of adults made or received a digital payment. While digitalization offers the promise of increased financial inclusion and improved financial health of consumers, it can also bring new or heightened risks for consumers.  Notably, consumer protection regulations are often missing during policy discussions and are in many contexts not properly enforced.

To address this gap, Consumers International launched the Fair Digital Finance Accelerator. The Accelerator empowers consumer organizations to work more effectively within the regulatory environment by bringing together a thriving community of over 60 consumer associations from low- and middle-income countries, offering a unique space for collaborative action, influence and learning.

The knowledge base that underpins what we do with the Fair Digital Finance Accelerator is our recently launched annual fair digital finance index. The objective of the index is to track the capacity of Consumer Associations to advocate for better financial consumer protection regulations in LMICs, as well as provide an objective assessment of the state of financial consumer protection in these countries and a basis for discussion between different stakeholders on potential for change.

The fair digital finance index

In 2022, the Fair Digital Finance Accelerator surveyed its global membership of consumer associations. The survey gauged members’ views on the state of financial consumer protection in their respective jurisdictions, the key risks or consumer concerns associated with digital financial services and the extent of engagement of consumer bodies in the local policy dialogue. The findings of the baseline survey form the core of the index and will allow the Accelerator to monitor progress over time and to pinpoint key topics to engage on.

To produce the final report, the survey data were then complemented with other publicly available data, including country-level data from the Global Findex survey, the GSMA Mobile Internet Connectivity index and the GSMA Mobile Money Regulatory index.

The conceptual framework

What sets the fair digital finance index apart from other indices in the financial consumer protection sphere is the breadth of the framework that it covers, from a country’s regulatory framework to the ultimate consumer outcomes. The index is also unique in that it takes into consideration the actual lived experiences of consumers, through the consumer outcome vantage point that forms the basis for how the index is compiled.

Illustrated in the diagram below, the conceptual framework covers four broad pillars, each of which has its own set of elements, indicators and variables to assess.

1. Consumer Protection Needs: In this pillar, we look at the need for a financial consumer protection (FCP) framework in the first place, centered on understanding the risks that consumers face and their ability to protect themselves against risk – such as by knowing their rights and responsibilities.
2. Consumer Protection Framework: This pillar looks at the regulatory frameworks in place, whether they are based on consumer-centric principles and how they have sought participation from consumer representatives.
3. Inclusion and Protection “Playing Field”: How is financial service usage playing out for consumers? Do consumers actively use and have positive experiences with digital finance?
4. Ultimate Consumer Outcomes: The last pillar assesses outcomes in real terms for consumers. Are digital financial services making a difference to consumers’ financial health? What impact are they having on advancing sustainability?

Global scores on financial consumer protection

The index findings highlight significant gaps in financial consumer protection from the point of view of the consumer – with the average total index score coming to just 40 out of a possible 100.  Nevertheless, the total score masks some variations across the pillars. For example, the highest scores are achieved in the enabling infrastructure and inclusivity elements, the latter driven by indicators on account usage frequency.

On the other hand, elements that deal with how consumers are experiencing the digital financial sector scored more poorly. There is a high perception of risk vulnerability, with consumers feeling they do not have the tools or knowledge to protect themselves against these risks, and there are remaining user frustrations with the services. Together, these findings point towards a fair digital finance market failure.

What differences can be seen between countries?

The fair digital finance index (and the resulting report) presents the results for sets of country clusters rather than at an individual country score level. This allows for meaningful comparison without pronouncing judgement on any particular country. For the purpose of the index, three clusters were defined:

• Advanced Countries scored above 66.67 on the overall index. 
• Transitioner Countries scored above 33.33. 
• Emerging Countries scored below 33.32.

It is important to interpret the cluster findings within the context of the sample. Thus, “advanced” countries are advanced relative to the other low- and middle-income countries included in the sample, rather than in absolute terms. Figure 3 below shows a breakdown of countries in scope, according to the aforementioned clusters.

While stark global differences do exist, we can also see that consumer protection needs remain unmet across the board. Take the “Protection Needs” pillar, where low scores are evident for all country clusters. This is driven by a high sense of risk from consumers, which is especially pronounced amongst emerging cluster countries.

More to be done to protect and empower consumers

The findings of the index paint a disconcerting picture. Though digital finance is broadly available to consumers and the basic elements of financial consumer protection are in place in most countries, the index points to an environment where digital financial services risks are rife and many consumer protection needs remain unmet. For example, consumers don’t feel financial service providers do enough to ensure they understand the terms and conditions underpinning their products. More work needs to be done to effectively protect and empower consumers against digital finance risks and bring their voice to the fore.  

Importantly, financial consumer protection frameworks need to go further and become more consumer-centric. Where protection frameworks are not able to effectively protect consumers against risks, it can undermine the gains of financial inclusion and erode consumer trust. Addressing this gap requires a concerted effort across regulators, business and consumer representative bodies.