Elisabeth Rhyne, Visiting Fellow at the Financial Access Initiative, was formerly Managing Director of the Center for Financial Inclusion at Accion, where she co-founded the Smart Campaign. On July 28, 2020, The Center for Financial Inclusion announced that they will wind down the campaign.
Many microfinance loan officers in Pakistan receive a high proportion of their pay in performance bonuses that reward keeping delinquencies low. Normally, the performance incentives are well-balanced, and loan officers follow guidelines for respectful client treatment. But in the face of rising delinquencies due to the Covid-19 lockdown, FAI research reported a tendency for loan officers to resort to high-pressure loan collection tactics to protect their bonuses.
The Smart Campaign, a global effort to embed Client Protection Principles and related practices into the microfinance and financial inclusion sectors, has worked with markets in crisis to curb these kinds of abuses. One important learning is that when markets are under pressure, consumer protection practices need to be adjusted. In the case above, microfinance institutions needed to revise loan officer pay formulas to allow for higher delinquency in their portfolios, relieving their temptation to pressure clients.
Unfortunately, this kind of guidance will no longer be available from the Smart Campaign. The Center for Financial Inclusion at Accion, which houses the Campaign, has announced that it is shutting the Campaign down. After April 2021, it will stop certifying institutions as following client protection principles. Its resources will be transferred to SPTF and CERISE.
“Protecting clients requires continual vigilance.”
The Smart Campaign may be closing, but its work is far from over.
Protecting clients requires continual vigilance. Whenever client and provider interests diverge – and market pressures will make them diverge – providers will tend to weight their own interests more heavily than those of customers. It is a lucky institution that can focus on building long term customer resilience without facing market pressure that rewards telling customers half the story, increasing charges, or otherwise cutting corners, at least in the short run. There will always be bad actors poisoning the market with practices that confer competitive advantage by exploiting consumer weaknesses. Customers will always have less industry knowledge and negotiating power than providers, making it hard for them to demand fair treatment. These are facts of life in the financial arena, and this is why there is an ongoing need for counterbalancing forces.
“Regulators are seen as the necessary police force to ensure good behavior, but policemen are not enough.”
Regulators are seen as the necessary police force to ensure good behavior, but policemen are not enough. In the United States, the recent protests against police violence have led to the recognition that policing cannot solve social ills, and advocates are calling for greater collaboration among community entities. Similarly, financial consumers will be better protected if consumer protection is not seen as an exclusively regulatory issue, but actively involves industry and consumers, creating what we have often called the three legged stool of consumer protection: regulators, industry, and consumers.
The Smart Campaign mattered greatly to its sector over the past decade because it was one of the few global entities strengthening the industry leg of that stool. (The consumer leg is by far the weakest; the Smart Campaign has done some important work there, but overall with less emphasis than on industry.)
The Campaign approached its task armed not with sticks but with carrots. Its philosophy was embodied in its early tagline, “It’s the right thing to do; it’s the smart thing to do,” which posited that providers should embrace the Client Protection Principles both for moral reasons and because financially healthy and loyal customers are key to long run business success. It set out to help providers turn the widely accepted Principles into practices, by developing detailed standards of practice and then training providers and, finally, assessing their performance. This culminated in the Smart Certification program, which provided a mark of public recognition to institutions meeting a high bar. The over 120 institutions that achieved Smart Certification serve more than 50 million people. Through these activities and more, the Campaign raised the awareness of and commitment to client protection throughout the microfinance sector.
But after twelve years, is the Smart Campaign’s work still needed?
The argument for an industry-focused effort was strong in 2008 when the Campaign began, as a substitute for weak financial consumer protection regulation in many low and middle income countries at that time. Since then, regulatory bodies have developed their capacity to execute on the consumer protection mandates that were nascent a decade ago. Many of them used Smart Campaign standards, tools, and training materials to do so. Recently, the Smart Campaign has acted more as a complement to regulation than a substitute.
The kind of work that is still needed is like the example at the start of this post. It involves looking inside organizations at how they operationalize the principles; it involves responding to emerging situations like Covid-19; it involves continual capacity building. Regulation informs the industry of the desired end result (no violations of respectful treatment norms), but industry-based efforts assist institutions to produce those results.
In a process that is already well-advanced, most of the work has shifted out of the global arena and into local associations that the Smart Campaign has partnered with for years, like the Pakistan Microfinance Network and the Cambodia Microfinance Association. At the global level, the Social Performance Task Force [link] will continue to uphold the Smart Campaign standards (which constitute the biggest segment of their “Universal” social performance standards) and to house the Campaign’s wealth of public goods. The organizations that have conducted Smart Certifications will continue to provide third-party evaluations of client protection practices for institutions on request (see here and here}.
Even more importantly, industry-based consumer protection work is still needed because of the digital evolution of the financial inclusion sector. In 2019, after extensive consultation, the Campaign promulgated new standards for digital credit. In developing these standards the Campaign team recognized that digital transformation requires a profound shift in the focus of consumer protection from face-to-face interactions between staff and customers to the new customer touchpoints: screens and interfaces. This shift means that inside organizations, a new set of people are in charge of operationalizing fair treatment – product and UX/UI designers. During the Campaign’s consultations about the new standards it became clear that the professionals in these fields have not yet integrated consumer protection into their thinking. This work is just beginning.
“Digital transformation requires a profound shift in the focus of consumer protection”
One of the main rationales for ending the Campaign has been the view that the digital financial services world will not be swayed by carrots like Smart Certification. Unlike microfinance institutions, digital financial service providers do not see themselves as part of a broader movement, nor do they work toward social as well as financial bottom lines.
While this may be true, it suggests different strategies and expectations—and doing more, not less. Digital entities may not be interested in becoming Smart Certified, but they do want to avoid risks, retain customers, and gain the favor of regulators and investors. They will engage in work to improve consumer protection outcomes if they perceive that it will fulfill these aims. And as with the state of microfinance in 2008, regulators are not fully prepared to oversee digital financial service providers, particularly since they do not regulate many of them. Work to translate consumer protection principles into digital financial services is only beginning, and is vital for the long-term success of these services.
As we say goodbye to the Smart Campaign, what may be missed most is its continuing voice reminding (even nagging) all the players in the sector of the imperative to protect consumers. It’s the right thing to do. It’s the smart thing to do.