Putting financial services customers first

We are increasingly and more acutely aware of the role of customers in effectively achieving overall economic development in emerging markets. They are critical to stimulating businesses and markets as consumers of goods and services – but also as influencers of trends, demands and preferences. We realise that the successful and sustainable growth of businesses in emerging markets requires that those firms understand the customers they serve and keep them at the centre of their work.

The businesses that serve these customers are becoming more innovative. This is largely underpinned by digitisation that is driving down costs to serve and improving customer acquisition, as well as the increasingly widespread adoption of hybrid business models (comparable to asset-based financing): which provide a consumer good or durable product as well as a financial or credit product to pay for it. The mixed- value chains that are used to design, develop and deliver these products can be complex, quick to evolve, and difficult to untangle. For example, business-to-consumer relationships are becoming less linear and more stakeholders are now involved in the delivery of the product to the end customer. These business models span the education, health, and water sectors, and are most notably seen in the growth of the off-grid solar market that uses pay-as-you-go systems to provide much needed access to energy to the lowest income populations in some of the most rural areas.

Simultaneously, the evolution of the financial services industry itself continues at a fast-pace. On one hand, digital financial service (DFS) or fintech providers (particularly in digital credit) are cropping up in the dozens in some countries. We expect these DFS businesses to scale faster than their brick and mortar counterparts and we encourage them to innovate and iterate more quickly. On the other hand, more traditional brick and mortar providers are increasingly experimenting in digitisation and automation, in what some call their ‘digital transformation’, allowing them to reach new customer segments for the first time. We also see mobile network operators seeking approvals to deliver financial products to their well-established, digitally enabled customers base, prompting discussions of ‘digital banks’.

The question is: in the process, are we losing sight of our end customers’ financial safety and health, and our responsibilities towards them?

At CDC, we have seen these innovations in our markets and across our portfolio as well as in future investment opportunities. Among others in the industry we have become increasingly aware of the need to adapt and develop new and inclusive approaches to assess, manage and mitigate risks to customers. Most importantly, as an emerging market investor and a development finance institution, we want to encourage good practice, be proactive in curtailing risk, and enhance social and development impact. Earlier this year as a core member of the working group that developed the Guidelines for Responsible Investing in Digital Finance, we supported the need for a new set of guidelines on responsible investing in the technology driven market. Currently, along with two other funders, we are supporting GOGLA – the off-grid solar industry association – to develop its first set of customer protection principles led by industry practitioners and off-grid solar companies themselves.

We are also clear on our responsibility as investors to practically work with our businesses on addressing the potential risk to customers caused by the delivery of financial products and services, especially in innovation-driven environments. The need to tailor products to meet customer needs has become the norm, but the need to mitigate risks to customers while we do this has been less common. These innovations have accelerated access to finance and improved the customer experience, but at the same time have brought a number of different or new types of risks to customers. These include issues such as the risk of over-indebtedness due to easier access to small loans; breach and misuse of customer data due to the technology risk of multiple systems and third parties; agent incentives and instances of fraud; and discriminatory artificial intelligence or machine learning credit risk models. Regulatory regimes have been slower to keep up and sometimes retroactive, while current customer protection and social performance frameworks can fall short of capturing the changing environment and providing guidance on how to cope with it.

In response, we have developed our CDC principles of customer protection: four overarching values that we believe to be necessary to actively assess, manage, and mitigate risk to end customers in our and our companies’ everyday work. Our framework has been developed into a toolkit that enables both ourselves and our investees to follow a practical set of steps to identify areas for improvement and develop a broader set of good practice. We intend for it to generate business value and achieve sustainable positive impact, as each principle corresponds to a different aspect of the organisation and its operations.

• Safeguarding of customers – is intended to be externally-facing and assesses the quality of a company’s interactions and communications with the customer.
• Fair treatment – is internally-facing and assesses whether the company’s business practices are fair to customers.
• Enabling organization and culture – assesses whether the company’s culture, policies, processes and governance structure enable it to meet the first two principles.
• Sustainability and innovation- is intended to be forward-looking and assess the company’s ability to be or remain customer centric and proactive about customer risk management.

We intend for this framework to be living. As our investees start adopting these principles and implementing actions towards them, we expect to grow a set of practical examples that bring these values into operation. We hope that customers will be better served and better protected as we continue to innovate, resulting in greater customer trust.