As Digital Credit Surges, New Research Shows Need for Greater Consumer Protection

Digitization has made credit accessible to more people in recent years, but many countries lack institutional protections for their most vulnerable citizens, who are most susceptible to fraud and exploitation. With billions of dollars of credit being disbursed to consumers in low- and middle-income countries (LMICs), the need for more evidence-informed safeguards is clear.

Mobile Instant Credit: Impacts, Challenges, and Lessons for Consumer Protection is a collaborative report from the Center for Effective Global Action (CEGA) at UC Berkeley and Innovations for Poverty Action (IPA) that contributes to a common understanding, shared vocabulary, and conceptual framework to advance knowledge of the relationship between global development and the digitization of credit. Specifically, the report focuses on Mobile Instant Credit (MIC)—small digital loans that are primarily marketed and used for consumption purposes—as there is now a sufficient body of research to inform policy decisions.

The report delivers three key insights for policymakers:

1. The current evidence reveals that Mobile Instant Credit does not have consistent impacts on consumption, resilience or asset ownership, but leads to modest improvements in subjective wellbeing.
2. Mobile Instant Credit did not impact the average consumer’s financial health, ability to save, or total spending, but the growth of digital loans in LMICs poses an increased risk of misconduct, including overcharging, fraud, and predatory collection practices.
3. Several new methods for collecting and analyzing data have shown promise to improve regulatory oversight and empower individuals, but more evidence is needed to understand whether these promising approaches can protect at-risk consumers.

As providers increasingly offer a wider variety of products and services, digital credit has the potential to improve lives by reducing costs, accelerating the loan process, and enabling better information on prospective borrowers that may lead to more suitable and sustainable products. However, the effectiveness of many forms of digital credit remains unstudied, even while regulatory frameworks are lacking in many poor countries.

While the average consumer may experience mixed benefits from digital credit, there is clear evidence that vulnerable communities are most susceptible to fraud and exploitation. More consumer protection research is needed to inform the design of better products and to understand the regulatory structures that are most effective at protecting consumers.

Despite what remains unknown, there are reasons for optimism. Although predatory lending, fraud, and privacy infringement exist, the report documents that a growing number of digital credit interventions have shown a positive impact, including approaches to mitigating gender bias and reductions in default rates.

Supported by the Bill & Melinda Gates Foundation, the report primarily draws on evidence produced by CEGA’s Digital Credit Observatory (DCO) and IPA’s Consumer Protection Research Initiative (CPRI). Both initiatives support extensive research on digital credit and how to better protect consumers and support their financial health.