The past few years have shown the unprecedented rise and fall of financial technology around the world. This includes the financial innovations revolving around digital payments, products, peer-to-peer lending, and marketplace lending system.
Most Financial Technology companies delivering financial services are progressively making a major shift in building the walls of the financial and banking system—from client-centric solution programs to providing digital credit options made accessible for underserved and underbanked consumers.
Amidst the rise, this has led the regulators and investors to face a vast number of challenges in finding ways to distinguish the responsible lenders from the predatory ones.
So, how can the regulators determine and monitor these FinTech operators? And how can you as an employer pick the right financial service provider to support your employees’ emergency needs?
By Definition: Predatory Lending versus Inclusive Lending
Predatory Lending is a lending practice that induces any abusive charges and loan terms on borrowers. This forces the borrower to accept unfair terms through deceptive, illegal, and coercive actions that the borrower doesn’t need or cannot afford. On the other hand, Inclusive Lending provides reasonable access to acceptable global standards, transparent, and responsible lending practices.
Last year, the Philippines has faced fraudulent and illegal online lending behavior that forced FinTech companies to take strict measures in setting the standards for responsible lending practices. This has become an ongoing effort to address the continuous problem of the financial ecosystem following the regulation set by the Security and Exchange Commission and other regulatory boards in.
Based on the survey conducted by Bangko Sentral ng Pilipinas (BSP) in 2015, only 12% of Filipino adults borrow money from lending or financial companies, higher than the percentage of adults who borrow money from a bank source at 4.4%. Those who borrow greatly resort to informal sources; 61% of them borrow money from family and friends, and 10% borrow from informal lenders.
BSP launched the “Economic and Financial Learning Program”, a flagship initiative to further improve Financial Literacy in the Philippines by educating students, working adults, and especially those unbanked people.
5 Areas to Consider in Regulating and Investing in Financially Inclusive Companies
Breaking through the cycle, there are five (5) areas to consider how to regulate and invest in FinTech companies to further Financial Inclusion, according to Medium.
The goal of regulation is to ensure transparency, fairness, and protection for consumers. There are areas where the market still fails in choosing a financially inclusive FinTech company and this is where the regulation comes in to protect the consumers.
1. Accurate Marketing and Accounting. Some lenders execute deceptive and unscrupulous actions by relying on hidden charges and complex schemes to hide the true cost of borrowing. Regulators should put strict rules on this. Make sure the product terms and customer experience are clear and accurate during the entire customer lifecycle journey to avoid unethical lending behavior.
2. Privacy and Security. Most informal and predatory lenders hide their true agenda in managing the borrower’s personal data to benefit them. One example of this is illegally selling borrowers’ data to third parties.
3. Equal Treatment. Demonstrating unfair and discriminating treatment to borrowers like asking borrowers with lower income with zip codes for additional information or excluding people of color and ethnicity to acquire affordable loans.
4. Fair Evaluation on the Borrower’s Ability to Afford a Debt. Ensure that lenders or FinTech companies deliver fair evaluation to assess the borrower’s credit and ability to take on debt. Some lenders devalue the importance of credit evaluation and choose to compensate for the higher rate which leaves the borrowers unable to pay back and improve their credit score.
5. Formal Complaint Processes. Regulate each FinTech company to implement a formal and documented process of review and how to properly address the complaints of borrowers in a timely and accurate manner. In this way, borrowers can provide visibility to predatory practices and hold each lender accountable to fix any problems.
The number of FinTech startups improving the financial health of underserved and unbanked consumers has increased. However, this has not resolved their overwhelming loan charges with higher interest rates than traditional bank charges to unbanked consumers in which they have to put higher interest rates to compensate.
Identifying these responsible financial service providers can be a difficult task. If you need additional support, Uploan can help you. Guided by the right regulation and investment policies, we make sure to implement the right process to responsibly address our borrower’s financial needs.