Over the past decade and half, digital innovations have transformed the financial sector in Kenya, generating significant benefits for consumers and the economy. As a result of the digital transformation, customers - many of whom were financially excluded or underserved - can now borrow loans, pay bills, transfer money and access their bank statements easily using their computer or mobile phone. This so-called financial inclusion miracle has mainly been driven by mobile money; as such, many of these digital financial services are based on M-Pesa, the revolutionary mobile money service launched in 2007 by Safaricom.
However, the positive implications for increased financial inclusion and inclusive growth through the Digital Financial Space (DFS) are tempered by the potential risks to client protection. Evidence from research suggests that consumer welfare is compromised by lack of effective disclosure of prices and key terms, inadequate dispute resolution mechanisms, fraud and abusive practices.
As a result, there are growing concerns that as usage of DFS and related delivery channels become more widespread and complex, laws and regulations that have been put in place to protect consumers are becoming obsolete, exposing users to myriad of risks.
Since consumer protection for DFS is a dynamic issue for regulators and supervisors across the globe, the biggest challenge is how to strike a balance between how they interact with the industry they oversee while at the same time protecting the interests of the consumers who are served by that industry.
In the case of Kenya, the five financial sector regulators are forward-looking and cognizant of their role as economic enablers rather than just gatekeepers, and regularly engage with private-sector players as well as with each other under the Financial Sector Regulators Forum to develop a more pragmatic regulatory enabling environment.
Despite the ongoing discussion and debate about which aspects of consumer protection can be best addressed by industry-led actions, versus requiring regulations, the upsurge in the number of cases of fraud, loss of customer funds, lack of transparency regarding applicable fees and costs as well as indebtedness and abuse by unscrupulous digital lenders continues to underscore the need for effective financial consumer protection for DFS.
It is therefore safe to state that while Kenya has succeeded in harnessing the potential of digital technologies to significantly enhance financial inclusion and spur economic growth, the need for effective financial consumer protection in the digital space is now more important than ever.
This is because good consumer protection practices protect the interests of consumers, creating trust in using digital financial services, while preserving the commercial incentive to provide these services at scale.
Moreover, robust consumer protection in digital financial services is necessary to ensure that financial markets are deep and serve the broad market, providing access to financial services for low-income households, while ensuring long-term stability in the sector. To help address these consumer protection challenges related to the use of DFS, the International Telecommunications Union Focus Group on Digital Financial Services developed five consumer protection themes for digital financial services. These are: provision of information (disclosure) and transparency; dispute resolution; prevention of fraud; data protection and privacy; and protection of funds.
Taken together, they provide the building blocks for a robust digital financial consumer protection regime for any jurisdiction. Accordingly, the consumer protection policies and approaches for DFS developed and adopted by Kenya’s financial sector regulators and consumer protection agencies should evolve and adapt in line with these five themes/principles.
Moving forward, there’s need to institutionalise and entrench these principles via a deliberate legal, regulatory and policy framework in order to counterbalance the inherent disadvantage of financial service consumers vis-à-vis the power, information, and resources of their providers.
In this regard, policy makers should ensure that such a comprehensive financial consumer protection regime is designed in such a manner that ensures fairness, transparency and recourse rights and has effective enforcement mechanisms including dispute resolution to ensure that such rights are protected.
Martin Mulwa and Peter Mwencha, Centre for International Trade, Economics and Environment, Nairobi.