Over the weekend I read a Newscast about the growing threat from digital overnight lending companies. I’ve come across quite a few articles like this over the past few months, and it was yet another variation on a familiar theme. But as much as my instinct was to move on, something in the report got me thinking.
As regular readers of this column know, I am in favor of the use of digital technologies to democratize credit. I think we have the opportunity to take advantage of the platform architectures that we have built to allow those who are currently neglected by the financial system to access them. However, reports of ugly incidents in this space remind me that loans have always had a dark underbelly, and as we increasingly rely on online lending platforms to allow wider access to credit, we will only create more opportunities for this ugliness to manifest in the new ones. and more pernicious ways.
According to the aforementioned report, loans worth almost ₹300 crore has already been disbursed through a multitude of digital loan applications. These loans, the size of which varies from ₹5000 to ₹50,000, are aimed at users who need short-term liquidity and do not have the necessary credit history to access the formal banking sector. Digital lending applications use innovative algorithms and unconventional data sources to fill this gap. They make credit deductions that the traditional banking industry simply cannot, and on that basis offer loans to individuals who otherwise would have had no choice but to turn to unorganized lenders. for help. But the real reason these solutions matter is not because they offer credit to those in need, but because they offer those whose banking system doesn’t even recognize a clear path through which to enter. the country’s formal credit market.
Since most of these loans provide for rapid repayment in relatively short time cycles, annualized interest rates can be as high as 60-100%. For those who are able to repay their loans on these terms, the digital loan is an invaluable source of short-term funding. This is what they need to get through an unexpected bad period or to provide the money to grow their business.
Complete the necessary fields however not everyone can do what it takes to pay off loans under these circumstances. For these unfortunate people, the same digital features that deemed them worthy of a loan will quickly be turned against them to force them to repay. Stories abound of apps accessing the address books of failing people to send messages to their contacts, branding them as delinquents and using social shame to get them to comply. It’s tactics like this resulted in suicide of two unfortunate souls in Telangana, and which ultimately led the Indian authorities to take a closer look at digital lending in general.
Any country that seeks to rely on digital systems to expand access to formal credit must put in place appropriate frameworks to address these challenges. However, this is easier said than done. Most unethical digital lending companies go under the regulatory radar, operating such businesses without registering as non-bank financial corporations (NBFCs). Because they can take advantage of the national payments infrastructure and make loans so small that they fall below regularly monitored transaction thresholds, most of their activities go unnoticed. It is only when a client commits suicide or files a complaint, despite the public disgrace that this entails, that their activities come under scrutiny.
It is instructive to understand how these digital loan companies find suitable victims to target. While the vast majority of digital loan applications design their customer acquisition systems to focus on bulk SMS marketing campaigns, most of the more sophisticated applications deploy intelligent integrated marketing strategies to ensure that their ads appear when victims are most vulnerable – when they need to buy a ‘push’ to level up in a game they’re playing or buy a coveted digital asset. Since many online games are thinly veiled gaming applications, these strategies are extremely effective when used to algorithmically target loan announcements to players who are on a losing streak.
It is practices like this that need to be regulated. No one should be allowed to acquire customers when they are most vulnerable, and the ad engines that allow this type of targeting should be curtailed. If we can ban alcohol and cigarette advertising on TV because young children might be exposed to it, shouldn’t we take a similar approach to digital loan offers that target vulnerable people?
To be effective, regulation will need the cooperation of different branches of government. It will be up to the telecommunications department to use anti-spam regulations to prevent the marketing of unethical SMS loan products, and the Department of Electronics and Information Technology to consider how best. to regulate advertisements in applications for loans designed to take advantage of it. moments of weakness.
As important as regulation is, we also need to think about appropriate solutions that can be integrated into our new digital lending ecosystem. Since we’re building much of this from scratch, it’s not too late to build protections into its design. We need to make the most of this opportunity.
Rahul Matthan is a partner of Trilegal and also has a podcast under the name Ex Machina. His Twitter handle is @matthan
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