Compliance and regulation concept. Enforcement of laws, regulations, and standards, requirements, internal policies and procedures. Minimize legal and financial risks, protect corporate reputation.

How Regulation mitigates risks and how they fit in the Collaborative DFS Regulatory framework

Author: Greyford C Mwase

Project Lead at Payments Association of Zambia

It goes without a shred of doubt that collaboration serves as a tool for driving financial inclusion globally, and multisectoral initiatives bridge the chasm in underserved areas. This is not void of risks, this is why regulation exists to play a significant role in mitigating risks in various industries, including the financial sector, in the context of Collaborative Digital Financial Services (DFS) and its regulatory framework, several aspects contribute to risk mitigation including the following:

A. Risk Management Requirements

Collaborative DFS providers can enhance their ability to identify and mitigate potential risks by complying with standards including identification and assessment of risks such as operational, cybersecurity, and credit risks. The regulation requires financial institutions to put in place resilient practices as far as risk management is concerned.

B. Compliance Standards

Regulations establish the standards of compliance to which financial institutions must adhere, and the standards often include guidelines for risk management practices, data security, customer protection, and operational procedures. This fits in the collaborative DFS regulatory framework in that although regulation is not the starting point of collaboration, it is foundational in providing controls, best practices, and general Jurisprudence of DFS collaboration.

C. Consumer Protection

Regulatory frameworks often include measures to protect consumers. This may involve setting clear guidelines on disclosure of terms and conditions, ensuring fair and transparent pricing, and safeguarding customer data. This protection helps build trust in collaborative DFS platforms and reduce the risk of harm to consumers.

These, and more, guarantee foresight and oversight in safeguarding the complex nature of DFS collaborations.

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The role of consumer protection in the digital economy part 2

Source: UNCDF

Part 2. Challenges and Opportunities of the Digital Economy

The rise of the digital economy has raised unique consumer protection issues and opportunities. The availability of e-commerce and other digital transactions offers consumers a wider range of choices in potentially global markets. With more choices at their fingertips, in theory consumers can more easily and efficiently compare prices and terms, enhancing their bargaining power. While these factors may alleviate some traditional concerns of consumer protection, they exacerbate others and raise new ones.

For example, in online purchases, consumers may have limited knowledge about the provider, including where it is located, its reputation for quality or fairness, its responsiveness to complaints or even whether it is who it purports to be. They may not have an opportunity to inspect products to ensure they are safe, effective and high-quality. This can create significant information asymmetries between the providers and the consumers making online purchases.

Moreover, the nature of digital payments and collection of personal data also raises new issues about data security, the potential for fraud and violations of privacy. Recent research shows that 17% of online shoppers who abandon their online cart prior to completing their purchase cited a lack of trust in providing payment information to the provider. Providers can attempt to mitigate this distrust by assuring consumers through the use of measures such as recognized security certifications or trust badges and partnerships with reputable online payment system providers. However, these measures may require significant investments that some smaller providers cannot afford.

How consumer protection supports the digital economy

In order for a digital economy to flourish, consumers need to have trust in the integrity and fairness of digital markets. Effective consumer protection laws and procedures can engender such trust, giving consumers the confidence to engage and transact. These aim to address the asymmetries, consumer irrationalities and other barriers to optimal consumer choice. They typically involve the application of rules, principles and procedures to impose obligations of fairness, accountability and transparency (sometimes referred to as FAT) on providers and grant consumers certain rights consistent with these values. While approaches vary across jurisdictions, a cluster of six core principles particularly applicable to the digital economy can be distilled.

Fair practices

Consumers may be vulnerable to deception where online transactions do not allow the opportunity to properly evaluate goods, services or the provider before making the purchase. For example, a consumer purchasing clothing online will not be able to verify the quality of the fabric or the fit or assess whether the branding is authentic. Online product reviews by other consumers are a potential means of increasing pre-purchase transparency. A 2016 study showed that 82% of adults read such reviews before making an online purchase. However, such reviews may not be reliable and fraudulent reviews are becoming increasingly prevalent, for example with businesses artificially increasing their ratings or artificially lowering competitors’ ratings through fake reviews.

Consumer protection frameworks typically require providers to adopt fair business practices through the entire lifecycle of consumer transactions, from promotional and advertising materials through the terms and conditions attached to a purchase. This includes prohibiting any deceptive, fraudulent or unfair representations and ensuring that products are genuine, the quality is accurately depicted, pricing is clear and not presented in a misleading manner, any online reviews or endorsements are authentic, and the provider accurately discloses its identity and qualifications.