Digital financial services are growing globally, with a variety of offerings (more than 250) now serving 300 million people in developing markets according to the GSMA. However, inactivity rates are staggeringly high, with as many as two-thirds of registered digital financial services users inactive, and the cross-sale of products beyond simple person-to-person transfers in many markets is limited.

CGAP’s latest Focus Note, “Doing Digital Finance Right: The Case for Stronger Mitigation of Customer Risks,” reveals new evidence on customers’ perceptions and experiences with risks, and the ways these risks harm their trust, uptake, and use of the services. Ugandan consumers, for example, report that risks resulting from network and service unreliability deter them from using mobile money. Lapsed users – those who have been inactive for at least 90 days – in Tanzania say that they limit their use of digital financial services to emergency situations because recourse options are poor, and they fear making a transaction error they cannot resolve.

The Focus Note reviews current evidence on customer risks, including nationally representative quantitative surveys from the Financial Inclusion Insights (FII) studies and the Agent Network Accelerator (ANA) studies conducted by InterMedia and the Helix Institute, respectively, and funded by the Bill & Melinda Gates Foundation. It also draws on findings from four consumer protection-focused country case studies commissioned by CGAP (Bangladesh, Colombia, Philippines, and Uganda), analysis of FII qualitative findings and other available research on customer risks in DFS.

The report identified seven key risk areas for customers of digital financial services:

1. Inability to transact due to network/service downtime

This is the most commonly-cited risk area, with 59% of Ugandan and 52% of Kenyan users reporting experiencing service downtime. It can lead to risky customer behaviors such as leaving cash with an agent to conduct a transaction later when the network is back up. It also presents challenges if customers need money urgently and cannot cash-out until the network resumes.

2. Insufficient agent liquidity

This is the second most common risk-related area, and commonly prevents customers from transacting and accessing their money. In addition, when an agent lacks liquidity, customers are often forced to make several, separate transactions and pay higher total fees as a result. The Agent Network Accelerator studies find that 14% of daily transactions in Tanzania and 10% in Uganda are denied because agents lack the liquidity to complete the transaction. This problem particularly plagues bulk payment recipients (such as G2P recipients). Because recipients often receive their transfers all on the same day and want to cash-out immediately, agents struggle to meet liquidity demands. The recipients are often among the poorest in a country, and the extra fees and the delay in receiving their benefits can be extremely problematic.

3. Complex and confusing user interfaces

This issue frequently causes user errors, such as sending money to a wrong number, which are difficult to resolve and often result in financial loss. Difficulties with the menu also cause many customers to seek assistance conducting transactions, requiring them to share private information (such as their PIN) with an agent, family member or friend. This practice exposes customers to potential fraud by the person providing help.

4. Inadequate provider recourse

Complaints and dispute resolution options are often unclear. Furthermore, time, money, and airtime are lost as customers travel to customer care centers or wait on hold for call center staff, who may or may not be able to solve the problem.

5. Non-transparency of fees and other terms

This prevents customers from fully understanding the details of services and leaves them vulnerable to agent misconduct and price fraud. For example, a study of 500 users in Nairobi, Kenya, showed that 35% of them linked to a particular bill pay service thought the service was free, despite audits of their accounts showing a fee deduction each time they used the service.

6. Fraud perpetrated on customers

Customers can experience fraud at the hands of provider employees, who may gain access to accounts and use the private information for dishonest purposes, or external fraudsters who use social engineering scams such as phony promotions to obtain money or information from unsuspecting customers. Customers also experience fraud perpetrated by agents, including charging unauthorized fees, forcing customers to split transactions, or accessing private customer information.

7. Inadequate privacy and protection of customers’ personal data

Disclosure of data handling practices is often weak, with details available only on a website to which few consumers have access and in “legalese” which is difficult to understand. In addition, most consumers are unable to assess the current and future risks of clicking on the “agree” box for data-related terms and conditions. Stolen or compromised data may be used for identity fraud or criminal purposes, or could harm a customer’s credit profile.

Fortunately, providers of digital financial services are focusing more attention on these issues, and are beginning to incorporate solutions into their business models. The analysis for the report identified five priority areas for provider action, which will be discussed in subsequent blogs in this series.