Aggressive competition for short-term profits may encourage digital lenders to grow their businesses by means of deceptive marketing and sales practices. As a result, information presented in advertising may be incomplete, inaccurate, or misleading. Digital credit typically targets underserved consumers who face the greatest digital and financial literacy challenges and suffer the most from deceptive marketing (which often translates into low loan repayment rates).1
Recommendation: One regulatory approach to marketing is to restrict sales practices that misrepresent costs and benefits. Another is to require push campaigns to include explicit warnings on the risks of short-term, high-cost credit, and information on alternatives to such loans. In addition, regulation can set parameters for “choice architecture.” This refers to the way in which the presentation of consumer choices “nudges” recipients toward certain options rather than others (e.g., through placement, sequence, wording, font, graphics, or defaults). Thus, regulation could require loan options to be presented in an accurate, neutral way. This might mean, for example, banning default selections likely to disadvantage the borrower, such as pre-selection of the maximum loan size and requiring the recipient to opt out in order to change it.
The ability of providers to reach out through the internet and mobile phone networks has encouraged promotion through push marketing.2 Potential customers receive unsolicited credit offers. Many such offers highlight only the potential benefits of digital loans while hiding risks, or making unrealistic offers with hidden conditions. These offers may be designed to exploit behavioral biases of target audiences. For example, they may aim to trigger impulse borrowing by marketing on weekend evenings when people are most susceptible, or to encourage borrowing of the maximum amount possible by trivializing risk and exaggerating potential, often unrealistic, benefits. Regulations have treated this kind of marketing as false advertising, mis-selling, or up-selling.
Country Examples
Short-term credit providers in Armenia must add legislated warnings to their disclosure material, warning customers about the high cost of the credit and encouraging them to shop around and assess their ability to repay.
The Monetary Authority requires providers to ensure that all advertising and promotional materials are fair and reasonable and do not contain misleading information. FSPs engaging with third parties on marketing activities are responsible for ensuring that all advertising and promotional materials published or shared by the third parties are fair, reasonable and not misleading.
The Bank of Lithuania requires that advertisements not show benefits unless potential risks are equally visible.
The Bank of Portugal encourages providers engaged in sales of retail banking products and services via digital channels to “evaluate the use of graphic elements such as font size, color, icons and images in all information media, including on the screens of the marketing platform and in advertising, ensuring that those elements are not likely to affect the readability, understanding, and prominence of information.”1
