Automation makes for contact-free, frictionless digital credit. Consumers value the anonymity and impersonal nature of borrowing through digital channels. Insights from users of M-Shwari and M-Pawa show that consumers perceive that the use of a private, digital channel that does not require the consumer to interact with a human intermediary enables them to avoid harassment, corruption and social pressure.1
Automation shortcuts human intervention, adding speed and certainty – but also removing a key barrier to bad credit choices.2The risk here is that inappropriate credit products may be pushed on the client through apps and that the absence of a human intermediary or other source of friction can make bad outcomes more likely.
The recommendation of many researchers, taken up by several regulators, is to slow down the process of transacting digitally to allow consumers more time for deliberation. This might involve, for example, adding intermediate steps, a review screen, or a cooling-off period.3 Interposing delays and extra steps so as to improve digital credit outcomes has come to be known as “positive friction.”4 The aim is “to intentionally slow users and shift them out of automatic thinking to allow them to make more considered decisions that can help achieve positive consumer outcomes.”
Recommendation: Policymakers can encourage the use of positive friction in digital credit to support their consumer protection objectives. Possible ways to support positive friction through consumer protection policy measures include:
- Pricing transparency and disclosure rules that provide for an extra review of terms and conditions or comprehension tests to improve consumer understanding of their loan obligations.
- Cooling-off and withdrawal provisions that help consumers reflect on their product choices and gather more information.
- Increased protections for vulnerable populations, such as the ability to self-protect from using a digital credit product during periods of vulnerability or for undesired behaviors (e.g., gambling).
- Enhancing product suitability by requiring providers to seek additional information from customers about their personal and business activities, or their borrowing needs, during the loan application process.
Country examples of positive friction
Consumer credit directives require the right of withdrawal from distance contracts to be made available to the customer through a prominent, easy-to-find ‘withdrawal function’ on the FSP’s interface. It must be comprehensible, clearly labelled, and continuously available during the withdrawal period. If a borrower withdraws, they must receive a confirmation receipt without delay.1
During the cooling-off/look-up period, the borrower must be given an explicit option to exit the digital loan by paying the principal and proportionate APR without any penalty. Cooling-off periods are at least three days for loans repayable in 7 days or more, and one day for loans repayable in fewer than 7 days.1
An experiment found that reducing loan speed by doubling the delivery time from ten to twenty hours increased the likelihood of repayment (by nearly 6%) and decreased the likelihood of default (by 21%). Another experiment found that making it harder to skip through a screen detailing loan terms and conditions increased viewership of the T&C by more than 14%.1
