Increase in digital lending use a warning sign

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ACCORDING to a report released last week by a consumer credit agency, the use of digital loan apps by Filipinos will increase significantly by 2022. This is certainly good news for the digital lending industry, but for everyone else it should be viewed with great concern.

Online money loans are companies that offer small money loans with very minimal requirements, handling the entire application and approval process through a smartphone app or in some cases via SMS. Their offer is attractive because of its easy accessibility; the requirements are usually just a valid ID and a working cell phone number, approvals are issued in minutes, and they offer incentives in the form of eligibility for higher loan amounts for borrowers who pay back their loans on time.

There are believed to be about two dozen digital lenders operating in the Philippines; the number is a bit insecure, which is a problem in itself. The recent study focused on just 10, which are properly licensed and have applications available for download from Google Play and the Apple Store.

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The instant relief of money that a digital lender can provide to a customer in desperate need comes at an extremely high cost, even under the best of circumstances. New borrowers, who are generally limited to P1,000 loans, can expect a repayment period of just seven to 14 days, at interest rates between 21 and 48 percent — rates that are actually worse than the illegal “5-6” informal lenders. For larger loans with longer repayment periods, available to customers with a good repayment record, interest rates average around 27.4 percent, with some lenders charging as high as 65 percent.

Determining what the interest rates of online loans are is actually quite tricky; unlike banks and other more formal lenders, most digital lenders blatantly circumvent regulations requiring the clear disclosure of interest rates.

In addition to high fees, many digital loan borrowers have fallen victim to predatory and abusive collection practices. An in-depth investigation by the Philippine Center for Investigative Journalism (PCIJ) last year revealed some of these in graphic detail: cases of customers falling behind on their loan payments and subjected to severe harassment, including the lenders harvesting their phone contact details and contacting their friends, family and colleagues, and in some shocking cases even death threats or threats of other bodily harm.

These practices are, of course, highly illegal and the agency most responsible for combating them is the National Privacy Commission (NPC). To its credit, the NPC has been aggressive in pursuing abusive digital lenders, but admitted in the PCIJ story that it is fighting a losing battle; the agency simply does not have the manpower or resources to respond quickly enough to all consumer complaints, and is further hampered by slow litigation.

What the government can do

To protect the public, we believe there are four steps the government should take. First, if there was ever an issue on which Congress could productively use its penchant for conducting a “study for legislative purposes,” it would be that. The proliferation of digital lending appears to be facilitated by gaps in existing laws and regulations; whether this is due to poor enforcement or a lack of applicable laws needs urgent investigation.

Second, the banking industry needs to be more proactive in offering alternatives to the large small consumer loan market that it is currently clearly ignoring. It’s understandably a risky business segment from the banks’ point of view, but on the other hand, it’s one that’s clearly in high demand.

Third, the NPC should be given the resources it needs to better carry out its consumer protection mandate.

And finally, consumer education needs to be improved. It seems pretty clear that many borrowers just “don’t know what they’re getting into” when looking for an online loan. If consumers are well informed about the true cost of digital loans, their rights to information from lenders, and the complaint or dispute resolution services available to them, they can make better choices and avoid ending up in an even more dire situation.

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