Digital Credit Observatory (DCO)
In the new era of digitization, the rapid proliferation of digital banking solutions will have important impacts on global financial inclusion. Hundreds of millions of people can now save, borrow, and make payments directly through their mobile phones rather than through a brick-and-mortar financial institution. Due to the large number of unbanked individuals with access to mobile phone networks, digital credit has the potential to dramatically change usage patterns and scale well beyond traditional channels of credit in developing countries, including microcredit. Accordingly, there is much to learn about the potential impacts - both positive and negative- of this burgeoning product category on the poor.
The unbanked and under-banked often lack traditional collateral and the formal records needed for traditional credit scores, creating a large potential market for lending (and borrowing). Digital credit providers often circumvent this information gap by leveraging alternative sources of data. The rapid growth of digital credit also raises important questions about consumer protection. As digital credit products have proliferated, so too have reports of predatory behaviors by some lenders. In unregulated or loosely regulated markets, the use of digital credit may pose serious risks to consumers, including over-indebtedness, manipulation, identity theft, accidental leakages, and fraud.
A knowledge gap exists in understanding how these digital credit products alleviate (or entrench) poverty. Given the proliferation of digital credit models in low-income environments, a rigorous evidence base is needed to better understand this sector at scale.
The DCO aims to address this knowledge gap. Managed by the Center for Effective Global Action, a leading global development impact research center based at the University of California, Berkeley, the DCO functions as an applied research network charged with answering key questions related to the impacts—both positive and negative—of digital credit products in emerging markets, as well as the effectiveness of promising approaches to maximizing benefits while minimizing risks to low-income consumers. The DCO will rigorously examine and develop an evidence base on the delivery, impact, and regulation of digital credit. The evidence generated through the DCO will compliment work by other research centers to inform advocacy and decision-making in this space.
The primary function of the DCO is to fund a coordinated set of studies that explore the effectiveness and welfare impacts of digital credit products and consumer protection mechanisms through qualitative pilot work, randomized trials, survey data collection, and advanced data analytics.
Strategic goals include:
- Create a strong network of private sector, research and policy partners in the digital credit arena
- Generate a coordinated portolio of studies on the impacts of digital credit and optimal consumer protection mechanisms
- Arm policymakers with a set of proven indicators and actionabale insights needed to engage in evidence-based decision making and policy creation
The DCO will fund a coordinated set of research studies that are directly relevant to the work of policymakers and practitioners in the digital credit sector.
The primary function of the DCO is to fund a suite of closely coordinated research studies, carried out by CEGA affiliates and their collaborators and in cooperation with a range of policy, regulatory, and industry partners in developing countries. The majority of funded studies will be full-scale, rigorous impact evaluations, and the remainder will be early-stage pilot projects. Importantly, studies will use standardized survey modules to collect data on a range of financial health and development outcomes, allowing the DCO to generate insights that are highly robust and generalizable.See more