Innovations in technology and finance in the last few decades have resulted in the rise of digital financial services (DFS). Through scale efficiencies, lower transaction costs and increase in speed, DFS offers pathways to serve people excluded from traditional financial systems. Evidence from Randomized Controlled Trials hints at the potential of DFS as an instrument for advancing financial inclusion (J-PAL, 2024; Pazarbasioglu et al., 2020). It appears prospective borrowers could also stand to benefit from the promises of digital credit. The data-intensive nature of DFS can decrease information asymmetry between lenders and borrowers (Suri et al., 2021), reduce credit-decisioning time (Chappel et al., 2018) and lower transaction costs (J-PAL, 2018) in some cases. Further certain studies point evidence that digital lending improves subjective welfare (Björkegren et al., 2022), reduces volatility (Dalton et al., 2019) and increases resilience (Suri et al., 2021).
Yet, customers exhibit perceptible hesitation in engaging with DFS, at least initially. On the one hand, despite stated benefits and convenience, there is a general preference to physically visit banks or shops (Home Credit, 2023) or approach other familiar sources to obtain loans over digital platforms. A key reason for this appears to be the lack of trust in digital lending (Sawhney et al., 2022). A similar lack of trust has been observed to be a key impediment to adoption of various other digital financial services (Jünger & Mietzner, 2020; Chawla & Joshi, 2019; Alalwan et al., 2017; Gao & Waechter, 2017; Filipiak, 2016).
On the other hand, is the problem of misplaced trust, where customers end up placing trust in fraudulent actors, resulting in misuse of their personal data, imposition of high fees without disbursement, usurious interest rates and harassment through aggressive recovery practices (Microsave, 2024; Tiwari, 2023). As per the report of Digital Lending Working Group, nearly 54% of the lending apps available in 2021 were illegal. Despite efforts to remove these from app stores, such apps continue to survive through alternate channels (Microsave, 2024). The lack of trust in digital lending as noted above is partially caused by the presence of fraudulent actors in the space (Venkatesan & Totolo, 2023). These bad actors, thus, end up jeopardizing the reputation of responsible players as well.
To harness the potential benefits of digital lending while safeguarding borrowers, it is crucial to understand how borrowers come to trust and contract with a digital lender. In early 2024 we commenced a study of DFS borrowers to understand how they gauge trustworthiness. By studying people’s instinctive, unguided ‘trust-decisions’, we hope to uncover their mental models of trust. More specifically, we aim to (i) articulate the expectations that customers have of trustworthy lenders, (ii) help lenders design their products in a manner consistent with the customer’s expectations, and (iii) translate these principle-level expectations into processes that lenders may adopt in their customer service to become trustworthy. This note speaks to the first objective noted here.
The full paper is available here.
