EASY LOANS, EASY PREYS: Regulators need to swim faster than online loan sharks

The growth of online lending apps point to the need for financial literacy and a new approach to regulation.

By Aileen Macalintal

Philippine Center for Investigative Journalism

Last of Two Parts

It’s so easy to get microloans.

Chel, 36, took out a loan from an online lending app (OLA) for P3,500 with an advertised repayment period of 120 days. Instead, she received P1,300 to be paid in seven days, with interest.

The OLA then demanded payment of P3,500, almost three times the loan proceeds, in less than a week. Chel said she didn’t see these obligations in the loan terms.

On the fifth and sixth days, she received texts reminding her of the due date. If she didn’t pay, she would be “posted,” a term used by OLAs referring to social media shaming.

Out of fear, Chel paid in full. But the OLA offered another loan, this time for P5,500. She didn’t take the bait.

Chel said she had in fact turned down an offer of P15,000 because she knew she couldn’t pay it back, certainly not in seven days as her family was hardly making both ends meet.

Chel, who was unemployed, was able to take out a loan even without proof of income. Her only valid ID was from the Philippine Health Insurance Corp.

Victorio Dimagiba, president of advocacy group Laban Konsyumer, thinks the rollout of digital financial services in the Philippines happened too quickly.

“In the Philippines, we went to digital financial products and services very quickly without going to the basics: financial literacy education,” the former trade undersecretary said.

“Consumers in countries such as ours are at greater risk because we don’t have the foundation to understand what digital financial services are. A lot of companies went to this without informing consumers of their rights and responsibilities,” Dimagiba said.

Complaints flood SEC

As of Nov. 2, 2021, there were 101 registered financing and lending companies, according to the Securities and Exchange Commission (SEC).

The SEC has been “backtracking” to understand OLA-related data, said Rachel Esther Gumtang-Remalante, director of the SEC corporate governance and finance department, in an interview.

At the time of the interview, the SEC could not provide the Philippine Center for Investigative Journalism (PCIJ) with historical data on OLA complaints.

To be fair to responsible lending or financing companies, the commission also validates complaints, said Gumtang-Remalante.

The SEC official agreed that the growth of OLAs had left lenders’ debt collection practices unchecked.

“Technology provided access to credit,” she said.

Moreover, OLAs allowed people to borrow money without understanding loan terms, she said.

Gumtang-Remalante said the SEC teamed up with Google Play, an app store for smartphones running on the Android operating system, in 2019 to tighten regulation.

However, complaints kept coming. Google Play began kicking out OLAs, and in April 2022, the tech giant finally decided to be strict on the approval of lending apps in the store.

Location map not required

One way to find where the loan sharks could be hiding is to check the OLA’s location.

But location maps were no longer required in forming a legal credit company in the Philippines beginning Sept. 9, 2016.

This was in compliance with then President Rodrigo Duterte’s directive to streamline requirements and processing time for more efficient public service and less “public inconvenience.”

Asked about the removal of certain requirements for SEC registration, particularly the map requirement, Gumtang-Remalante said, “We’ll see… that’s a good starting decision.”

The commission does not tolerate fly-by-night companies that legitimize their illegal actions through SEC registration, she stressed.

The SEC said it penalizes erring lenders, based on formal complaints.

SunCash, registered as SunCash Lending Investors, an app notorious for its collection practices, is one of them.

Four Chinese nationals own 99.5% of the foreign equity in SunCash Lending Investors, according to the company’s general information sheet filed with the SEC.

In February 2022, the SEC ordered SunCash to pay a penalty of P50,000 for unfair debt collection practices. A borrower had complained that SunCash threatened her contacts that they would be labelled on social media as scammers.

SunCash also allegedly used insults and profane language and engaged in false representation or deceptive means to collect debt. It even got access to the victim’s list of contacts without her consent.

This was the company’s second violation. The first was in January 2022; it paid P75,000.

Moving forward, the SEC said it would require credit companies to submit a “clear business plan for product offerings.”

Gumtang-Remalante said the SEC was also drafting an agreement with the National Bureau of Investigation, the law enforcement agency that takes charge of white-collar crimes.

Amid the increasing number of OLA victims, the Bangko Sentral ng Pilipinas (BSP) in March 2022 capped interest charges on loans. But this is only for amounts of P10,000 and below.

Financial literacy, regulation

For advocates, one solution is long-term: financial literacy.

Gilberto Llanto, former president of Philippine Institute for Development Studies, the state think tank, said the BSP should coordinate with the Department of Education to include financial literacy in the school curriculum.

The high school curriculum should at least offer economics and finance courses, with updated learning materials on e-commerce, e-money, and e-finance.

“Economics and finance are not easy subjects. Mahirap ito. You really have to talk about the financial system, the financial markets, different products in the financial system. So you really need to develop understanding and proficiency. A very large segment of the population is possibly not educated and not well-educated. Let’s reform and strengthen primary and secondary education,” Llanto said.

“Unfortunately those who access microcredits are from Classes C and D. Kung sino pa ang hindi masyadong literate financially, sila ang nangangailangan ng pera (Those who are in need of money are the ones who are not financially literate),” said Llanto.

Victorio Dimagiba’s Laban Konsyumer is part of a working group on financial literacy headed by the BSP. It is also working with other consumer groups in the Association of Southeast Asian Nations.

“We are developing a training module for consumers across all sectors, ABCDE…especially D and E classes, on rights and responsibilities of digital financial products and services,” he said.

The former trade official cited Thailand, Indonesia, and Malaysia as good examples of policing fintechs; in Singapore, OLAs do not proliferate, he said.

“That’s what the country lacks at the moment: simplified, well-documented, easily understood, transparent lending/financing documents, financial literacy programs, and consumer education,” Dimagiba said.

Seldom do people read the fine print, for instance, so the working groups will advocate for bigger fonts and the use of icons, he said.

“It’s back to basics for consumers, to alert them of what they will be going through,” Dimagiba said.

The program will develop financial literacy modules in up to six local languages.

Since the SEC head is also the chair of the Credit Information Corp. (CIC), the two agencies have been working on financial literacy efforts. Their activities include webinars on credit scoring and consumer debt.

Third globalization

But consumer education is just one side of the coin. The ecosystem is prone to abuses.

“Digital technology is an enabler. Too many good things also enable many bad policies. It is brought about by the platform economy. Some people call it ‘the third globalization’ – cloud computing, big data, and algorithmic decision-making,” said Llanto.

Given the growth of online lending, data privacy boundaries must be set, he said.

“That’s the difficulty. You cannot monitor. Regulators are unable to monitor how the online lenders are using your personal information. There are issues now on who owns the data.

Everyone’s data is being aggregated, processed, re-processed, re-imagined, and re-stored somewhere in the cloud,” he said.

Llanto called for institution-based regulation, which entails more coordination between different regulatory agencies.

“Traditionally, you regulate institutions. But what we see now is activity-based regulation; regulation of different activities performed by different institutions,” he said.  “Regulators need to talk to each other.”

As of this writing, victims still exchange stories and advice among themselves in public and private Facebook groups. Most comments showed that they don’t know which authorities to turn to.

They don’t know which government agencies can and should be protecting them. While victims overseas turn to charities and community centers for help, Filipinos go to what’s accessible to them – the freedom of information portal and social media – out of despair.

To stop online lending platforms from ruining the lives of people, regulators need to swim faster than the sharks. END

Illustration by Joseph Luigi Almuena