Behaivorally-informed approaches to disclosure: What works for - PowerPoint PPT Presentation

Behaivorally-informed approaches to disclosure: What works for consumers? Rafe Mazer Financial Education & Investor Behavior Conference Rio de Janeiro – December 8, 2015 1

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Behavioral economics matter in financial consumer protection because… • Financial products are particularly complex • Trust is key for products and financial sector overall • Certain business models exploit consumer biases • Economic consequences of financial mistakes particularly harmful for low-income consumers 4

Behavioral research matters more for BoP financial consumers • Scarcity and stress of low, informal income can impact decision-making • Social & economic barriers to formal finance & suitable products • Increased access via innovative channels and platforms • Lack of research and data on these consumers, providers, and markets 5

When thinking about pre-sale and choice of financial products and services, there are a number of critical elements to consider 1. Content of information 2. Timing of information delivery 3. How the choice and product is framed 4. Source of the information 5. Channel  This becomes even more complicated when transitioning from traditional, brick and mortar products to digital financial services 6

Disclosure Challenges for Consumer Credit & Savings Accounts in Mexico CAT= 107% CAT= 267%

Lab Experiment to Improve Savings and Credit Product Disclosure Low-income subjects from Mexico city and surroundings were invited to a session to test several savings and credit disclosure forms (treatments). Each session had 30 participants and lasted between 1.5 – 2 hours. Each session had 4 rounds, each with a different disclosure treatment. Participants were paid 200 Pesos (USD $16) to show up and could win 100 Pesos more depending on answers. Prior to the session, some participants received SMS and live calls about financial decision-making

Experiment Design Savings – Participants with a fictional endowment of 5000 Pesos had to choose the best savings product. – Participants were assigned to one of two usage profiles: • Profile 1: 2 inquiries and 2 withdrawals of 250 Pesos per month. • Profile 2: No monthly activity Credit – Participants had to choose the best 12 months, 10,000 Pesos loan product.

Treatments Tested  Each treatment presented 5 or 10 credit or savings products with information on different terms.  The terms of the products were simulated using distributions taken from the market and then they randomly assigned to participants.  None of the participants received the same combination of products  Participants could win additional money depending on answers.

GAT (Ganancia Anual Ganancias en un mes Ganancias en un Producto Institución Total)* sin ninguna actividad mes con actividad** A Batoamigo -0.02% $0.50 -$3.75 B Finamigo 1.79% $7.92 -$4.88 C Santander -0.68% -$1.00 -$1.00 D Banco Ahorro Famsa -0.08% -$0.17 -$0.25 E Financiera FinComun -0.63% -$0.42 -$12.88 * GAT (Ganancia Anual Total) es un porcentaje que representa el dinero obtenido de una inversión o ahorro durante un año, se obtiene de restarle al rendimiento generado las comisiones cobradas. ** Incluye dos consultas y dos retiros al mes de 250 pesos cada uno, sin ninguna penalidad por no mantener el saldo promedio mínimo mensual requerido.

Saldo Comisión por Comisión por Comisión por GAT Ganancias en Monto Comisión Comisión promedio no mantener consulta de retiro de efectivo Comisión Tasa de Ganancias en (Ganancia un mes sin Producto Institución mínimo de por por manejo mínimo el saldo saldo en cajeros en cajeros por interés un mes con Anual ninguna apertura apertura de cuenta mensual mínimo propios del propios del inactividad anual actividad** Total)* actividad requerido requerido banco banco Libertad A Servicios $100 $20 $9 $250 $45 $9 $1 $0 2.0% -0.61% -0.43% -0.48% Financieros Financiera B $650 $15 $7 $300 $40 $0 $8 $0 1.0% -1.01% -0.39% -0.43% FinComun Banco C Compartam $750 $20 $0 $950 $90 $0 $0 $0 1.5% 1.06% 0.11% 0.13% os D HSBC $200 $0 $0 $900 $55 $0 $0 $0 1.8% 1.77% 0.14% 0.15% Caja Popular E $400 $15 $2 $300 $65 $0 $3 $0 1.6% 0.78% -0.04% -0.04% Mexicana * GAT (Ganancia Anual Total) es un porcentaje que representa el dinero obtenido de una inversión o ahorro durante un año, se obtiene de restarle al rendimiento generado las comisiones cobradas ** Incluye dos consultas y dos retiros al mes de 250 pesos cada uno, sin ninguna penalidad por no mantener el saldo promedio mínimo mensual requerido. 5

Monto que Pagos Seguro de Producto Institución En Total Pagas recibes mensuales vida A Bancoppel $10,000 $1,224 Si 146.85% B Financiera a Emprender $10,000 $1,281 Si 153.76% C Banorte $10,000 $1,162 Si 139.49% D Financiera Ayudamos $9,173 $1,205 Si 144.60% E HSBC $10,000 $1,177 Si 141.22% F Caja Popular Mexicana $10,000 $1,191 Si 142.87% G Banamex $8,797 $1,075 Si 129.03% H Finamigo $10,000 $1,286 Si 154.27% I Libertad Servicios Financieros $8,878 $1,231 Si 147.67% J Financiera Independencia $10,000 $1,137 Si 136.50% *CAT (Coste Anual Total): Coste total del crédito expresado en porcentaje anual que incluye los costes y los gastos 27 totales del crédito a contratar y permite efectuar comparaciones entre diferentes ofertas de crédito.

Monto que Producto Institución Pagos mensuales Seguro de vida En Total Pagas recibes A Crédito Familiar $10,000 $1,150 Si $13,796 B Financiera Ayudamos $9,611 $1,045 Si $12,934 C Dimex $9,484 $1,075 Si $13,419 D Scotiabank $10,000 $1,306 Si $15,674 E Bancomer $9,602 $1,087 Si $13,445 *CAT (Costo Anual Total): Costo total del crédito expresado en porcentaje anual que incluye los costes y los gastos totales del crédito a contratar y permite efectuar comparaciones entre diferentes ofertas de crédito.

Fewer Options and Simpler Content Improves Consumer Choice Percentage of people that chose best product 80% 70% 67.3%*** 60.7%*** 60% 55.7%*** 50% 45.5%*** 42,1% 40,6% 38,7% 40% 36,9% 30% 20% 10% 0% Credit Savings Original leaflet 5 Simple 5 Complex 10 Simple

Summary of results Treatments improve decision making compared to the current leaflets. Positive impact of changing APR/APY to pesos. SMS / calls showed no effect. Financial education and educational level correlate positively with the ability to choose a cheaper product.

Mystery Shopping in Mexico Shows Why Disclosure Matters — but may not be sufficient “Experienced” Profile Points of information provided to “Inexperienced” Profile mystery shoppers during sales visits » Points of information 14.2 of 33 items 6.2 of 33 items provided to credit shoppers 9.8 of 22 items » Points of information provided 6.6 of 22 items to savings shoppers » Mean printed materials provided Savings .77 Credit .65 to shoppers » Percentage of all mystery shoppers receiving 30% any printed materials *Graphs independently scaled

Disclosure of prices and fees in mobile money Tariffs are widely published at agents, but often unavailable at the time of the transactions 20

How does digital delivery of credit change consumer behavior and risks? In a digital environment, do borrowers. . . … resist temptation better/worse with unexpected SMS offer? [take-up rate] … focus adequately on how they will repay? [ hyperbolic discounting ] … perceive turning down offer as a loss , or feel “honored” to receive an offer that is “pre - approved” (ref push marketing)? … respond to “framing” re the amount they qualify for, above or below the amount they would request if they had to ask? (ref automatic approvals of certain amounts) … “feel” loss/gain of digital money differently than cash? 21

How does digital delivery of credit change consumer behavior and risks? Initial evidence from CGAP experiments with digital lenders 1. Adjustments in framing of summary product costs made consumers more likely to review these terms, and reduce delinquency. 2. Timing of SMS and use behavioral “nudges” in repayment reminders can increase repayment rates. 3. Consumers more frequently opted into educational content for a digital savings/loan product when the loan component was emphasized. 22

Separating finance fees leads to better borrowing decisions Choose your repayment plan: Choose your repayment plan: 1.Repay 228 in 45 sec 1.Repay 200 + 28 in 45 sec vs. 2.Repay 236 in 1min and 30sec 2.Repay 200 + 36 in 1min and 30sec 3.Repay 244 in 2min and 25sec 3.Repay 200 + 44 in 2min and 25sec Clarifying interest rates led to a reduction in default rates on first loan cycles from 29.1% to 20%

Active choice approach increases viewing of T&Cs Kindly take a Welcome to Welcome to minute to view TOPCASH: Choose your TOPCASH: Terms and loan amount: Conditions of 1.Request a vs. 1.Request a taking out a loan 1.KES 200 loan loan: 2.About 2.KES 400 2.About 1. View Ts&Cs TOPCASH 3.Exit Loan TOPCASH 2. Proceed to 3. View T&C’s loan request Terms and Conditions viewing increased from 9.5% to 23.8% by making it an active choice