Financial (Dis-)Information and Disclosure: Experimental Evidence

from MexicoA

Xavier GinéWorld Bank

G20 Meeting, Moscow

Financial (Dis-)Information and Disclosure: Experimental Evidence

from MexicoA

Xavier GinéWorld Bank

G20 Meeting, Moscow

Motivation• Access to financial services is limited in

developing countries (Demirguc-Kunt and Klapper, 2012).

• Several explanations have emerged– Transactions costs, asymetries of information,

financial illiteracy

• Poor quality of the product – Evidence of repayment problems and hidden

charges in credit and savings products among low-income households in Mexico

– Savings: Hidden fees yield negative effective rate

– Credit: Many regulated and unregulated institutions, with large variation in total cost of credit.

Motivation• In 2009, new requirements for disclosure

formats and pricing transparency through modifications to the Law for Transparency and Regulation of Financial Services– Required that consumers be presented with

key financial terms.

• Yet, problems persist, and it is unclear whether these disclosure modifications are effective– Fung, Graham and Weil ‘s “Full Disclosure”

book

Example: Credit

CAT= 267% CAT= 107%

Example: Credit

Example: Savings

Example: Savings

Why aren’t financial products transparent?

• Financial products are inherently complicated– But then firms would have an incentive

to make simpler products or to provide information

– Is government intervention needed in this case?

• Firms purposefully make products more complicated to maximize profits– Firms make more money when pricing

is not transparent– In this case, firms will resist

transparency initiatives

What do we do?• Implement two studies to answer the

following questions:– What is the quality of information

provided to low-income customers interested in savings and credit products?

• Does information vary by the type of consumer?

• Are financial institutions complying with the new transparency rules? Are they offering the cheapest products that meet the customer needs?

– How effective are disclosure forms?

Study 1: Audit Study• Trained low income “shoppers”

interested in credit and savings products visit financial institutions to assess the (quantity and quality of) information provided by the staff

• Savings Scripts differed along:• Specific savings needs: 5000 Pesos (USD

385) in a Checking account or Fixed Term deposit.

• Credit Scripts differed along:• Over indebtedness: Asked for a loan

representing 20% or 70% of their household income.

Audit Study

• Both Scripts differed along:• Financial Literacy: Neophytes and

Experienced• Awareness of Competition: Among

experienced shoppers, half mention a previous high interest rate offer, the other half mentioned a low interest rate.

• Formal dress: Shoppers were encouraged to dress formally on alternate interactions with the lender.

Setup• Collaborative effort with CONDUSEF,

member of the National Council for Financial Inclusion

• 4 towns near DF, with population between 30,000 and 50,000 habitants, predominantly from the low-middle income socio-economic group.

• 26 FIs (regulated and not) have presence– Commercial Banks, Low income banks,

SOFOMS, SCAPS and SOFIPOS

Setup• Savings

– 4 professional auditors made 7 visits each to different institutions in each town for a total of 112 visits.

• Credit– 18 trained low-income individuals had 115

interactions and 215 visits (each interaction could have up to 4 visits).

• After each visit, auditor had to fill in a questionnaire, validated via audio recording.

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

17.3***

9.4

13.812.6

SAVINGS: Interview timeM

inu

tes

High Experience Low experience High over indebted

Low over indebted

Financial Literacy Profile Over indebtedness profile

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.034.7***

29.0

32.5***31.1

CREDIT: Interview timeM

inu

tes

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

82.0%

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

98.0%

100.0%

88.7%

94.4%

90.6%

92.6%

SAVINGS: Product offered aligned with needs

High Experience Low experience High over indebted

Low over indebted

Financial Literacy Profile Over indebtedness profile

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

1598.29 1670.46

2451.22***

841.27

CREDIT: Requested - Approved amount

Me

xic

an

Pe

so

s

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

8.6***

5.4

6.3***

7.7

SAVINGS: Number of information items (of 18)

Ite

ms

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1.5 1.5 1.51.5

SAVINGS: Legal requirements (out of 2)

Ite

ms

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.03.7

3.23.4 3.5

SAVINGS : Terms of account (out of 10)

Ite

ms

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2.3***

0.5

1.0***

1.8

SAVINGS: Fees and Commissions (out of 6)

Ite

ms

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

67%***

43%

54% 55%

SAVINGS: Pct of terms mentioned from actual product offered

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0%

1%

2%

3%

4%

5%

2.23%2.07%

3.87%***

0.71%

SAVINGS: GAT of actual product of-fered

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

1.38***

0.46

0.870.96

SAVINGS: Explanation of termsIt

em

s

High Experience Low experience Fix term account Checking accountFinancial Literacy Profile Term profile

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

1.061.11

1.26

0.91

SAVINGS: Total number of printed materials

Ite

ms

Summary of Results

• Staff tends to disinform potential clients, especially neophytes– Yet, experienced shoppers rate the staff

higher– In general, staff cannot explain key

terms such as GAT and CAT

• Misalignment of incentives between staff and potential client– Staff adjusts correctly loan size but

client typically ends up with more expensive credit and savings products

Conclusion and Caveats

• The study covers only one region of one country– Need replication to other contexts

• Disclosure and transparency policies are difficult to implement successfully because FIs have a strong incentive to undo them– They are insufficient for debiasing

customers