Financial (Dis-)Information and Disclosure: Experimental Evidence from Mexico Xavier Giné World 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. Hidden fees in savings may be one reason why individuals are suspicious of savings products. Stories that savings were depleted by fees abound. Minimum balance penalties tend to consume all their savings. As a result, individuals prefer to save at home or using ROSCAs (“tandas” in Mexico). Easier to save in banks that are targeted to attend this population.

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 Aspects taken into account: Minimum balance requirements, waiting time in the institution, interest rate, benefits. Pay more attention to brochures that are simpler (but with lower information content) Never read the contract and when they do they don’t understand it. The main changes relevant for the slides/our study are: Articulo 7: Difusion de comisiones en Sucursales y Establecimientos. This requires financial entities to place information on CAT, concept, and term of commissions in their branches, and gives CONDUSEF the role of specifying standardized ways in which the information is presented to clients. Articulo 11: Contratos de adhesiones. Amongst other aspects, specifies certain content of the "caratula", including Comisiones, tasas de interes, CAT y monta a pagar en case de creditos, prestamos y financiamientos; advertencias en materia de tasas y comisiones; conceptos de cobro y sus montos; entre otras." Articulor 13: Estados de cuenta y comprobantes de operacion. Similar to 11, but related to accounts. Articulo 15: Difusion del CAT (costo anual total). this requires the CAT to be used and posted for all credit transactions and loans. Articulo 18 Bis 2: Aplicacion de tasas a creditos. Requires that only one maximum normal and penalty interest rate be applied to credit products.

Example: Credit

Example: Credit CAT= 107% CAT= 267%

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 CONDUSEF is a public institution part of the Ministry of Finance (Secretary of Finance and Public Credit) established in the 1999 Law for the Protection and Defense of Financial Consumers. Commercial banks: Scotiabanks, HSBC, Banorte, Banamex, etc. Low income banks: These are commercial banks that target low income households. They include Banco Ahorro Famsa, Bancoppel, Compartamos Banco, Banco Walmart and Banco Azteca. All but Banco Compartamos are all located inside “department stores”. SOFOM (Sociedades Financieras de Objeto Multiple) They cannot collect deposits but offer standard credit products, including factoring. SCAP (Sociedades Cooperativas de Ahorro y Préstamo) Una SCAP se constituye con un mínimo de 25 socios y tiene por objeto realizar actividades de ahorro y préstamo. Las SCAP se reconocen como parte del sector social de la economía así como intermediarios financieros sin fines de lucro. SOFIPOS (Sociedades Financieras Populares) Son instituciones de microfinanzas constituidas como sociedades anónimas de capital variable. Se encargan de proporcionar servicios financieros a los sectores y comunidades que carecen de ellos, ajustados a las características del mercado y al riesgo que presentan, para responder a la demanda de la población de escasos recursos excluidos del sector financiero. Credit shoppers visited 24 institutions. Savings shoppers visited 19 institutions.

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.

Added over up to 3 visits.

Legal requirements includes: officer requested (1) IFE (2) Address certificate.

Terms of account includes Terms of account includes. (1) customer needs to be member-client to open account (2) minimum amount to open account (3) minimum balance required (4) available maturities (5) debit card (6) interest rate (7) fixed/variable interest rate (8) GAT (9) IPAB (10) IDE.

Avoidable fees and commissions includes: (1) fee if minimum balance not maintained (2) inactivity fee (3) before deadline withdrawal fee (4) withdrawal commission (5) balance consult commission (6) debit card reposition fee. Unavoidable fees and commissions include: (1) opening fee (2) management fee.

Legal requirements: 65% across the board, terms of account 50% across the board (GAT never mentioned)

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 Staff offers what’s in their best interest. The idea is that the most adequate products for the consumers are not aligned with commercial interests of banks. IDEA on caratula: Grade in Restaurants in LA / info led to increases in quality.

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