Financial Capabilities in Mexico Results from the 2012 National Survey on Financial Behaviors, Attitudes and Knowledge G20-World Bank-OECD Conference on Financial Capabilities and Consumer Protection Moscow, June 13, 2013 Rekha Reddy Senior Economist Finance and Private Sector Development Group, Latin America Region The World Bank

2 The access and usage of a portfolio of financial products and services for the population, under an appropriate regulatory framework that protects the interests of users and promotes its financial capabilities. Working definition of Financial Inclusion Quality Adequacy of financial inclusion Usage Better Opportunities Access Higher number of people included in the financial system Financial Inclusion Curve Increase in financial penetration Branches (Banks & MFIs) ATMs POS (debit & credit card) Branchless banking Savings, transactions, credit, insurance, pensions, remittances. Appropriateness of products & services Consumer empowerment Enabling environment Financial education Consumer protection Financial inclusion / financial education measurements (supply and demand-side data) Financial Capabilities Relevance to Mexico’s Financial Inclusion Strategy

3 Context of 2012 Mexico Survey Key Challenges in Financial Capabilities Policy Implications Outline

Financial Capabilities Relevance to Mexico’s Financial Inclusion Measurement Efforts Dimension Measurement instruments Regulatory reports (Supply-side data) GIS for Financial Infraestructure Demand-side surveys (ENIF2012) Qualitative studies (focused & impact studies) FE Program evaluations Financial Capabilities Survey (WB) Financial Literacy evaluations (OECD) FL school curricula evaluations (PISA) Regulatory Reports on complaints (Supply side data) Impact evaluation of active supervision: Mystery shopper assessments (CGAP) Indicators Access points by each 10,000 adults Percentage of municipalities with at least a financial access point Percentage of population that lives in a place w/one access point Access points by each 10,000 adults Percentage of municipalities with at least a financial access point Percentage of population that lives in a place w/one access point Percentage of adults with at least a deposit account in a formal institution Percentage of adults with at least one credit account or credit card in a formal institution Percentage of adults with at least a deposit account in a formal institution Percentage of adults with at least one credit account or credit card in a formal institution F INANCIAL I NCLUSION AccessUsage Financial Literacy &Education Consumer protection New generation of “Quality” indicators to be developed Source: CNBV, “Core Set of Indicators”: AFI

o Survey sponsored by the World Bank Russia Trust Fund for Financial Literacy and Education and the World Bank Latin America Region in conjunction with national counterparts o Mexico Counterparts: CNBV and CONDUSEF o Phases of Survey Development o 2010: conceptual framework developed, qualitative research begins, 13 focus groups o 2011: qualitative research 48 in-depth interviews, pilot testing of quantitative survey o 2012: Nationally representative survey rolled out in June-July to 2,026 respondents, 18 years and older making financial decisions for their household or themselves o Mexico customized core Russia Trust Fund questionnaire (ex: OECD-INFE financial knowledge module, financial education, use of government programs) 5 The 2012 Financial Capabilities Survey

6 Context of 2012 Mexico Survey Key Challenges in Financial Capabilities Policy Implications Outline

1. Many Make Plans…. Far Fewer Adhere to Them Only 29% of the population reports having money left over after paying for basic expenses such as food and other necessities. 70% of adults reported planning how they used the money they received. 34% reported always keeping to their plan. 63% Say they know how much is available at home for daily expenses… 18% know exactly how much they spent in the last week. Source: World Bank analysis of Mexico Survey on Financial Capabilities, 2012

45% of survey respondents felt they could cover a major expected expense of one month’s income without borrowing Just 34% felt they could cover a major unexpected expense Major Expenses Children’s Future Less than 1/3 of the population under age 60 reports plans to cover old-age expenses Over age 60, nearly 2/3 report insufficient or no provisions for living costs Old Age Slightly more than half of the parents surveyed had plans to support their children’s education Plans to save for children’s inheritance were less common (>20%) 2. Limited Funds Set Aside for Future Expenses Source: World Bank analysis of Mexico Survey on Financial Capabilities, 2012

Ability to Cover Major Unexpected Expenses by Income 29% Percent Reporting Shortfalls in Money For Necessities Report borrowing from family or friends to make ends meet 3. Several Indications of Financial Strain, Particularly Among Low-Income Individuals

Family members—namely mothers and fathers are the most common source of guidance. 4. Half of the Mexicans Surveyed Were Never Taught to Manage Their Money Teachers of Money Management Source: World Bank analysis of Mexico Survey on Financial Capabilities, 2012

5. Many Financial Products Users Seem Optimistic in their Assessment of their Ability to Choose Products … … All Products Account at a financial institution Personal Loans Tandas Pawn Shops Look for information from distinct sources 57%71%66%53%52% Consider various alternatives before deciding 62%76%71%60% Look to find the most appropriate product for needs 68%76%74%68% Verify terms and conditions before contracting 68%81%76%72%64% Verify terms and conditions in detail62%66%51%61%60% Of those borrowing from pawnshops and participating in tandas (informal rotating savings groups) say they verify terms and conditions in detail Source: World Bank analysis of Mexico Survey on Financial Capabilities, 2012

Mexicans have weaker performance relating to interest rate calculations and the concept of risk and portfolio diversification. Mexico’s level of correct responses to questions related to numeracy, the time value of money and the interest paid on a loan were in line with other countries surveyed. 6. Relative Weaknesses in Financial Knowledge Also Suggest Challenges to Choosing Financial Products Source: World Bank analysis of Mexico Survey on Financial Capabilities, Non-Mexico data are from Atkinson, A. and F. Messy (2012), “Measuring Financial Literacy: Results of the OECD / International Network on Financial Education (INFE) Pilot Study.

7. Cross-Country Data Suggest Relatively Short-Term Planning Horizon for Mexicans Source: Kempson, Perotti and Scott, 2013

Over half the population falls into two clusters: unsophisticated money managers and short term money managers. 22% Unsophisticated money managers 33% Short-term money managers 12% Young impulsive spenders 9% Affluent but disorganized 25% Careful money managers and planners 8. Distinct Challenges for Profiles in Financial Capabilities Source: World Bank analysis of Mexico Survey on Financial Capabilities, 2012.

Over half the population falls into two clusters: unsophisticated money managers and short term money managers. 9. Diversity in Regional Weaknesses in Financial Capabilities Source: World Bank analysis of Mexico Survey on Financial Capabilities, 2012.

Financial knowledge and financial capability are positively associated with use of formal financial products such as bank accounts and credit cards. Financial knowledge and financial capability negatively associated with use of informal financial products like pawn shop loans and informal loans from family. World Bank Analysis of National Survey on Financial Capabilities, Mexico 2012 and Consejo Nacional de Inclusión Financiera 2012 financial infrastructure data No statistically significant relationship between number of commercial branches in a municipality and number of individuals with formal products, suggesting that increased bank branch access is not enough Banking correspondents increase access to formal financial products primarily for individuals with high financial capability or high financial knowledge 10. Not Enough to Provide Financial Inclusion Channels, Also Need Enhanced Financial Capabilities

17 Context of 2012 Mexico Survey Key Challenges in Financial Capabilities Policy Implications Outline

Diverse challenges show that increasing financial capability requires multi-stakeholder efforts. Increased activity of Mexican coordination mechanisms for public authorities, such as working groups on Financial Education and Financial Inclusion (CONAIF), established in 2011, will help to address financial capabilities challenges and support effective implementation of programs. Coordination with private sector stakeholder activities is also crucial. National Survey of Financial Behaviors, Mexico 2012 Enhanced financial infrastructure is needed to expand financial inclusion—although it is not the only factor. Allow deposit-taking “cajas de ahorros” to sign up banking correspondents on the same terms as banks. More specific rules to promote the marketing of basic bank accounts to the financially excluded could be issued. Policy Implications Scale up promising programs that support rural adoption of mobile payments.

Technology that increases access to personal finance information can help improve planning behaviors and enhance decision-making. Mobile phone and Internet based personal finance tools can help users better administer their spending, savings and investments. The use of text messages and social media can be used to send simple sustained messages related to personal finance, such as managing account balances, loan payment, and savings to promote desired behaviors. Encouraging financial institutions to create labeled savings accounts for specific goals, commitment accounts and future dated mobile payments are simple ways to make savings gains feel tangible and curb tendencies to overspend and view only the short-term Modify policy to encourage recipients of social benefits to save rather than withdrawing their transfer (Oportunidades) Remittance linked products aligned with the needs of migrant workers and their families offer the opportunity to move transfers directly into saving products. National Survey of Financial Behaviors, Mexico 2012 Improved product design elements incorporated into financial products can help people save. Policy Implications

Ensure financial education interventions are well-timed and well-targeted. Carefully designed school based programs coupled with programs incorporating learning modules that involve the household could be implemented to support the critical role of the family in providing financial education. Design interventions for a population that is not accustomed to learning in a classroom setting, such as entertainment education (telenovelas, radio) to disseminate key messages in financial capabilities to the general population. National Survey of Financial Behaviors, Mexico 2012 Support customer protection interventions that help mitigate effects of limited financial knowledge. Could require the current Total Annual Costs (APR) that is in percentage form to be modified to Total Amount You Pay in peso value. Adapt regulations to reflect new channels such as mobile banking or new types of correspondents. Policy Implications Require regulated financial institutions to incorporate good practices for disclosure and pricing regimes

Project Team Institutions and Contact Information CONDUSEF: Marco Carrera Santa Cruz, CNBV: Luis Garza Trevino, World Bank, Rekha Reddy, THANK