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How far can you push inclusion policies if the incentives don’t align? New evidence from an audit study in Mexico

Rafael Keenan Mazer's picture

Financial inclusion initiatives are proliferating rapidly through domestic and global efforts like the Alliance for Financial Inclusion’s “Maya Declarations.” These efforts are materializing in regulatory improvements in issues ranging from mobile banking—allowing ever more innovation, to consumer protection to access to finance for SMEs. There regulations, however, may only prove effective if they take into account the incentives that providers and sales staff have to shroud prices and adjust their behavior to undermine transparency initiatives.

To assess the quality of information provided by sales staff and the suitability of the financial products offered the World Bank, CGAP and CONDUSEF (Mexico’s Financial Consumer Protection Agency) conducted an audit study of savings and credit products for low-income consumers. (The full results have been released in a working paper and accompanying policy note and infographic with key highlights) The research team trained low-income consumers in peri-urban Mexico City and Cuernavaca to visit a range of financial institutions, seeking consumers loans and savings product. By varying the shopper’s scripts along the debt to income, purpose for the savings, and whether they were “experienced” or “inexperienced” shoppers, the study revealed important insights.

Disclosure is limited. Overall the audit study revealed very low levels of disclosure of product information during visits, even though credit shoppers often performed multiple visits. In only 30% of visits did mystery shoppers receive any printed information, and verbal disclosure of information was equally limited. In particular, the staff provided enough information to allow auditors to apply for the loan or to open the savings account, but that very little voluntary information about avoidable fees and commissions was provided.

Product suitability will depend in large part on provider incentives. Product suitability refers to the idea that consumers should be offered the product that is best aligned with their stated needs and current economic situation. The results show that suitability depends crucially on the provider incentives. As mentioned, shoppers sought either “high” or “low” loan amounts, corresponding to either 70% or 20% of annual household income, respectively. Sales staff demonstrated ability to assess the capacity to repay of borrowers by being 47% more likely to be reject “high debt” shoppers and by reducing their loan size if approved. However, shoppers seeking a low-balance, day-to-day cash management account were rarely offered the government-mandated “Cuenta Básica” (Basic Account), which features low fees and no minimum balance, thus likely to be the best option for a low-balance saver. Indeed, in only 2 of the 54 visits of the day-to-day use profile was this product even mentioned, let alone recommended by the sales staff. A look at the data on all scheduled fees, charges and interest from the providers visited provides the reason for the lack of product suitability: the average annual returns were -0.77% and -7.36% for basic and checking accounts, respectively. So clearly the basic accounts are far less profitable for providers, and thus were reluctant to offer them voluntarily even when they were the best fit for the shopper’s stated needs.

These experiences in Mexico are not an anomaly. Similar studies in India of the life insurance market (Anagol, Cole, Sarkar, 2012) and a similar “no frills” savings account (Mowl and Boudot, forthcoming) have shown how misalignment of provider and shopper incentives can get in the way of more pro-consumer financial inclusion policies.

So what can be done to address these discrepancies in policy and sales practices? The solution is not likely to be more sticks and tougher rules. Instead, the insights from Mexico and India call for greater appreciation of human behavior and incentive structures before launching policies to promote certain products or sales practices. This could include, for example, lowering cost of basic savings products by allowing mobile or agent banking to make them financially viable for providers, or helping providers to see the potential benefit of these products as gateways to long-term client relationships and on-selling of more profitable products in the future. In any event, one should first make sure that provider and staff incentives are well understood before new policies are implemented.