Now that the Nobel Committee has decided to award the prize once again for work in behavioral economics, it is a good time to study the role of disclosure formats for effective consumer protection.
We partnered with CONDUSEF, the financial consumer protection agency in Mexico, and the Superintendent of Banks in Peru to test which types of product disclosures work best for savings and credit products by low-income consumers in Peru and Mexico.
In a lab experiment, low-income consumers were assigned a financial needs profile—such as having to make two withdrawals per month from a savings accounts and two balance inquiries—and then incentivized to choose the product that best fit their needs. In each round of the experiment, we tested different methods for providing summary product information. In Mexico, we tested comparative tables; in Peru, we tested a key facts statement (KFS) designed by the financial institutions; and in both countries we tested.
- Current marketing materials gathered from financial institutions during sales visits by actual consumers
- A simplified KFS that used behavioral insights to facilitate comparison shopping.
Our results show that the simplified KFS with its standardized format significantly improves consumer decision-making compared with the marketing materials currently provided by financial institutions. The effects are much stronger for credit than savings products. The probability of choosing the cheapest loan increases from 42 percent using the marketing materials to 65 percent using the simplified KFS. We also find that the price elasticity of credit products is -1.04 using brochures and -3.19 using the simplified KFS, that is, about three times as large.
Perhaps more importantly, financial education may not be as cost-effective as a well-designed KFS. Although we find that the participant’s financial education is correlated with better financial decision-making, with credit products, the effect of the disclosure format is about three times as large as that of the effect of financial literacy. More importantly, the simplified KFS is particularly useful to financially illiterate individuals, as financial literacy increases the price elasticity of credit products by 58 percent when using brochures, but only by 7 percent when using the simplified KFS. This finding calls into question the emphasis by some consumer protection agencies in emerging markets on expensive financial education programs, and makes the case for shifting resources toward developing and enforcing effective disclosure and pricing transparency regimes instead.
For savings products, however, the KFS only increases from 32 to 34 percent for savings accounts (figure 1).
One reason for this disparity in impact on credit versus savings products is perhaps that individuals may not care about the total yield of the savings account and focus instead on other characteristics. After all, a consistent finding from the literature on savings is that the behavioral response to changes in the price of saving is not large.
Regulators beyond Mexico and Peru are using consumer testing to improve disclosure format. The Consumer Financial Protection Bureau and the Federal Reserve of the United States constantly survey and test financial consumers on how they understand information, which information they think is useful, and finally how the information can be more effectively conveyed. As an example from a developing country, the Bank of Ghana used consumer testing of KFS formats to develop its new standardized loan KFS template, which was issued in February 2017.
The laboratory setting approach can be an effective and low-cost mechanism to test the design of financial disclosure initiatives. It also suggests that policy makers need not only to mandate certain key terms, but also the format in which these terms are presented, to encourage comparison shopping and improve financial well-being. In addition to standardizing KFS, regulators in Mexico and elsewhere are requiring lenders to send detailed product information in a machine-readable format, so it can be downloaded by startups, which provide timely comparative information to individuals looking for financial products. These channels also have the advantage of being fully digital, removing the time and travel burdens to shopping around, and making it easier to review and compare competing KFS on the same screen at the same time. Finally, because KFS is most useful early during the sales visit, policy makers should take care to develop rules for the timing of disclosures and monitor compliance with timely disclosure of KFS through mystery shopping and other market-monitoring tools.
Source: X. Giné, C. Martínez, and R. Mazer .“Information Disclosure and Demand Elasticity of Financial Products: Evidence from a Multi-country Study,” Policy Research Working Paper 8210, World Bank, Washington, DC, October 2017.
- Financial Sector