Finance & PSD Impact NOVEMBER 2017 The Lessons from DECFP Impact Evaluations ISSUE 44 Our latest note tests whether mandated disclosures are enforced and whether financial products offered are suitable to the needs of low-income customers in Ghana, Peru and Mexico. It builds on early results presented for one country in Impact note 28. You Get What You Ask For: Testing Information Disclosure in a Multi-Country Study Xavier Giné and Rafael Mazer Financial consumers often fail to of auditors requested loans that accounted for compare across different products and do not different shares of their household’s annual choose the most cost-effective product or the income. Second, to study whether the staff one most suitable to their needs. This is provided information according to the because the decision of which product to perceived ability of customers to absorb it, purchase may not only involve unfamiliar some auditors were trained to use more concepts but also because financial sophisticated financial language and engage institutions shroud prices to maximize more during the visits (i.e. experienced profits. auditors). Third, to study the degree to which Many governments have tried to the staff tailored the terms of products encourage comparison shopping by offered, a set of experienced auditors were introducing legislation to improve disclosure instructed to mention that a competing and transparency (see impact note 43). In institution had offered them better terms. some cases, governments have also tried to reduce the cost of financial products by 2. Results mandating that low-cost savings products be Our results show that while savings offered in the marketplace or have imposed auditors were offered products that matched usury laws capping the interest rate that can their preference for maturity, they were rarely be charged on credit products. The fact that offered the cheapest product. By contrast, large price dispersion still persists, however, when faced with credit auditors requesting indicates that these efforts may not have been large amounts relative to household income, successful. financial institutions significantly reduced the amount granted if the application was 1. Mystery Shopping finally approved. Financial institutions thus In this study, we assess the enforcement lent responsibly. of mandated financial information Notably, auditors were provided with too disclosures and the adequacy of products little information to allow them to compare offered to consumers. We implement an audit across products, especially for non- study in Peru, Mexico and Ghana in which experienced auditors that did not engage auditors visited branches of financial during the visits. institutions seeking to acquire a loan or a To measure the degree of information savings product. disclosure, we construct a transparency index Each auditor was assigned one script to that reports the percentage of the total cost of visit multiple branches. First, to study the product that was actually disclosed either whether institutions provided products that voluntarily or after the auditor prompted the met the needs of customers, some auditors staff for the information. We find that were told to express a preference for an regardless of the country’s regulatory regime, account where funds would be deposited for very little voluntary information about the a minimum duration of one year. Another set costs of the product is provided. The Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) transparency index with voluntary disclosure of information is 29 percent for transactional Savings: APY disclosure accounts and 18 percent for credit products. 100% In addition, the correlation between the cost 80% 69.0% * disclosed voluntarily and the total cost of the 60% product is zero. When the index includes 40% 20% 6.3% 2.3% 2.3% information prompted, almost 70 percent of 0% the cost of savings products is disclosed to Voluntary All experienced auditors. The transparency index for credit products that includes information With experience Without experience that was prompted increases to 41 for non- experienced auditors, and to 68 percent for We argue that the reason why experienced auditors as they ask more information disclosure is limited does not questions about the cost if the information is come from lack of staff literacy but rather the not provided voluntarily. incentive to see as many clients as possible to When assessing whether APR/APY is meet their sales quota. Indeed, their income disclosed as mandated by the law in Mexico is subject to incentive schemes that reward and Peru (but not in Ghana), we find that it is the number of sales of certain products. This almost never disclosed voluntarily. For non- also explains why clients are rarely offered experienced users, APY is disclosed in only the cheapest product that met their needs. 2 percent of visits, while for experienced auditors, information is disclosed a little 3. Policy Recommendations more often, in 6 percent of visits. Non- These results have the following relevant experienced auditors do not ask for the APY implications: and thus remain uninformed, but experienced 1) Enforcement of legislation that auditors did ask for it and received it in 69 requires staff to voluntarily disclose APR and percent of the visits (see Figure 1). Similarly, APY should be strengthened. auditors are only told voluntarily about the 2) Basic guidance could be provided to APR in less than 8 percent of the visits. In consumers on the key questions to ask when contrast, when prompted, staff disclose the looking for a credit or savings product, so can APR in 43 percent of the visits. This suggests they make better informed decisions. that mandated disclosure is only partially 3) Disclosed information could be enforced, and that staff does not discriminate provided more transparently. In addition to on consumer sophistication by providing disclosing the APR and APY to enhance more information to clients that may be able comparability across similar products, staff to absorb it. Staff only provide information to could also be mandated to disclose usage fees those who ask for it. because they can significantly impact the Figure 1: Share of visits in which APY was total yield and cost of products. disclosed, voluntarily or not, to experienced and non-experienced auditors For further reading see: Giné, X. and R. Mazer “Financial (Dis-)Information: Evidence from a Multi- Country Audit Study”, World Bank Policy Research Working Paper 7750, July 2016. Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact