Finance & PSD Impact OCTOBER 2017 The Lessons from DECFP Impact Evaluations ISSUE 43 Our latest note tests how different ways of disclosing information affect comparison shopping for savings and credit products in Peru and Mexico. The Power of Standardization: Testing Information Disclosure in a Multi-country Study Xavier Giné, Cristina Martínez and Rafael Mazer Governments and academics have simplified key fact statement (KFS) designed focused on financial education as a tool to using behavioral insights to facilitate improve financial wellbeing, but the efficacy comparison shopping. of these initiatives is mixed. As an alternative 2. Results to educating financial consumers, Our results show that the simplified KFS governments around the world have tried to with its standardized format significantly encourage comparison shopping by improves consumer decision-making introducing legislation to improve disclosure compared to the marketing materials and transparency. An early example of currently provided by financial institutions. mandated financial disclosure is the Truth in The effects are however much stronger for Lending Act of 1968 which required that credit than savings products. The probability consumers in the U.S. be presented with key of choosing the cheapest loan increases from financial terms for credit products, and 42 percent using the marketing materials to standardized the calculation of certain key 65 percent using the simplified KFS but it product terms and disclosure formats. Peru only increases from 32 percent to 34 percent and Mexico introduced similar disclosure for savings accounts (Figure 1). laws in 2005 and 2009, respectively. The fact that large price dispersion still Figure 1: The Probability of Choosing the Cheapest persists, however, indicates that these efforts format is higher with a simplified key fact statement (KFS). may not have been successful. In addition, while disclosure regulation dictates what terms should be disclosed and how they should be calculated, the actual design of the forms is typically left to the financial providers. 1. Laboratory Experiment This study seeks to understand the role of disclosure formats in facilitating comparison shopping for savings and credit products by low-income consumers in Peru and Mexico. We implement a laboratory experiment in One reason is perhaps that individuals which low-income consumers were assigned may not care about the total yield of the a profile and then incentivized to choose the savings account and focus instead on other product that best fit their needs from among characteristics. After all, a consistent finding 5 or 10 available products. In each round of from the literature on savings is that the decision-making, information about the behavioral response to changes in the price of products was presented in a different format, saving is not large. Alternatively, subjects including current marketing materials evaluating savings products may not have gathered from financial institutions during had enough information as the lack of impact sales visits by actual consumers, and a is concentrated in Mexico where 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) simplified KFS did not contain the total yield shopping and improve financial wellbeing. In earned by the savings account. recent years, some regulators have begun We also find that enhanced transparency mandating standardized formats. in KFS increases price elasticity. The price 2) The laboratory setting approach taken elasticity of credit products is -1.04 using suggests an effective mechanism to test the brochures and -3.19 using the simplified design of financial disclosure initiatives. This KFS, that is, about three times as large. For approach is not new. For example, the savings products, the price elasticity is 0.02 Consumer Financial Protection Bureau and using brochures and 0.03 using the simplified the Federal Reserve of the U.S. constantly KFS, and the difference is not statistically survey and test financial consumers on how significant. In addition, non-price factors they understand information, which such as the (random) order in which savings information they think is useful, and finally products are presented to consumers matter how the information can be more effectively more when brochures are used rather than conveyed. simplified KFS, consistent with the idea that 3) In addition, regulators in Mexico and transparency allows individuals to focus on elsewhere are requiring lenders to send the price. detailed product information in a machine- Finally, we show that financial education readable format so that it can be downloaded is correlated with better financial decision- by startups like ComparaBien, making, but for credit products, the effect of ComparaGuru, and rocket.la which provide the disclosure format is about three times as timely comparative information to large as that of the effect of financial literacy. individuals looking for financial products. More importantly, the simplified KFS is These channels also have the advantage of particularly useful to financially illiterate being fully digital, removing the time and individuals as financial literacy increases the travel burdens to shopping around, and price-elasticity of credit products by 58 making it easier to review and compare percent when using brochures but only by 7 competing KFS on the same screen at the percent when using the simplified KFS. same time. 4) Finally, because KFS is most useful early on 3. Policy Recommendations during the sales visit, policymakers should These results have the following relevant take care to develop rules regarding the implications: timing of disclosures and monitor compliance with timely disclosure of KFS 1) Regulators should not only mandate certain through mystery shopping and other market key terms but also the format in which these monitoring tools. terms are presented to encourage comparison For further reading see: Giné, X. Martínez, C and R. Mazer “Information Disclosure and Demand Elasticity of Financial Products: Evidence from a Multi-country Study”, World Bank Policy Research Working Paper 8210, October 2017 Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact