90902 Finance & PSD Impact JULY 2014 The Lessons from DECFP Impact Evaluations ISSUE 28 Our latest note examines the extent to which financial disclosure policies are enough to protect consumers in Mexico. Financial Disclosure in Mexico: Evidence from an Audit Study Xavier Giné, Cristina Martínez and Rafael Mazer Many financial decisions are made account opening, deposits, withdrawals, infrequently and may involve unfamiliar balance enquiry fees, or debit card fees. concepts, especially for individuals with But as the financial crisis of 2008 limited financial capabilities. Therefore, painfully reminds us, these efforts may not financial consumers are prone to mistakes have been successful partly because either in choosing among products or in financial institutions shroud prices and using them inappropriately. adjust their behavior to undermine These mistakes would be less of a transparency initiatives and prevent the concern if market forces led to a set of marketing of mandated products. relatively cheap financial products. But this This discussion highlights two is rarely the case. In Mexico the total annual questions that are the focus of our cost of a 10,000 pesos loan (748 USD) investigation. First, what is the quality of ranges from 10.7% to 326.5%; the total information provided by financial annual yield for savings products with an institutions to low-income customers when initial deposit of 5,000 pesos ranges from - choosing among credit and savings 63.6% to 6.2% for an investment account products? Second, do financial institutions and from -100% to 5.1% for a checking offer the products that best meets the account. This large price dispersion is the customer needs, in particular as it relates to result of a market failure created by the cost and intended usage? information asymmetry between less informed customers and better informed Audit Study financial institutions and the misalignment To answer these questions, of their incentives. we implemented an audit study in peri-urban Many governments around the world areas near Mexico City. Auditors visited the have tried to reduce the information branches of financial institutions seeking to asymmetry by introducing legislation to acquire a loan or a savings product. Since improve disclosure and transparency, and in the goal was to capture all the information some cases have mandated that low-cost given to the auditor until the product was savings products be offered in the contracted (or the auditor was rejected in the marketplace or have imposed usury laws case of credit), several follow-up visits were capping the interest rate that can be charged. required. The scripts used by auditors An early example of mandated financial differed along four dimensions. disclosure is the Truth in Lending Act of  First, we introduced variation specific to the 1968 which required that consumers in the product sought. Savings auditors expressed a US be presented with key financial terms for preference for either a checking account (for credit products, and standardized the day-to-day financial needs) or an investment calculation of certain key product terms and account where funds would be deposited for disclosure formats. Mexico enacted a similar one year. Credit auditors requested a loan law in 2009 and in addition, the Banco de amount of either 20 or 70 percent of their Mexico requires that all deposit-taking household’s annual income, thus creating institutions offer a “basic account” without 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) exogenous variation in the level of basic account was only offered in 2 of the 54 household indebtedness. visits in which the auditor expressed a  Second, we varied the financial preference for a checking account. By sophistication of the auditor made salient by contrast, when faced with credit auditors the language used and the level of requesting large amounts, financial engagement during the visits. institutions demonstrated ability to assess  Third, we varied the level of competition the capacity to pay of borrowers by both being more likely to reject their loan among sophisticated auditors by stating that application and by reducing the amount a competing institution had offered them granted if the application was finally better terms. approved.  Finally, we created variation in the dress Thus, firms seem to behave code used during the visit. rationally by following their own self- interest. Each auditor was given a randomized list of branches to visit and was randomly assigned Policy Implications to a script. In Mexico financial disclosure policy can be improved, for example by providing Results basic guidance to consumers on the key We found that the staff provided questions to ask when looking for a credit or enough information to allow auditors to savings product. In addition, information apply for the loan or to open the savings could be provided more transparently as account, but that very little voluntary tested in a follow-up to this study (Giné, information about avoidable fees and Martinez and Mazer, In process). commissions was provided to Of course, not all terms and unsophisticated auditors. In contrast, conditions should be disclosed because too experienced auditors, who were instructed to much information may also be ineffective, ask specific questions about the product if but aggregate terms such as the total cost of the staff did not disclose this information credit (CAT) and total yield (GAT) should voluntarily, ended up being better informed, be adequately disclosed as required by law both because they asked more and because to enhance comparability across similar the staff provided more information products. voluntarily. This study covers standard consumer Hence, the first key finding is that credit and savings products that may be staff adjusts the information provided to the expensive to offer, especially to low-income perceived knowledge of the customer, populations. A promising avenue is the take- resulting in too little voluntary provision of up of low-cost mobile or online savings basic product information to inexperienced accounts, or access to financial products as a customers. byproduct of government-to-person payment Related, while savings auditors were programs, as is the case with the offered products that matched their “Oportunidades” social protection program preference for maturity, they were rarely in Mexico. offered the cheapest product. The mandated For further reading see: Giné, X. Martínez, C and R. Mazer “Financial (Dis-)Information: Evidence from an Audit Study in Mexico”, World Bank Policy Research Working Paper 6902, June 2014. and Giné, X. Martínez, C and R. Mazer (In Progress) “Information Disclosure and Demand Elasticity of financial products: Evidence from Mexico”. Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact