Consumer Insights into Disclosure

Disclosure and pricing transparency are important building blocks for countries looking to develop effective consumer protection regimes. They also are of particular importance for low-income populations, who often have lower levels of literacy and numeracy, and limited experience with formal financial products. Recognizing this, CGAP has been using consumer research to inform consumer protection policymaking on disclosure forms and pricing transparency. An effective method has been to present consumers with sample loan disclosure forms and asking them to identify the most salient information for their decisionmaking processes. This information has proved valuable in developing new approaches to disclosure.

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) and CGAP conducted a series of focus groups with 123 consumers from different financial provider types and geographic regions. The objective was to test consumer comprehension of key terms and cost as well as their ability to compare similar products across providers. Focus group results provided important feedback from consumers that led to improvements in disclosure and pricing rules for microcredit. The BSP has since released a new circular modifying several provisions in the Truth in Lending Act, including the requirement to use effective interest rate and declining balance calculations on payment schedules, and modifying the loan disclosure form for small business, retail, and consumer credit.

The experience in the Philippines and several other markets have generated the following high-level points for making disclosure work for low-income consumers:

• Cash is king.Consumers tend to focus less on things like interest rates and ratios on disclosure forms than monetary values, particularly the amount of each payment and the repayment schedule. Many consumers think less in terms of the “value” of a product relative to the costs, and more on whether or not they can afford the product.
  • Possible lesson for policymakers: Don’t rely too heavily on the power of the interest rate, and remember that in many cases consumers have already decided if they want the financial product before they seek out a loan officer or visit the branch.
• Sometimes ‘bad’ features aren’t necessarily‘bad’ in the eyes of consumers.Microfinance Transparency found in an evaluation of Compartamos’ loan products that, “compulsory savings requirement results in a significant additional cost to the client.” However, iIn the Philippines we found mandatory savings was viewed by most as a positive feature to a product, instead of as an additional cost (both in money and opportunity cost).
  • Possible lesson for policymakers: Pricing regulations should be developed so that they effectively incorporate mandatory savings and similar features (like term-life insurance) into the costs presented to the consumer, but the appropriateness or permissibility of these features may be a more complicated issue than anticipated.
• Recourse needs to be part of the transparency equation.Even with clear information, things can go wrong, and when this happens consumers will need assistance in resolving issues with providers. However, in our experience there is very low awareness by low-income consumers of recourse options available, and so many serious problems go unresolved.
  • Possible lesson for policymakers: Consumers like the idea of having information on the front page of disclosure forms of who to contact both within and outside the financial institution to resolve their complaints. Policymakers should consider making language on recourse options a required component of disclosure forms as they would other key terms like interest rate and loan amount.
• Product-specific, not provider-specific rules.Due to the design of regulatory jurisdictions, in some countries providers offering similar products are not governed by the same regulatory body, and this leads to variance in disclosure rules for similar products, making it it harder for consumers to compare costs and shop around for the best value.
  • Possible lesson for policymakers: Consumer protection regulation, and in particular pricing transparency and disclosure, should be based on product not provider type to ensure comparability and standardization.
• Consumers are resourceful. Even in markets with insufficient transparency and wide ranging products, we found consumers using their own tactics to compare products and find the most suitable products for their needs. Nothing beats transparent, concise, and easy to understand pricing information, but it is reassuring to see how resourceful many consumers are even without well-developed disclosure rules.