Does Information Overload Affect Uptake of Financial Services?

Imagine for a minute that you are a client at a microfinance institution (MFI), and your loan is up for renewal. The loan application and approval process involves a lot of paperwork, time, and long trips to the branch office. It always stresses you out. Making matters worse, you actually aren’t even sure you will be able to repay the loan, at least not on time, and wonder whether you should be taking it out at all. But if you don’t, you won’t have the cash on hand to pay the school fees next month, nor to replenish the supplies of your shop. Complicating matters, the MFI is now telling you about some insurance product that might pay you if there is a flood or other catastrophe and your shop or home is damaged. But signing up for an insurance policy means paying more on the loan, and you don’t really understand what it’s all about anyway. “I’ll probably just skip that, at least for now,” you think.

As MFIs expand their services, cross-sell, and bundle products, this scenario is likely to happen more and more often. There is great opportunity for MFIs and others to use their existing infrastructure and relationships to offer non-credit services, but it comes with the risk that consumers may not understand or use the information provided to make decisions that best address their complex financial needs.

This is why the MicroInsurance Centre is currently conducting research that aims to shed light on ways in which MFIs can more effectively and efficiently market and provide multiple financial products to their clients, while at the same time ensuring that customers develop a clear understanding of the products they are buying and of how to effectively use them.

Our prior work reveals that borrowers experience great stress around the loan approval process. Consumers who are stressed often selectively ignore information, make short-sighted or impulsive decisions, or avoid making a decision all together. If clients receive too much information at once, they may ignore a decision about insurance, or make a decision without fully understanding the product. All of this leads to ineffective access. Because of these factors, simply making financial products available is not sufficient for effective financial access.

Our research aims to better understand these challenges and how MFIs can address them. We focus on the timing and manner in which insurance is marketed and sold, aiming to understand when MFI clients are most receptive to new information. We seek to answer critical questions about clients’ behavior and psychology and how they respond to complex financial information. Specifically, we ask:

• Do microfinance clients suffer from an attention deficit when making decisions about what tools to use to manage their financial needs?
• How does the timing of a financial product’s marketing affect clients’ ability to process and retain information about the product, and how does it affect their purchase decisions?
• Does separating the marketing of a microinsurance product from the loan application process improve the understanding of uptake and insurance?

Separating the insurance purchase process from the loan approval process may help reduce the burden of stress and information overload on prospective clients, leaving them better able to evaluate information critically and make a reasoned decision about whether to purchase insurance. We hypothesize that clients who receive the insurance offer at a separate time will exhibit a better understanding of the products they buy, as well as be more likely to purchase insurance.

To test this hypothesis, we are working with a major financial institution in Colombia to conduct a randomized control trial and complementary focus group discussions. Two groups of 250 loan applicants each will be offered a new property insurance product, with the first group receiving the insurance information and offer at the time of the loan appraisal (the control group) and the second group receiving the information and offer at a separate time (the treatment group). By randomly assigning individuals to the joint offer or separate offer, we can establish that any differences in product understanding or take-up rates between the two groups were caused by the timing of the intervention.

The findings from this study, funded by CGAP’s Client at the Center Research Fund and anticipated for quarter three of 2015, will shed light on efforts to sell value-added services linked to loans from MFIs and cooperatives worldwide and how these services can affect global financial inclusion. MFIs are increasingly becoming providers of a wide range of financial services, from loans to savings, insurance and remittances. Rigorous data on the effectiveness and efficiency of cross-selling or bundling these products will provide unique insights into how to reach the largest number of clients while ensuring that clients fully understand and can make rational decisions about the products and terms that they are offered.