Behavioral Research and the Client Protection Principles

> Posted by Rafe Mazer, Financial Sector Specialist, Government & Policy, CGAP

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It’s a great time to be working on consumer protection. Even while risks change or expand in scope as new products evolve and access increases, it seems that there are just as many talented researchers and new approaches to making consumer protection work emerging. Some of the most important breakthroughs are coming from consumer and behavioral research. This includes insights into what sales staff really do and why (see, for example, this infographic on a recent World Bank/CGAP/CONDUSEF audit study in Mexico), how consumers make financial decisions—not always for purely economic reasons, and what the context of low resources or scarcity means for financial behavior.

The next step is to take these research insights and turn them into improved consumer protection policies in emerging markets. CGAP’s recent publication, Applying Behavioral Insights in Consumer Protection Policy, describes a range of current and potential ways we can bridge the research and policy fields. But what about providers? What can we take from the recent behavioral insights emerging for the Client Protection Principles?

CPP 1: Appropriate product design and delivery

What works best for low-income consumers won’t always work best (or at all) for providers, and this can lead to some very anti-inclusion behaviors. Consider for example a fascinating forthcoming study in India by Amy Mowl and Camille Boudot, which showed that even when trained consumers persisted in trying to open no cost basic savings accounts, providers went to great lengths—even lying about regulations—to avoid providing these accounts. So perhaps we need to look at the growing research on sales staff incentives, have an honest conversation about just how much policy can force mass distribution of appropriate products, and focus instead on where the true nexus for consumer welfare and provider business case may lie.

CPP 2: Prevention of over-indebtedness

Here the long-term incentives may be better aligned between providers and consumers, as poor loan portfolio quality will eventually catch up to a lender in most cases. Several behavioral issues are pertinent to consumers’ falling into situations of over-indebtedness (e.g. tunneling, or temporal discounting) that providers can take into consideration when designing loan products. A basic first step is to make the cost of credit more salient upfront to consumers, by presenting the costs before consumers are about to sign for the loan, and in terms that they will understand (e.g. not a confusing percentage-based representation of APR). Additionally, understanding the context of the moment the consumer is seeking the loan—are they dealing with an emergency problem and so “tunneling” on the immediate without consideration for the long term?—means providers can design products and guidance that helps consumers consider long-term implications of a credit decision as well.

CPP 3: Transparency

Behavioral research is showing that new ways of presenting product features in ways that connect with our daily financial lives can help them to become more salient and understandable to most consumers. It is also showing us that the way information is presented—including information overload—can matter as much as the actual information itself in driving our decisions. This is also one of the easiest areas to get started on, via simple testing of new formats and terms with actual consumers.

CPP 4: Responsible pricing

The behavioral insights relevant to this principle overlap significantly with those on over-indebtedness, although with the added issue of helping to assure that providers don’t take advantage of consumers’ biases, such as lack of attention to detail, to hide costs of things such as credit life insurance in the fine print or misrepresent its value for money.

CPP 5: Fair and respectful treatment of clients

Mullainathan and Barr said it best: Many lower income people feel “that banking is not intended and should not appeal to people with lesser means…a poor client may feel reluctance, shame, and a general sense that he or she could never be an important or valued customer at a bank.” Perceptions matter for usage and client behavior. I have always been surprised in interviews with consumers—especially lower-income segments of the populations we look at—how much simple things like layout of the branch, signage, or even how they are greeted impact their decisions to seek a product, complete a transaction, or seek recourse when something goes wrong. New research methods can offer a path for providers to test all these small changes in design or behavior to figure out how they drive consumers’ behavior and feelings of being respected and treated fairly.

CPP 6: Privacy of client data

As digital footprints become a bigger element of financial inclusion, the need to protect consumers’ data becomes even more important. Here a key behavioral issue emerges: A gap between what consumers say (“I want my data protected”) and what they do (relinquishing control of their data at the slightest barrier or ticking the consent box without considering what they consented to). We therefore should not hold much hope for consumers to self-protect here, and so providers should design their data sharing policies and informed consent approaches with this gap in what we say and what we do in mind.

CPP 7: Mechanisms for complaint resolution

Improved recourse can be a win-win for consumers and providers, as it can drive long-term usage and loyalty of consumers. However, recent work by CGAP on consumer complaints behavior has drawn out some small design flaws in providers’ complaints processes that can greatly limit consumers’ ability to see a complaint through to resolution. This includes physical and procedural barriers (such as “fill out this form then come back tomorrow,” which may not be possible for consumers), limited advertising of channels, and unclear steps to escalate a complaint if the first attempt by the consumers goes nowhere. Simple solutions are emerging, such as using real-life success stories of consumers who complained and got successful resolution to create positive expectations to encourage complaints, using local authorities or new channels, such as agents or mobile banking, to move complaints initiation out of the often intimidating (and crowded) banking halls, and integrating commitment devices (such as “we will call you within three days”) to increase follow-through. We are excited to try out some new design approaches to see if we can improve systems so they make consumers more likely, and this is certainly a space where providers aligned with the Smart Campaign should be encouraged to test and innovate.

Have you read?

Helping Consumers Understand Their Digital Data: Initial Experiences from Tanzania 

Behavioral Approaches to Product Innovation at the Base of the Pyramid

Contemplating Scarcity and Its Implications for Microfinance and Poverty Alleviation