> Posted by Sonja E. Kelly, Fellow, CFI
The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
While in Chile this summer, I met with a number of people from SERNAC, Servicio Nacional del Consumidor (the national consumer protection agency). They mentioned that after a number of lawsuits in Chile involving credit providers taking advantage of consumers, the agency recently helped to usher in a new law that improved financial capability.
Here’s what astounded me about the law: it requires that the lending terms and conditions be boiled down to a two-digit number, and that that number be prominently displayed for the consumer. That’s right, the terms and conditions of each credit product in the country are translated into a two-digit number… Talk about a challenge!
The law creates a structure under which credit-issuing institutions must combine various aspects of terms and conditions into one simple number so that consumers can interpret and compare different credit offers. This number is displayed in bold, big numbers in the top right corner of the first document that a consumer receives regarding the loan as well as on subsequent monthly statements.
Example consumer credit contract summary sheet, complete with a placement marking (CAE: XX%) for the terms and conditions number.
The idea is to make comparisons between products as simple as possible. I picture Chilean consumers comparing one another’s numbers the way my family compares gas prices: with gusto.
With the number, consumers don’t have to understand the math behind interest calculated using an APR. They don’t have to grasp the repayment structure, or know whether their payments are being applied to the interest or the principal. They don’t even need to evaluate competing fees associated with missing payments. While understanding all of these things is certainly helpful to understanding loan terms and evaluating competing products, the idea behind this two-digit number is that the number factors in all of the critical pros and cons for the consumer. All the consumer needs to do is compare different products’ numbers to make a sufficiently adequate choice about which product works best for them.
But herein lies the number’s downfall: with such a complicated formula for quantifying the superiority of some products over others, it is hard to pick out different loan products for different needs. One consumer may want to have a high interest rate but pay off a loan over a very short period of time, and others may want a low monthly payment over a longer period of time. Such nuances get lost in a simple number.
Furthermore, while this simplification may make clients more capable of making a decision about credit in the short-term, it also may enable consumers to forego educating themselves on various aspects of credit terms which build towards a long-term, nuanced understanding of financial products. One of the public officials with whom I spoke joked, “No one—not even us—really understands what the number means.”
To me, this effort demonstrates that financial inclusion must come along with questions about how people will use an intervention, how people will understand it, and what people give up when they use it.
For more on CFI’s efforts to better understand and facilitate improvements in financial capability, read about our Financial Capability Roadmap. For more information on Financial Inclusion 2020, sign up for project updates.
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The Next Wave of Financial Capability Initiatives