> Posted by the Smart Campaign
Transparency sounds simple – in business, government, relationships, and most areas of life. Take the business of offering financial products and services. As a provider, you inform prospective and current clients of everything they need to know about your product. As a client, you use this information to make sound decisions about buying and using said product. Consequently, providers can claim full disclosure and hope to benefit from increased loyalty of clients. Clients have the information to make educated decisions and rest easy knowing exactly where that provider stands.
Similarly, in relationships, transparency (read: honesty) is always the best policy. The best practice is always to say everything that’s on your mind. After all, the truth will set you free… Except for maybe when your partner is already overwhelmed with information. Or when what you’re trying to share is incomprehensible. Or when your partner is trying to concentrate on something else. What I’m trying to get at is this: transparency may seem simple, but it’s not. Effective transparency provides information in a way that enables the person receiving the information to understand it and use it.
Inclusive finance providers need to hit the sweet spot – sharing the optimal amount of the most critical information with clients, in an understandable format, at appropriate times. To make matters more challenging, inclusive finance clients are often illiterate, poorly educated, or new to formal institutions.
The good news is that around the world, including in Mexico, the inclusive finance industry is hard at work to embed transparency effectively. In 2014, the Mexican government passed widespread financial reform that emboldened the role of the consumer protection agency, CONDUSEF, and made its rules mandatory for all credit institutions. CONDUSEF was enabled to issue and publicly publish recommendations to financial institutions. In the last year, CONDUSEF imposed important new regulations in areas of transparency and money laundering, and ended up revoking the operating permits of 1,449 non-regulated (SOFOM) institutions that did not meet the standards.
Despite efforts to increase and enforce regulation, there are still significant gaps between what is required by law and what is happening on the ground. A mystery shopping study conducted by CONDUSEF and CGAP revealed that even though the letter of the law on pricing disclosure may be followed:
- Only 30 percent of all mystery shoppers received any printed information during a visit.
- Fees and costs of financial products are often presented in complex formats designed to obscure the true costs.
- Financial sales staff often treat customers differently based on their perceived financial knowledge, providing less information to lower status customers.
- Low-cost accounts are not always offered even though they exist.
But of course, big change usually doesn’t happen overnight. In the case of transparency, it will take coordinated action from regulators, providers, investors, and clients. The Smart Campaign has set out standards for pricing transparency which include:
- Total Cost of Credit (in nominal amount) – That is, the total amount of fees, principal, and interest that will be paid over the life of the loan. BoP consumers have a better grasp of the terms of a loan when price is expressed in concrete terms.
- Repayment Schedules – BoP consumers tend to focus more on installment payment amounts (rather than on interest rates), as their main concern is whether their cash flows will be able to cover them or not.
- Annual Percentage Rate – The Costo Anual Total (CAT) in Mexico, required by law, is often irrelevant to clients. It can be difficult for customers with low literacy to understand. Nevertheless, having a fixed way of calculating and reporting fees and interest is important for comparison shopping (though still far from perfect).
- Other Key Terms – It is important to inform consumers of the potential risks that come with the product (e.g. penalty fees, changes to interest rates, etc.).
Evidence from studies on transparency suggests a positive correlation between disclosure and favorable pricing trends induced by increased competition. Though as mentioned, more information is not always necessarily better. There are diminishing returns to consumer comprehension if excessive information is presented that overwhelms them.
There is growing interest from donors and investors in this area, but at present few funding decisions explicitly take transparency practices into account. However, if regulatory advances are any indication of a rising tide, and institutions disclosing fair prices are able to better retain clients and gobble up more market share, investors might very well change their ways. After all, transparency is in everyone’s best interest. For more on recommended disclosure practices by providers, visit the Smart Campaign website.
Note: Adapted from a presentation by Isabelle Barres, Director of the Smart Campaign, at the recent XIV National Microfinance Summit in Mexico, which convened over a thousand of the country’s microfinance stakeholders, including MFI directors, regulators, investors, government officials, and heads of microfinance associations.
Image credit: Accion
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