Protecting Consumers Means Thinking Like Consumers

Meet Joseph, the central banker, and Alice, the hard-working entrepreneur who’s struggling to figure out how to take her first loan. Joseph and Alice are the stars of a new CGAP animation highlighting how policy makers and consumers can work together to co-design better consumer protection policies through behavioral research.

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Joseph and Alice are not real people, but the impact of behavioral research on consumer protection is anything but hypothetical. Across the world, consumer protection authorities have been using behavioral research to inform everything from post-financial crisis rules for mortgage brokers to regulations on new mobile and app-based financial services. In many cases, behavioral insights have improved consumer protection policies.

Behavioral research seeks to understand the predictable but often counter-intuitive ways in which people make decisions, how they form intentions and whether they follow through with them. People do not always make decisions in the way policy makers expect, resulting in outcomes that may not be what they intended their policies to produce. For example, you might expect someone like Alice to make the rational business decision to take the lowest cost loan. But there are many reasons she might choose another option. Perhaps a well-intentioned friend recommends a more expensive lender. Using behavioral research for consumer protection allows policy makers to understand these unexpected behaviors and design policies that help consumers make better decisions. 

Throughout CGAP’s policymaking journey of the past 10 years, we have been inspired by what happens when consumers and policy makers connect to co-design consumer protection solutions. This can be a Ghanaian consumer telling central bank staff about how difficult it is to get a refund from her bank, thereby informing new regulations on complaints handling. Or it can be a rural Armenian describing his tradition of jarring summer vegetables to eat in the hard winter, triggering a new idea for how the government can teach citizens about savings. 

In the Philippines, behavioral research has been a recurring feature of consumer protection policy innovations. When the Philippine central bank, Bangko Sentral ng Pilipinas (BSP), set out to develop a new Truth in Lending Act (TILA) to improve loan disclosure and consumer comprehension of loan  costs and terms, they sought input from real microfinance customers. Under the new law, providers would be required to present prospective borrowers with certain information about their loan products in the form of a key facts statement. Consumers offered feedback on how to improve the design of the statement to make it an easier read and do a better job helping them make financial decisions. Their feedback was then integrated into the Truth in Lending Act (2012). But the journey did not stop there. 

To measure providers’ compliance with TILA, BSP recruited and trained financial consumers to conduct mystery shopping visits before and after TILA took effect. This research enabled BSP to identify where providers were doing a good job changing their sales practices to comply with the law, as well as areas where providers should improve compliance with TILA. For example, they found nonbank lenders were consistently not displaying in their branches the mandatory poster informing consumers of their rights to a key facts statement. Mystery shopping has informed the development of further disclosure and financial education policies, showing that the use of behavioral research in consumer protection policy making is a continuous process.

There is no one right way to do behavioral research for policymaking. Consumer protection challenges vary across and within countries, and behavioral research methods can be as simple as focus groups or as complex as randomized control trials. What they have in common is their appreciation that even if policies are signed in the governor’s office, they should reflect the world of the consumers they seek to protect, where people do not always make rational decisions.