Which one of these would you trust and use more for your financial needs: A pawn shop or a bank? If you are a low-income financial consumer in Mexico, the answer is quite likely the pawn shop, due both to social factors (“they treat us with respect when we enter”) and product features such as simpler, more easily understood pricing structures, flexibility in the terms of the loan, and efficiency and speed of access.
This insight into how low-income consumers in Mexico shop for credit, and what information is easy or difficult to understand has implications for developing effective disclosure and pricing transparency rules that take into account consumer behavior. More broadly, it serves as an example of how direct consumer research is an important tool for policymakers looking to develop consumer protection that takes into account the experiences and behaviors of low-income consumers.
Recent behavioral research on financial decision-making has demonstrated how we often rely on imperfect information and limited options to decide things like which bank has the best terms, whether we should save now and buy later, or maybe turn that extra cash into an investment. Sometimes we make a good choice, sometimes we don’t, and this poses a very important challenge for effective financial consumer protection policymaking: how to develop comprehensive consumer protection rules for a market when it is made up of millions of consumers with different experiences, needs, access levels, and personality traits that all influence their decision-making?
One approach to this challenge that is gaining popularity amongst policymakers, providers, and important consumer protection voices like the Center for Financial Inclusion is to incorporate direct consumer research into consumer protection policy reforms and market supervision. Through direct consultations with consumers—and in particular low-access and inexperienced consumers—policymakers and others can gain important insights into key issues such as financial decision-making, common problems or abuses in the marketplace, and how consumers seek to resolve issues when they arise.
In CGAP’s experience this direct feedback has offered valuable information that has helped to inform consumer protection policies in low-income environments, leading to creative new policy approaches to consumer protection issues of particular relevance to low-income or inexperienced consumers, such as financial decision-making, disclosure and pricing transparency, and recourse and dispute resolution processes.
Over the next few weeks we will share a sample of experiences from several countries where consumer research was used to gain new insights and inform consumer protection policies for the low-income consumers typical to the microfinance sector (a summary of some of the key findings from this research can also be found in this slide deck). Watch this space in the fall as we release a Focus Note on how policymakers can adapt traditional consumer research tools to seek out perspectives of these consumers and translate these experiences into policies that are better informed by actual consumer experience, capabilities, and behaviors.