It is a fascinating time to be working on financial consumer protection. Global- and domestic-level challenges in mass-market financial sectors from consumer credit bubbles to mobile money fraud have built a strong case for the importance of increased and more effective consumer protection measures.
At the same time, the boom in behavioral research methods and experiments means that these challenges don’t have to be addressed using the same methods or approaches that failed before. We can now achieve a deeper, more evidence-based understanding of how actors in a financial market behave, what incentives drive them, and what new policies or products might best facilitate financial systems that are both inclusive and responsible.
In the new CGAP Focus Note, "Applying Behavioral Insights in Consumer Protection Policy," we present a summary of the growing evidence from consumer and behavioral research for consumer protection policy on four topics—disclosure and transparency; complaints handling and recourse; debt stress; and fair treatment. Our experiences researching this publication—and running field experiments ourselves—have led us to five key takeaways on the role of behavioral research in consumer protection policy:These new research methods provide deeper understanding of the context of the financial lives of base-of-the-pyramid financial consumers, and how that should influence consumer protection policy. Perhaps just as importantly—and to borrow from my co-author Alex Fiorillo—this new research agenda is leading to more empathy for the experiences and challenges poor customers face every day. Empathy, combined with better evidence and insights, can lead to highly motivated, increasingly effective, consumer protection policies and approaches.
- The behavioral evidence base in consumer protection is growing quickly. The recent boom in field-level behavioral experiments has advanced the consumer protection evidence base greatly. This is especially true in areas such as how consumers make financial decisions, and the best ways in which information can be presented to them to optimize their financial outcomes.
- To be effective, regulations need to account for incentives and how they drive behavior. For example, behavioral research in Mexico and in India showed that sales staff and provider incentives for offering basic savings accounts did not align with policy goals. Mandating the availability of a basic banking product does not guarantee that it will actually be sold in the market. Since these accounts aren’t profitable for providers, sales staff are not generally inclined to offer them even though they could be the most suitable savings product for many base-of-the-pyramid consumers. Research tools such as audit studies (or “mystery shopping”) can help us not just better understand consumers, but also to probe the incentives that drive behavior of those selling the products.
- Innovation in base-of-the-pyramid financial markets is changing consumer protection priorities. There is a need to understand the impact that new innovations – such as the expansion of financial access through agents, mobile banking, and even crowdfunding - have on consumers’ behaviors. For example, do customers borrow differently via mobile phones than they do face-to-face with a loan officer? Given the likely surge in consumer credit that is offered through non-traditional channels and scored with non-traditional data, we predict that exploring this particular question is going to be one of the most important behavioral research priorities for consumer protection policymaking over the next few years.
- Context can greatly influence financial behavior. Behavioral research draws out many common patterns of behavior by consumers and providers across quite diverse markets. But this does not mean context no longer matters. Recent research has demonstrated that the context of low and variable incomes can cause an individual to make different financial decisions than they would when not operating in a context of scarcity. For markets with poor customers, these insights into “the psychology of scarcity” are essential to consider when developing policies for consumer protection and related topics such as financial capability.
- Start small, start cheap, but just get started! Many of the research efforts described in the Focus Note were done on relatively small budgets, and over a period of just a few months. Yet they often produced insights that had significant impact on policy approaches and understanding of market behavior. More rigorous studies on the impact of these new consumer protection measures is an important goal going forward, but at this stage even simple, initial policy diagnostics that use consumer and behavioral research can yield critical and highly practical insights. Policymakers facing severe resource constraints should therefore tailor their research approach to their resource constraints. Indeed, with so much to do and so little time and money, we believe that our policy partners cannot afford not to invest in these modest evidence exercises that help them prioritize what to work on and increase the likelihood of succeeding in meeting their current consumer protection objectives.
For far too long the commentary on FI has asked the question "what more can we do?" and ignored the more fundamental "are we doing what we're doing well?". Thank you for highlighting excellent research that shines the light on blatant compliance failures on existing, easily understandable and (arguably) easily implementable regulations.
In an industry that's a stickler for following complex financial regulations, we're observing self-motivated agents perpetrating a "culture of non-compliance". I would surmise that there's more to it than what meets the eye.
Has anyone tried to motivate financial institutions to wholeheartedly offer low cost basic (no frills) (savings) accounts to emerging customers by engaging in a transparent discussion of just how unprofitable they are, and if that shortfall might be compensated from some fund or subsidy? If conducted with the appropriate honesty and transparency (including an agreed upon profit margin), such a discussion might motivate enough financial institutions to kick start universal bank coverage, and subsidies should converge to zero over time as technology and economies of scale improve stand-alone sustainability.