# **1. Introduction**

Many financial decisions are made infrequently and without immediate feedback that can be used to improve decision-making (Thaler and Sunstein, 2008). Mistakes in financial decision-making would be less of a concern if market forces led to a set of relatively cheap financial products. However, this is rarely the case. Table 1 reports summary statistics for estimated costs and yields for all credit and savings products, respectively, offered to low-income households by the 64 financial institutions in Colombia that were part of the study between March and July 2015. The total annual cost of credit including usage fees ranges from 24.42 percent to over 58 percent<sup>1</sup> . The total annual net yield of a savings product ranges from 4.16 percent to 9.92 percent for an investment account and from -0.02 percent to 8.84 percent for a transaction account.

While these costs may be driven by riskiness or the high transaction costs involved in servicing low-income households, the price and yield dispersion for similar products is large and points to an information asymmetry between less informed customers and better informed financial institutions.

This discussion brings to the fore two interrelated questions that are the focus of this paper. First, what is the _quality of information_ provided by financial institutions to low-income prospective customers when choosing among financial products? Second, do financial institutions _offer the product that best meets the customer needs_ , in particular as it relates to cost and intended usage?

To answer these questions, we followed the protocols in Giné and Mazer (2017) and implemented an audit study in 3 cities in Colombia.<sup>2</sup> These cities were chosen because they are populated mainly by middle and low-income households, who are the target of this study. Additionally, most Colombian financial institutions have branches in these cities, which eased the data collection process.<sup>3</sup> According to the market conduct index published by the Economist Intelligence Unit’s 2016 Global Microscope Index and Report, Colombia is ranked first alongside Peru out of 55 countries.<sup>4</sup> Auditors visited the branches of both supervised and unsupervised financial institutions seeking to acquire a loan or a savings product. Since the goal was to capture all the information given to the auditor until the product was contracted (or the auditor was rejected in the case of credit). We recruited and trained local residents to serve as auditors instead of relying on professional auditors.

> 1 Part of the variation in prices is explained by the usury rates that different institutions can charge. During the study period (March and July 2015), the usury rate for banks issuing loans below a certain amount was between 28.8% and 28.9%, while for microfinance institutions it was 52.2%. 2 Capital Bogotá, Tunja and Pereira. In Bogotá the audits were applied in Kennedy, a locality where the majority of the population is constituted by middle and low income households.

> 3 Bogotá, Pereira and Tunja had in 2015, 23.1, 24.4 and 22.9 financial branches per each 100,000 inhabitants, respectively. Colombia ́s average is 14.7. 4 Market conduct includes indicators of the capacity to protect the financial consumer, the content of disclosure rules, the disclosure of product terms, pricing information and non-discrimination in the financial service provision.

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