# **1. Introduction**

Many financial decisions are made infrequently and without immediate feedback that can be used to improve decision-making (Thaler and Sunstein, 2008). In addition, these decisions may involve unfamiliar concepts especially to individuals with limited financial capabilities (Lusardi and Mitchell, 2007, 2014) and as a result financial consumers may not necessarily choose the most cost-effective product or the one most suitable to their needs (see for example, Gross and Souleles, 2002; Choi et al., 2011; Duarte and Hastings, 2011; Hastings et al. 2012; Agarwal et al. 2013 and Campbell et al. 2011 and DellaVigna 2007 for reviews).<sup>1</sup> More generally, 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 all credit and savings products offered by the 26 institutions that were part of the study targeted to low-income households. The total annual cost of a 10,000 pesos loan (748 USD) ranges from 10.71 percent to 326.53 percent. The total annual yield for savings products with an initial deposit of 5,000 pesos (374 USD) exhibits a similar pattern. The yield ranges from -63.60 percent to 6.17 percent for an investment account and from -100 percent to 5.12 percent for a checking account. This large price dispersion is the result of a market failure created by the information asymmetry between less informed customers and better informed financial institutions and the misalignment of their incentives.

Many governments around the world have tried to reduce the information asymmetry by introducing legislation to improve disclosure and transparency, and in some cases have mandated that lowcost savings products be offered in the marketplace or have imposed usury laws capping the interest rate that can be charged on credit products (Chien, 2011). From a political economy perspective, mandated disclosure laws are easy to enact because they only require the provision of information leaving the actual products unregulated.

An early example of mandated financial disclosure is the Truth in Lending Act of 1968 which required that consumers in the US be presented with key financial terms for credit products, and standardized the calculation of certain key product terms and disclosure formats. Mexico enacted a similar law in 2009 and in addition, as part of the Law on Credit Institutions of 2007 the Bank of Mexico requires that all deposit-taking institutions offer a “basic account” without account opening, deposits, withdrawals, balance enquiry fees, or debit card fees.<sup>2</sup>

> 1 Agarwal et al. (2013) find that if feedback is fast enough, then financial learning can occur, albeit the hard way:  credit card fees paid by new card holders fall during the first three years after account opening because after paying a fee, consumers adjusted their behavior to avoid paying it in the future.

> 2 Table 1 also reports the summary statistics for mandated basic savings accounts offered by the institutions in the study. As expected, the mean in annualized yield is higher and variation is lower than that of checking accounts, and they do not vary by whether avoidable fees are included or not, since most of the basic accounts do not charge avoidable fees. We note that only data for 13 of the 26 institutions are reported in Table 1. While all institutions must offer the account, they are free to set a

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