metadata: authors: 0: author: Gine,Xavier
1: author: Garcia,Nidia
2: author: Gomez-Gonzalez,Jose
count: Colombia
docna: 0: docna: Financial information in Colombia
docty: Policy Research Working Paper
subtopic: Legal Institutions of the Market Economy,Educational Sciences,Financial Literacy,Finance and Development,Financial Sector Policy
teratopic: Public Sector Development,Finance and Financial Sector Development,Education
abstracts: cdata!: An audit study was conducted in Colombia
            following the protocols in Giné and Mazer (2017).
            Trainedauditors visited multiple financial institutions
            (both regulated and unregulated), seeking credit and
            savingsproducts. Consistent with Gabaix and Laibson (2006)
            and similar to Giné and Mazer (2017), the staff onlyprovided
            information about the cost when asked, disclosing less than
            a third of the total cost voluntarily. Inaddition, clients
            were rarely offered the cheapest product, most likely
            because staff was incentivized tooffer more expensive and
            thus more profitable products to the institution.
geo_reg_key: 119228,517191
repnme: repnme: Financial information in Colombia
display_title: Financial information in Colombia
listing_relative_url: /research/2017/03/27249206/financial-information-colombia
topicv3: Education m1327048 470,Consumer Protection m1327226 364,Financial Disclosure m1327252 2081,Financial Literacy m1504979 3391,Financial Institutions m1505015 3797
publishtoextweb_dt: 2017-03-07T00:00:00Z
historic_topic: Public Sector Development,Finance and Financial Sector Development,Education
no_of_pages: 29
author_keys: 0: author_key: 658884
model_extractions: WPS7998 Policy Research Working Paper 7998 Financial Information in Colombia _Xavier Giné Nídia García José Gómez-González_ Development Research Group Finance and Private Sector Development Team March 2017
Policy Research Working Paper 7998

# **Abstract**

An audit study was conducted in Colombia following the protocols in Giné and Mazer (2017). Trainedauditors visited multiple financial institutions (both regulated and unregulated), seeking credit and savingsproducts. Consistent with Gabaix and Laibson (2006) and similar to Giné and Mazer (2017), the staff onlyprovided information about the cost when asked, disclosing less than a third of the total cost voluntarily. Inaddition, clients were rarely offered the cheapest product, most likely because staff was incentivized tooffer more expensive and thus more profitable products to the institution.

This paper is a product of the Finance and Private Sector Development Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at xgine@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Financial Information in Colombia**<sup>∗</sup>

Nídia García Banco de la República, Colombia Xavier Giné World Bank José Gómez-González Banco de la República, Colombia Keywords: financial information, audit study. JEL codes: D14, G18, G21, O16.

>  García: <u>ngarcibo@banrep.gov.co; Giné: xgine@worldbank.org; Gómez-González: jgomezgo@banrep.gov.co. We thank the</u> State Secretariat for Economic Affairs of Switzerland (SECO), the Knowledge for Change Program and the Strategic Research Program of the World Bank for funding and to Rekha Reddy for design support and useful suggestions. We would also like to thank the Superintendencia Financiera de Colombia and in particular Ernesto Murillo and Maria Fernanda Tenjo for their collaboration throughout the study, IPA Colombia for data collection, and Nohora Forero, Diego Rodríguez and Ildrim Valley for outstanding research assistance. The views expressed in this paper are those of the authors and do not reflect the view of the Banco de la República or its Board of Directors.
# **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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The scripts used by auditors are described in Giné and Mazer (2017) and differed along four dimensions. First, we introduced product specific variation. Savings auditors expressed a preference for either a transaction or an investment account where funds would be deposited for a minimum duration of one year. To study whether lenders issued credit responsibly, credit auditors requested a loan amount of either 20 percent or 70 percent of their household’s annual income, thus creating exogenous variation in the level of household indebtedness when requesting the loan. Second, to study whether the staff provided information to customers according to their perceived ability to absorb it, we varied the financial sophistication (experience) of the auditor made salient by the language used and the level of engagement during the visits. Third, to study the degree to which the staff was able to tailor the terms of products offered, we varied the level of competition among experienced auditors by stating that a competing institution had offered them better terms. Finally, we created variation in the dress code used during the visit. Each auditor was given a randomized list of branches to visit and was randomly assigned to a script.

Using the actual terms of the products offered to auditors, we develop a transparency index that reports the percentage of the total cost of a product that is disclosed to the client by the staff, either voluntarily or after being prompted. The model of Gabaix and Laibson (2006) provides a useful framework to make sense of the results. In the presence of enough uninformed customers, the model predicts that firms in equilibrium will fail to advertise fees and charges that uninformed customers will end up paying and informed customers will try to avoid. Thus, advertising will be deceptive rather than informative and firms will have no incentive to de-bias customers (see also Gurun, Matvos and Seru, forthcoming).<sup>5</sup> We find that the staff provided enough information to allow auditors to apply for the loan or to open the savings account, but that very little voluntary information about the costs of the product was provided. The transparency index with voluntary disclosure of information is around 47 percent for both transaction accounts and credit products.<sup>6</sup> In sum, auditors are provided with too little information to make meaningful comparisons across products.

The remainder of the paper is organized as follows. Section 2 describes the regulatory environment and financial market for low-income households in Colombia. Section 3 reviews the predictions of Gabaix and Laibson (2006). Section 4 describes the experimental design while Section 5 describes the data and empirical strategy. Section 6 reports the results, and Section 7 concludes.

> 5 We note that if consumers were rational, then shrouding would actually hurt the financial institution, as consumers faced with impartial disclosure of fees and commissions would assume they are high and purchase from banks that disclose more information. Shrouding behavior by banks would thus unravel, forcing banks to disclose all the information (Grossman, 1981; Jovanovic, 1982; Milgrom, 1981). There is evidence however suggesting that consumers tend to ignore not only information that is not disclosed (see Nisbett and Ross, 1980 for an early review), but also disclosed information that is not made salient (Finkelstein, 2009 and Chetty, Looney and Kroft, 2009).

> 6 The index ranges between 0 and 100 percent, where 0 percent indicates that no information about the cost of the product is disclosed and 100 percent means that the full cost of the product is disclosed

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# **2. Context**

Financial markets in Colombia have been transformed recently by the appearance of new providers and new intermediation channels such as agent and mobile banking. Many of these new actors, products and channels have appeared to provide financial services to certain segments of the population that have been traditionally excluded from the financial system.

Between 2011 and 2015, the number of financial access points increased substantially. Nowadays, all municipalities have at least one financial access point available. This is explained by the spread of banking agencies throughout Colombia, increasing from around 19.938 in 2012 to 95.000 in 2015.

Today, however, the percentage of individuals with savings accounts or credits with the financial system remains low with respect to international standards. In the case of savings accounts, which are usually the first products that link Colombian consumers to the financial system, only 50.5% of the population had one in 2015. This percentage, which is clearly below the average for OECD countries, may show that the country has yet important barriers to overcome in order to enhance growth in household savings. It is worth mentioning that many households still use informal ways to save. Twenty-four percent of respondents of a survey conducted by Banca de las Oportunidades and the Financial Superintendence of Colombia in 2015 reported participating in Rotating Savings and Credit Unions. In addition, only 26.2% of the population reported having a loan from a financial system while 33.0% reported having informal loans.

Although efforts to promote financial inclusion have shown some success, many challenges remain, especially in rural municipalities. In particular, dispersed rural population do not have access to financial products that meet their needs. Colombia enacted Law 1735 of 2014 for example to encourage the design and implementation of electronic payment services that should ease access of the rural population to the financial system.

This new financial landscape in Colombia has improved the relevance of the consumer protection and financial education of the population in a context where an increasing percentage of the population is having access to the financial system.

In this sense, Colombia has enacted laws and decrees to strengthen the regulatory environment for promoting consumer protection and financial education.

Law 1328 of 2009, and later Law 1748 of 2014 established the rules and principles for the transparency and disclosure of the financial information in order to improve the financial consumer protection.<sup>7</sup> Mandatory information to be provided includes the terms and conditions of the contracts,

> 7 Other regulation related to consumer protection include Decree 2555 of 2010, Decree 4809 of 2011 and Decree 1854 of 2015 as well as the SFC ́s Circular Básica Jurídica Part I, Title III and Circular Externa 029 of 2014.

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including the APR and APY, and a list of all fees. These laws also establish that institutions regulated by the SFC must provide their clients clear and timely financial information allowing them to be adequately aware about their rights and obligations with the regulated financial institutions, and enough information for them to be able to compare costs among products. Particularly, Law 1748 of 2014 mandates that financial institutions inform their clients in addition to the interest rate paid or received by them, the Unified Total Value for all items, actually paid or received by the client in all their products and in advance to the conclusion of the contract, but this law is not currently enforced.

Additionally, Law 1328 and Law 1480 established that financial institutions must provide financial education to their clients. Decree 457 of 2014 which was drafted by the Inter-Sectorial Commission for Economic and Financial Education, in charge of designing and implementing the National Strategy for Economic and Financial Education, states that consumer protection is one of the main objectives.

One issue hindering the effectiveness of financial disclosure is the low level of financial capabilities among Colombians. According to the PISA 2012 results, Colombia occupied the last position (out of 17 countries) on financial literacy. This low level of financial capabilities may impact financial decisions. People unaware of the consequences of their financial behavior are more prone to making bad decisions. In fact, a 2012 World Bank study found that just one-third of those surveyed could calculate a simple interest rate, and that 69 percent of the surveyed population stated they were never taught how to manage their money. A survey conducted by the CAF in 2014 showed that only 12% of the people surveyed managed the concept of compounded interest rates, only 36% mentioned to have a financial plan for their lifetime, and 67% reported to have had economic difficulties in the near past. Similarly, in a survey conducted by Banca de las Oportunidades and the Financial Superintendence of Colombia in 2015, only 62% of the people surveyed mentioned they knew the different costs associated to their financial products.<sup>8</sup> From a policy perspective, mistakes in financial decision-making due to limited information would be less of a concern if all financial products offered were relatively cheap. However, the cost of financial products varies drastically depending on whether certain product fees are incurred (World Bank, 2008). While according to Asobancaria the costs of financial products in Colombia remain average for the region, the perception of consumers is that these costs are high.

Many of the respondents of the survey conducted by Banca de las Oportunidades and the Financial Superintendence of Colombia in 2015 had a negative perception of the financial system. In particular, the main two reasons for not saving using financial products are the high costs associated with the ownership of a savings account (34%) and the perception that the products offered by the system are inadequate for their needs (22%).

> 8 However, the results of our study suggest that probably this self-reported percentage is overrated.

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This may explain why uptake and usage of financial products is low compared to other countries. Although data sources differ, only 64.5% of adults reported an active usage of their accounts during 2015 (RIF, 2015). World Bank Financial Inclusion (Findex) data finds that the percentage of those with an account increased from 30.4% in 2011 to 39% in 2014.

Table 1 reports summary statistics for all credit and savings products that could have been offered by all 46 financial institutions to the study auditors. For consumer credit loans, Table 1 reports the total annual cost of a loan to be repaid over 12 months with monthly installments.<sup>9</sup> For savings products, Table 1 reports the total annual earnings from a deposit in a term account and in a transaction account.<sup>10</sup> The table presents two different costs (or returns) depending on whether or not usage fees are incurred. The reason for presenting costs and returns this way is that information (or lack thereof) on usage fees is relevant since behavior can be adjusted to avoid incurring them. For example, a well-informed borrower could have borrowed from elsewhere to meet the installment payment obligation and avoid a high late payment fee while a well-informed saver could have timed the deposits and withdrawals from the account to prevent the balance from falling below the minimum thus avoiding the minimum balance fee.

Thus, when the total cost (and return) include only fees that must be incurred to acquire the product (i.e. without usage fees) the cost refers essentially to the annual percentage rate (APR) and annual percentage yield (APY) that had to be disclosed in Colombia. But because usage fees are only incurred if the client engages in certain behavior, the reported cost and returns with usage fees are computed using a hypothetical usage profile suggested by the regulators as typical among low-income consumers. For credit, we assume that the client misses one payment; for fixed term deposit we assume that the client withdraws part of the money before the maturity while keeping the remainder until the end of the year. For the transaction account, we assume that the client is charged for two account inquiries and withdrawals per month, debit card replacement, a month long account inactivity and is penalized because the client maintains an average balance below the minimum required for 2 months per year (ex: avoidable fees).

According to Table 1, the average total cost of the credit product with unavoidable fees only was of 27.34%, similar to the average cost when avoidable fees are included (27.42%). However, mean values are not very informative, as a large variation in these costs was observed, ranging from a minimum of 9.63% to a maximum of over 58 %.<sup>11</sup> Annualized yields for savings products exhibit a similar pattern. Investment accounts yield on average 4.66% without avoidable fees and 4.16% if these fees are included. Transaction accounts have lower (negative) annualized yields averaging 1.30% without avoidable fees, or -0.02% if

> 9 Loan amount was 6,200,000 COP (about 2000 USD using the exchange rates at the time of the study).

> 10 Savings deposits were 1,500,000 COP (around 515 USD).

> 11 One reason for the high observed variation in the costs of credit is due to the heterogeneous rates offered by different types of financial institutions. Banks typically offer the lowest rates; while microfinanance institutions offer a higher interest rates. This results from differences in regulation policies for these types of institutions.

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these fees are taken into account.

Table 1 suggests that small differences in behavior can have large impacts on the cost or return of a product, especially for credit and transaction accounts, and thus, accurate information on overall costs and in particular usage fees can save customers sizeable amounts. Additionally, costs vary largely within financial institutions. A well-informed consumer, with the possibility to compare between products and financial institutions, could perceive lower costs (higher returns) than a poorly informed one.

# **3. Theory**

Recasting the example in Gabaix and Laibson (2006), imagine that a financial institution can offer a 2 percent deposit rate on a savings account so long as it can also charge a fee whenever the average monthly balance falls below a certain minimum, to break even.<sup>12</sup> If the fee is not assessed, the institution can only offer a 1 percent deposit rate. Suppose that there are two types of customers, naïve and sophisticated. Naïve customers are not informed about the minimum balance fee (or do not ask about it when opening the account) and thus decide which account to open based on the highest deposit interest rate offered. In contrast, sophisticated customers know about the fee. Assume further that if customers do not take action, the timing of their deposits and withdrawals is such that the average balance will fall below the minimum thus resulting in the minimum balance fee being assessed by the bank. Customers however can exert some effort to change the timing so that the balance never falls below the minimum.

In this setup, banks will market accounts with a 2 percent deposit rate, failing to disclose the minimum balance fee, to attract naïve customers. Given the assumptions made, all naïve customers will end up paying the minimum balance fee, unaware of it. Sophisticated customers will also be attracted to the 2 percent deposit rate but will never pay the minimum balance fee as they will take action to avoid it. Banks will therefore make enough money from naïve customers to cover the losses from offering the account to sophisticated consumers: naïve customers will cross subsidize the sophisticated ones.

Note that if a bank decided to price the savings account more transparently, offering savings accounts at 1 percent without the minimum balance fee, no customer would be attracted to the 1 percent account because it offers a lower interest rate. All customers would still demand the 2 percent savings account, naïve customers failing to realize that they will end up paying the minimum balance fee and sophisticated ones realizing that they are better off earning 2 percent and avoiding the minimum balance fee altogether.<sup>13</sup> The equilibrium is thus one in which financial products offered have hidden fees that are

> 12 Note that this fee will only be assessed to the subset of customers whose average balance falls below the minimum. We assume that the bank knows this fraction of customers in the population and that given the deposit rate offered, it can calibrate the fee to break even.

> 13 Alternatively, naïve customers could understand the fee structure but be over-optimistic about the chances of their savings balances falling below the minimum. In either case, they would prefer the 2 percent account to the 1 percent account offer.

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only taken into account by sophisticated consumers. More formally, the following testable implications can be derived:

1. The staff of financial institutions are knowledgeable about the financial product but will only provide customers with information to contract it, without disclosing its cost voluntarily. As a result, both naïve and sophisticated customers are aware of all requirements to open a savings account or contract a loan. In addition, sophisticated customers ask about fees such as the minimum balance fee on deposit accounts or the late payment fee in credit products and thus learn about such costs while naïve customers do not ask about them and thus remain uninformed.

2. Naïve and sophisticated customers are offered the same product, but naïve customers will earn less net interest on savings and pay more in total for credit as they also pay fees.

In Section 6 we test these predictions more formally.

# **4. Experimental Design**

The audit study was conducted in collaboration with the Banco de la República (Central Bank of Colombia) and the Superintendencia Financiera de Colombia (Financial Superintendency). Bogotá (capital) and two other cities (Tunja and Pereira, with populations of 190,000 and 470,000 respectively, were selected for the study. A radius of 1.5 km was drawn from the business center, and a census of every financial institution inside the circle was conducted. We found a total of 64 distinct institutions across these 3 cities. For the purposes of the analysis we differentiate between audit studies conducted in the capital Bogota and other areas.

Credit auditors requested a 12-month loan for a household expenditure, preferably with monthly installments. The expenditures included house repairs, medical expenses and children’s school supplies, among others. Savings auditors were assigned an amount of 1,500,000 pesos (515 USD) that they wanted to deposit.<sup>14</sup> Since we wanted to capture all the information and materials that staff would provide to prospective clients up until the signing of the credit contract or opening of a savings account, a visit by the auditor was deemed complete when either the institution refused to open the account or granted the loan, or when the auditor was asked to sign the contract. Because credit auditors had to reside locally, we could not use professional auditors. Instead, we recruited 39 auditors from low-income households living in the study locations. Table 2 reports the characteristics of auditors. There were 19 men and 20 women, with

> 14 The loan maturity and savings amount were suggested by the regulators as the modal loan maturity and a typical balance in a savings account. The local currency was converted to USD using the prevailing exchange rate during the study period.

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ages ranging from 19 to 61. Education levels were average for the low-income population, ranging from primary to undergraduate education. Credit auditors made 153 visits (total 153 auditor-branch pairs since no multiple visits were needed to complete a loan application process). Savings auditors carried out a total of 156 visits.

Credit and savings visits took place between the months of March and July 2015. In a given location, a branch was always visited by more than one auditor. After each visit the auditor was required to complete a questionnaire.

Immediately after recruitment, auditors were randomized into savings and credit scripts, stratifying by gender. Auditors memorized the script and used a uniform language when asking about the products. Appendix Table 1 documents the contract terms about which auditors had to ask if the staff did not disclose the information voluntarily. During the training, the auditors and field manager were never told about the purpose of the study nor the specific hypotheses we wanted to test.

The scripts, also described in Giné and Mazer (2017) varied along three dimensions: financial sophistication or literacy, the degree of perceived competition and the dress code used in the visit.

Appendix Table 2 shows that for the 5 auditor characteristics we collected, there is balance in 9 out of 10 comparisons. In particular, credit auditors assigned high experience profiles are marginally more likely to be older. We conclude therefore that the profiles are assigned randomly and that the samples of auditors in each script are balanced.

# **5. Data**

We use data from 4 different sources. First, the questionnaire filled by auditors after each visit which covers various aspects of the visit, including its length, the products offered and their features. Second, the printed materials that the staff handed to the auditor, consisting of either brochures about the product or, less frequently, personalized amortization tables when credit was requested. The third data source comes from a survey of a sample of credit officers that serviced the auditors. The survey was conducted after the audit study was completed and asked about basic socio-economic characteristics, financial literacy, the marketing of financial products and bonus schemes offered by their employers. The fourth and final data source is what we refer to as the market products dataset containing the terms of all the savings and credit products offered by the institutions in the study at the time of the visits. This dataset was assembled using various sources including the web, market surveys and conversations with the regulatory authorities and staff of the financial institutions. The dataset only includes credit products with loan sizes in the range requested by the auditors, and savings products that can be contracted with the initial deposit amount mentioned. The construction of this dataset proved challenging for two reasons. First, the authorities in charge of collecting market information only require the average of certain terms for the institutions they supervise. As a result, they did not have detailed data on all the terms for all credit 9
and savings products of supervised institutions and they lacked all product data for unsupervised institutions. The web was therefore used to fill in missing information, but since many of the terms were not available online either, they had to be requested directly from the institutions, particularly unregulated ones. The other problem was that financial institutions were not always able to disclose their product portfolio at the time of the study when asked a few months later. This resulted in a product dataset with 1,206 saving and 216 credit products. These data are used to generate Table 1 and to assess the total costs of the products offered to the auditors.

We use data from the questionnaire, and market products dataset to construct variables related to the amount of information provided by the institutions.<sup>15</sup> We first matched the product offered to the auditor during the visit to the actual product in the market product dataset using the commercial name of the product when available. Although auditors were instructed to gather the commercial name during their visits, the staff failed to provide it in more than half of the visits. For visits without recorded product commercial name matching was done based on other product attributes like the type of savings account (transaction vs. investment), the interest rate quoted, and the presence of several fees. Even when a product offered was found in the market products dataset, the match could not sometimes be used because the market products dataset contained missing terms for the product. The resulting sample of matched products consists of 119 savings and 59 credit products.

From the different product terms collected (see Footnote 15) not all are equally relevant or important, because they may not apply or may not be charged. For this reason we develop a “transparency index” that reflects the disclosed cost as a percentage of the total (annual) cost of the product. The index ranges between 0 and 100 percent, where 0 percent indicates that no information about the cost of the product is disclosed and 100 percent means that the full cost of the product is disclosed. The index is thus a ratio where the numerator is the sum of product-relevant costs disclosed by the staff and the denominator is the total cost of the product. For example, if a savings product has a monthly management fee, then the annualized cost will be included in the denominator and will appear in the numerator if the staff mentioned it.<sup>16</sup> Because the total cost may include usage fees, we compute the transparency index with the usage profile suggested by the staff of the Banco de la República and the Financial Superintendency of Colombia and used in Table 1. The transparency index is reported for all costs disclosed orally as well as the costs disclosed voluntarily by the staff, that is, those costs that were not prompted by the auditor. The

> 15 For savings products, the fees include (1) opening fee; (2) management / administration fee; (3) membership fee; (4) debit card fee; (5) the interest rate offered; (6) the total annual earnings (APY); (7) inactivity penalty; (8) account inquiry cost; (9) cash withdrawal cost; (10) debit card replacement fee and (11) early withdrawal fee for investment accounts. For credit products, the fees include (1) interest cost; (2) insurance (e.g. life, default); (3) membership cost; (4) credit acquisition costs; (5) management / administration fee; and (6) late payment.

> 16 In this example, if there was no management fee, then it would not appear in the numerator or denominator although the staff could have mentioned that such a fee was not assessed.

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transparency index is also computed for the printed materials, such as brochures and amortization tables given to the auditors during the visit.

In addition to the information provided we assess the cost of the product offered and compare it to other similar products offered by the same institution. We compute the total costs and earnings without usage fees, using the formulas for total annual cost and total annual earnings (APR and APY), and with usage fees under the profiles of Table 1.

# **6. Empirical Strategy and Results**

Similar to Giné and Mazer (2017), because the assignment of scripts to auditors was random, we can run the following OLS regression for savings visits: where yij is the outcome of interest for auditor _i_ visiting institution _j_ , HLi is an indicator for high literacy or experience, HIij takes value 1 if auditor _i_ visiting institution _j_ quotes a high interest rate (high competition in case of savings), while LIij is an indicator for a low interest rate quote (low competition). In addition, INVi is a dummy that takes the value of 1 if auditor _i_ has a preference for an investment account or fix term deposit (0 if transaction account) and the dummy Fij takes value 1 if auditor _i_ visiting institution _j_ was dressed in a formal way. The variable εij is a mean-zero error term. The regression specification includes a dummy for whether the institution is located in the capital (Cj). The vector Xi denotes the gender and employment status of the auditor. Standard errors are clustered at the auditor level.

For credit auditor-branch pairs, a similar specification is used. Note that if the pair involved more than one visit, the outcomes are aggregated up to the pair level. Instead of INVi dummy, we include the dummy HDi that takes the value of 1 if the auditor asked for a loan amounting to 70 percent of its household income (0 if asked for a loan of 20 percent of its household income). In the credit specification, the indicator for high interest rate HIi (low interest rate LIi) denotes low (high) competition because a credit at lower cost is more attractive.

Tables 3-6 report in each column the coefficients in regression (1) above for different outcomes yij related to the visit, the transparency index, interest rate disclosure and the relative costs of the financial products offered compared to the cheapest alternative that was not offered. In all of the tables, the first 4 rows show the coefficients associated with the script indicators. The tables then report the number of observations and the mean of the dependent variable for auditors for whom all script indicators take value zero. These “control” auditors are neophytes. In addition, savings control auditors have a preference for a 11
transaction account while credit control auditors ask for a loan of 20 percent of household income. Tables 3-6 then test for induced competition by reporting the p-value of a t-test that quoting a high interest rate is the same as quoting a low interest rate for auditors with experience (HLi ∗HIij = HLi ∗LIij). They also report the p-value of an F-test that both experienced coefficients (HLi ∗HIij and HLi ∗LIij) are jointly zero (HLi = 0).

Columns 1-4 and 5-8 of Table 3 report characteristics of savings and credit visits, respectively. Columns 1 and 5 of Table 3 report the average wait time by credit and savings auditors, respectively, before talking to the staff. Because auditors had to wait in line to inquire about any product, the wait times are comparable across products. Columns 2 and 6 report the average face to face time with the staff. Control savings auditors spent on average 10.8 minutes talking with the staff (column 2), while credit auditors spend 19.1 minutes (column 5).

In column 2, experienced savings auditors reported significantly longer interview times relative to neophyte auditors by 5.6 and 4.3 additional minutes depending on the interest rate quoted from other institutions, although this difference is however not significant.<sup>17</sup> This longer interview time with experienced auditors simply reflects the fact that they were instructed to ask more questions about the cost of the product if the staff did not provide such information voluntarily (see Appendix Table 1 for a list of items that auditors had to ask about if the information was not provided voluntarily).

Column 3 reports if the auditor was offered the savings product he or she was looking for. Control auditors were offered the type of savings account they requested 100 percent of the time and there are no differences by auditor experience.

In column 6, auditors visiting banks in the capital area had a face to face time of 14.9 minutes while the face to face time in the other areas was approximately 17 minutes. In contrast to the savings audits, experienced auditors did not have more face to face time with the staff although they did ask more questions. However, auditors asking for a loan amounting to 70 percent of its household income faced a shorter interview time, possibly because staff anticipated a rejection earlier in the interview.

Column 7 reports the probability that the loan application was rejected by the lender. About 23 percent of the control credit auditors were told they did not qualify for a loan. Interestingly, none of the treatment dummies are significant, suggesting that experience or indebtedness played no role in the likelihood of loan rejection. Financial institutions in the capital tend to reject more applications (60 percent versus 18.4 percent). Interestingly, among auditors that were offered a loan, auditors approved in the capital were approved amounts significantly smaller than those requested (column 8).

> 17 It is not clear a priori whether the extent of competition should play a role in the length of the interview because when faced with an auditor that has an alternative offer with a lower interest rate, say, the staff could spend more (or less) time convincing the auditor about the better product offered in the institution.

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Table 4 explores whether the information about costs provided to auditors conforms with the predictions of the Gabaix and Laibson (2006) model reviewed in Section 2. Prediction 1 states that customers will only be provided with the required information to contract the product, without voluntarily disclosure of cost information. Columns 1 and 5 confirm this prediction by reporting whether the staff asked for documentation required to open an account and take out a loan, respectively. Control savings and credit auditors were asked for this information in 95 and 90 percent of the visits, respectively. In addition, for savings products the treatment dummies are not significant suggesting that the staff requested the same information from all auditors, irrespective of their experience. Columns 2-3 report the transparency index for savings products. Column 2 includes in the numerator all the cost information disclosed to the auditor orally, regardless of whether it was provided voluntarily or prompted by the auditor when the staff failed to disclose it voluntarily. Column 3 includes in the numerator only cost information disclosed voluntarily by the staff. Columns 2 and 3 confirm Prediction 1 of the model, as the staff discloses little cost information voluntarily, and only experienced customers that ask about costs learn about them, while neophyte auditors remain uninformed. In column 3, none of the treatment indicators are statistically significant, indicating that staff does not voluntarily disclose more information to experienced auditors. In contrast, the results in column 2 suggest that experienced savings auditors managed to acquire significantly more cost information, an increase of 13 percent for the low interest rate quoted, compared to neophytes. While the coefficient on HLi ∗LIij is not statistically significant, a test that HLi ∗LHij = HLi ∗LIij cannot be rejected, and a joint test that HLi = 0 can be rejected with a p-value of 0.002. This underscores the vulnerability of low-income poorly educated consumers who are less likely to ask relevant questions about the cost of the products. Control auditors are provided about 70 percent of the cost of the product, which is relatively higher than numbers in similar studies in other countries. The staff provides significantly more information than in other countries, perhaps due to the existing better financial disclosure regulation. Thus, staff are informative when auditors know what to ask (Robert and Stahl, 1993).

The transparency indices for credit products are reported in columns 7-8. The results are different from those for savings. According to column 7, experienced credit auditors are given the same information as that provided to control auditors.

Columns 4 and 8 report whether auditors were given any printed materials (generic brochures or personalized information) during the visit. About 57 percent of savings auditors and 63 percent of credit auditors were given any material and among those who were, the mode was one brochure for both products. Although experienced auditors asked for a key facts statement and the contract to review prior to signing, no auditor (experienced or not) was ever given these documents.

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To underscore the point that the staff only provided cost information when prompted, Table 5 reports the voluntary and eventual disclosure of the interest rate and APY / APR. The dependent variable is a dummy that takes value 1 if the rate was disclosed. Columns 2, 4, 6 and 8 report the voluntary disclosure of the interest rate and APY/APR for savings and credit products, respectively. In line with the results from Table 4, voluntary disclosure is low, especially for APR. The staff disclosed the interest rate for savings products voluntarily in 19 percent of the visits and in 47 percent of the visits for credit products. In column 1, virtually all of the auditors were eventually provided information about the interest rate. In column 5, auditors were provided with the interest rate in 93 percent of the visits, significantly higher than that of column 6 because credit auditors had to inquire about the interest rate. If one feels that comparing disclosure rate between the interest rate and APR/APY is problematic because APR/APY are concepts that are more difficult to explain, then this result provides a sharper test about the behavior of the staff of only providing information when the client asks about it, at least for credit. For savings, column 4 suggests that experienced auditors provided information about the APY voluntarily. In addition, columns 3 and 7 make again clear that experienced auditors received information about the APY and APR, respectively because they were instructed to ask about them.

Table 6 can be used to test Prediction 2 of the model, which states that all customers are offered similar products. Columns 1 and 2 of Table 6 report the total yield after one year that would accrue in the savings account under the assumption of “no usage” (column 1) and “usage” (column 2). “No usage” refers to an activity level without deposits to or withdrawals from the account for one year. In this case, if inactivity fees are not assessed, then the formula to calculate total yield coincides with the APY. In column 2, “usage” assumes an activity level of 2 account inquiries and 2 cash withdrawals per month, penalty for a month long account inactivity, and a penalty if the average balance in the account is below the minimum allowed. As expected, auditors with a preference for investment accounts are offered higher yields as they are more profitable for the institution, but we also find that experienced auditors are given slightly higher yielding savings accounts, especially among those that quoted a low interest rate. Columns 5 and 6 report the total cost of credit products with and without a late payment, respectively. In the case of savings products Prediction 3 is confirmed, because all auditors are offered similar products, but not in the case of credit products where experienced individuals seem to receive higher interest rate loans.

Columns 3 and 4 report the difference in total yields between the cheapest savings product that the institution could have offered while meeting the needs of the auditor and the actual product offered. None of the financial literacy treatment dummies is statistically significant, suggesting that financial literacy does not affect the yield of the savings product offered. Columns 7 and 8 report the difference in total costs between the cheapest credit product offered by the institution and the actual loan offered to the auditor.

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While all auditors were offered more expensive products, experienced auditors, especially those that claimed to have a lower offer from a competing bank, appear to receive a cheaper credit product.

Why do staff provide little information voluntarily and offer relatively more expensive products? Table 7 tries to address this question by reporting results from the staff survey. About 60 percent of the staff in each country have university degrees. We asked the same interest rate question as in Lusardi and Mitchell (2014) and Atkinson and Messy (2012) and found that 62 percent answer the question correctly. Despite servicing about 18 clients per day, 96 percent of the staff claims to voluntarily provide all the information related to products offered. Yet, their income is subject to incentive schemes that reward the number of sales of certain products. About 46 and 41 percent of the staff report being influenced by their incentive schemes when deciding which credit and savings products to offer respectively. This explains why clients are rarely offered the cheapest product that met their needs.

# **7. Conclusions**

This study follows the protocols in Giné and Mazer (2017) to assess the quality of information that financial institutions in Colombia provide to potential customers seeking savings and credit products as well as the adequacy of products that are offered and finds similar results to those in Mexico, Peru and Ghana. We find that consumers who do not actively engage the staff, are not provided enough cost information. In contrast, experienced auditors who were instructed to ask specific questions about the product if the staff did not disclose the information voluntarily end up better informed. This finding underscores the gap between enacted regulation and its enforcement and how this gap may persist as financial institutions have strong incentives to undermine disclosure initiatives.

In any event, financial disclosure regulation in Colombia could be improved. For example, basic guidance could be provided to consumers on the key questions to ask when looking for a credit or savings product. In addition, information could be provided more transparently as tested in a follow-up to this study in Mexico and Peru (Giné, Martinez and Mazer, 2017). Of course, lenders may choose in equilibrium to spend little time with low-income customers because they are expensive to service, but aggregate terms such as the APR and APY should be adequately disclosed voluntarily as required by law.

This study covers consumer credit and savings products contracted at the branch and may therefore be expensive to offer, especially to low-income populations. A promising avenue is the take-up of low-cost mobile or online savings accounts where interactive channels are available to provide information on a regular basis at a relatively low-cost, or access to financial products as a byproduct of government-toperson payment programs.

Finally, this study focuses on the disclosure of information during the period until the product is contracted (pre-sale period). While the terms of the credit products studied cannot be changed, those of 15
savings products can vary with market conditions and as a result, assessing post-sale disclosure may also be important in future research.

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