Remembering 2 Pay

There’s a lot of excitement about mobile banking. So much excitement that it’s easy to forget that mobile phones can be used for other purposes—like contacting people. That might be corrected by a new paper on using text messages to remind people to repay loans. The study is by Ximena Cadena, a research analyst at Ideas42, and Antoinette Schoar, a professor at MIT’s Sloane School. It follows on a recent study by Dean Karlan, Margaret McConnell, and Sendhil Mullainathan that shows that savings rates rise when people are sent text messages simply reminding them to save. Cadena and Schoar instead remind people to pay their monthly loan installments.

What makes their study especially interesting is that they compare the impact of a monthly text message reminder (timed to be received just before installments are due) to other kinds of interventions. One alternative is getting a hefty cash bonus for repaying on time. Another is a reduction in the interest rate of their next loan.  

Cadena and Schoar show that the effects are similar for all three interventionsbut the text messages have advantages, especially for younger customers. 

The idea follows from a broader idea in behavioral economics: that customers are often looking for ways to structure their financial lives, both when saving and when borrowing.

Here’s their abstract:
“We report the results from a field experiment with a micro lender in Uganda to test the effectiveness of privately implemented incentives for loan repayment. Using a randomized control trial we measure the impact of three different treatments: Borrowers are either given a lump sum cash reward upon completion of the loan (equivalent to a 25% interest rate reduction on the current loan), a 25% reduction of the interest rate in the next loan the borrower takes from the bank, or a monthly text message reminder before the loan payment is due (SMS). We find that on average the size of the treatment effect is similar across all the treatment groups: borrowers in the treatment groups have a 7-9% increase in the probability of paying on time and the average days late drop by 2 days a month. The results suggest that simple text messages which help borrowers to better manage their repayment dates have similar effects as large changes in the cost of capital of 25% of interest. The impact of the cash back incentives are stronger for customers with smaller loans and less banking experience, the reduced future interest rate seemed to be most effective for customers with larger loans, while the SMS text messages were particularly effective for younger customers.”