A recently released World Bank Policy Research Working Paper presents results of an audit study of Mexican banks, investigating whether bank employees hide the lowest cost options from potential customers in order to turn a higher profit.
Financial products can vary widely in cost while providing more or less the same services. The dispersion in prices for products that offer essentially the same benefits – checking accounts, savings accounts, loans, and index funds – is thought to at least partly reflect a lack of information on the part of consumers. Savvy and informed consumers would gravitate to the lowest cost option, and competition would then drive prices down to the same level for equivalent products.
A key potential source of information on financial product attributes and prices is bank employees. Bank employees presumably know their products, but may strategically choose not to divulge information about lower cost options.
This is in fact what Gine, Cuellar and Mazer (2014) find in their Mexico study. The authors sent trained auditors to 26 financial institutions in lower-income peri-urban areas near Mexico City to attempt to obtain a checking account, an investment account or a small or large loan. Auditors were randomly assigned to demonstrate either low or high financial sophistication during their visit to the bank, to state that they had a competing offer, and to adopt different dress codes.
In the overwhelming majority of cases, auditors seeking a checking or investment account were not offered the cheapest product. In addition, printed materials provided to all auditors contained insufficient information to make product comparisons, and unsophisticated auditors in particular were offered almost no information of any kind on avoidable costs and fees.
Along with this strategic behavior, the auditors found a very large amount of dispersion in costs and fees. Checking accounts varied in yield from -100 percent to 5 percent, savings accounts with a minimum initial deposit varied in yield from -64 percent to 6 percent, and the cost of a loan varied from 11 percent to 327 percent.
Policy options for addressing this problem include disclosure requirements and other regulation. The authors note that Mexico had in fact already enacted some legislation in this direction at the time of the study, requiring in 2009 that costs be reported in a standard format, and in 2007 that banks offer a low-fee “basic” checking account. Despite these requirements, shrouding of prices and product attributes and wide price dispersion persist.
The authors posit that the answer may in fact be more regulation requiring better disclosure, combined with consumer campaigns to encourage potential bank customers to ask the questions that will lead employees to divulge additional information on product costs. Innovations that reduce underlying costs to banks of serving lower-income customers may also result in cost-savings that are passed on to consumers. They include a cautionary comment, however, that the effects of disclosure requirements may remain weak when financial institutions have strong incentives to find ways to circumvent them.