Principal investigator: Angelo Cruz do Nascimento Varella
Article title: READING THE FINE PRINT: INFORMATION DISCLOSURE IN THE BRAZILIAN CREDIT CARD MARKET
Article authors: Bruno Ferman
Location of the intervention: Brazil
Sample size: 19.690 credit card customers
Main theme: Finances
Type of Intervention: Experiment with credit card statements
Primary variable of interest: Choice of payment terms
Evaluation method: Experimental Evaluation (RCT)
Policy Problem
High-cost consumer credit is a recurring theme in academic literature, especially regarding the protection of individuals. A particularly heated debate among researchers is based on the understanding that lenders intentionally conceal information about the interest rates charged, in order to distort the client's understanding of the costs involved in credit operations. Consequently, the availability of data on consumer interest rates is a recurring issue among regulators.
However, despite the popularity of public policies aimed at providing consumers with reliable information on interest rates, there is no consensus among academics about the effectiveness of these measures. This is even more relevant in emerging countries, where access to credit can be restricted and particularly expensive.
Assessment Context
In Brazil, between 2000 and 2010, the volume of credit granted to consumers doubled. This expansion was particularly aggressive for credit card transactions, which increased more than 12 times in the same period, despite the high prices charged, usually exceeding 10% per month. For comparison, the average annual inflation rate in the country was less than 7% during the same period.
In part, this increase is due to the increased availability of credit for low-income and middle-class consumers. In particular, there has been an increase in the ease of obtaining credit through credit card companies associated with retail stores, which often restrict the use of the cards to purchases within their own stores, or simply allow conventional use of the cards acquired by customers.
Policy Details
In Brazil, there are two common alternatives for paying off credit card debt for customers who have not made full payment on their bills. The individual can choose to pay a portion of the debt equal to or greater than the established minimum payment amount, typically 15% of the total due, carrying the remainder over to the next bill, with monthly interest rates ranging from 11,89% to 15,99%. A second option is to choose a number of months to make payments in fixed installments. The advantage of this option lies in the pre-approved credit and the flexibility it offers the customer, who can continue using the card.
The experiment was conducted in partnership with a large credit card company, with over five million customers, mostly from middle and lower classes. 19.690 individuals were selected and classified into high and medium risk groups. On average, 30% of customers used the revolving credit option and paid approximately 60% of the total amount, with an average bill of 661 reais.
Assessment Method
In July and September 2010, the company used three distinct parameters for different customer groups in order to validate the analysis of the experiment:
- Interest rate – 3,99%, 7,49% or 11,89% per month;
- Method of disclosure – hidden text in a footnote, within the limits of the law, or a prominent and highlighted display;
- Payment plan duration – 6, 8, 10, or 12 months. It's important to note that customers are free to choose different terms, so this parameter only highlights the options offered by the company.
All parameters were randomly assigned, so that each consumer had the same probability of receiving different conditions to settle their debts. The aim of the study is to evaluate the effects on customers' payment decisions based on the different parameters presented.
Main results
By observing customer choices, the researcher could see that individuals identified information regarding interest rates and acted accordingly, even in situations where the data was discrete. When presented explicitly, risk-prone customers were the only exception, preferring to pay higher interest rates.
Regardless of the disclosure method, approximately 2% of customers chose plans with interest rates around 11,89%, and approximately 4% of consumers opted for plans with interest rates of 3,99%. The result suggests that individuals were able to adequately assess and decide on their payment strategies, regardless of the exposure to information about interest rates.
Among customers who preferred to pay their debts in installments, there was a clear preference for shorter plans, with 53% of consumers preferring to pay in six months, compared to 13% who chose the 12-month option. However, it should be noted that the results change according to the options offered. Even when able to choose any period for installment payments, the preference for longer plans jumped from 16% to 56% when shorter-term plans were not displayed as pre-established options.
Lessons in Public Policy
Contributing to the debate on public policies for consumer protection, the study demonstrates that, on average, individuals are able to consider their payment alternatives, even when information about interest rates is not highlighted on their bills. This indicates that previous research that guided the debate on the creation of protective legislation may have been flawed, so that consumer protection should be directed towards other aspects of credit policy.
Reference
FERMAN, Bruno. Reading the fine print: Information disclosure in the Brazilian credit card market. Management Science, vol. 62, no. 12, p. 3534-3548, 2016.
