Retail Financial Markets with Inexperienced and New Financial Consumers
The study of household finance has been concerned with how households use and ought to use financial markets to achieve their objectives. A vast majority of Indian households are either inexperienced or new to the concept of using financial markets to achieve their objectives. In this setting, one of the primary concerns of policy makers and researchers have been about the design of consumer financial regulation to minimise, or better still, prevent exploitation of financial consumers by experienced, profit-driven financial firms.
In an ideal market-driven economy, competition plays a key role in ensuring that firms do not exploit consumers because other competing firms could potentially reveal such exploitation and win over consumers (or demand). This profit-driven motive, however, may not necessarily work when consumers are myopic or unaware — a setting that echoes the current state in India. In an influential academic work, Xavier Gabaix and David Laibson argue that highly competitive markets are not immune from exploiting myopic consumers, since as long as they exist, both financially aware and rational consumers and financial firms are likely to exploit this to their gains. Such a possibility endangers a positive welfare improvement for households through financial market participation, particularly when such exploitation may have distributional consequences with the poor often losing out to the rich.
One approach is for regulation to be gatekeepers of what products are available in retail financial markets. However, this approach assumes that regulators are fully aware of the entire gamut of household needs, and therefore can perform this function without impeding innovation in both the product space and in reaching the last mile. Another approach is to design, test and deploy market interventions that could “correct” such exploitative tendencies from firms.
We asked ourselves what are the ideal features of such an intervention while working on the Bharat Inclusion Research Fellowship project. Over the past few months, we have had several in-depth engagements with Bharat households — in pilot studies, focussed group discussions, through friends and family and with surveyors who are the direct point of engagement with households in this study — and have arrived at four broad aspects that are likely to make market interventions successful. The first feature we deem necessary for an intervention to make markets work for Bharat is what we term as a “needs filter”. While households assess products based on their needs when it comes to purchasing a car, or a two-wheeler, or the size of a house, it may be harder to do so with financial products simply because they do not possess prior experience, or the tools to sieve through the current product landscape to map to their needs. The second feature we deem necessary is to provide tools to prioritise product features. While a firm may choose to focus a consumer on aspects that make their product look favourable, an intervention that draws consumers’ limited cognitive space to those features of any product they are being sold will be critical. The third feature is to provide choice and alternatives that transcend product boundaries to achieve the same outcome at the lowest cost possible. We believe that these three features will increase the likelihood of success with an intervention to enable households take better financial decisions. Lastly, we believe that the credibility of the information provider in this intervention will matter a great deal. The provider needs to be seen by households as having no conflict of interest, nor be influenced or be dependent on firms to generate the information provided to them.
The intervention, if successful, is likely to have two types of changes to the market. First, it creates a real opportunity for households to be “informed” and less unaware by way of a surgical, focused financial education at the point of sale. We expect this to alter their purchase decisions without relying on market forces and competing firms to unshroud product features and information. Second, the very existence and take-up of such an information generating infrastructure is likely to change the behaviour of firms operating in this market and result in an equilibrium where firms are less likely to engage in shrouding information relevant to decision-making. While the first is the focus of our experiment in the field, the second is only likely to be observed when such an intervention in observed dynamically over time. Our current experiment, we believe, is the first step towards a full-fledged market intervention in retail financial markets to enable inexperienced households take a step in the right direction.