Pricing Transparency. Anne-Laure Behaghel November 15, 2017

Transcription

1 Pricing Transparency Anne-Laure Behaghel November 15, 2017

2 2 Objective of the session Reaching adequate transparency in pricing is one of the main challenges that providers meet in their communication with clients. Using the CPP standards related to pricing transparency, which are fully integrated into the USSPM, as well as the 2013 publication Microfinance TRAPS, we will develop upon the concrete aspects that can be implemented at an FSP to improve pricing transparency. CPP: Client Protection Principles USSPM: Universal Standards for Social Performance Management FSP: Financial Service Provider

3 3 Agenda Transparent versus responsible pricing (5 minutes) Definitions (5 minutes) What are confusing prices (15 minutes) Implementing transparency pricing (25 minutes): o What information should be provided? o When should it be provided? o How should it be provided? Convincing a provider to be transparent (15 minutes) Key resources (5 minutes) Questions & answers (15 minutes)

4 4 Transparent & Responsible Pricing Transparency is a prior condition to Responsible Pricing because it gives clients the opportunity to understand and compare products/providers. Pricing transparency contributes to efficient financial markets by setting the ground for fair competition, thus supporting responsible pricing in the market. Hand-in-hand principles

5 5 Definitions Responsible Pricing implies that providers price their financial products in a way that is affordable for the client while contributing to the financial sustainability of the institution. Transparent pricing implies that the terms and conditions of the financial products are communicated to the client in clear way, allowing both a precise understanding of the price and comparability between different products.

6 6 Definitions Responsible Pricing Affordable Transparent Pricing Understandable Providing addedvalue for money Minimizing inefficiency that gets passed on to clients Clear use of language Complete and concise information Timeliness Sustainable Comparable Revenues cover expenses No excessive profits Disclosure of ALL costs, including all fees and side costs Standardised interest rate

7 7 What pricing elements may lead to a lack of transparency and confusion for the client? «Buy $10 or more worth of airtime and get free wifi access!!»

8 Which one of these loans would YOU choose? 8 Interest FREE loan Interest and Fee Interest and Deposit Only Interest Loan amount: 1000 $ 1000 $ 1000 $ 1000 $ Duration: 10 weeks 10 weeks 10 weeks 10 weeks Interest rate p.a: Disbursement fee: Security deposit: 0% 15% flat 12% flat 40% declining 5% 2% 1% 0% 0% 0% 20% 0% Total cost 50 $ 50 $ 33 $ 42 $ APR 49% 47% 49% 40%

9 9 Flat versus Declining balance Interest is the cost of borrowing money. Declining balance: the interest is calculated on the outstanding balance of the loan With the declining method, borrowers pay an interest on the amount of money they actually have in hand. Flat method: the interest is calculated on the initial loan amount. It doesn t correspond to the definition of «interest», it is rather a fee with payment spread across the loan term. Flat interest rate disclosure is commonly used because the quoted «interest» appears lower than in the declining method.

10 10 Annual Percentage Rate or APR The APR (Annual Percentage Rate) indicates the price it costs you to rent 1 currency unit during 1 year. It is a rent price. An APR of 30% means that it costs $30 to borrow $100 and to keep this $100 during one whole year. The APR calculation translates interest rate and all associated fees and conditions into a standard annual rent cost. APR is a critical indicator to allow comparing products with different conditions and terms.

11 11 APR versus Effective Interest Rate (EIR) Both apply the Discount Rate Method on the client s cash-flows according to the repayment frequency. APR converts simply this periodic interest rate into an annual rate. APR = i x n EIR takes into consideration the effects of compounding the interests EIR = (1+i) n - 1 i = the periodic discount rate that would make the present value of the loan received equal to the present value of the instalments paid. n = the number of periods (weeks, months, quarters ) in a year The compounded interest rate reflects the opportunity cost for the borrower not to be able to invest the interest he pays to the lender into an asset generating the same percentage of return.

12 12 What is a Transparent Price? REMINDER Factors of confusion in pricing: Flat interest rate Fees and disbursement commissions Repayment frequency Security deposit or compulsory savings Compulsory insurance Declining interest rate Standardized interest rate disclosure (APR/EIR) which integrates all fees and conditions of the loan A clear and complete repayment schedule with all the information regarding the loan costs

13 13 Remember! Total cost of a loan is one indicator for the client, but cannot be the only one. The actual cost of a loan depends on the interest rate, on other fees linked to the loan, but also on the duration during which the client will dispose of the loaned amount. A standardized interest rate disclosure method, such as the APR/EIR - which translates all fees, associated costs, conditions and repayment terms into a declining interest rate - facilitates the comparison of different products.

14 14 What information should be provided? Comparable Understandable Informed Decision Transparent pricing goes further than simply communicating a total cost and an APR Client must receive complete cost and non-cost information Clear, precise and concise information that will help her/his decision-making

15 15 Key Facts Document - Loans Total loan amount ALL fees/charges Total cost Standardized interest rate Set-Up/Origination/Commission Administrative fees Insurance premium Taxes Third-party fees (e.g: mobile money) Legal registration of contract or collateral!! Whether deducted or up-front!! Whether interest may change over time If so, the index to which it is pegged & cost scenarios incl. pessimistic scenario Clear repayment schedule With number and due dates Instalment broken down into principal and interest Charges and conditions for early repayment/pre-payment Charges and consequences of delayed payment or default Non cost information: rights and obligations, guarantor obligation/collateral conditions, use of personal info, contact for complaints

16 16 Key Facts Document - Savings ALL fees/charges Minimum and maximum balances Opening / Closing fees Withdrawal fees Balance inquiries Charges in case balance falls under a certain amount Third-party fees Interest rate Including on what balance the interest is calculated (daily/average/closing ) For fixed-term deposits > charges and conditions for early withdrawal Whether deposits are governmentally insured If and under which conditions savings may be used to cover a loan default.

17 17 Key Facts Document - Insurance Especially if bundled to a loan Premium amount Amount & term of coverage Events / individuals covered When and how to file a claim Certificate of coverage Cooling off periods Cancellation rights and terms Including a clear exclusion list Inform client to inform beneficiaries Required documentation to prove damage Acknowledge receipt of claim Prospective benefits

18 18 Key Facts Document - Payments Amount paid by sender in his currency Estimated exchange rate All fees and taxes Amount to be received in destination currency Non cost information: instructions for collecting money, cancellation conditions, instructions for resolving errors, linked products (if any), transaction confirmation

19 19 Example of what not to do! Interest : 2,5% / mth Commission : 2,5% Up-front Fee : 30,000 Security deposit: 20% of loan amount The APR is actually 84,71%

20 20 Example Key Facts Document In June 2011, Bank of Uganda issued the Financial Consumer Protection (FCP) Guidelines to all supervised financial institutions (commercial banks, credit institutions and microfinance deposit-taking institutions, SFIs). Here is an extract of the Loan KFD. Source:

21 21 Example continued Source:

22 22 Example continued Source:

23 23 When should the information be provided Pricing information must be spontaneously provided to the client before any commitment is taken. It is the responsability of the provider to ensure full understanding of the client. The client must have time to review the information before signing. Timeliness is key

24 24 How should the information be provided Orally and in writing Several channels Plain and local language No small print Displayed and visible in branches Readily available Brochures and posters are updated with final prices and conditions In the public domain Branches Website Media MF Association Staff must be trained to explain pricing information to clients and to ensure client understanding.

25 25 How do I convince a Financial Service Provider to be more transparent?

26 26 Common objections (1) A flat rate is easier to calculate, to explain, and thus for the client to understand. A flat rate is not an interest rate. The declining interest rate is the only valid approach The understanding of the client is limited: no means of comparison, no full disclosure of all costs There are other ways of facilitating the client s understanding, while disclosing a transparent price Check this Consumer Pricing Education video: «Auntie Need a Loan»

27 27 Common objections (2) Clients don t care about interest rates. They think in terms of installment amount." Good first step! Adjusting the installment amount to the client s repayment capacity is the right thing to do. BUT responsible finance is also about delivering reasonable added-value for money. And provide clients with comparable elements to be able to decide; and this is only possible through a standardized interest rate.

28 28 Common objections (3) Clients understand more easily a repayment schedule where the installment is constant." Take a loan of $1000 over 12 months at 1% monthly interest Even without a sophisticated MIS, it s possible to apply a declining balance interest and to communicate in a simple way the installment amounts.

29 29 Common objections (4) If a client finds that a product is too expensive, he will not take it. Does the client really have all the information he needs to make a conscious decision? Does he have any other option? Does he have the financial education to make a decision based on a quality-price ratio? It is within the responsability of the provider to enhance clients financial education and to communicate actual prices of its products.

30 30 Common objections (5) Competition forces providers to bring prices down already This is true in a transparent market where all parties have the same level of information. Then yes, the market price will be driven by demand and supply But in a non-transparent market, competition rather drives providers in a growing spiral of lack of transparency And there also may be collusion, where providers agree to charge too-high comparable prices

31 31 Common objections (6) It s suicide to disclose an effective interest rate if competitors don t do it! Transparent pricing is a process that needs to be generalized in order to be efficient: It s the regulator s role This must imperatively be accompanied by a client awareness campaign.

32 32 Common objections (7) If I disclose my actual prices, I will loose my clients Two similar products may have a different price, and for justified reasons that the provider can explain The choice of the client will then be made upon the quality of service and/or accessibility

33 33 Who benefits from transparent pricing? Clients: They know the actual price they can decide whether they want to borrow. They can choose amongst competitors on the basis of comparable data (incl. qualitative information). They improve their situation and receive the full benefit of financial inclusion. Financial Service Providers Well-informed clients are accountable for their decisions, and pay back what they are committed to. It increases client loyalty. Providers know the market price in which they operate and they can make decisions to refine their pricing strategy. Regulators They observe the market prices and can sharpen their enforcement ability by refining their policies.

34 34 Who benefits from transparent pricing? Financial Partners: They know what prices providers apply and can choose their partners accordingly. The sector: The whole microfinance sector has data allowing analysis, benchmarks The sector stabilizes, improves its efficiency, its quality of service, financial inclusion as a whole Transparent prices facilitate fair competition Prices reach/are at a «responsible» level.

35 35 Remember! Transparent pricing communication gives the client all necessary elements to decide on which products suits him best He will thus be accountable and take responsibility on the consequences of his decisions. Nejira Nalic, CEO Mi-Bospo (Bosnia) «Our experience shows that if a client leaves our branch confused about their loan, or encounters problems during the loan cycle because they lack understanding of the product, they are much less likely to become a long-term client. Mi- Bospo s leadership believes the focus on transparency has improved client loyalty.»

36 36 Key resources (1) Link to : MfTransparency Calculation Tool

37 37 Key resources (2) Link to: Microfinance TRAPS handbook

38 38 Key resources (3) SPTF Standard 4b & the SPI4 tool Smart Campaign Principle 3 and the Smart Getting Starting Questionnaire And of course, SPTF s resource center

39 Questions? 39

40 40 The Responsible Microfinance Facility (RMF) The RMF offers the following trainings: Responsible Inclusive Finance Training Smart Assessor Training SPI4 Auditor Training Training TA providers on client protection Training TA providers on other elements of SPM The RMF provides co-financing to financial institutions for the following activities: Accompanied SPI4 assessment plus additional support Client protection assessment Upgrade project Specialized training on an aspect of SPM Smart certification and/or social rating Next deadline for applications: 24 November 2017

41 41 Join us for the next webinar! Preventing overindebtedness Dec. 6 at 10 a.m. EST Led by Anne-Laure Behaghel Thank you for your participation!