The 2012 Financial Capabilities Surveys

1. Lessons from the2012 Colombian and Mexican Financial Capabilities SurveysCOLOMBIA-OECD-WORLD BANK CONFERENCE ON FINANCIAL EDUCATION Rekha Reddy The World BankOctober 2012rreddy5@worldbank.org

2. The 2012 Financial Capabilities Surveys • Surveys sponsored by the World Bank Russia Trust Fund for Financial Literacy and Education and the World Bank Latin America Region in conjunction with national counterparts • Colombia: Banco de la Republica • Mexico: CNBV and CONDUSEF • Survey developed from qualitative research that began in 2010 • Nationally representative surveys: those 18 years and older making financial decisions for their household or themselves • Colombia: 1,526 respondents • Mexico: 2,022 respondents • Countries customizedcoreRussia Trust Fund questionnaire (ex: OECD-INFE financial knowledge module, financial education, use of government programs)

3. Topics for Presentation • Challenges in Financial Capabilities • 1. Imprecise Daily Money Management • 2. Incomplete Planning for the Future • 3. Decisions on Financial Products with Insufficient Financial Knowledge • 4. One Country’s Data Do Not Fit All • Financial Capabilities Interventions with Impact

4. 1. For Most, Daily Money Management is Imprecise Of those surveyed who have some responsibility for household expenses… Most plan daily expenditures • 95% in Colombia and 74% in Mexico said they planned their daily expenditures in some way But fewer plan regularly • 79% in Colombia and 69% of Mexicans report that they keep to these household budgeting plans Or precisely • Less than a quarter of survey respondents knew exactly how much they spent in the last week Which could exacerbate already existing resource gaps • In both countries, approximately 60% of respondents reported having being short of money for basic necessities at least once.

5. 2. Planning for Future Expenses is Incomplete Of those surveyed who had some responsibility for their household expenses… Unexpected Expenses Children’s Future Old Age • 49% of Mexican survey respondents and 23% of Colombian respondents felt they could cover a major unexpected expense without borrowing • More than half of the parents surveyed in both countries had plans to support their children’s education • Plans to save for children’s inheritance were less common (less than 30%) • A minority reported contributing to a future pension in both countries: 10% of those under age 60 in Colombia, 28% in Mexico

6. 3. Most Report Researching Financial Products Of those surveyed who had some responsibility for their household expenses… In both countries, men and those with higher levels of education are more likely to make decisions about financial products.

7. 3…But Limited Knowledge of Interest RatesHinders Decisions on Financial Products • Source: Colombia and Mexico data are from World Bank analysis of 2012 Colombia and Mexico survey data on financial capabilities . Non-Mexico data are from Atkinson, A. and F. Messy (2012), “Measuring Financial Literacy: Results of the OECD / International Network on Financial Education (INFE) Pilot Study. The samples for Colombia and Mexico were constructed including only those individuals who make financial decisions, which may affect representativeness, while the INFE countries did not use that filter. 68% of Colombian respondents and 51% of Mexican respondents state that no one--not a parent, a teacher or other—taught them to manage their money.

8. 4.One Country’s Data Does Not Fit All: Financial Capabilities Differ among Key Segments Of those surveyed who had some responsibility for their household expenses… Men/ Women Rural/Urban Formal/ Informal Employment • Similarly Vulnerable • Rural respondents were more likely to report being short of money • Differences in Planning • In Colombia, those in rural areas were more likely to plan, while in Mexico it is the reverse • Similarly Indebted • A higher proportion of the informally employed say they borrow more than they can afford • Differences in Surplus • In Mexico, the informally employed were far less likely to have disposable income, whereas the Colombian formal and informally employed were fairly similar • Consistent Product Usage Patterns • Relatively more men use deposit accounts and credit cards than women • Differences in Relative Financial Knowledge • Women scored similarly to men on financial knowledge in Mexico, but worse on every question in Colombia • .

9. Topics for Presentation • Challenges in Financial Capabilities • 1. Imprecise Daily Money Management • 2. Incomplete Planning for the Future • 3. Analyzing Financial Products with Insufficient Financial Knowledge • 4. One Country’s Data Do Not Fit All • Financial Capabilities Interventions with Impact

10. Product Design Can Support Improved Daily Money Management and Planning for Future Expenses Designs with Impact on Financial Capabilities • Savings • Commitment savings accounts: After one year, individuals in the Philippineswho gave up access to their savings for a period increased savings 81% relative to a control group (Ashraf et. al 2006) • Labels for savings accounts with specific goals: Treatment group in Ghanawith access to accounts in which individuals named specific savings goals saved 31% more on average than the control group (Karlan et. al 2012) • Reminders to save: Letters or text messages from the financial institutions(FI in Bolivia, Peru and the Philippines increased the likelihood of reaching savings goals by 3% and the total saved in the reminding FI by 6%. (Karlan et. al, 2010) • Automatic enrollment in pensions: Under automatic enrollment, participation in a UnitedStatesfirm’s 401K planincreased from a low base to between 86% and 96% of employees (Choi et. al 2004)

11. Financial Education and Consumer Protection are Complementary Interventions for Financial Capabilities Targeted financial education has shown impact: • Financial capabilities survey data showed desires and concerns can vary widely by demographic group • Ex: Brazil financial literacy program for at students and their parents. • Where the student curriculum was provided in conjunction with the parent financial literacy workshop, the program raised students’ savings rates by 24%, and increased the percentage of parents who track monthly expenses by 17% (Bruhn et. al forthcoming). • New interventions planned for younger students, certain groups of women Consumer protection-particularly consistent disclosure requirements across financial products- can compensate for limitations in financial knowledge: • (Anagol et. al 2012) found that 60-80% of Indianinsurance agents recommended unsuitable high commission products. Requiring commission disclosures for one product led agents to recommend other products without disclosure requirement. • Forthcoming study (Gine, Mazer et. al) evaluating the effectiveness of Mexico’s credit disclosure reforms on consumer understanding & financial decision-making

12. Muchas gracias! For more information: Colombia Team DairoAyiber Estrada- destrada@banrep.gov.co Nancy Zamudio Gomez- nzamudgo@banrep.gov.co Mexico Team Arturo Luna Canales-alunac@condusef.gob.mx Luis Trevino-ltrevino@cnbv.gob.mx World Bank RekhaReddy-rreddy5@worldbank.org