Principle #2 – Transparent and Responsible Pricing This presentation is made possible by the Smart Campaign www.smartcampaign.org Principle #2- Transparent & Responsible Pricing [Introductions of facilitator(s) and participants]

Agenda Client protection principles Principle #2 in practice Effects of non-transparency and the client perspective Participant feedback Practitioner lessons and good practices Conclusion and call to action This is the agenda for today’s discussion. We will begin by reviewing the Six Principles of Client Protection 2

Client Protection Principles 1. Avoidance of over-indebtedness 2. Transparent and responsible pricing 3. Appropriate collections practices 4. Ethical staff behavior 5. Mechanisms for redress of grievances 6. Privacy of client data [Each principle is listed, along with how the Smart Campaign defines the principle]. These are the Six Principles of Client Protection 1.Avoidance of Over-Indebtedness. Providers will take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness. Similarly, providers will take adequate care that only appropriate non-credit financial products (such as insurance) are extended to clients. 2.Transparent and Responsible Pricing. The pricing, terms and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) will be transparent and will be adequately disclosed in a form understandable to clients. Responsible pricing means that pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for financial institutions. 3. Appropriate Collections Practices. Debt collection practices of providers will be neither abusive nor coercive. 4. Ethical Staff Behavior. Staff of financial service providers will comply with high ethical standards in their interactions with microfinance clients, and such providers will ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients. 5. Mechanisms for Redress of Grievances. Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients. 6. Privacy of Client Data. The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions, and such data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories). 3

Agenda Client protection principles Principle #2 in practice Effects of non-transparency and the client perspective Participant feedback Practitioner lessons and good practices Conclusion and call to action Now, let’s discuss how institutions put Principle #2 into practice. 4

Transparent pricing is a pre-condition to responsible pricing. Transparent and Responsible Pricing: Principle in Practice Transparent Transparently disclose, in a form understandable to clients: Pricing Terms Conditions (including interest charges, insurance premiums, all fees, etc.) Pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for the financial institution. Responsible This is the Campaign’s definition of the principle “fair and transparent pricing.” An institution puts the principle into practice by ensuring that: The institutions discloses, in a form understandable to clients: the pricing, terms, and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) and Pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for the financial institution. Transparent pricing is a pre-condition to responsible pricing. Transparent pricing is a pre-condition to responsible pricing.

Agenda Client protection principles Principle #2 in practice Effects of non-transparency and the client perspective Participant feedback Practitioner lessons and good practices Conclusion and call to action Now, let’s discuss the effects of non-transparency, as well as the client’s perspective on transparent and responsible pricing. 6

Lack of transparency affects the client and the MFI Effects Client… MFI… 1 Client does not understand the maintenance fees for her savings account. …sees that her savings have decreased and thinks the bank has robbed her. …loses business when client tells others about her experience. 2 …is demoralized and does not trust ATM transactions. …loses benefit of investment in new technologies. Client is not aware that she receives only three free ATM withdrawals before incurring fees. 3 When institutions are not transparent with clients, both clients and the institution will likely suffer consequences. This chart list three common ways that an institution is not transparent with clients, followed by the possible effects on the client, and the possible effects on the MFI. Client believes that if she does not file an insurance claim, the premium will be returned to her. …concludes that insurance is a rip-off when she does not have the premium returned. …finds that products intended to add value and attract clients actually have the opposite effect.

Client Perspective Can your clients agree with the following? I can easily understand the interest rate and compare it to other institutions. I received the loan amount as stated in my contract. I know my installment amounts and when payments are due. I’ve never had unexpected: late fees, early payment fees, or account activity fees, changes to my interest rate or loan terms. I understand my responsibilities for delinquent group members. I know my outstanding debt and the amount in my savings account. I always have the opportunity to ask questions during my interactions with the institution. Transparent and responsible pricing requires an institution to think from the perspective of their clients. This checklist will help you think about how well your clients understand pricing. [Ask participants: Do you think your clients would agree with all of the following statements? Read the statements.] If there are statements here that your clients wouldn’t agree with, your institution should examine how pricing and term information is disclosed to clients.

Agenda Client protection principles Principle #2 in practice Effects of non-transparency and the client perspective Participant feedback Practitioner lessons and good practices Conclusion and call to action Now, we would like to hear from YOU. 9

Feedback from Participants Have you received training from your institution that highlights transparent and responsible pricing? How do institutions set their prices? What effect does the competitiveness of the local microfinance market have on transparent and responsible pricing at institutions? [At this point in the presentation, ask participants for their feedback on the information presented so far. Use these questions (or others that have come up during the presentation) to stimulate discussion.] Have you seen examples irresponsible pricing and/or lack of transparency?

Agenda Client protection principles Principle #2 in practice Effects of non-transparency and the client perspective Participant feedback Practitioner lessons and good practices Conclusion and call to action Now, we will discuss our own experiences, as well as good practice examples from around the world. 11

Lessons from Practitioners [Write your points for the presentation here:] Points Two microfinance practitioners will discuss their experiences confronting client over-indebtedness. Suggested Format: 1. One presenter discusses prevention of client over-indebtedness (how to design and sell financial products that avoid over-indebting clients). 2. The other presenter talks about mitigation (his or her experiences facing pre-existing over-indebtedness problems and finding solutions that benefit MFIs and clients).

Good Practice Indicators: Institutions with Transparent Pricing Follow truth-in-lending laws and required APR or effective interest rate calculation formulae. Work with the client to understand the price of her loan and all of its terms and conditions. Also disclose: insurance premiums, minimum balances, all fees, penalties, linked products, third party fees, and whether any of these can change over time. Provide loan contracts that show an amortization schedule that separates principal, interest, fees; and defines the amount, number and due dates of installment payments. Train staff to communicate effectively with clients. Give the client time to review all documentation prior to the sale. These are the indicators of an institution with transparent pricing. Read through the list and ask participants to think about which of these indicators their institution they are fulfilling, and which they could improve]. Does your institution follow good practices for these transparent pricing indicators?

Good Practice Indicators: Institutions with Transparent Pricing Are competitive in the marketplace. Do not subsidize prices. Favor long-term relationships with clients to short-term profits. Do not charge customers for their own inefficiencies. Ears a reasonable rate of return to support operations and grow, while allowing the customer to do the same. Do not charge excessive pre-payment penalties or account closure fees. Invest a portion of their profits to increase value to customers, such as lowering interest rates or adding or improving products and services. These are the indicators of an institution with transparent pricing. [Read through the list and ask participants to think about which of these indicators their institution could “check off,” or say that they are already practicing]. Does your institution follow good practices for these responsible pricing indicators?

Good Practices: Design, Process, Feedback Pricing strategy should consider all costs associated with the product: account maintenance fees, commissions, etc. Also consider non-monetary costs to the client: trips to the MFI, learning how to use a new technology, etc. Product Design Train staff to communicate pricing and associated costs effectively. Communicate information clearly: use visuals, graphs, large print, plain language, explain terminology. Give examples that illustrate costs associated with the product. Sales Process Periodically check clients’ understanding of products and services. Adjust communication methods based on client feedback. Client Feedback The “good practice” example highlights the importance of: considering ALL costs (financial and non-monetary) when pricing products; training staff to communicate prices in ways that clients can easily understand; and checking clients’ understanding of products and services, to test how effectively staff are communicating. [Read through the good practices.]   (Note: Starting in 2008, the Center for Financial Inclusion carried out a fourteen month-long research project called Beyond Codes. In this project, fourteen MFIs piloted the implementation of pro-client policies and practices. Their experience revealed good practice examples of client protection. The good practice examples used in this presentation come from the Beyond Codes project.)

Good Practice: Financial Literacy for Improved Transparency Client gains basic financial knowledge. Product Information: Client makes decisions based on information from the MFI and his/her own knowledge. Transparency: The client is always aware of his/her rights and responsibilities associated with use of the financial product or service. Financial institutions must set responsible prices and establish transparent policies and practices. These measures are more effective if the client understands what the prices and product terms mean for her business and personal finances. Once clients have a basic level of financial literacy, they are able to make informed financial decisions with the institution’s product information, and they understand their rights and responsibilities when using the product or service. This is financial literacy. MFIs that chose to offer financial literacy services make a long-term investment in their client base. [Ask participants: The arrow on this slide depicts the effects of financial literacy for the client. Could we add another point on the arrow that highlights the effects of client financial literacy on the institution? In other words, do institutions benefit from investing in financial literacy for clients?]

Example of Good Practices from Bosnia-Herzegovina Tip: Have loan officers read through contracts with clients before the client signs. Practice Outcome MFI learns where to revise contracts to make them clear; clients are not mis- or under- informed Organization requires loan officers to read through contracts with clients and ask them questions to ensure that clients: Understand the terms Accept the terms This is an example of good practice in transparent pricing, from Mi-Bospo, an MFI in Bosnia-Herzegovina. Contracts should be free of confusing terminology and loan officers should be satisfied that clients fully understand the terms before asking clients to sign.

Agenda Client protection principles Principle #2 in practice Effects of non-transparency and the client perspective Participant feedback Practitioner lessons and good practices Conclusion and call to action Now, let’s conclude with a summary of what we’ve discussed, and a call to action. 18

Conclusion Call to action Summary: The Smart Campaign has developed six principles of client protection, one of which is transparent and responsible financing. Pricing, terms, and conditions must be transparent (fully and clearly disclosed) and responsible (affordable to the client, sustainable to the institution). Failing to be transparent and responsible turns clients off from using an institution’s products and therefore endangers business. Good practices are available to help institutions improve in this area. [Read the summary on this slide]   [Use the Call to Action question, and any of the questions below, to stimulate discussion among participants]. How could one or more of the “good practice” examples be implemented in your institution? What other solutions have you seen (or would like to see)? Have you seen a similar (or different) practice in your institution or elsewhere? What are the costs associated with improving transparency to clients? What are the benefits—both to the client and the institution? What is the role of financial institutions in financial literacy for clients? Have you seen good models for providing this service sustainably? Call to action What next steps can your institution take to make sure that clients understand your products, as well as their own rights and responsibilities?

Thank you! Join the Campaign and Endorse the Principles of Client Protection Have questions? Want more information? Contact the Smart Campaign Email: info@smartcampaign.org Thank you!