Client protection principles Principle #2 in practice

Principle #2 – Transparent

and Responsible

PricingThis presentation is made possible

by the Smart Campaignwww.smartcampaign.org

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1. Client protection principles2. Principle #2 in practice3. Effects of non-transparency and the

client perspective4. Participant feedback5. Practitioner lessons and good practices6. Conclusion and call to action

Agenda

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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

Client Protection Principles

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Agenda

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Pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for the financial institution.

Transparently disclose, in a form understandable to clients:

• Pricing• Terms• Conditions (including interest

charges, insurance premiums, all fees, etc.)

Transparent and Responsible Pricing: Principle in Practice

Transparent

Responsible

Transparent pricing is a pre-condition to responsible pricing.

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Agenda

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Lack of transparency affects the client and the MFILack of transparency

EffectsClient… MFI…

Client does not understand the

maintenance fees for her savings

account.

Client is not awarethat she receives

only three free ATM withdrawals before

incurring fees.

Client believes that if she does not file an insurance claim, the premium will be

returned to her.

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…sees that her savings have

decreased and thinks the bank has robbed her.

…is demoralized and does not

trust ATM transactions.

…concludes that insurance is a

rip-off when she does not have the premium

returned.

…loses business when client tells others about her

experience.

…loses benefit of investment in

new technologies.

…finds that products intended to add value and

attract clients actually have the opposite effect.

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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.

Can your clients agree with the following?Client Perspective

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Agenda

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Feedback from ParticipantsHave you received training from your institution that highlights transparent and responsible pricing?

What effect does the competitiveness of the local microfinance market have on transparent and responsible pricing at institutions? Have you seen examples irresponsible pricing and/or lack of transparency?

How do institutions set their prices?

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Agenda

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[Write your points for the presentation here:]• Points• Points• Points• Points

Lessons from Practitioners

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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.

Good Practice Indicators: Institutions with Transparent Pricing

Does your institution follow good practices for these transparent pricing

indicators?

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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.

Good Practice Indicators: Institutions with Transparent Pricing

Does your institution follow good practices for these responsible pricing

indicators?

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Good Practices: Design, Process, Feedback

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Good Practice: Financial Literacy for Improved Transparency

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Example of Good Practices from Bosnia-HerzegovinaTip: Have loan officers read through

contracts with clients before the client signs.

Organization requires loan officers to read through contracts with clients and ask them questions to ensure that clients:• Understand the terms• Accept the terms

PRACTICE MFI learns

where to revise

contracts to make them

clear; clients are not mis-

or under- informed

OUTCOME

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Agenda

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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.

Conclusion

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?

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Join the Campaign and Endorse the Principles of Client

Protection

Have questions? Want more information?

Contact the Smart CampaignEmail: [email protected]

Thank you!

Client protection principles Principle #2 in practice

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