Responsible Pricing Isabelle Barr è s, Director smartcampaign December 1, 2010

1. Responsible Pricing Isabelle Barrès, Director www.smartcampaign.org December 1, 2010

2. Definition Different approaches to responsible pricing Beyond Codes project proposal The road ahead Today’s agenda

3. Client Protection Principle #2: Transparent and Responsible Pricing: • Transparent 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: Responsible pricing means that pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for financial institutions. • For all financial products, NOT just loans: deposits, insurance, overdrafts, remittances, transaction accounts AND loans.

4. Transparent and Responsible Pricing: Why it matters and What it means • Why it matters: what the market will bear may not ultimately benefit customers • Short-term profit maximizing vs. building long-term benefits • Interest of policy makers and the media • Main rationale for setting interest rate ceilings • What it means: • FIs do not charge customers for their own inefficiency • Pass the benefits of efficient operations on to customers • Build beneficial relationships with customers • Prices are not discriminatory based of race, gender, or ethnicity • Challenges: there is no consensus on a standard definition of responsible pricing

5. Interest rate caps Margin caps Return on Equity Comparative transparency Promoting competition Different approaches to Responsible Pricing

6. Strengths Simple Easy to understand Same standard gets applied to all financial institutions Weaknesses Does not contextualize – and pricing is very contextual As a result… The poor have fewer financial services available to them Growth rates of institutions serving poorer clients decline Transparency in prices decreases as lenders find ways to skirt regulation by adding additional charges and fees Approach #1: Interest rate caps

7. Strengths Simple – only 2 numbers needed to determine if a price is ‘responsible’ Weaknesses Very difficult to apply this standard across a wide range of locations and conditions As a result… Most NGOs with small average loan sizes would fall in Yunus’s ‘red zone’ Approach #2: Margin caps

8. Strengths Accounts for differences in operating costs and cost of funds Comparable, simple MFIs can set targets and manage to them Weaknesses Obscures inefficiency Does not differentiate in how the profits of the MFI are used Approach would not apply to large commercial banks As a result… Interest rates very sensitive to profits: could lower interest rates An MFI which sets an upper limit on its return on equity could discourage commercial investors from investing in it. Approach #3: Return on Equity

9. Strengths Standardization of pricing helps users determine if price is ‘responsible’ Simple (one number) Accounts for different products, contextualizes Weaknesses Process of collecting data is long and labor intensive Data needs to be updated regularly Clients may not have access to data Not so useful if few providers who charge similar prices. As a result… Downward pressure on interest rates Approach #4: Comparative transparency

10. Strengths Innovation: better products at lower prices Weaknesses Can take a long time to develop Market forces can encourage short term profit maximization over long term sustainable relationships with clients As a result… Downward pressure on interest rates …Or upwards to boost equity valuations Approach #5: Promoting competition

11. Given the state of the practice, the Smart Campaign endorses comparative transparency methods for assessing responsible pricing: Observers will apply their own standards Will promote transparency and exert pressure on MFIs to price responsibly Need for ready available pricing data that uses a standardized formula or standardized indicators Development of consensus standards will be enabled by comparisons of similar products and institutions The Beyond Codes project proposal: Recommendation

12. Competitive, unsubsidized pricing Prices do not reflect inefficiency Reasonable rate of return Re-investment of profit benefits client No excessive penalties or fees The Beyond Codes project proposal: Current assessment

13. Work with MF Transparency and the MIX Develop tools for evaluating pricing Make it easier to assess the reasonableness of prices easily and quickly Example: explore approaches such as country-based indices The Beyond Codes project proposal: Next steps

14. Require pricing disclosure utilizing a standard formula (regulators and associations) Educate stakeholders on the cost curve Promote client level education on comparing loan products Learn more about client level ROI Promote competitive environments The Beyond Codes project proposal: Next steps for the industry

15. www.smartcampaign.org Responsible Pricing Paper: http://www.smartcampaign.org/tools-a-resources/2/243 Thank you! Questions, ideas, suggestions?