NBERWORKINGPAPERSERIES LEARNINGTONAVIGATEANEWFINANCIALTECHNOLOGY: EVIDENCEFROMPAYROLLACCOUNTS EmilyBreza MartinKanz LeoraF.Klapper WorkingPaper28249 nber/papers/w28249 NATIONALBUREAUOFECONOMICRESEARCH 1050MassachusettsAvenue Cambridge,MA02138 December2020 WearegratefultoPierreBachas,ShawnCole, Xavier Gin,JessicaGoldberg,RawleyHeimer, Supreet Kaur, Michael Kremer, Rocco Machiavello, David McKenzie, Simone Schaner, Lore Vandewalle and numerous seminar and conference participants for helpful comments and suggestions. Financial support from the Asian Development Bank, Innovations for Poverty ActionGlobalFinancialInclusion Initiative,InternationalGrowthCentre,U.S. Departmentof Labor,andtheWorldBankisgratefully acknowledged.ThisstudywasapprovedbytheHarvard andColumbiaUniversityInstitutionalReview BoardsandregisteredintheAmericanEconomic AssociationRegistryforrandomizedcontroltrials (AEARCTR0001107).CamillaFabbri,Maura Farrell, Rayhanul Islam, Michel Nehme, Smita Nimilita, Minita Varghese, and Rebecca Wu providedoutstandingresearchassistance.Theopinionsexpressed inthispaperdonotnecessarily reflecttheviewsoftheWorldBank,itsexecutivedirectorsorthecountries theyrepresent.The viewsexpressedhereinarethoseoftheauthorsanddonotnecessarilyreflectthe viewsofthe NationalBureauofEconomicResearch. NBERworkingpapersarecirculatedfordiscussionandcommentpurposes.Theyhavenotbeen peerreviewedorbeensubjecttothereviewbytheNBERBoardofDirectorsthataccompanies official NBERpublications. 2020byEmilyBreza,MartinKanz,andLeoraF.Klapper.Allrightsreserved.Shortsections of text,nottoexceedtwoparagraphs,maybequotedwithoutexplicitpermissionprovidedthat fullcredit, includingnotice,isgiventothesourceLearningtoNavigateaNewFinancialTechnology:EvidencefromPayrollAccounts EmilyBreza,MartinKanz,andLeoraF.Klapper NBERWorkingPaperNo.28249 December2020 JELNo.G21,G5,O16 ABSTRACT How do inexperienced consumers learn to use a new financial technology? We present results from a field experiment that introduced payroll accounts in a population of largely unbanked factory workers in Bangladesh. In the experiment, workers in a treatment group received monthly wage payments into a bank or mobile money account while workers in a control group continued to receive wages in cash, with a subset also receiving an account without automatic wage payments. We find that exposure to payroll accounts leads to increased account use and consumer learning. Those receiving accounts with automatic wage payments learn to use the account without assistance, begin to use a wider set of account features, and learn to avoid illicit fees, which are common in emerging markets for consumer finance. The treatments have real effects, leading to increased savings and improvements in the ability to cope with unanticipated economic shocks. We conduct an additional audit study and find suggestive evidence of market externalities from consumer learning: mobile money agents are less likely to overcharge inexperienced customers in areas with higher levels of payroll account adoption. This suggests potentially important equilibrium effects of introducing accounts at scale. EmilyBreza HarvardUniversity LittauerCenter,M28 1805CambridgeStreet Cambridge,MA02138 andNBER ebrezafas.harvard.edu MartinKanz TheWorldBank 1818HStreetNW Washington,DC20433 mkanzworldbank LeoraF.Klapper TheWorldBank 1818HStreet,NW Washington,DC20433 lklapperworldbank1 Introduction The last decade has seen an unprecedented expansion in access to consumer nancial products, with an estimated 1.2 billion adults gaining access to a bank or mobile money account over this period (World Bank, 2017). While this has expanded the nancial tools available to households, there is also widespread concern that nancial intermediaries can prot from exploiting inexperienced consumers (Campbell et al., 2011). This is especially true in developing economies where nancial access has expanded rapidly against the backdrop of enormous variation in consumer experience and sophistication (Agarwal et al., 2018; Anagol et al., 2017; Badarinza et al., 2019). This proliferation of new nancial products and technologies has been accompanied by an extensive debate about the tradeo between access and consumer protection. Some regulators have argued that predatory practices are suciently widespread to warrant outright limits to access, fees, and product features|potentially at the expense of gains from broader nancial inclusion. 1 Proponents of lighter regulation, on the other hand, have advocated for information-based policies that instead aim to increase transparency to strengthen consumer knowledge and sophistication. An important open question at the heart of this debate is to what extent risks to consumers can be mitigated by learning-by-doing that occurs naturally, as new nancial technologies are introduced at scale and used on an everyday basis. Studying this question is empirically challenging for several reasons. First, the typically high degree of selection into adoption and active use of new nancial technologies requires a setting with exogenous variation in access as well as incentives to engage with the technology to identify consumer learning. Second, many types of consumer protec- tion risks, such as side payments to intermediaries, are dicult to observe in administrative data and may require surveys, audit studies, and other non-traditional data to be accurately measured. In this paper, we study consumer learning in the context of payroll accounts, a simple nancial technology that is currently being rolled out to millions of workers worldwide in response to demands for increased supply chain transparency and as a result of the Covid-19 pandemic. 2;3 We conduct a eld experiment with a population of salaried factory workers in Bangladesh who, prior to our study, received their wages entirely in cash. In the experiment, workers were randomly assigned to either continue receiving wages in cash, or begin receiving wage payments into a bank or mobile money payroll account. In a set of comparison treatments, workers were given an account but 1 See, Mullainathan et al. (2009), and Beshears et al. (2018) for perspectives on behaviorally informed regulation, and Agarwal et al. (2015) on the eectiveness of current consumer nancial protection regulation. 2 More than 50% of employees globally and 85% of employees in developing countries receive wages in cash. Approximately 300 million individuals earn regular veriable wage income but do not have access to a formal nancial account (Demirg u c-Kunt et al., 2017). In response to allegations of widespread labor rights and minimum wage violations, many international brands have started to require suppliers to pay employees into digital payroll accounts. This, in turn, has led entire industries to begin digitizing wage payments to their global workforce. See, for example, Fashion Brands Team Up To Spearhead Campaign Around Wage Transparency, Forbes November 5, 2019. 3 Several countries, including Bangladesh where our study is set, have made government bailouts during the pandemic conditional on rms phasing out in-person cash payments and introducing payroll accounts for workers. 1continued receiving monthly wage payments in cash. We measure treatment eects on learning and real outcomes using panel of surveys as well as administrative data. We also employ a machine learning approach (Chernozhukov et al. 2018) to understand which types of consumers are able to learn how to use the nancial technology in a more eective manner through exposure to payroll accounts. We additionally examine the market-level implications of consumer learning with a complementary audit study that examines how the prevalence of illicit extra charges changes as consumer sophistication in the market increases and information asymmetries between consumers and nancial intermediaries are diminished. The setting of our experiment has several attractive features that help us trace how individuals engage with accounts and learn to overcome consumer protection challenges associated with a new nancial technology. First, electronic payroll accounts are a nancial technology with potentially high returns to adoption that is currently being introduced to millions of workers worldwide. At the same time, payroll accounts are susceptible to many common consumer nancial protection prob- lems, such as shrouded fees, commission-based incentives, and barriers to use among inexperienced consumers. Second, we measure behaviors and real outcomes, using comprehensive administrative data that captures all nancial transactions made by study participants as well as self-reported survey data. Third, we are able to examine consumer learning in a controlled environment that allows us to induce random variation in access as well as incentives to use the technology among individuals in the same workplace environment. We hypothesize that being given an account alone lowers transaction costs and facilitates savings on the extensive margin by relaxing constraints re- lated to account opening. Adding direct deposit wage payments provides an incentive to actively engage with the account on the intensive margin. This variation in the intensity of account use, generated by our experimental design, in turn allows us to identify whether frequent use causes consumers to learn how to use the nancial technology in a more ecient and cost-saving manner. We nd compelling evidence of consumer learning as a result of active engagement with the nancial technology. Our payroll account treatments increase active engagement with the account and cause consumers to learn how to use the features of the technology to their advantage. While direct deposits lead, mechanically, to more withdrawal and cash-out transactions, participants in the treatment group also make more deposits, send-money transactions, and accumulate higher account balances. We document consumer learning using two main outcomes. Our rst outcome, outside transactions, is an indicator for the likelihood of a worker making a transaction outside the workplace, where help with accessing the account is not readily available. Our second learning outcomedirect transactions focuses on mobile accounts, and measures whether participants learn to transact through their account without the help of a mobile money agent, thereby sidestepping illicit extra charges which are widespread in our setting and many other markets for consumer nance. 4 4 Annan (2019) shows that in Ghana consumers are overcharged in 20% of all mobile money transactions, with female customers being more than 90% more likely to be the victim of nancial agent misconduct. See also the Nigeria Financial Services Agent Survey (EFINA, 2020), which shows that 40% of nancial services agents in 2We nd learning eects along both of these dimensions. Most substantively for worker welfare, those receiving direct deposits into a mobile account are less likely to make costly over-the-counter transfers brokered by intermediaries, which are banned by the platform, but extremely common in our worker population. Notably, the treatments do not change the number or frequency of transfers to others. Moreover, the dierential impacts of direct deposit relative to account only on illicit fees cannot be explained by dierences in transaction costs alone. 5 Thus, direct deposits induce learning about the nancial accounts and help to partially mitigate the kinds of consumer protection issues that are common in settings with limited capacity for regulating consumer transactions. The learning and consumer protection impacts from receiving a payroll account are accompanied by an increase in trust, as measured by whether the respondent would feel comfortable leaving BDT 1,000 (US$12) in an account. 6 This eect is most pronounced for mobile money accounts the more novel and technologically demanding type of account used in our study. While baseline trust in bank accounts (56%) is substantially higher than trust in mobile money accounts (38%), our intervention eliminates this trust gap almost entirely for individuals who are given a payroll account. Our treatments also aect real outcomes, including savings and the ability to cope with unan- ticipated shocks. Receiving wage payments into a formal account causes a large increase in formal and overall savings at all measured time horizons. Specically, our intervention increases the like- lihood of having any savings by 4-11 percentage points and more than doubles the likelihood of individuals having savings in a formal account from a base of 25%. In contrast, simply providing an account has much smaller and often undetectable impacts on savings. Our results suggest that workers both shift resources from informal to formal vehicles and generate new savings by reducing discretionary consumption as a result of receiving direct deposit wage payments. In line with prior research, on account ownership and savings we also nd evidence that our treatments improved the ability of workers to smooth consumption. Workers receiving direct deposits report fewer instances where they were unable to mitigate an unforeseen shock due to lack of resources. However, we cannot statistically distinguish these eects from the account only group. In the second part of our analysis, we examine which characteristics shape an individuals ability to learn how to optimally use the technology. Rather than search for treatment eect heterogeneity trait-by-trait, we use the machine learning (ML) approach proposed by Chernozhukov et al. (2018) to let the data reveal patterns of heterogeneity. We detect no heterogeneity in our main savings and consumption smoothing outcomes, which suggests equal gains through exposure for all groups. The ML procedure does detect heterogeneous impacts on consumption and consumer learning. Nigeria overcharged consumers and the Financial Inclusion Insights Survey (CGAP, 2018), which nds that 12% of mobile money customers in Bangladesh noticed that they were being overcharged. The actual incidence is likely much higher. 5 For individuals with their own account, a person-to-person transaction requires visiting an agent to perform a cash in transaction and then executing a simple transfer on the mobile phone. An over-the-counter transaction requires visiting the same agent to make the transfer. 6 We use the exchange rate as of May 2014, the start date of our experiment, for all currency conversions. 3Interestingly, the ML tool partitions the sample into savers and learners. The savers cut discretionary consumption to generate new savings, but do not experience large learning-by-doing gains, while the learners do not cut consumption by as much but experience large learning-by- doing gains. Savers are more likely to be females, parents, in positions of low levels of household resource control, and those with low levels of education and experience with nanci