A Personal Touch- Text Messaging for Loan Repayment

The researchers conducted a randomized controlled trial to measure the impact of text message reminders on micro-loan repayment in the Philippines. Borrowers were randomly assigned to treatment or control groups. Treatment text messages varied content in terms of loss or gain framing and whether the borrower's name or the loan officer's name was mentioned. Message timing ranged from the due date to two days before the due date. Overall, the researchers found no treatment effect of either timing or loss/gain framing versus the control group or each other. However, the researchers did find significant positive effects of including the loan officer's name on repeat borrowers. This may suggest that reminders of a personal relationship may trigger social obligation behaviors.

2008-05-01

2010-03-31

Several measures of loan default (e.g. Late, More than 7 Days Late, Late 30 Days After Loan Maturity, Any unpaid balance at maturity, Any unpaid balance at maturity + 30 days)

Each week, the researchers received a list of borrowers with payments due the following week. The first time a borrower appeared on the list, they were randomly assigned to a treatment group (receiving a text message reminder) or the control group (no reminder). Only one loan cycle per borrower was included in the study, since the likelihood of receiving future loans could be affected by treatment received in prior loans. The treatment messages varied by content and timing. The content dimension varied whether the text message was framed in terms of loss or gain, and whether the text message used the borrower's name or the loan officer's name. The timing dimension varied whether the text message was sent the day of, the day before, or two days before payment was due. The researchers observed administrative data on loan amount, term, and the number of weeks in the experiment. The outcome variables were five measures of loan delinquency/default. The researchers used an OLS model to estimate treatment effects, controlling for loan officer and month-year fixed effects.

Randomization done by computer

individual loans

No

943 loans

943 loans

Control: 310 loans; Total treatment: 633 loans
Content treatment: 116 positive and addressed to client, 232 negative and addressed to client, 142 positive and mentions loan officer, 143 negative and mentions loan officer;
Timing treatment: 214 messaged on due date, 196 messaged the day before due date, 223 messaged two days before due date

We worked with two microlenders to test impacts of randomly assigned reminders for loan repayments in the “text messaging capital of the world”. We do not find strong evidence that loss versus gain framing or messaging timing matter. Messages only robustly improve repayment when they include the loan officer’s name. This effect holds for clients serviced by the loan officer previously but not for first-time borrowers. Taken together, the results highlight the potential and limits of communications technology for mitigating moral hazard, and suggest that personal obligation/reciprocity between borrowers and bank employees can be harnessed to help overcome market failures.

Karlan, Dean, Melanie Morten, and Jonathan Zinman. "A Personal Touch: Text Messaging for Loan Repayment." NBER Working Paper 17952, Cambridge, September 2012.

https://www.povertyactionlab.org/sites/default/files/publications/316_74%20text%20messages%20Aug2013.pdf