The recent and rapid growth of the microfinance industry in the developing world can be attributed, in large part, to the acheivement of impressively high loan repayment rates among microborrowers. But while microborrowers have surprised skeptics with their proven ability to repay loans, microfinance institutions (MFIs) and commercial banks lending to the poor still struggle with relatively high transaction costs and low rates of return. All types of MFIs, from strictly for-profit to mission-oriented, would benefit from inexpensive mechanisms for boosting repayment rates and lower administrative costs per borrower. One such mechanism might be automated loan repayment reminders sent via text (or sms) through cellphones. Known as the text message capital of the world, the Philippines witnesses the transmission of over 1 billion text messages every day and thus offers a prime setting for testing the effectiveness of text message reminders on improving client repayment rates.

IPA, in partnership with Microenterprise Access to Banking (MABS) and three commercial banks in the Philippines, designed an RCT to test the effectiveness of text message reminders as a tool for boosting repayment among micro-borrowers. In addition to testing the overall impact of text reminders, the study was designed to explore the importance of timing, framing and personalization of the reminders. Specifically, we explored whether messages received before the due date or messages received on the due date prove to be the most useful timing for reminding borrowers to pay. Secondly, the framing, or psychology, of the message sent was varied, allowing us to test whether emphasizing the benefit of compliance or the cost of non-compliance is a more effective motivator for repayment. Finally, we explored the importance of personalizing the text message by inserting into the message a variety of combinations of the bank’s name, the account officer’s name and the client’s name.

IPA randomly assigned approximately 7,200 borrowers with new loan releases into a control group or one of 18 treatment groups (with various combinations of timing, framing, and personalization). Over the course of the next six months, cell phone numbers and payment due dates were submitted on a weekly basis to an automated text message application that sent the assigned text message to borrowers on the appropriate date. Following the six months of text reminders, IPA analyzed bank data to examine differences in repayment rates, instances of default, and late payments across the 18 treatment groups. IPA also analyzed the cost of the text message system to the banks, taking into account loan officer time, cost of the software development and administrative costs.