Financial innovation of the day: smaller fonts
Josh Reich explains how overdrafts work, in the real world:
It is pretty easy for a bank to clearly communicate your available current balance. But look at the language that banks use to describe available balance, with additional complexity from pending bills that have yet to be posted, checks that have been authorized but not cleared and temporary holds placed on the account. These are not difficult concepts to understand if you take the time, but banks go out of their way to make it as hard as possible to really understand what is going on with your own money. They have no incentive to help you understand, as a confused customer is a profitable customer. We’ve joked that one of the greatest innovations in banking is ever-decreasing font sizes.
Actually, these are difficult concepts to understand. Maybe not if you’re a geeky college graduate with a solid grasp of mathematics and banking, but many ill-educated Americans have much more important things to do with their time than have to study hard to understand how these things work. As Josh says, “banking should be simple, boring & cheap”, and the onus should not be on the consumer to try and work out how their bank is trying to confuse them.
Right now, banks and consumers are in a lopsided arms race: contracts get ever more complex and fonts get ever smaller, and consumer groups can respond with little more than ineffective — or even downright counterproductive — financial-literacy programs. Here’s Lauren Willis:
The pursuit of financial literacy poses costs that almost certainly swamp any benefits. For some consumers, financial education appears to increase confidence without improving ability, leading to worse decisions. When consumers find themselves in dire financial straits, the regulation through education model blames them for their plight, shaming them and deflecting calls for effective market regulation. Consumers generally do not serve as their own doctors and lawyers and for reasons of efficient division of labor alone, generally should not serve as their own financial experts. The search for effective financial literacy education should be replaced by a search for policies more conducive to good consumer financial outcomes.
What worries me is that the Consumer Financial Protection Agency is not going to have any control, as far as I can tell, over Josh’s font sizes — he can claim that he’s going to try to be as clear and transparent as possible, and I believe him, but no one’s forcing him to do that. (In fact, if there were someone forcing him to do that, he wouldn’t have a business model, since everybody else would be doing the same thing.)
And BankSimple is going to be web-based; at least in the first instance, it’s going to be disproportionately popular among precisely the geeky college graduates who need it least.
The thing to note here is that perception is often much more important than reality. One of the ways that Wachovia and Washington Mutual managed to grow so quickly for so long was by being the “friendly”, open, transparent bank — by encouraging people to come in for free dog treats, rather than putting signs on the doors saying that anybody entering without a legitimate banking purpose is a trespasser who might be prosecuted. (Really, the new flagship Bank of America branch on 42nd Street has those.) The younger big banks had long, convenient hours, and pushed their “free checking” product very hard indeed — where of course “free” means “we’ll gouge you with fees any chance we get”.
Once again, the onus should not be on the consumer to be able to work out the difference between friendly, approachable BankSimple and friendly, approachable Wachovia and WaMu. All banks will say that their products are free — and the CFPA should stop them from doing so. But it can’t, because it will only have enforcement abilities for the biggest banks. So the war will continue to be one of marketing, rather than reality, and the consumers will continue to be the biggest losers.