Financial innovation of the day: smaller fonts

By Felix Salmon
March 18, 2010
Josh Reich explains how overdrafts work, in the real world:

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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.

8 comments

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Maybe a word limit should be imposed on descriptions and exceptions for products. I.e. if you can’t describe your product and carve out all your exceptions and fees in 100 words or less, you can’t sell it.

Posted by mushr00m | Report as abusive

I work as a bank teller, have been for over three and a half years, and I do not know where Mr. Reich gets his assesment of how a bank describes an available balance. If a customer asks for an available balance we simply say “Your available balance is….”

And I take offense to your claim that only geeky college graduates can understand the “difficult concepts” of a check clearing or a pending charge. Maybe it is difficult for you but pretty much most customers that I interact with understand it just fine. A check is either cleared or it is not. If you as an account holder are expecting a check to clear, make sure your available balance reflects enough to cover the check. How is that difficult to understand? A bank has no way of knowing what checks you have written unless you ask specifically if check number XXX has cleared the account or not.

In todays world of debit then a transaction done on day X may reflect as a “pending” debit. This I admit can be a bit confusing if you are not familiar, as I have had a few customers look at me oddly, but I explain to them as simply as I can that “pending” means that the funds have been put aside already until the debit is processed. Their available balance reflects the debit already being set aside. Pretty much this is what the customer really wants to know. Usually a pending debit is reflected the business day after the transaction is done and “posts” the following business day.

A check that has been “authorized” but not “cleared” is the same as a “pending” bill that hasn’t been “posted”. Mr. Reich should refrain from trying to take one concept and turn it into two scare tactics.

Temporary holds can be placed on an account for many reason ranging from a caution of possible identity theft to legal purposes where lawyers are invovled. We do not discuss these holds when a customers simply asks for their available balance unless there is a block on the entire account all together.

In its simplest form, and overdraft occurs when an account holder accesses more funds than their account has. Being that I am a teller and in no way make policies for the banks I will not discuss the concepts of overdraft fees, how the banks asses them, and the amounts. That’s for those of higher authority then me. What I will say is the way to avoid overdrafts in its simplist form is to make sure the funds are available. You can do that by asking any teller and they will tell you in the simplist form possible “Your available balance is…”

Since you, Mr. Salmon, want to attack the concept of a “free checking account” let me counter with this; at the bank in which I work, our “free checking” account is actually free. I have read the fine print in the disclosures. There are not fees other than overdraft fees. There are no monthly fees, there are no minimum balance fees. There are “hidden” fees. The only thing the account holder pays for is checks, which is clearly stated in the disclosure. So I do not know what bank you went to where they “gouged you with fees any chance they got” on a “free” checking account, but it was not the one I work out.

Mr. Salmon, this blog attempts to take the basic Banking 101 concepts and turn them into a giant scare tactic of how banks are evil and out to get you. You do not have to be highly educated to walk into your local branch and understand the concepts of deposit, withdrawal, check writing, and debit. Whenever an account is opened all disclosures are presented in writing (required by law). All questions are answered as best as possible for the customer to understand. As with any contract it is ultimately up to the customer to read and understand the fine print.

I will say, Mr. Salmon, that in my experience working in the Banking 101 atmosphere its not the ill-education of the customer to the concepts, it’s the customers “the customer is always right” attitude in that they don’t want to take the responsibility necessary to manage their accounts properly, they expect the bank to manage their accounts for them. You would be surprised.

Posted by iflydaplanes | Report as abusive

Since you, Mr. Salmon, want to attack the concept of a “free checking account” let me counter with this; at the bank in which I work, our “free checking” account is actually free. I have read the fine print in the disclosures. There are not fees other than overdraft fees. There are no monthly fees, there are no minimum balance fees. There are “hidden” fees. The only thing the account holder pays for is checks, which is clearly stated in the disclosure. So I do not know what bank you went to where they “gouged you with fees any chance they got” on a “free” checking account, but it was not the one I work out.

My bank account has no fees for cheques and no overdraft fee other than interest. Seems like your bank’s could be freer than it is. You probably pay a higher rate of interest, it’s true.

Posted by GingerYellow | Report as abusive

Yes, iflydaplanes it is that simple! It only took you 736 words to explain how a “simple” free checking account works.

Posted by misterdog | Report as abusive

I never have any problem checking my available balance. It’s the number right next to where it says “available balance,” with cleareds/non-cleareds, pendings/non-pendings, etc., all figured in. If one is put off by the mere sight of such long words, well then, there really isn’t much that can be done about that.

There’s next to nothing on my online account summary that should generate even a bead of sweat on the brow of anyone with a three-digit IQ.

Posted by Mega | Report as abusive

@misterdog
Yeah, I got a little carried away. I do understand peoples outrage at the banking industry with todays economy being what it is and the causes of the finanical meltdown and everything, but don’t start attacking us little guys on the bottom rungs of the ladder. That is what frustrated me and it turned into a 736 word rant.

@GingerYellow
The free checking account we offer is not an interest bearing account. While I am sure it could be even more free than it is given the cost of the items it does involve (checks and overdraft fees) in the context of gouging the customer with any fees it can is simply not true.

Posted by iflydaplanes | Report as abusive

@ Mega
Three-digit IQ; the other half of the population also needs a bank.

Posted by Gasol | Report as abusive

Actually, in the US they’re more than half. I’d be willing to cut the 90-100 crowd some slack in the name of getting things to function more smoothly, but the financial affairs of anyone below 90 should be placed in the hands of a guardian.

Regrettably, “race to the bottom” seems more and more to be the guiding principle nowadays.

Posted by Mega | Report as abusive