Earlier this week, we completed an in-depth assessment of new FDIC guidance – or, shall we say, dictates – on overdrafts. In it, the FDIC tells banks to convert “excessive” users of overdrafts to products that are better for them. This is, we think, a lot like ordering Bergdorf’s to identify excessive buyers of $600 shoes with four-inch heels and then forcing it to offer lower-heel, lower-cost options. We don’t do this in retailing – when was the last time a saleswoman proffering $40 lipstick whipped out the $2 identical ones to customers who seemed to be buying too much make-up? Why, then, is a moral duty demanded of banks? This is, we think, not just a theological question – it’s a vital strategic one as a new framework for federal consumer-finance regulation is formed following Dodd-Frank.
To date, retailing – outside of banking, anyway – has been covered principally by a patchwork of safety rules. Thus, cars are to some extent supervised by the National Highway Traffic Safety Administration, cosmetics – at least sort of – by the Federal Drug Administration and some of the riskiest products – too-tight jeans and too-high shoes, not at all. Except for stuff that’ll kill you, the retail code is caveat emptor.
Until right about now, the banking code was also caveat emptor, but with a disclosure sticker. Starting with the Truth-in-Lending Act and proceeding to a growing deluge of similarly “truthy” laws, Congress has mandated more and more disclosures intended to ensure consumers knew what they got when they cozy up to a credit card, car loan, mortgage or other offerings. As products became problematic, disclosure piled upon disclosure until the paper pile-up at the mortgage closing table confounds all but the canniest lawyer (and, sometimes, even them).
This is called information asymmetry – meaning that consumers simply can’t be expected to know what they are doing. Much as drug regulation is premised on the fact that ordinary consumers can’t assess pharmaceutical safety, disclosures are often insufficient for self-protection. Some products may be just too risky for most, if not all, consumers. But, working out which is what and where regulations can and can’t protect customers remains a very difficult balancing act. At least so far, no one’s figured out how to do clinical trials for financial products.
The FDIC’s overdraft statement is clearly on one side of this balance – lacking authority to bar a product, it is trying instead to force banks to shove preferred product options in consumer’s faces. This is ending information asymmetry and then some, but it still means that products the FDIC wants to ban altogether remain on the market if consumers somehow still find their way to them. This, though, may well end under the new Bureau of Consumer Financial Protection mandated in Dodd-Frank. The law gives the Bureau far-reaching power to ban any product or pricing it doesn’t like if it’s found unfair, deceptive or abusive – a wholly subjective set of judgments that could sweep a lot of offerings off the table even if suited to some customers some of the time.
So far, the debate over consumer financial products has principally focused on safety – that is, deciding if regulators can find products too dangerous for consumption. But, there’s another, even thornier moral question still to come on bank retail products. Our colleague, Nick Day, recently posted an analysis on the FedFin website linking to a paper from the Federal Reserve Bank of Boston on interchange fees and credit-card reward points. The study chastises fees not because they’re just too darn high, but rather because the combination of fees and card-reward programs advantages the wealthiest of consumers at the expense of lower-income ones. It posits an “income-equality” model for public policy on retail finance.
This is a step still farther into the complex terrain of who runs banks for what purpose and at how much profit. Whether the new Bureau will tread on this untried terrain remains to be seen, but it will surely take up where the FDIC was forced to leave off. Some consumer-finance products will carry disclosures akin to skulls-and-crossbones, some will be allowed only after customers are told what’s good for them and still others will be barred. Which is which will determine which retail financial-service providers survive in a very new world. And, perhaps more importantly, where the new regulatory regime starts and stops will dictate whether anyone suited for the banking version of $600, four-inch heels can still find the products they want even if mother doesn’t like them.