In October 2010, the Pew Safe Checking Project began a study of checking account terms and conditions at the 10 largest banks in the United States. One noteworthy finding was that the median length of disclosure documents was 111 pages.
Disclosures help consumers make educated decisions, but the information needs to be in a clear and understandable format. Obviously, at over 100 pages in length, the checking accounts in our study did not meet this standard. Filled with highly technical language, they were far from customer-friendly. These types of disclosures force consumers to learn about fees and terms the expensive way—after they incur them.
Clearer disclosures would level the playing field and encourage a more transparent, fair, and dynamic marketplace for financial institutions. They would allow competition to flourish based on consumers' awareness of what they are buying. Consider the nutrition labels on our food. It's hard now to imagine not having this commonsense tool to help consumers to make healthier, more informed choices. People on low-sodium diets can make educated decisions on which manufacturer's soup best meets their dietary needs. All the nutritional data is written on the package, making it simple to compare products.
Consumers lack a comparable tool for selecting a checking account, one of the most common consumer products. But the Consumer Financial Protection Bureau can remedy this by requiring uniformity of disclosure documents.
A standardized disclosure form would allow banks to compete with each other based on simple, consumer-friendly, and consolidated information about the key fees, terms and conditions of the checking accounts they offer. In a crowded marketplace, big banks, community banks and credit unions could more clearly differentiate themselves based on their products and services. (Pew offers a model disclosure box, available for free at www.pewtrusts.org/disclosurebox, and we encourage banks to post it on their own websites and make it available in their branches.)
It is clear that customers want this type of standardized disclosure. According to a July survey of U.S. checking accountholders, commissioned by Pew, 78 percent of accountholders believe it would be a positive change to require banks to provide a one-page summary of information about checking accounts' terms, conditions and fees. Only 4 percent said doing so would be negative.
The need for better disclosure also applies to overdraft options. Currently, banks are not required to disclose all of the available choices for overdraft protection when a customer signs up. Consumers need to know they have three choices—overdraft transfer plans, overdraft penalty plans or not opting in for either. And they need to be informed of the fees associated with each. Our poll showed accountholders want to know their choices, with 83 percent of respondents saying that banks should be required to provide a summary of the options, how they work, and a description of the fees. Only 2 percent said this would be a negative change.
The marketplace continues to exhibit new areas for increased competition. In the past year, a number of banks said they would no longer reorder certain types of transactions for at least some of their accounts. Reordering, the practice of processing debits and withdrawals in a non-chronological order to maximize overdraft fees, should be eliminated entirely. It is not fully disclosed or explained, making it difficult for consumers to responsibly handle their money.
The CFPB can work to safeguard checking account holders by setting regulations around the disclosure of fees and overdraft options, and by banning the practice of reordering. No matter how uniformity is reached, it will enhance competition and make the market run more efficiently—which is exactly what consumers want and what the bureau was designed to do.
Weinstock directs Pew Health Group's Safe Checking in the Electronic Age Project.