Today's consumers can't live without checking accounts, credit and debit cards and consumer loans. But this dependency should not be confused with happiness or even satisfaction with the financial institutions that issue them. They routinely generate anger across the board. These products are essential to modern life. No one can get by with just a pocketful of cash anymore, even a large pocket. And these products have improved tremendously over the years due to the innovative adoption of information technology. But banks have abused consumers' trust by milking every possible penny of profit from these products through a seemingly endless series of fees, exceptions, hidden controls and one-sided legalistic protections for themselves.
The Obama administration's proposed Consumer Financial Protection Agency can help the industry deflect this animosity. By creating a consumer banking governmental participant, the industry will gain a shield, or defense. If there is an arbiter of what is OK for consumers' bank products, the industry is protected. There will finally be a reputable and authoritative voice.
The industry will gain from the CFPA by having a partner to sell its story — its reform, if you will. Consumer banking products need a makeover, not to make them less useful to the consumer, nor even less profitable to the banks. Consumers are not averse to fair profits based on fair products. Rather, the products need a measure of transparency — so that the consumer can actually understand them — and basic fairness. And, this will be mostly at the margin, where the egregious cases lie. The overwhelming majority of the basic functions will certainly remain. Yet, who will believe the industry if they do this alone? Right or wrong, far too few will trust them. For the industry's own self-protection, it should get behind the CFPA and treat it as a needed and valuable partner.
Consumers are angry not just about prices and fees, but customer service (lengthy automated response phone systems), "agreements" with complex features (an analogy with bloated software) and their rights. People never used to have to worry about secrecy of card numbers, credit scores, or identity theft. But now they do.
Take the ubiquitous credit card, for example, a truly valuable product, yet one that is widely disparaged. It allows easy payment in some 20 million locations worldwide, offers convenience credit, gives 30-45 days' float to convenience users, creates an automatic record of purchases and even gives charge-back protection to certain purchases unavailable with checks. No wonder people use it!
Yet, the banking industry has loaded the product with unneeded features and marketing gimmicks, ballooned up the unused credit limit overhang and striven to give a card to practically anyone. (Much of this can now be said for debit cards as well.)
Technological innovation will continue to change consumer payment and credit products. The Internet is by far the best example of this. It has already brought us Web-based payments like PayPal, online access to banking and credit accounts and online bill-pay services. More can be expected. Even person-to-person lending, disintermediating depository institutions entirely, has been tested and may succeed.
Consumer loans have migrated from a rarity 150 years ago, to a privilege a generation ago, to a virtual right today. New-car sales depend upon auto loans; colleges would shut their doors without student loans; the role of mortgages in the housing market is patently obvious.
Of course, credit is not an entitlement, because not everyone always pays back what they owe. The issue is: Given that access to consumer credit and payment systems is so important, should the industry, and only the industry, determine all of the rules?
The answer is obviously no and, in fact, there are already a dozen major laws governing consumer credit. Some have been on the books for a long time. These laws restrict certain actions and depend heavily upon disclosure. The CFPA would not change these existing laws, but it would rearrange portions of the executive branch to make their enforcement far more effective.
Therein lies the benefit for the banking industry. With a visible, legal, partner watching and approving its actions, consumers will feel far more trust in how they are treated. People's ill will toward these products should subside, and this will be all to the good. Complex payment and credit products are here to stay, and our dependency on them cannot diminish. It's time to recognize them as essential parts of our life and take action to improve the industry's tarnished image. Both consumers and the industry have much to gain from the CFPA.
