The scandal involving Wells Fargo opening more than 2 million unauthorized accounts has prompted obvious questions over whether other banks engaged in similar practices. It also has likely motivated some customers to want to dump their financial institution. This same impulse came up before during the financial crisis as Americans protested financial institutions they felt were not serving them well. After all, voting with your feet is an important part of holding banks accountable for misdeeds.
Yet few Americans actually dump one bank in favor of another.
Inertia and information overload explain part of customers' hesitation to actually leave their bank for another. Just finding the right replacement account and doing the paperwork takes time. Ironically, technology doesn't aid the process but in fact makes it even harder for customers to switch. Widespread use of electronic payments, such as direct deposit and online bill pay, keeps customers at their financial institution longer.
Customers have strong incentives to use these electronic tools and benefit greatly from them. Direct deposit is faster, cheaper and safer than getting paid by check. Paying bills electronically, rather than by check or in person, is a fast and usually seamless process that can help keep families on financial track during busy times. Moreover, the least expensive bank accounts typically require regular contributions by direct deposit.
At the same time, these technological linkages combine with other more outdated payment systems to lock in customers at their current banks. For example, because the payment systems use bank-specific routing and account numbers to send and receive payments, re-establishing these digital account linkages with a new bank account imposes needless hassle, time and costs. Customers must notify their employer with their new account information, and every utility bill, credit card bill and loan payment must be switched over with the new routing number and account number. And all of these payments must ultimately go through on time, the first time.
If your paycheck takes longer to be deposited, if a credit card company does not recognize your new bank right away, or if a mortgage or rent payment doesn't go through, there are costly financial consequences. They include late payment, overdraft or bounced check fees, and ultimately greater financial instability. After a switch, customers also face the risk of their former bank charging zombie closing or inactivity fees. At the end of the day, the cost of leaving may simply seem too high.
But it doesn't have to be this way.
We need to move toward consumer ownership of one's financial data, with clear rules of the road for secure portability of that data, protecting privacy, and ensuring strong consumer protection and meaningful consent. Only when consumers own their own data and can securely move it or share it with others will we have real competition for financial services. Doing so will also empower consumers to better manage their financial lives with new tools for budgeting, saving and investing.
The Consumer Financial Protection Bureau can start by using the authority given to it under the Dodd-Frank Act to require banks to provide consumers with information about their account usage in standardized, machine-readable format. Consumers can use this information to shop for better accounts, use third-party financial management apps, and switch accounts more easily. The consumer agency also needs to protect consumers from unauthorized or abusive use of their data. Ultimately, a consumer-owned, universal, portable financial identity could enhance consumer autonomy, choice and competition.
The next step could be the creation of platforms dedicated to the process of account switching, with software routing digital deposits and withdrawals to the new account just as paper mail gets forwarded when individuals change their home address. The United Kingdom has been experimenting with just such an approach over the last few years.
If financial institutions knew that customers could easily walk away when treated badly, they would be incentivized to compete for their customers' loyalty. The price of overdraft, over-limit, and late fees, as well as other contingent fees, would also likely come down. Small banks and credit unions could also find it easier to attract new customers in their communities by making it easier to carry over the customer's financial transactions. Finally, greater competition would motivate banks to better serve the nearly 16 million adults who have no bank accounts at all.
For many Americans, the Wells Fargo scandal only reinforced a troubling belief that they are not in control of their financial lives. Even before the scandal, only about one in four Americans held "quite a lot" or "a great deal" of confidence in banks, according to Gallup. But a policy making it easier to dump one's financial institution and simplify bank account switching would put millions of dissatisfied customers back in control of finding and keeping a bank or credit union that serves them well. That's the best way for financial institutions to earn the trust of consumers.
Michael S. Barr is professor of law at the University of Michigan and senior fellow at the Center for American Progress. Joe Valenti is director of consumer finance at the Center for American Progress.