Despite all of the new powers at their disposal, regulators continue to emphasize simplified and standardized disclosure as a critical tool to ensure consumers get a fair deal.
The Consumer Financial Protection Bureau has applied behavioral research and design thinking to the creation of model mortgage forms, sharing a series of prototypes on its website and seeking feedback. Last month, the bureau shared a sample penalty fee box for disclosing overdraft fees on bank statements.
"We strongly believe that financial institutions can and should speak to their customers in terms that are simple and clear," CFPB director Richard Cordray said during the Consumer Bankers Association conference last week. "This kind of straightforward transparency promotes more informed and more responsible decision-making by consumers across a number of financial markets."
In an era of increasingly complex financial products, it makes sense to focus more attention on how to explain to consumers what's in their wallets, especially given the sorry state of most disclosure forms.
To make a real difference, though, financial providers need to see disclosures as more than a legal requirement or a box to be checked. Disclosures are opportunities to positively influence consumers' behaviors and choices.
Earlier this month, our organization, published recommendations for a standardized fee box for general purpose reloadable prepaid cards. Three prepaid card providers — Green Dot, Plastyc, and Ready Credit — have publicly committed to adopt or test the Center for Financial Services Innovation's proposed disclosure box, and several others have expressed interest in the concept. (CFSI is a strategic partner of Core Innovation Capital, which is an investor in Plastyc, and Green Dot participates in CFSI's Innovators Roundtable.)
CFSI's recommendations detail a series of considerations in designing the prepaid disclosure box that we believe apply to financial disclosure broadly.
- Disclosures should have a clear and consistent placement. The most well-designed disclosure document is useless if consumers cannot find it before making a purchase decision.
- Thoughtful design and formatting can make it easier for consumers to understand disclosures and make it more likely they will be read. Organizing information into clearly defined lists or tables with categories and plenty of white space can improve comprehension.
- Simple, clear and straightforward language is paramount. Disclosures for financial products are typically written at a reading level well above what most Americans can comprehend. When disclosures use terms that consumers do not understand, they tend to ignore them.
- Crafting the ideal disclosure document requires making tradeoffs between simplicity and comprehensiveness. All fees should be disclosed somewhere, but trying to accomplish everything within a single box or table can reduce effectiveness, distracting consumers from what is most important or resulting in information overload.
Getting basic disclosures right is important for ensuring consumers see, read and understand product details before they buy, but disclosures can be so much more than a neutral sharing of information. The field of behavioral economics shows how they can be a tool for promoting positive actions.
One subtle but important way that CFSI's model fee box encourages more efficient use of prepaid cards is by highlighting free services alongside those with costs. In the "Add Money" category, for instance, consumers will see that loading funds via direct deposit is free, while loading cash at a retailer has a cost. Seeing various ways to use the card for a particular activity and the cost differential can encourage behavior change.
In another example, online prepaid company Plastyc is rolling out a new disclosure box as part of a smartphone app that includes the typical use or median number of times a consumer incurs each of the listed fees in a month or a year. Putting fees in context provides consumers a better understanding of the total cost of using the product, helping them make a more informed decision about which product might be best for them.
New technology is transforming the way consumers conduct their financial lives. The mobile phone in particular presents a tremendous opportunity for providing consumers with relevant, real-time information that can enable improved decision-making.
Plastyc's fee box will be accessible via smartphone at the touch of a button. How many consumers actually keep the lengthy terms and conditions document they receive when opening a checking account or receiving a new credit card, let alone carry it around with them to consult before making a transaction?
Information is power. By finding more creative and effective ways to share information, financial providers can empower their customers to make smarter decisions about their money, and in the process reduce costs and build customer loyalty. Everybody wins.
Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation. David Newville is CFSI’s policy manager.