Americans troubled by trade-off
between privacy, easy credit access
By Lucy Lazarony • Bankrate.com

People don't feel as if their lives are spinning out of control when they're charged an ATM fee. It's not a violation of someone's personal space when a call to a bank's help line doesn't help. There's little about a bank's check cashing policy that makes people want to shudder.

But mess around with someone's private financial information -- and look out. Talk about a hot topic. It's hard to imagine a more volatile financial issue than consumer privacy.

Attorneys general from 20 states are investigating financial institutions for breaches in consumer privacy. At last count, 10 state legislatures were proposing tougher privacy protections, with more states likely to follow.

At the federal level, the rules for a 1999 privacy law are not even finished and already President Clinton, the Comptroller of the Currency and several members of the U.S. Congress are calling for tougher laws.

"When you ask people, 'Do you care about privacy?', who would say no?" asks John Byrne, senior counsel and compliance manager for the American Bankers Association.

Almost everyone is in favor of protecting privacy, but no one can agree on how to do so.

It's not just about money
Unlike so many other banking issues, this one goes beyond dollars and cents. Who has our information and what are they doing with it? When did we lose control?

"They know if you've gotten married. If you just bought a house and had a baby. They know the magazines you read. The Web sites you visit -- there's something spooky about that," says Walter Kitchenman, a senior analyst at the TowerGroup, a consulting firm for financial services.

Plus, this is an election year, when every issue gets amplified and twisted beyond recognition.

"You put all that together and it doesn't always make for a rational debate," Byrne says.

"Our greatest fear is that the privacy issue is not debated in fact but in hyperbole."

The fact is that we are living in an information age. And while the benefits are numerous and far-reaching, the biggest casualty is our privacy.

"Technology is making all kinds of things possible," says Anne Wallace, manager of Barefoot Marrinan, a division of KPMG Peat Marwick, a financial services consulting firm. "The opposing force is consumers saying, 'What's going on?' "

Interested in the flow
Make no bones about it -- it's your private information companies are slicing and dicing and analyzing and categorizing, all so can they decide what product to try to sell you. Banks and financial services companies are no exception. Indeed, they are some of the strongest proponents for keeping all this private information flowing along.

Just look, they say, at what's happened with consumer credit information in the past 10 years. A free flow of accurate credit information coupled with technological advances has revolutionized the way Americans borrow money.

Instead of thousands of regional offices doing their own things, we now have the big three credit bureaus and their affiliates. Having a central source for consumer credit data helps banks make lending decisions and it gives consumers a lot more freedom.

We don't need a long relationship with a bank to qualify for credit anymore. We don't have to apply in person, either; we can apply online.

Any lender we choose will pull up the same information on us from the credit bureaus.

"We complain about the fact that banks share information. But that permits us to move freely and to get credit from anybody," Kitchenman says.

The price of convenience
The growth and fine-tuning of credit scoring models in the past decade has helped lenders make more precise lending decisions in less time. Because of this, more and more businesses have jumped to consumer lending. This competition has helped drive down the cost of credit in this country.

"U.S. consumers have access to more credit, from a greater variety of sources, more quickly and at lower cost than consumers anywhere else in the world. The ability to grant credit quickly and appropriately depends on ready access to information about consumers," writes author and Indiana University law professor Fred H. Cate, in a recent paper on privacy and consumer credit.

"Even large credit decisions, to finance a college education or to purchase a first home, are often made in a matter of minutes, instead of weeks or months as is the case in most other countries, because consumer information is readily accessible."

In others words: things are mighty nice here in America because of some nifty advances in data technology and the free flow of personal information. Why mess with a good thing?

Credit application allows an inquiry
But wait a second. Financial services companies can pull a copy of your credit report only after you've filed an application for credit. So, in essence, when you apply for a credit card, an auto loan or a mortgage, you give that creditor permission to view your credit history.

And under the Fair Credit Reporting Act, banks must give customers notice and the chance to opt out before they can share a customer's credit information with an affiliate. So when it comes to credit information, there's a definite element of consent.

But that's not the case with customer transaction and experience information that banks and other financial services companies collect. This information includes Social Security numbers, credit card numbers and account balances. Financial services can pretty much do anything they want with this data. And they have.

Banks routinely sell and share this information with affiliates and third-party marketers hawking everything from travel clubs to cell phones to fertilizer.

"Most people consider their financial information extremely sensitive," says Beth Givens, director of the Privacy Rights Clearinghouse in San Diego.

"Many people are just dumbfounded when they learn that banks can sell information without their permission."

Unclear privacy policies cause fear
The complaint is that you can trust your bank with your money but you can't trust it to hold on to your private account information. It makes a lot of people uneasy.

It hasn't helped that many banks and financial services companies have been less than clear in spelling out privacy policies to consumers.

"Most of us don't really know what our banks do with our financial information," says Cate. "We don't understand it and, quite frankly, banks haven't done a good job of explaining. So we have visions of George Orwell's 1984."

A new law aims to change that. Under the Gramm-Leach-Bliley Act, a financial institution must disclose its privacy policy when a consumer signs on as a customer and at least once a year thereafter. Financial institutions also must give consumers the chance to block the sharing of "non-public" information, including transaction and customer experience such as account balances, with third-party marketers.

President Clinton signed the Gramm-Leach-Bliley Act on Nov. 12, 1999. Federal regulators have until May 12, 2000, to translate the financial reform law into a comprehensive set of rules. The rules would take effect six months later.

The financial services industry and consumer advocates got a peek at the rules early in February, when they were released for public comment. The rules can be viewed on the Web sites of the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The public comment period lasts until March 31.

A privacy promise not kept
The new law also prohibits financial institutions from sharing or selling customer account numbers to third-party marketers. This very issue came under scrutiny in Minnesota last summer.

The Minnesota Attorney General's office charged Minneapolis-based US Bancorp with telling its customers that it would keep their account information confidential and then selling the information, including account numbers, to a telemarketer. Worse still, the telemarketer then allegedly debited customers' checking accounts without permission.

U.S. Bancorp admitted no wrongdoing but it quickly agreed to settle the case to the tune of $3 million. The highly publicized case struck a nerve with many consumers and helped kick the privacy debate into high gear.

"We started getting calls from individuals that were outraged that banks were selling customer data and they wanted to know what they could do about it," Givens says.

What can you do about it? The first thing is to learn your bank's privacy policies.

"Consumers have to read the notices -- no matter how boring -- and if they feel, 'I don't like that,' they should opt out," says Wallace.

Be sure to sift through the disclosure a few times until it all makes sense. If customers have questions, they should call the bank.

"If they don't get an answer that is sufficient. They should move their accounts," Byrne says.

"Vote with your feet."

The trouble is, where should consumers go? At this point, most bank privacy policies are remarkably similar.

Exception to the rule
One national bank has managed to break away from the pack. Industry heavyweight Chase Manhattan recently beefed up its privacy provisions after coming under pressure from state officials.

In a settlement with the New York State Attorney General, the bank has agreed to stop sharing customer credit line and balance information with outside marketers. Chase customers must give written consent before the bank can provide name, address and telephone information to marketers.

"If Chase can do it. Other banks should be able to do it," says David Butler, a spokesman for Consumers Union.

"We think it's a good start."

"Start" is the key word here. This whole privacy debate is just beginning. It's going to be years before this thing is sorted out. Technology is changing faster than financial institutions, lawmakers and consumers can keep up.

"It's as if the technology keeps leapfrogging everyone's expectations," says Wallace. "This transitional period is going to last several years as consumers and industry try to find a balance.

"This isn't going to get easy."

-- Posted: Feb. 16, 2000