A few weeks ago I wrote about a Pew Health Group project to establish a sort of bill of rights for debit card users. I'm happy to report that at least part of that effort -- simplifying bank disclosures -- is beginning to catch on.
Several financial institutions, including Chase, North Carolina State Employee's Credit Union and Pentagon Federal Credit Union, have recently signed on to adopt Pew's format for bank disclosure forms, according to a statement released by the organization today.
The form is designed to replace labyrinthine bank disclosures which run an average of 111 pages, according to Pew, with a simple, easy-to-understand list of fees, bank policies and other essential information.
From the Pew press release:
A standardized form, such as Pew's model disclosure box, will enable consumers to have the information needed to comparison shop and determine the checking accounts that best meet their needs. Such a form would also encourage all financial institutions to compete based on clear information about the key fees, terms, and conditions of the checking accounts they offer.
I think that last part nails why these forms are such a big deal. Over the last few decades, many financial institutions made their money on checking by signing up as many accountholders as possible to "free checking" and then nailing accountholders with unexpected fees buried deep inside disclosure forms. The more difficult it was for accountholders to understand fee policies, the more likely it was they'd rack up fees, fattening banks' bottom lines. Sure, that drove away some customers, but most would stay because of the shear inconvenience of switching checking accounts to a different institution.
That model has become increasingly unworkable as bank's fattest source of fee income -- consumer overdraft -- was severely curtailed by a Federal Reserve rules change requiring accountholders to opt in for banks' lucrative courtesy overdraft programs. The oversight of the CFPB is likely to drive another nail in that model's coffin, as the Bureau looks likely to emphasize clear disclosure as a key part of its mission.
The adoption of the Pew model for clear disclosures seems to signal that some financial institutions have seen the writing on the wall for that "gotcha fee" way of doing business. They're betting that being clear and upfront about their fees will improve the way potential customers see them and encourage current customers to stick around.
I think the FIs that have chosen to follow Pew's guidelines voluntarily are to be commended, especially Chase. One would expect credit unions, which have historically been more consumer-friendly than other types of financial institutions, to support an initiative like this, but not so much a huge, multinational banking conglomerate. Adopting clear, easy-to-understand disclosures is the right thing to do. My hope is that it turns out to be good business, too, but I'm not really sure yet.
There was a reason banks adopted the gotcha fee model in the first place: people seem to prefer their fees to be hidden. Remember the debit-card-fee fiasco? Banks proposed a clear, easy-to-understand fee to help them break even on consumer checking accounts, and people freaked out, forcing banks to begin increasing lesser-known fees at the margins instead.
That's why I think that while it's great that banks are beginning to adopt simple disclosure voluntarily, industry-wide regulation is going to be essential to prevent them from being penalized for it in the marketplace.
What do you think? Is it good business for banks to simplify their fee information and account policies? Or do "gotcha fees" work?
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