Bank Customers Just Aren't That Into Transparency

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Bank Of AmericaIt's almost enough to make you feel sorry for the banks.

Consumer advocates and government officials often extol the value of transparency and easy-to-understand disclosures when it comes to financial services. Here's CFPB Director Richard Cordray in a January interview with Candice Choi of The Associated Press:

On transparency and disclosure; a key insight here is that more disclosures don't always make things better.

As it accumulates, there can be so much dense, fine print that it can actually make things much worse. Consumers find it hard to penetrate, and they often will not read it.

That's a concern, and that's why we're trying to make things more transparent, simpler and clearer with our "Know Before You Owe" project.

However, simply making things clearer to consumers is not enough if people aren't actually playing by the rules and defrauding consumers. There, we have to enforce the rules and we have to do it fairly, evenhandedly, but with rigor so that everybody understands that they have to follow and respect the law.

I think Cordray is right that clear disclosure of fees and terms is better for customers in the long run. But I think it's also fair to say that in the short term, consumers flat-out hate knowing how much they really pay for checking accounts.

Sure, some of the public antipathy toward large national banks has come as a result of their role in the financial crisis. But the broad national backlash to new bank fees exemplified by Bank Transfer Day didn't happen until debit card fees came on to the scene.

In a way, though, those flat monthly fees for checking represented little more than a shift in the way we paid for checking. Federal Reserve changes making overdrafts opt-in ensured we wouldn't pay for them through penalizing the mistakes of serial overdrafters, many of whom really weren't in a position financially to subsidize the nation's checking accounts. Then, the Durbin amendment ensured we wouldn't pay for checking accounts through retail prices subtly inflated by debit-card processing fees charged to merchants.

And lest people think banks can make money off checking by lending out their checking deposits, if you've paid any attention to interest rates on consumer loans lately, you know they've been breaking record lows for weeks now. Banks make money on the difference between loan rates and their cost of funds, and falling rates are shrinking that margin.

In short, banks can no longer hide the price of checking behind overdrafts and debit interchange, and so are being forced to put their fees out in the open. Sure, paying for checking directly, rather than through those back-door methods, is certainly more transparent, but man do people hate it.

Far from being happy that they know the true price of checking, customer outrage is causing a mass exodus from the large national banks. As my colleague David McMillin noted on Friday, a recent J.D. Power and Associates study found that 9.6 percent of customers in 2012 indicate they switched their primary banking institution during the past year to a new provider. This is up from 8.7 percent in 2011 and 7.7 percent in 2010.

Now you can see why many banks have resisted making their pricing, terms and conditions more clear. The more transparent they get, the bigger the backlash it seems.

Banks are far from blameless for the current state of affairs. They were the ones who shifted their revenues on checking accounts away from monthly fees and toward penalty fees and swipe fees. In an attempt to win market share from one another, they used that shift to make checking appear free to customers. Eventually, customers came to considering a free checking account their birthright, even though, as recently as our 2001 Checking Study, only 7.5 percent of checking accounts were free.

Now that consumers are used to free checking, though, good luck getting them to accept that they'll have to pay for it, especially with many families still struggling from the aftereffects of the recession.

What do you think? Should customers get used to the idea of paying for checking accounts?

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