As the Treasury official in charge of setting up the Consumer Financial Protection Bureau (CFPB), Elizabeth Warren isn't wasting any time. Having been appointed as sort-of interim Bureau head, in September, she has spent a lot of time talking with bankers to determine how to make financial products more consumer-friendly. But this might seem odd -- aren't banks at odds with the entire purpose of the CFPB? Not exactly, and Warren has a different philosophy for regulating than many in Congress.
So just what is Warren trying to do with these talks? According to an article this week in the Financial Times, she hopes to make products more transparent and potentially end free checking. But it isn't her intention to necessarily end free checking -- just to end fake free checking where consumers pay fees on the back-end instead of upfront. In a speech on Thursday to the Consumer Federation of America, she explained that simply prohibiting practices was a waste of time:
This agency can issue thou-shalt-not rules--and some companies can try to work around them, and the agency can issue more and more rules. That approach will eliminate some of the worst practices. But the market still will not work as it should. I'm here to argue that we need fundamental change, not just narrow rules that ban the latest abuses. We need tough, no-nonsense changes that will last and that will address the real, underlying issues.
In the speech, Warren used last year's credit card regulation as an example of rules meant to protect consumers that didn't work as well as hoped. In that case, a number of new rules were put in place, and credit card companies immediately acted to try to find ways to circumvent them. This is generally the game that is played between Washington and banks. Regulators create new rules and financial firms find clever ways to avoid them. Warren seeks to end the game and find productive solutions to achieve the end she seeks of clearer consumer disclosure about financial products, without stifling banks' ability to earn a profit.
One example of this comes with overlimit fees, big penalties paid by debit card users when they exceed their available balance. It's pretty clear from what Warren has said that she isn't a big fan of them. She thinks that they serve as a way to obscure the real cost of checking, instead of just charging these individuals more money upfront. For example, if a person averages one overlimit every other month at the cost of $35, why not just charge them a monthly maintenance fee of $17.50 and eliminate the overlimit fee?
Warren prefers this approach, because she thinks it will allow consumers to more easily compare all of their options in the financial product marketplace. If some banks have higher upfront fees and lower back-end fees, then their service might appear more expensive than another that has lower upfront fees but much higher back-end fees. Not only is that frustrating from the consumer perspective, but it actually harms competition by making comparison shopping very difficult. Of course, it also seemingly rewards companies that are less forthcoming about the true cost of their services -- something which is undesirable from an economic perspective.
Now it's certainly possible, even plausible, that if companies are clearer about the cost of financial products, then the landscape could change considerably. If competition does ramp up for non-prime customers with better information at their disposal, then this should drive prices down for those consumers. That means more of the cost might have to fall on the shoulders of the prime customers.
Banks probably wouldn't be thrilled with this result. They likely want to continue to be able to offer their best customers some reward for banking with them. And currently, their less savvy customers are subsidizing that benefit. So the challenge for Warren -- or whoever ends up the official head of the CFPB -- is get banks to make peace with the seemingly inevitable outcome of a cost shift. It isn't as simple as being more upfront about costs, because in order for profits to remain relatively flat, banks need to earn revenue from somewhere.