What is the nature of transparency? Is it enough to be able to see through, understand and believe there are no secrets being kept from us?
Not really. Though transparency is crucial to our understanding, a banking system that doesn't also guide us toward our best interests is destructive in the long run and very hard to trust. Trust is a crucial component to mutually beneficial relationships and the fact that most people don't trust their bank indicates that the relationship, and perhaps the system, is broken. There's a path to sustainable profitability that restores the benefits of this relationship on both sides, and it starts with humanity and a win-win approach to doing business.
And while we've fought to have access to information about the food we eat, the cars we drive and the potentially toxic products in our homes, we're still in the dark about what being financially well really means and how we get there.
A system devoid of humanity creates only one winner: the person holding all the cards. In the case of banks, even they needed to be bailed out, as their consumers completely foundered under the weight of unsustainable debt. While banks aren't the enemy, much can be done to humanize and improve a system that encourages too many people, including the banks themselves, to fail. Semi-transparency makes this problem worse.
In the world of consumer loans and credit, transparency is a newly implemented concept. It goes only halfway to addressing the issues millions of people are confronted with where their money is concerned. Actually, understanding the information provided by those institutions that lend us money or offer us credit cards is one thing but, as consumers, finding a way to navigate a cynical and confusing system that doesn't support our best interests is the other half of the challenge. You can read the available information, but can you really understand how the bank calculates the value of your relationship with them, given that you aren't sure you trust them?
Understanding is required across the spectrum of our experiences in order for us to feel safe. It's particularly important in terms of our financial lives, as it represents one of the important building blocks of financial wellness. And while we've fought to have access to information about the food we eat, the cars we drive and the potentially toxic products in our homes, we're still in the dark about what being financially well really means and how we get there. Banks continue to benefit from our ignorance and apathy and even capitalize on it, much like manufacturers of dangerous products did before we demanded to know more about what was going on around us.
Financially, Emotionally and Mentally, We Are the Frog
Ideas about financial wellness are experiencing a profound and catalytic moment. It seems that, collectively, we're realizing how messed up we are where money is concerned. Americans have an unhealthy relationship with money, borne of our needs, the speed of our commercial culture, the relative ease and accessibility of consumer credit, and the unspoken mandate to shop, spend and acquire that comes at us from all angles. It can all be very hard to resist.
My goal is to change how we think and talk about this subject, and it begins with transparency and an honest assessment of where we are as people and a nation. We need to open our eyes to an environment that doesn't support our health and well-being, leading to crippling burdens of debt, unsustainable consumption and powerlessness that inhibits our growth as individuals and communities. Nice things are lovely to have, but the costs of buying an unsustainable lifestyle are leading to a level of stress that is literally shortening our lives and threatening the very economic viability of our nation.
Think about a 19th-century science experiment sometimes cited to illustrate how we integrate threats that increase slowly. A frog dropped in boiling water immediately jumped out, but when it was placed in cold water that was slowly heated to a boil, the frog stayed in too long and died. The gradual temperature change went unnoticed until it was too late and, though a gruesome example, the experiment tells a story about what happens when we aren't proactive. We need to notice the progressive changes around us when they concern how our financial well-being connects to the rest of our lives -- and we need to act. Our future depends on it.
Thank You, Dr. Warren: The Fine Print Became Legible
In the last six years, we've made huge strides in terms of being able to actually know what the terms of our credit relationships are, through the work of Dr. Elizabeth Warren and the Consumer Financial Protection Bureau. Armed with legislation, they've been able to revolutionize and render more transparent the so-called fine print -- enabling us to have some protection from lenders who are not showing us the whole picture of our loans and credit cards -- and holding these companies accountable for illegal or corrupt lending practices.
Enforcing federal regulations in consumer finance is a huge step forward in terms of shining a light on predatory practices, and since its inception in 2010, important things have changed for consumers. At least now we have some leverage if the credit card we signed up for didn't disclose, for example, that the interest rate would change, seemingly without warning. This is institutional change at a massive, macro level. While it's a big deal, this is one small step toward a solution to our money problems. It doesn't get us as far as we need to go. Lasting change will not be led by regulators, but by market-based commercial solutions that seek to monetize financial health and well-being as a nationwide movement.
The questions in the now visible fine print that aren't addressed are:
- Does this financial product work for consumers, not against them?
- Does it contribute to or diminish our chances of achieving financial wellness?
- Are we better off with it or without it?
- Who really benefits from this?
- Is this causing harm?
Progress is iterative and now that we can see what we're dealing with, we need to tackle the issue of doing what's right for consumers.
We need a Consumer Financial Empowerment Bureau. The market will lead the way to sustained and widespread impact and solutions, faster and far beyond what any regulator can do. We have some transparency, but we are still guided toward financial powerlessness. That needs to change.
Among those tasked with creating financial products, few are asking if we as consumers are being harmed or helped by engagement with their services. This is the kind of honest transparency that we should be talking about. Rather than hurting our customers and guiding them toward unsustainable ways to spend that aren't in their interests, let's head in another direction. But this conversation hasn't gone as far as it needs to go.
As a result, the system of financial services is still designed to enable too many consumers to fail and makes the banking system more vulnerable to economic volatility.
What's Really Important in Our Financial Relationships?
What the fine print doesn't allude to may be the most important part of our financial relationships. Services that don't work for us to create the greatest good we're capable of achieving are by definition working against us, even though they may be legal and monitored by government oversight.
We know life costs money, but are interest rates as high as 30% really reasonable? Banks borrow money for next to nothing at today's interest rates. Why can't consumers benefit from that as well?
The standard operating metrics of most financial services are: "How much money is being made from this investment, person or opportunity?" and "What's the Net Present Value?" Profit should be balanced with questions about who really wins in financial interactions and what a win looks like for each side. Furthermore, we need to examine how sustainable the model is over an extended period of time. Doing the right thing for consumers pays off for everyone over the longer term, because customers who succeed are more likely to remain engaged.
Sure, it can be argued that the consumer with several credit cards in their wallet has plenty of options and is free to spend at will, but who other than the bank actually benefits from that? We know life costs money, but are interest rates as high as 30% really reasonable? Banks borrow money for next to nothing at today's interest rates. Why can't consumers benefit from that as well?
The current arrangement has one clear winner and one clear loser. Though transparent, this is unsustainable, from both sides. Doing the right thing for consumers creates a tailwind while making short-term decisions at the expense of the consumer creates a headwind. Banking is no different than any other industry: treating people well actually pays off in the long run.
Is It Really Transparent?
This "one winner, one loser" approach to profit is semi-transparent but very, very cynical. At this point, our banks don't care if we succeed or fail because, at least in the short term, they win on both sides of the equation. They make money regardless of what we do because their best interests are always represented in the form of profits, while ours are not: If we fail to make our payments on time, our rates go up and we pay penalties. When we do it right and pay on time, they still make money, as we pay fees for services and the privilege of the bank lending us money in the form of credit.
The Banks' Most Devious Idea to Date
Consider the idea of minimum payments on our credit cards. Few things have gone as far to harm consumers as the idea that we can rack up endless debt but only pay a small fraction each month, keeping us beholden to the bank that "loaned" us the money. This is a form of indentured servitude, and we have a negative visceral reaction to the idea that our futures belong to someone else. And yet, we do it all the time. Banks designed the minimum payment to be their primary interaction with consumers, featuring it as the "amount due" on statements, leading many to take the path of least resistance. This just pushes the problem forward, rather than forcing us to deal with our current reality.
A system that has one winner, the credit card company, is missing out on an opportunity to create a win-win relationship between consumer and lender.
With each minimum payment, we borrow from our future selves, restricting our choices. Who among us isn't still paying for something they've long since forgotten? Was it worth it? In my life, it almost never was.
And yes, we bear full responsibility for our choices. We get ourselves into this situation every time we buy something we can't pay for in cash, on the spot. This isn't about our spending on emergencies, it's everything else we want to buy because it's there. The system is designed to separate us from our money, based on a set of conditions that we willingly participate in, although they're directly counter to what would be better for us. Spending and paying need to be re-coupled, so we see what we're really doing. We win when we save, not when we spend everything we earn.
A system that has one winner, the credit card company, is missing out on an opportunity to create a win-win relationship between consumer and lender. To use a gambling analogy, the house always wins because their best interests are always represented. As consumers, ours are not. And though there are millions of us, we are surprisingly voiceless and too often don't vote with our dollars for brands that have our best interests at heart.
Those of us creating financial products can measure our success as a business by prioritizing the success of our consumers, and by proving that it works both sustainably and financially for both sides. This win-win model is possible here -- when we accept that though there may be lower profits in the near term but continue working toward the best interests of our consumers, we all benefit in the long term.
Win-lose is no longer acceptable business and the harm to consumers is evident. If in doubt, just look at our findings on financially induced PTSD. While money is a necessity and enables our lives, we need to partner with companies that help and reward us for saving it, not just spending it.
Let's Do It Differently
We're working toward more and more transparency in financial services, but let's apply this lens from macro to micro; let's examine ourselves as well as the institutions.
As a country, let's think more about sustainable consumption, how we spend our money and how we save for the future, as well as invest in our families and ourselves. Very few of the things we buy are actually needed, but we've fallen into a false sense of "normal" as we incur more debt by the day while ignoring what it's doing to us emotionally, physically and mentally. Stores want us to shop, banks want to loan us money, and our economy grows as we spend. But what do we want? We want to be healthy and happy, but debt is obscuring both of these things. Our well-being is obscured because the stuff we bought is in the way.
I believe the future of banking will evolve to place the well-being of consumers as the path to sustainable profits. We should be figuring out how to take costs out of the system, reducing rates consumers are on the hook for, rather than working out new ways to charge people for what we already do. There's the win-win. Yes, this means banks will make a little less money in the short term, but both consumers and business will benefit in the long run.