Unsurprisingly, my Friday blog entry got some backlash on twitter and through direct comments on the blog itself.
The original blog entry proposed that people do not want transparency, as unbundling costs makes them angrier than if they are bundled.
The feedback tells me that's not quite right:
- Simon Deane-Johns, aka Pragmatist, says that the argument I made: “is flawed in so many ways, starting with the central premise that customers don't care about charges”;
- Ian G makes the point that: “the problem is not the prices, nor the transparency, but the lack of competition”;
- Aden Davies comments: “ignorance is bliss is a strategy that won’t benefit our industry”; whilst
- Bank of me says: “I wonder if your views on the usefulness of this data is due to the usability of that data and your ability to take actions on it in a meaningful way”.
I’m glad you pulled me up on this blog entry, as I was actually talking a load of claptrap.
Not a complete load of claptrap, as some of it is true.
It is true that we don’t like to see charges and specifically resent being charged for financial transactions.
It is true that the basic premise of money and banking is going to cause resentment and anger because money controls our ability to satisfy our needs and impulses. Anything that restricts such activity is going to be viewed as irritating at least and causing anger for many.
However, I agree with all the comments above.
It is not that customers do not care about charges, that they would prefer not to see them, that transparency is not useful, but it is also true that the solution is not to unbundle and make all items explicit in the way that some are today.
The issue really comes down to two things.
- customer education and understanding; and
- an inability to see a clear picture.
First, customers are blissfully ignorant of how our industry works. They do not understand the issuer, acquirer, merchant and processor ‘four-pillar’ model of fee structures.
They do not understand how PayPal and others add another layer of fees over and above those of the card companies.
They do not understand that cross-border transactions can be charged at different rates, dependent upon whether you charge in local currency or home currency.
They do not understand the fee rates and structures.
That may be a matter of education but it goes deeper than this.
For example, the information is easily gathered out there. Just look at moneysavingsexpert.com if you want to know how. The question is how many people generally understand and take this advice.
The second part is an inability to see a clear picture as many financial firms charge different price structures for the same product.
The easiest way to illustrate this is to step back to the roots of charging and take the example of how APR is calculated.
I always step back to this, as it is the target area that is easiest attacked by politicians.
Politicians ask banks to explain how they calculate APR, annual percentage rate fees, and many cannot give a clear answer as APR is charged in different ways by different firms.
There’s APR, nominal APR and effective APR.
Effective APR is the one that varies considerably as participation fees, origination fees, service charges, late fees and more are applied and can change the APR wildly.
This is why Wonga objects to having to quote their APR – something over 4,000% - because Womga is not designed for long-term loans of a year or more (an annual percentage) but is designed for very short-term loans of a day or two.
This is why, if you borrowed £100 off Wonga and didn’t pay it back, you would be over £23 trillion in debt within seven years (which is more than double the national debt of America!).
All in all, the solution is not transparency, unbundling or education, but a clear definition of how this industry operates, a single structure applied to all for apple-to-apple comparisons, and a clear statement of what is being charged, why and when.
That’s the solution.
Not transparency on its own.