Why transparency is NOT the solution

We had a good debate this week about the future for multilateral interchange fees (MIFs) amongst the card companies.

The argument made for change by regulators appears to boil down to that the card operators and issuers are ripping off customers by taking percentage fees opaquely.  These fees are applied throughout the process, and the lack of visibility of charging means that customers don’t know they’re being ripped off.

The solution: more transparency.

Now I can see the argument and solution rationale, but I fundamentally disagree with it.

The reason I disagree is that customers are not rational when it comes to money.

They will happily pay fees to ATM operators, currency exchanges, PayPal and more if it is convenient and supports instant gratification.

I should know, as I’m one of them.

Do I count the fees and the breakdown of costs for every transaction?

No.

Do I object when I see the cost of a transaction?

Yes.

Take the example of booking an airline ticket and you see that there is £4.50 ($6) charge for booking the ticket using a credit card.

Do we get upset with the airline?

No.

Are we pissed off with the card company and the bank?

Yes.

Or take the example of my own bank who recently started itemising cross-border transactions with the charge per transaction.

Do I appreciate the transparency?

No.

Do I object to the fee per transaction?

Of course I do.

In other words, customers would far rather prefer everything bundled into one charge where the bank fees are hidden, rather than seeing the fees per transaction itemised explicitly.

That does not sit well with regulators, but ask the question: why is this?

We happily pay for fees from service providers, and we don’t mind seeing the explicit charges for our telephone calls or internet provision, so why are we so resentful about bank or card company charges for services rendered?

Because there is this mentality that transactions should be free.

Or there is in certain countries and economies, particularly the UK where banking has been ‘free’ for the last four decades.

Mix this mentality of free with the psychology of money that gets upset with anyone who controls our urges to spend, and you have a dangerous concoction of anger and resentment.

And that’s why customers don’t want to see transparency in banking , as they resent every charge made.

So I’m all for more bundling, and adding an extra 0.01% charge in the process, as it’s better to keep customers happy than to annoy them with those pesky charges.

Cartoon found via Facebook page of Peter Aceto, CEO of ING Direct Canada 

 

Comments

[bankof.me]

Chris, Thanks for sharing your thoughts and your many truly fascinating insights on this and other posts. As you point out there are of course many things in your post which are undoubtedly observeable in the behaviour of many individuals.
Human nature to favour convenience or immediate need being one to justify what may seem to be irrational behaviour to others.
I am however curious if the lack of effectiveness of the datum provided by such transparency on fees is the lack of tools to help analyse and present these fees in a digestable format. I wonder if transparency is in fact the beginnings of providing more unbundled services in addition to bundled services which some may want.
Could transparency encourage comparison of constituent components even if bundled and hence competition or bundles that match your usage profile.
Your bank need not need provide these tools if the data was made available to you in an manner to allow further analysis by tools provided by others third parties (ie standards based data extracts).
In summary 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 meaniful way. If you had both would your views change and is it therefore worth starting the process to more innovative smart services with a bit more transparency.
Kind regards

[Pragmatist]

Nice try, Chris, but no cigar ;-) This argument is flawed in so many ways, starting with central premise that customers don't care about charges, just instant gratification or convenience. In essence, they lack real choice, but there are a ton of other issues...

@Bankof.me I agree with you. In part, this is a data problem, which the "Midata" initiative aims to help solve: http://sdj-thefineprint.blogspot.no/2012/11/warning-shot-fired-over-midata.html?m=1

[Iang (wikipedia on the economics of cartels)]

I'm with Pragmatist on this, any argument that assumes irrational customers is suspect from the start ;-)

Where this angst is coming from is the regulator's occasional desire for competition. They see competition as shown by reducing and "fair" prices, whatever that means. This observation is mostly only that - popular observation and a mythical belief that reducing prices proves we have more competition. With this in mind, regulators go into action: "we must force the prices down."

The problem however is not the prices, nor the transparency, but the lack of competition, in and of itself. When all the providers get together in a club, we call that a cartel in economics. The club obviously serves itself.

So the root problem is that the regulators and banks alike have conducted affairs for decades on the basis that having a club is a good idea. If we recall, the payments networks were originally argued into law in many countries on the same rationales -- fair deals for customers came about because all providers had to offer compatible and safe products. Hence a club, as promoted by regulators, and hence we have a "public cartel" to use wikipedia's words.

http://en.wikipedia.org/wiki/Cartel

Once within a club, with internally regulated processes, competition dies. So the regulators might want to go back and look at the basic economics of the situation before latching onto prices and transparency. This of course is unlikely, they are as much part of the problem as the other members of the cartel.

As regulators are part of the problem, we must await change from the outside. E.g., PSD & eMoney directives have moved s.l.o.w.l.y to encourage competition. E.g.2, systemic banking collapse in Europe will probably create a climate encouraging competition, amongst other things.