CHAPEL HILL -- Each decade has its own developments, defining issues and challenges. The 1970s and the '80s were characterized by the introduction of a various new financial securities and products. The Information Technology revolution of the 1990s enabled a relentless pursuit of efficiency through faster transactions and cost reductions. Today's dominant issue is the designing of an appropriate regulatory architecture for our vast, hard-to-control markets.
Last month the U.S. House's Financial Services Committee voted to address this challenge in part by establishing a Consumer Financial Protection Agency. Elizabeth Warren, chair of the Congressional Oversight Panel, has argued that the current regulatory structure of the financial markets is "badly fractured, creating inefficiencies and gaps" and that "today's business model is about making money through tricks and traps."
An average credit card contract has grown from a page long during the early 1980s to more than 30 pages today and is riddled with incomprehensible fine print. A 2007 survey by the Federal Reserve Board found that many consumers had difficulty understanding current credit card disclosures.
The proposed Consumer Financial Protection Agency (CFPA) is designed to "establish meaningful guidelines for consumer disclosure, collecting and reporting data, reviewing new products for safety, and prohibiting dangerous products." If it is established, it will encourage lenders to develop simpler, easy-to-understand, customer-friendly loans. The new agency's greatest economic value will be in lowering transaction costs by streamlining disclosure and increasing transparency.
Consider one example of how CFPA can help. A relentless move toward digitization and paperless transactions hasn't simplified credit card companies' Web sites. Although these sites are widely used by customers for checking balances, accessing account statements and making payments, they lack consistency across institutions and can often be as difficult to navigate as a credit card contract.
A quick review of the Web sites of six major credit cards - American Express, Bank of America, Barclays Bank, Chase, Citibank, and Discover - demonstrates inconsistency and, worse, difficult maneuverability.
Links to relevant information are scattered and hard to find. The payment feature goes by names like Pay Bill, Pay Credit Card/Make a Payment and Pay Now, which, nonetheless, allows scheduling of future payments.
Most companies accept payments anytime, but some allow a maximum of four online payments per billing cycle, which is further restricted to "one payment per weekday" (what about weekends?).
Access to freely downloadable old statements ranges from 18 months to six years, and prior statements can cost up to five dollars. Some companies provide a free year-end summary. All offer statements in Adobe Acrobat format; some offer additional format choices.
It is extremely difficult to find terms and conditions or information about various fees and charges. It is similarly difficult to find information on charges on foreign currency transactions that can range from zero to 3 percent.
Only half of the companies give easy access to a guide to benefits. The Web sites are cluttered with marketing for balance transfer offers, credit card protection services, travel bargains and the like that crowds out more relevant information
This sort of inconsistency and obfuscation frustrates cardholders, but it can be avoided if the credit card companies offer a highly standardized "plain-vanilla" Web site with easy maneuverability and comprehensibility.
This would lower learning costs, save time and money, make the costs and risks of products more transparent and protect the environment by prompting more people to sign up for paperless statements. It would not stifle innovation - a company may simultaneously offer its own distinctive, customized site.
Companies have chosen not to streamline their Web sites for the same reason they have not streamlined their contracts. They would prefer to obfuscate real costs to boost their market share and their profits.
Self-regulation works best (as in the case of securities market) when regulators maintain strong oversight. Indeed, self-regulation is not a panacea. After all, traffic moves faster when you have strong regulatory traffic signals rather than relying on self-regulation.
