Unfettered competition is the lifeblood of the free market. So you would expect that those businesses that love the free market would love as much competition as possible, right? Not always. Competition is certainly good for consumers, but more competition is often the last thing that businesses want, precisely because it is good for consumers. Most of the time, despite what businesses may desire, the market is full of competition and the free exchange of information. Take fast food: all prices clearly spelled out, all products clearly described and manufactured, no gotchas. Or most retail. It’s easy to compare products based on price, quality, and preference, and then decide what you want to get. Consumer surplus galore, and we all win!
But not all markets are as transparent or free. One in particular (that I’ve already complained about) is the financial market. It is for this reason that the Consumer Financial Protection Bureau (CFPB), so widely hated by Republicans in Congress, was created. Not to destroy innovation. Not to limit consumer choices. Instead, to make the market for financial products more transparent and to give consumers the information they need to make informed decisions.
Quick poll: how many of you with credit cards know your current interest rate? Late fees? Billing methods? Or, when it comes to mortgages, any early-payment fees? Points? If you have an ARM, how much can it go up each cycle? What’s the maximum rate? How much would you be paying in the worst case? These are big decisions, far more weighty than deciding whether to go to McDonald’s or KFC for dinner, but in reality consumers often have more information easily available for simple transactions. You’ll never buy a Happy Meal with a contract that has multiple pages of fine print. But credit card issuers often revise their Terms of Service and send out little booklets that just end up in the trash, unread.
One way to improve this state of affairs would be to require products like mortgages and credit cards to have short, standardized, and easy-to-understand summary reports that clearly explain all the terms and conditions. If I were king, I would create a one-page form for a mortgage that lists interest rate, term, early-payment penalty, total cost, total interest, and various scenarios if it is an ARM. And lo and behold, this is exactly what the CFPB is doing. About time, I say. In fact, there needs to be more of this.
Will requiring this information to be given to consumers destroy the financial marketplace? Of course not. The information is already there, just buried in the legalese; this will simply require the information to be consistently and simply presented. Which is the real reason the financial markets are against this: if consumers can easily compare products, then they may realize they can get a better deal elsewhere. Competition is great until you are losing your customers to another business.
For us consumers, though, it’s nothing but a benefit. The more transparency complex markets like the financial market have, the better.