Op-Ed: What your bank owes you: clarity

There are dozens of entities devoted to educating you about all things financial. Congress funds a commission and a website, Mymoney.gov. Schools have added “financial literacy” to their curricula. Banks put out pamphlets, and every major investment brokerage has Web pages devoted to educating people on how to invest wisely.

But none of it is working very well. Neither children who are required to take financial literacy classes in school nor adults who are randomly assigned to such courses perform much better on financial skills tests than those who don’t, nor do they make better financial choices or enjoy better financial outcomes.
Paradoxically, the opposite may be true. Participating in these programs can increase risky behavior as people gain a misplaced confidence in their ability to make financial decisions.

The chasm between the skill levels of most Americans and what the marketplace demands is just too wide. Credit card and other consumer contracts are written at a 12th-grade level to a graduate-degree level, even though the average American reads at the eighth-grade level or below. Even many who attend college do not understand their student loans, and 14% of students with federal loans believe they have no student loan debt at all.
The multiplicity of misleadingly named products demands specific instruction to decipher. One instrument called an annuity is a wise investment, another a scam. “Bounce protection,” “courtesy pay” and “debit card advance” all soothingly refer to allowing bank account holders to overdraft their accounts. In data collected by the Consumer Financial Protection Bureau, the median debit card overdraft was $24 and was repaid in three days, and the median fee banks charged for this “courtesy” was $34, implying an effective annual percentage rate that exceeds 17,000%.

Yet the velocity of change in the market means specific lessons are often obsolete on arrival. Right up to the 2008 crisis, people were taught that real estate was a safe investment. The debit card was yesterday’s cash management tool, but is today’s overdraft fee machine.
The resources used to sell financial products will always dwarf those spent on financial literacy education. And much of the so-called education is sponsored by the financial services industry, or nonprofits they bankroll, and designed more to increase market share than to teach people to think critically about hidden fees and risks.

Financial decisions are difficult, and even experts disagree about the right answers. How much should we each be saving for retirement, how should we invest that money, and how should we draw it down in retirement?
The decisions become more difficult as one moves down the income brackets. Without an employer that vets retirement and insurance plans, low-income workers have to manage these decisions alone. Add the unpredictability of income, and budgeting becomes impossible. The stress of financial scarcity also depletes cognitive and willpower resources, derailing good decisions regardless of financial knowledge.

Trying to educate every American out of these problems is an abdication of our collective social responsibility. We don’t expect people to be their own doctors or lawyers; why would we expect them to be their own financial advisors? When experts cannot agree on answers to the questions, pretending that we will teach artists and architects, farmers and flight attendants, police officers and plumbers to find good answers is a cruel joke.
If financial literacy education isn’t the answer, what is? The financial marketplace must be structured so that ordinary people — people with limited time, math skills, attention and willpower, and an abundance of those wonderful American traits of trust and optimism — can navigate it safely and effectively.

This demands that we vigorously enforce existing laws against unfairness, deception and abuse. We must ban class-action waivers and forced arbitration clauses (the Dodd-Frank Act permits this, but the issue is still being studied) so that defrauded consumers can sue for justice. But suing after the harm is not enough. Financial industry incentives must be brought into alignment with the interests of consumers.
At a minimum, we should outlaw commission structures that reward financial salespeople at the expense of their customers (as Britain has done). Beyond that, financial services firms should be required to demonstrate that their customers understand the costs, benefits and risks of financial products.

For example, banks ought to be required to show through third-party random sample testing that when customers trigger overdraft protection, they know what it is and what fee they will be charged. Investment brokerages ought to produce data on what proportion of their retail clients know the fees they will incur on each investment, and brokerages with low numbers penalized.
Knowing that poor comprehension levels among their customers will be sanctioned would give financial services firms an incentive to educate rather than obfuscate, and to offer products that align with rather than defy consumer expectations. Firms could determine what is most cost effective — educating their customers or redesigning their offerings so they are easier to understand.

Lauren E. Willis, a law professor at Loyola Law School in L.A., has published research on the ineffectiveness of financial literacy education. Theresa Amato, a scholar in residence at Loyola University Chicago School of Law, is the executive director of Citizen Works and its Fair Contracts Project.

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