The Politics of Plain Vanilla Products

08/28/2010 11:48 am ET | Updated May 25, 2011

On Sept. 16, Bank of America joined an industry trend in announcing a new credit card that will have a one-page explanation of terms and conditions. Bank of America intends this new card to cater to consumer demand for simpler and more transparent credit products.

At the same time, Bank of America has joined industry efforts to pour millions of dollars into lobbying Congress to kill the Consumer Financial Protection Agency -- an agency that's main mission would be to promote the use of simpler, clearer consumer credit contracts that people can actually read and compare (so-called "plain vanilla").

If you're paying attention, you're probably asking: huh?

Let's take a step back. Today, the market for consumer financial products is broken. Lenders compete over a few basic terms that consumers can compare -- like the nominal interest rate -- but they bury tricks and traps that consumers can't compare in the fine print. This leads to a market that rewards the innovation of tricks and traps but doesn't reward better features or lower costs. At the same time, the market encourages borrowers to over-consume through teaser rates or the functional equivalent of teaser rates (i.e. the tricks and traps), and it produces too much risk in the financial system. You may remember that extra risk as the main contributing factor to global financial meltdown and your dwindling 401k.

The concept behind plain vanilla products is that it's time to make banking simple again. Instead of allowing lenders to bury incomprehensible terms in paragraph after paragraph of legalese, plain vanilla means shorter, readable contracts. In a plain vanilla world, lenders would have to make the costs and risks of products clear upfront -- and they would no longer be rewarded by the market for tricking and trapping their customers. While the apparent cost of credit may go up - remember, the tricks and traps would be gone so the number on the front of the envelope is real- plain vanilla will force competition around lower costs and friendly terms.

This idea seems pretty simple -- after all, not a lot of people oppose shorter contracts (even the American Enterprise Institute has designed a one-page mortgage). And so the Obama Administration designed the CFPA to promote the use of plain vanilla products. The CFPA would safe harbor simple, comprehensible contracts but take a closer look at longer, incomprehensible ones. The idea? While we should expect personal responsibility when terms are transparent, regulators ought to take a closer look at opaque and indecipherable agreements.

A few months ago, it seemed liked the industry had a hate-hate relationship with this simple idea. Industry groups alleged that plain vanilla is a fancy term for the government "choosing" products for customers. (Actually, plain vanilla would enable real consumer choice by reducing obfuscation.) They alleged that plain vanilla would destroy innovation. (Actually, plain vanilla would enable innovation around lower costs and friendly practices rather than around tricks and traps.) They alleged that plain vanilla would mean that customers would be thwarted from selecting more complex products that better fit their needs. (Actually, plain vanilla would still allow any product that can be explained in comprehensible ways, as well as products that can't so long as they aren't dangerous and abusive.)

Today, it seems like the industry has a love-hate relationship with plain vanilla. It loves plain vanilla in that it is apparently embracing it, at least if you look at their marketing campaigns -- that is, their marketing campaigns for plain vanilla products, not their marketing campaigns against plain vanilla products. (With all these marketing campaigns, it's no wonder the $700 billion bailout hasn't been paid back yet.)

So, let's jump back to the beginning: Huh?

If you haven't guessed it yet, there's a pretty straightforward , two-part explanation for what's really going on here.

The first part is that the industry doesn't love plain vanilla. In fact, they view it as a threat to monopoly-sized profits that are possible only in opaque, uncompetitive markets.

The second part is that they're lying. They're pretending they love plain vanilla so that the perceived need for Congressional action fizzles, so that CFPA slowly fades away, and so that the public feels safe and protected by a working marketplace (consumer choice won in the end, we'll all think!). And then the banks can scrap the whole idea of plain vanilla once and for all - or, at least until the next crisis. So by appearing to love plain vanilla, the banks are, paradoxically, seeking to kill plain vanilla.

If you think this sounds far-fetched, just look to the industry's history of appearing to embrace change under congressional scrutiny but returning to bad habits when the lights go dim and the cameras go off. The best example happened in 2007, when Citigroup pledged to eliminate "universal default" from its credit card contracts. Less than a year later, the company picked the practice back up again. The Fed and Congress ultimately acted to prohibit this practice, but the tactics of the industry succeeded in kicking the can down the road.

If you're like me, you're wondering how such a simple idea for simpler products has turned out to be so complicated. Well, there's a straightforward answer for that too: the financial industry has the world's best innovators at making simple things seem complicated. If you don't believe me, just look at your 30-page credit card contract.

Cross-posted from New Deal 2.0.