Recently, Richard Thaler and Cass Sunstein, colleagues of ours at the University of Chicago and the authors of a recently published book called Nudge, wrote an op-ed in the Wall Street Journal entitled Disclosure Is the Best Kind of Credit Regulation.

We at FeeFighters think that Thaler and Sunstein’s proposal is a very good idea that would make financial services work better for everyone.

The premise of the article is that, while some financial services companies have behaved very badly in the recent past by not fully disclosing fees and rates to their customers, the best way to deal with the problem is not to limit the rates and fees that can be legally charged, but rather to set stricter rules for disclosure.

Everyone, including the Fed, is well aware that in banning activities that have caused justified ire in some quarters, the regulator is playing a game of whack-a-mole. If some method of making money is eliminated, lenders will find a new way in the near future. Merely by making market pricing more transparent, better disclosure can make consumers better shoppers, enabling them to be their own regulators.

One challenge of this approach is that financial products can be so complicated that even when fees and terms are fully disclosed they can be difficult to understand.  Thaler and Sunstein propose that the disclosure be provided electronically so that web-based tools can help customers make sense of their situation.

The Fed can substantially improve its proposal by requiring credit issuers to disclose relevant information electronically in a standardized, machine-readable format…issuers would be required to make available to users two secure electronic files. The first would be essentially a spreadsheet that listed all the ways in which a customer can be charged… The second file would be a list of all the actions the customer made in the past year that incurred a charge…To be sure, most consumers would not read these files in any detail. Instead we anticipate that new third-party Web sites would compete for the business of distilling the information in the files. The Web sites would serve three purposes. First, they would translate the information into plain English. Second, they would explain to consumers how they could save money by changing their behavior. And third, they would point consumers to alternative providers that, given their past behavior, would provide a better deal…None of these functions is being adequately provided now, and for one simple reason: The precise details of the terms being offered are not easily available.

We think this is quite a sharp idea.  At FeeFighters we are able to provide something similar to what Thaler and Sunstein propose, but it requires a significant amount of reverse-engineering and we are only able to do it in small niches of financial services (like credit card processing) where we can find financial services firms to partner with that are willing to provide more transparency than otherwise available in the industry.

For example, the credit card processing calculator, which is already a useful tool that helps customers 1. make sense of their fees, 2. figure out if there are ways they could save money and 3. compare their fees to those available from other providers, could be made better if Thaler and Sunstein’s proposal were adopted for the credit card processing industry.  First, it would be easier to use – we wouldn’t need to ask questions of the user about their credit card processing situation, we could extract it all from an existing data file.  Second, it would be more accurate since we wouldn’t have to depend on the accuracy of the answers to the questions we ask the user.