Vanilla Products, Eulogy

I was at a dinner party with some friends a few weeks ago, and the topic of credit cards came up. One friend talked about how she had just realized she had been paying for “credit card insurance.” What is that? If she died, her balance would be paid off. She is a 24 year old law student, who doesn’t carry a balance and has no dependents – it didn’t seem like it was a great value for her. She had to jump through some paperwork to get it turned off, and ultimately did, but for a few months there her credit card company was earning fees off something their customers didn’t want.

The funny and sad part is that we all had these stories (what are yours?). I had “unemployment insurance” on my checking account, where I’d get like two months salary if I was laid off – or something, the terms seemed so off for what I wanted (I was 22), I also shut it off after a few months of paying fees for it. The table was a collection of very well educated people who work in new economy jobs and lead upper-middle class lives with no families, so we could chuckle at the fact that the companies that provide us financial services were able to “get us” for maybe a couple hundred bucks, and felt a pang of sadness and guilt about what that difference would mean if we lived paycheck to paycheck. The question we asked ourselves was, what do you do about it?

The answer is obvious: you create a baseline, a vanilla option, and then let consumers decide what extra options they want to have in addition to it. Credit card insurance and unemployment insurance is probably valuable for someone, and that person would be excited to pay extra fees to have it. As Daniel Davies famously said, good ideas do not need lots of lies told about them in order to gain public acceptance. A corollary for innovation would be that you shouldn’t need to trick people into signing up for something that is genuinely innovative. Nobody was tricked into the internet.

Creating an innovation market

The technical term for what this is a “market”, and there’s no reason to be afraid of it. Rather than a creeping socialist plot, the vanilla contract is actually creating the conditions where innovation could flourish, where we could see consumers and markets do what they do best – express choices over what they want to spend their money on, what goods and services they would like to bundle with their default contracts, and have businesses compete to provide those services. Without it, we get “gotcha fees” and people become cynical about what innovations in consumer finance can actually accomplish. You end up with dinner parties of people trying to come up with the best “I’ve been had” story by businesses that should be working overtime to provide us with good services. Our finance sector can do better than that.

We need a vanilla option because it is difficult to simply not be part of the finance sphere of our economy. If you don’t like X, don’t buy it is more than enough for many markets, but it is very difficult to function without a checking account or a credit card in the greater economy. And there are genuine informational problems that exist at this level; you want consumers to be able to easily compare rates on products across providers, because that is how competition works.

So I’m disappointed to see that the vanilla option has been dropped.

At a hearing before the House Financial Services Committee, Treasury Secretary Timothy F. Geithner announced that the administration had dropped one provision in its plan for a consumer financial protection agency — a requirement for banks and other financial services companies to offer “plain vanilla” products, like 30-year fixed mortgages and low-interest, low-fee credit cards.

I don’t think it was ever explained very well by anyone in the administration, and perhaps I should have done a better job trying to explain how it is less adversarial than it looked on first examination. It is adversarial to the current way things are done, with massive profits coming from providing services consumers don’t want; and it is my fear that those profits contribute so much to the “safety and soundness” of large banks, the Fed’s first responsibility, that the Fed will have zero interest in breaking this terrible equilibrium financial services have gotten themselves into.