Banking is big business. It's profitable business. It's often easy money.
A study by the National Bureau of Economic Research released last week helps show why. In a nationwide survey of more than 1,000 respondents, NBER set out to see how much people know about their own finances. The results were ugly:
When asked whether they have an interest-only mortgages or a mortgage with an interest-only option ... 20 percent did not know the answer to this question.
When asked how good they are at dealing with day-to-day financial matters such as checking accounts, credit cards, and tracking expenses, close to half of respondents who have credit cards and checking accounts (49 percent) gave themselves the top score of 7. However, one-quarter of these respondents engage in behavior that generates fees or high costs, such as using credit cards for cash advances, paying a late payment or over-the-limit fee, and overdrawing the checking account.
About 20 percent of those who have auto loans do not know the interest rate they pay. About 10 percent do not know the interest rate on their mortgages. Of the 46 percent of credit card holders who don't make their credit card payment in full, 12 percent don't know the interest rate on their credit card with the largest balance.
When asked if retirement assets are invested primarily in a life-cycle or target-date fund ... 37 percent stated they did not know the answer to this question.
[And probably the most damning:] When asked to assess their financial knowledge, most respondents give themselves high scores.
This is why it's good to be a banker. There isn't a more profitable combination than raging confidence mixed with blind ignorance. Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC) focus a tremendous portion of their assets on consumer finance. Can you blame them? You often hear outrage over banks raising fees and jacking up interest rates. Part of this is justified by the cost of business. But part has to do with the results from this survey.
Banks raise fees because they can -- and a lot of customers don't even know it. In the 1990s, a tape recording caught a group of bankers bragging that the goal was "to lure people into the calm and then just totally [$%@#] 'em." When customers are unmindful of the fundamentals of their finances, achieving this is about as easy as it gets.
There's a comparison to draw here with the health-care system. One flaw of our health-care system is that those getting care often have no idea what it costs. Even those with health insurance are often oblivious to costs because employers pay the bulk of premiums out of employees' sight. Business works best when all participants are properly informed. Whether it's consumers' fault or not, many aren't. This causes people to make all kinds of irrational decisions, and leads to all kinds of problems -- spiraling medical costs in one area, and frequent financial crises in another.
What's the solution? Part of me says: to each his own. If you want to be oblivious to your finances, do it -- and pay the price. Another part of me isn't as cold, and knows that the consequences of other people's bad financial decisions spread far beyond those who misbehave.
Last week, my colleague Chuck Saletta said that "when an individual or a private company does stupid stuff, the consequences are limited to the reach of whoever screwed up." I couldn't disagree more. Just four banks hold assets worth over 50% of the nation's GDP. Every inch of the global economy feels it when these banks do stupid stuff. Even if I behave, it's in my interest to make sure you -- the banks' customers – do, too. Part of that includes making an effort to ensure everyone is informed about their finances. That's why I agree with my other colleagues Brian Richards and Ilan Moscovitz: The Consumer Financial Protection Bureau looks smarter by the day.
