The Salience Theory of Consumer Financial Regulation

Abstract

This Article focuses on recent regulatory interventions in the consumer finance space, considering three attempts to lower prices: a decrease in merchant interchange costs, a cap on credit card penalty fees and interest rate hikes, and a change to the policy default rule that limited banks’ overdraft revenue. The varied efficacy of these interventions suggests several lessons for policymakers. First, consumers are attentive only to fees that are salient to them (such as introductory interest rates on credit cards) and tend to ignore non-salient prices (such as late fees or overdraft charges). The existence of non-salient prices hints at a behavioral market failure that can and should be corrected by regulators. This is true even in a perfectly competitive world, because the existence of shrouded prices can lead to excessive demand for consumer financial products; can cause consumers to expend tremendous energy to avoid hidden fees; and can result in cross-subsidy of sophisticated consumers, who incorporate these prices into their decision-making, by non-sophisticated customers, who do not. In an imperfectly competitive world, price regulations that target non-salient prices can also decrease overall consumer costs. An alternative to price regulation is the use of behavioral tools, such as policy defaults and shocks to consumer attention, to encourage consumers to take non-salient prices into account. Finally, regulations directly lowering consumer prices — rather than decreasing merchant costs in hopes these savings will pass through — are most likely to result in immediate consumer benefit.