Since the establishment of the Consumer Financial Protection Bureau (CFPB) in 2011, many have wondered how the agency will balance its role as a financial regulator with its role as a provider of consumer education on responsible borrowing. Some feel the agency should be just as focused on educating consumers about financial products and services as it is regulating financial institutions – as borrowers played arguably just as big of a role in the events leading up to the financial crisis as lenders did.
But how does one educate consumers about financial products and services when the products and services being offered are continuously changing in the marketplace? Mortgage lenders, for example, typically offer a variety of different products, not only to meet borrowers' needs but also to differentiate themselves in a highly competitive marketplace. As with any other private enterprise, mortgage lenders have freedom, within certain legal boundaries, to market their products and services in whatever way they wish.
A recent report from the CFPB, however, seems to pin a lot of the blame on mortgage lenders by showing that they spend many times more money on marketing and advertising than they do on educating consumers about responsible borrowing. According to the report, the financial services industry spends approximately $17 billion each year marketing financial products and services while spending only about $31 million annually to provide financial education to consumers.
The report finds that six major sectors contribute to financial education spending: nonprofit organizations, the federal government, financial institutions, state governments, municipal governments and school districts, and philanthropic giving groups. Together, they spend a combined $670 million on consumer education programs annually. Nonprofits spend the most – about $472 million – followed by the federal government with $130 million. About three-quarters of financial education spending comes from private sources, while one-quarter comes from public sources, the report finds.
Meanwhile, financial institutions spend about $54 per person per year on marketing, while only $2 is spent on consumer education. According to the CFPB, the numbers ‘highlight the need for consumers to be able to access unbiased information about financial products and services.’
"When consumers receive the vast majority of their financial information from companies that are trying to promote an image or sell products, consumers have very little unbiased information," Richard Cordray, director of the CFPB, says in a release. "Today's study further reinforces the dire need for more and better financial education in this country."
The report provides a breakdown of how financial institutions are spending their marketing dollars, dividing those efforts into two main categories, ‘awareness advertising’ and ‘direct marketing.’ Awareness advertising is characterized by general promotional messages about financial products and services, not necessarily making an immediate sale of a product, while direct marketing's goal is getting a consumer to make an immediate purchase.
The report finds that financial institutions spend about $5.5 billion annually on awareness advertising, about 56% of which was spent on credit- and loan-related products. While the advertising focused mainly on credit cards, it also included mortgages, vehicle loans and home equity loans. The remainder was spent on marketing retail banking and other services.
In addition, the report finds that financial institutions spend about $12 billion annually on direct advertising, about 44% of which is spent on Internet advertising, 22% on mailers, 16% on television advertising and 18% on ‘other’ advertising.
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