Restore Banking Privacy

Banks have found a gold mine in their customer files, selling names, phone numbers, addresses and even Social Security numbers and account balances to marketers. Until recently, they did this without so much as notifying the customers. Landmark banking reform legislation adopted by Congress last year allowed a little protection, but it fell far short of giving customers real control over disclosure. California, always in the vanguard, may soon remedy that.

There are three similar measures before the State Legislature that would require banks to get customers’ approval before sharing private information with others. The so-called opt-in clause would give consumers the right to say no. This seems very little to ask of the banks, though from their reaction you’d think it was the end of their world.

Banks spent millions last year to defeat federal legislative proposals that would have curtailed sales of depositors’ financial data. They argued that the sharing of customer data, especially with their affiliated insurance or brokerage firms, helps the customers. Based on the data, they argued, affiliates can tailor products to individuals, saving them time and money.

That’s the theory. Reality is less sunny. NationsBank, for instance, paid about $7 million in penalties when the Securities and Exchange Commission found its investment affiliate used the data to sell highly risky hedge fund investments to the most risk-averse investors, holders of certificates of deposit. In another case, a small San Fernando Valley bank, Charter Pacific, sold 3.7 million credit card numbers to a convicted felon, who then used the numbers to bilk cardholders out of millions of dollars. In cases singled out by the U.S. Comptroller of the Currency as particularly brazen, banks have not only been selling financial data to marketers, they have been charging the accounts of customers who did no more than express interest in the telemarketers’ products.

The current federal law is little help. Banks can still share customer data with their affiliates without notifying the customers, and depositors have to “opt out”--usually in writing to the bank--if they don’t want their financial data sold to third parties.

The California proposals would require banks to notify their customers before disclosure and obtain explicit approval. They include AB 1707, introduced by Assemblywoman Sheila Kuehl (D-Santa Monica), which has passed the Assembly Judiciary Committee but will have a harder time with the Banking Committee. Two Senate bills--1337 by Jackie Speier (D-Dale City) and 1372 by Tim Leslie (R-Tahoe City)--face the same kind of hurdles. All are similarly protective of consumers and will likely end up combined in a single bill.

The banks’ claim that prior notification would cost too much is not convincing. Banks last year mailed out more than 3 billion credit card solicitations--more than 11 for each man, woman and child in the United States. Surely, notifying the customers to whom they owe fiduciary duty should not be such a financial burden.

The debate in California is being closely watched and could lead the way for other states to adopt strong financial privacy protection. Consumers deserve no less.