redesign | payments: Finally, proposed protections on prepaid banking products

In November, the U.S. Consumer Financial Protection Bureau (CFPB) published proposed regulations seeking to protect consumers in a market that has mostly been ignored: prepaid banking products.

The prepaid product market has grown from a $1 billion business in 2003 to an estimated $100 billion in 2014, with no signs of slowing. About 8 percent of all U.S. households use prepaid card and accounts, representing the growing number of people without bank accounts. Typically, prepaid accounts provide a way to pay bills electronically or purchase items online for those without credit or debit cards.

What exactly are prepaid banking products? Mostly preloaded and reloadable debit cards, but the proposed regulations extend beyond any plastic in your wallet. The CFPB also seeks to regulate electronic code or any device designed to store prepaid funds or capable of being loaded with funds. That means the regulation would cover not only physical prepaid cards such as those issued by employers to pay wages or those provided to pay government benefits (such as unemployment), but also electronic wallets such as PayPal, Google Wallet or Venmo.

Continue reading “redesign | payments: Finally, proposed protections on prepaid banking products”

redesign | legal: Corporations have the right to strip consumers of their rights. Sound fair to you?

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Nearly four years ago, in a case called AT&T Mobility LLC v. Concepcion¸ the Supreme Court ruled 5-4 that the Federal Arbitration Act of 1925 preempts any state law that prohibits a contract from barring class-wide arbitration. That dense bit of legalese essentially means that any corporation can take away your right to sue them in court, and instead force arbitration of your dispute. Not only that, but you can only arbitrate the dispute as to your claim alone — you cannot include any other people who may have been harmed by the same conduct.

Continue reading “redesign | legal: Corporations have the right to strip consumers of their rights. Sound fair to you?”

redesignAnswer: CarFax is a marketing tool for dealers, not a consumer protection tool

carfax-logoWhy doesn’t CarFax provide alerts for potentially troubling car history data, or provide a score based on the vehicle history? Like many business decisions, there are several contributing factors and, in this case, each should make car buying consumers question the value of the report and whether CarFax has their best interests in mind.  Indeed, the same factors may even open an opportunity for a more nimble competitor to rethink the market, rebuild the reports and redesign the industry.

The car-buying public is not CarFax’s primary customer.  CarFax—which controls an estimated 90% of the auto title history market—built its empire by penning exclusive agreements with numerous auto manufacturers and their certified pre-owned programs, as well as auto classified outfits such as Auto Trader and Cars.com.  The vast majority of CarFax reports are purchased by the people certifying or selling used cars, and then provided to the buying public for free.  Why?  Because a clean CarFax report provides a consumer confidence that they are getting what they pay for. As we saw in yesterday’s posts here and here, however, the CarFax report offers only raw data, no analysis, and the consumer’s confidence is not always earned.

The fact is, CarFax’s primary customers like the reports minimal.  CarFax specifically calls out only the worst case cars (such as titles branded Salvage or Flood), which smoothes the sales process and provides consumers with a perception of quality despite minimal due diligence and no analysis.  To this end, CarFax is not truly a research tool for consumers, but a sales tool designed to reduce friction in the used car market. If CarFax went out of its way to raise flags for questionable history, the pool of purchasers for the car would diminish as would the value of the car.  If CarFax provided a score, its dominance in the market would likely set up de facto diminishing tiered pricing based on the score range, and likely give more false positives than negatives.  As it is, if a CarFax shows a title branded as Salvaged or Flood, the car’s resale value is almost nothing.  If CarFax provided a more robust title history analysis, the first casualty would be the bottom line of their best customers.

Interestingly enough, auto dealerships—who are begrudgingly one of CarFax’s primary customers— have recently come out against CarFax reports as unreliable.  The most public outcry is voiced in an antitrust lawsuit (Maxon Hyundai Mazda NYLSI Inc. d/b/a/ Sunrise Toyota et al. v. CarFax Inc., case number 13-cv-2680, in the U.S. District Court for the Southern District of New York) currently supported by nearly 600 dealerships around the country.  While dealerships certainly stand to gain from the lack of analysis in CarFax reports, that benefit appears outweighed by the squeeze put on dealers resulting from CarFax’s sweetheart deals with OEMs, certified pre-owned programs and auto classifieds.  With each of those entities only recognizing CarFax reports, the suit alleges CarFax often charges dealers five times as much as competing title history providers. In the effort to unseat CarFax from this alleged monopoly, consumers have found an unlikely ally in the dealers who now claim CarFax reports are unreliable and subject dealers to unnecessary litigation.   Whether the dealer’s arguments find traction is yet to be seen, but in the meantime, have no doubt that despite their protests, dealers will milk as much value from the shroud of quality CarFax confers.

In all of this, the consumer gets lost, both figuratively and literally.  The reports are not the best product for consumers, but are instead designed to facilitate sales.  The reports also provide raw data with no analysis.  While many consumers will meaningfully interpret the data, many more will see the lack of obvious alerts as a stamp of approval.  It would be no easy feat to develop an algorithm to detect questionable data in a title history and thus provide meaningful analysis, but not impossible.  Through their antitrust claims discussed above, hundreds of dealerships are unwittingly creating a market for precisely such a product.  Indeed, from a public relations and litigation perspective, dealerships (and OEMs to some degree) could benefit from helping support or design a product which ensures transparency in auto deals, and would likely see a decline in auto fraud litigation costs as a result.  Even better, if a title-history product had organic growth based on consumer transparency creating mutual benefit to consumer and business alike, the sheen of CarFax’s gold-standard perception would fade, and the gravity of exclusivity agreements diminish.

Certainly this article does not cover the title history industry with sufficient depth, and the solution proposed above is oversimplified; however the point is that consumers and industry need not accept the status quo.  The innumerable lawsuits filed by consumers for defects in cars hidden or undisclosed in title reports coupled with the antitrust lawsuit by dealers reveal the title history industry as broken, or at the very least damaged.  Given that rare agreement by major players on both sides of such a common, yet critical transaction, there is no question this industry is ready for redesign.

Rocky’s comments

This is the same problem with investment analysts and accounting firms. Accounting firms are audited by the people who pay them, not an independent third party. Part of the reason that Groupon’s S-1 filing was so full of flaws was that Ernst & Young was being paid by Groupon. Keeping the customer happy comes into play.

redesignAnswer: The car was previously owned by a rental car agency and sold due to an accident resulting in frame damage

The first factor is clear: the CarFax report discloses the car as a former rental vehicle under the “Owner 1” information.  Rental vehicles are often driven hard, and are rarely worth the same as non-rental vehicles in a fair market.  A closer look, however, reveals the second–more important– factor:  the rental company only owned the car from 03/30/2013 to 11/04/2013, or a little over 7 months.  The average time-in-service for a rental vehicle is 13 months.  This car is well short of that average.  One of the primary reasons a rental company sells a car this soon after putting it in service is that the car presents a liability.

Title history reports such as CarFax typically turn up major repair work processed by insurance companies, but most rental agencies are self-insured and the repairs done by captive body shops. The wreck will never show on the title, despite such information being one of the primary purpose and marketing points of ordering the title history.  Only an inspection by a body shop revealed this car’s damage to its frame and sub-frame.  The damage, as it turns out, is a safety issue and the car is not worth anything near fair market value of a non-wreck.  The CarFax gives a false impression of quality here, and in many unreported wrecks.

Beyond my friend getting ripped off (though I am working on fixing that for him), the quiz raises a broader issue.  Title history companies have little incentive to find prior-wreck information when not branded on the title, nor do they adequately disclose such blind spots.  Certainly, CarFax has a “CarFax Guarantee,” but it only covers situations where CarFax misses a title actually branded as prior wreck or other defect.  When the defect is hidden from the title for some reasons, the title history provides a false comfort.  A better car history model would be consumer facing and use the information in the title history indexed against known defects to provide alerts that the buyer may wish to consult with a professional about the value of the car.  For example, a report could advise consumers that a rental agency sold the car before reaching the average in-service date and recommend the consumer consult a body shop.  The service could even extend its reach by partnering with local body shops and providing recommendations or a platform for advertising.

At redesignmobile, we see it as our mission to uncover holes in consumer service and work to fill them with solutions beneficial to consumers and the companies that serve them.  While we are not currently engaged to redesign the title history market, we also see it as our mission to bring such issues to light in the hopes that we can kickstart a discussion as to how we can all rethink, rebuild and redesign our world.

If you’d like to shine a light on other flaws in title history reports, or any consumer related matters, feel free to drop me a line at chuck at redesignmobile.com. I’m more than happy to listen.

This leads to today’s question: Why doesn’t CarFax provide a simple score for each vehicle? Or put a red flag next to the big red flags?

NOTE:  The CarFax report also shows an odd title history under “Owner 1.”  It appears that the car was sold at auction to a dealer and returned before landing with a second dealer who then sold it to Owner 2.  It is impossible to tell from this report alone whether anything truly unusual happened, or whether the report is capturing an oddity in the transfer from the auction house to the dealer.  In any event, in the context of the other information, this should be noted as another red flag and put the buyer on alert.

 

CarFax Quiz

 

Rocky got this one right.

redesignQuiz: Why was this used car purchase a bad buy?

The image below is a CarFax report showing the title history of a used car recently purchased by an acquaintance. CarFax, in case you do not know, is the current industry leader providing auto title histories to consumers and dealers alike. CarFax markets itself as providing information that may impact the purchase decision of a car through a detailed VIN history.

For the purpose of this quiz, assume this car was sold at fair market value for a typical car of this make and model year. When I saw this CarFax report, I told my friend he should make all efforts to undo the deal immediately. There are at least two factors in this report that should have warned him away from purchasing this car for that price. List the factors and explain why this was a bad deal.

NOTE: I redacted the dealer’s name.

 

CarFax
CarFax

 

Submit your answer here.