Banks Share Private Consumer InformationWith Marketers
July 29, 2002
In his April credit card bill from Citibank, Robert Murray learned he would soon be charged $89.95 to renew his membership in "Essentials," a discount club for fashion merchandise and designer fragrances.
Murray, a 46-year-old from Foster City who runs a computer monitor repair business, didn't recall joining and never used it -- yet he had been enrolled a year earlier and billed $69.95.
What Murray didn't know was that Citibank had provided information about his account to MemberWorks International, a publicly traded Connecticut company that runs Essentials -- and then had allowed the firm to bill his Citibank account.
Murray's case is just one of thousands of complaints stemming from the buying and selling of information between the nation's largest financial services companies and a handful of direct marketing firms.
Beyond unwanted credit charges, say privacy advocates and lawmakers, the increasingly widespread practice of information sharing raises frightening potential consequences, as more insurance companies, brokerages and banks combine into financial supermarkets in a new era of finance industry deregulation.
"Virtually all the information banks have about you is available," said Susan Henrichsen of the California attorney general's office. At a minimum, that includes names and contact information, but also income level and average balances, household information and even, in some cases, spending habits.
Although legislatures in 40 states have tried to pass tougher rules against data trading, not one has succeeded.
California is a case in point. Citigroup and the rest of the finance industry, represented by some of the most powerful lobbyists in Sacramento, are spending tens of millions of dollars for campaign contributions and aggressive lobbying to stave off legislative reforms that would give consumers more control over their personal financial information.
California is seen as a key battleground, because of industry fears that legislation here could start a national trend. Already, four such measures have failed in the state, despite repeated polls showing strong support for increased privacy protection.
Although the lobbying efforts have paid off so far, pressure is building in the state Legislature to pass a financial privacy bill that has been languishing in the Assembly.
A QUESTION OF CONTROL
At the core of the privacy campaign is the simple argument that people have a right to control how information about them is used.
Pressed for examples of possible excesses made possible by the federal law, privacy advocates offer no specifics. However, they offer some disturbing scenarios:
-- A bank uses information about a customer's purchases to determine how risky a lifestyle that person leads, then raises credit card, mortgage or insurance rates as a result.
-- A bank denies a loan because of information obtained about the customer's health from the insurance division. That would be illegal, but privacy advocates say there are no protections in place to stop it from happening.
BANKING LOBBY'S INFLUENCE
After the national banking failure of the Great Depression, Congress passed a law to prevent such a collapse in the future. It prohibited banks from owning insurance companies or brokerages and vice versa, and required multistate banks to create independent entities in each state.
In 1999, after two decades of corporate lobbying, the Financial Services Modernization Act tore down those walls, allowing banks, brokerages and insurance companies to combine. The act was among the most heavily lobbied issues in the history of Congress, generating about $87 million in soft money, PAC and individual contributions to federal parties and candidates.
The new structures encouraged more sharing of customer information. Under the law, financial institutions can trade information back and forth within their corporate umbrellas -- sign up for a credit card one day and receive a sales pitch for an insurance policy the next.
Just how much money the financial services industry makes from this practice is unclear. The agreements generally call for a flat fee to be paid to the bank in exchange for the names of account holders, plus a percentage of sales -- in some cases, up to 25 percent.
No one knows how much information gets sold or how often it gets sold. Experts say the profits are not large, but they are treated as practically free money, because personal information is an asset they already hold; all they have to do is put it together and sell it.
At a minimum, the income stream is one that banks and credit card companies are fighting hard to keep unrestrained -- and one they are clearly afraid of losing. Citigroup cited the possibility of increased privacy protection as a threat to its earnings in its annual filing with the Securities and Exchange Commission this year.
RUNNING AFOUL OF LAW
The relationship between financial services concerns and direct marketing companies has already drawn negative attention from law enforcement agencies around the country.
In 1999, U.S. Bank in Minneapolis was fined $4 million for selling information to MemberWorks.
Earlier this year, Citibank was fined $1.6 million by the California attorney general for not exercising more control over marketing scripts, including those of MemberWorks. (Citigroup officials declined to comment for this story.)
The California attorney general's office also pursued a separate case against MemberWorks, in which it agreed to refund $1.5 million to consumers in April 2001 for "misleading consumers." The companies settled all of the cases.
The ties between the financial services industry and the direct marketing firms -- MemberWorks has data-sharing agreements with 17 of the nation's top 25 bank and credit card companies -- have also led to myriad complaints from cardholders like Murray.
A spokeswoman for MemberWorks, Sandy Nelson, said the company's records show Murray was sold a membership in Essentials when he called Citibank customer service in April of last year. However, Murray said he has no recollection of consenting to such an offer. He said a customer service representative told him Citibank had provided his account information to MemberWorks.
"I'm a single guy," Murray said, "and I have no need for a membership in a shopping club."
BIG MONEY BEHIND BATTLE
State efforts to pass more stringent protections have centered on two concepts: "opt in," in which a financial institution must ask a customer's permission before tapping private information, and "opt out," in which the company is free to use the information unless the customer asks them not to.
A distinction is also drawn between sharing outside of a company, and within different entities of the same company. The bill awaiting a vote in the Assembly, by state Sen. Jackie Speier, D-Hillsborough, would require banks to get permission to sell customer data outside the company, but the burden would be on account holders to request that their information not be used within the company.
Since 2000, when California legislators began trying to pass tougher measures, one thing has remained constant: the flow of big money.
Banks, brokerages and insurance companies gave $4.7 million in campaign funds to the governor and Legislature while fighting the bills from January 2000 to September 2001, the reform group Common Cause reported. More than $850, 000 of that money went to Gov. Gray Davis, the group found.
Moreover, financial companies have spent $18.5 million lobbying the Legislature on various bills from January 2001 through last March, according to reports on file with the secretary of state.
The effort has also included the hiring of a lobbying firm run by Darius Anderson, a confidant and fund-raiser for Davis.
The firm, Platinum Advisors, lobbied for the financial companies at the same time Anderson was ramping up fund-raising efforts for Davis' re-election campaign.
In an interview, Jim Pitts, executive director of the Financial Services Council, said he thought hiring Platinum would help get his message to the governor.
"This is a Democratic-controlled House and Senate with a Democratic governor," Pitts said. "You needed somebody who would be close to the House and Senate, as well as the executive branch, who can make the case about what is good and bad about pieces of legislation."
Anderson declined comment on what he or his firm has done, citing client confidentiality.
The lobbyist's dual relationship is not illegal, and Davis' senior political adviser, Garry South, denied that Anderson had personally lobbied the governor.
"Darius Anderson does not lobby the governor on behalf of any client whatsoever," South said. "Gray Davis does not know who Darius Anderson's clients are from one day to the next."
WHAT THE FUTURE HOLDS
Ultimately, the battle may end up being decided as so many others have in California when the Legislature fails to enact popular will -- through a ballot measure.
Recently, talk of such an initiative has begun to escalate. Christian Larsen, the chief executive of E-Loan, an online lending concern that has made protecting financial privacy a top priority, has set aside $1 million to fund a ballot measure to strengthen it if the legislative process fails again.
But time may be running out for California and other state legislatures wishing to expand privacy rights as allowed by the 1999 act.
Amid more heavy lobbying from the financial services industry in Washington,
there are at least three legislative proposals circulating that would revoke states' rights to pass laws that are tougher than the ones on the books in Washington.
If they succeed and information sharing continues as is, critics fear, more people like Murray will get unwittingly billed for something they had no interest in.
But at a minimum, he is taking some matters into his own hands. He recently applied to have his name removed from marketing lists. As for whether he intends to keep his Citibank account, he said: "I don't think so."
PRIVACY AT A GLANCE
-- Current law: Consumers can ask their banks, usually through writing, to remove their names and any information about them from lists that are provided to companies outside that financial institution's corporate umbrella. However, that protection does not apply if the outside entity has formed a "joint marketing agreement" with the financial service provider, or if the outside company is another financial service provider (and almost any company, including a travel marketer, can meet that definition). About the only time this so-called "opt-out" provision works is if the outside company -- say, a clothing marketer -- has no established relationship with the financial company. -- What you can do: A consumer who wants to prevent personal information from being used or traded must contact the financial service company. The business does not have to ask permission to share data about customers. Financial companies put out a disclosure statement once a year, most often included in a statement or bill, about what is done with information about consumers. These disclosures sometimes explain how to be removed from marketing databases. Sometimes they require written notice, although sometimes it can be done through a toll-free number. This can be done at any time. -- Direct marketing: The Direct Marketing Association, a member group of companies that frequently buy and use personal information to make offers to consumers, also maintains lists of people who do not wish to be contacted. For more information about the Direct Marketing Association, or to get on the lists, visit www.dmaconsumers.org.
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