Startup to Translate Financial Fine Print

Different members of the Credit.com news team spent time at Finovate this week, a convention for companies introducing new tech products for the financial services industry. But probably the coolest thing we saw at the convention had no technology at all, no product, and no business plan.

It’s called Transparency Labs, and it’s a startup aimed at translating into English all the fine print buried in credit card, cell phone, mortgage and investment contracts. Eventually, the company hopes to have a slick web site where people can find a copy of their financial contract, get a quick summary of what it actually says, including any hidden costs that might be buried in all the 6-point font.

But first, the company has to know what’s actually in all those contracts. That’ll take more than a little bit of work.

“What’s out high-tech solution? It’s a big secret. We read the contracts,” David Hirsch, founder of the company, told us. “I’m happy to tell you, because no one else is crazy enough to do it.”

He’s right, of course. I just dug into my file cabinet and fished out the agreement for one of my investment accounts. Somewhere in the application process I had to check off a box certifying that I had read it—all 116 pages.

The actual number of pages of that document that I will ever read? Zero. And of course I’m not alone.

“One problem with all this fine print is that it’s turning us all into liars,” says Benjamin Texter, vice president of Transparency Labs. “Everybody’s checking off those little boxes saying they’ve read these contracts, and of course nobody does. Because you can’t.”

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What’s in the Fine Print?

There are reasons both good and nefarious for the growing length and complication of all that fine print. On the good side, banking is complicated, and a well-written contract is needed to clearly lay out each side’s rights and responsibilities in the event that something goes wrong.

On the nefarious side, lenders have figured out zillions of ways to manipulate otherwise simple agreements for their short-term advantage. One example: Buried deep in most credit card contracts is language stating that if a billing date lands on a weekend, the issuer has the right to mail out bills on a Friday instead of a Monday.

That one little clause reaps issuers millions of dollars in extra late payment fees. And it’s one of the simplest examples. The folks behind Transparency Labs hope that their project can help consumers spot these things, which will help people figure out the true costs of their financial products, and hopefully to make better decisions about which products to buy and which to avoid.

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Startup to Translate Financial Fine Print (cont.) »

Image: Okko Pyykkö, via Flickr.com

“Our ultimate goal is to tell people the actual price” of things like credit cards, Texter said. “I know the price of milk. The price doesn’t change as I carry it from the back of the store to the front. But with things like credit cards, the price can change pretty drastically, and a lot of people don’t know that.”

Texter showed me a demonstration of what the Transparency Labs web site might look like in the future. (The company hopes to make its tool available to the public sometime in early 2012.) Users may scan their documents from home, or they may select their contract from one of the thousands the company will have in its database. The company’s computers will scan the documents for technical language that’s pretty common in such contracts, such as clauses about fees, repayment schedules, etc. In the demonstration version the company showed at Finovate, important sections of the contract would be highlighted with text bubbles explaining in regular English what those sections mean.

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Hidden Risks and Fees

The web site also will show “Hidden Fees” and “Hidden Risks” buried in the agreement. A common hidden risk is that credit card companies often reserve the right to cancel accounts at any time, and demand immediate payment.

A common hidden fee, or at least one that is not broadly understood, is that the average retirement account requires investors to pay an average of $900 a year to their investment advisor, Hirsch says, since the average person has $60,000 saved up for retirement, and most financial planners charge a 1.5% annual management fee. Especially in today’s lousy economy, that often means such a small fee winds up eating fully a quarter of the average consumer’s investment returns.

That information is all right there in the contract. But most people can’t read it.

“I have a college education, and I can’t make sense of 90% of these contracts,” Hirsch says. “What about the guy who has a tenth grade education, he has a wife and two kids and he’s doing everything he’s supposed to do to take care of them. How is he gonna know what these things say?”

Explaining all that fine print is a noble calling, but Hirsch makes it clear that Transparency Labs is a long way from offering its services to regular consumers. Will it be a subscription-based site? Will it be funded by ads, or by linking people to credit cards that might be right for them? Honestly, Hirsch has a great idea on his hands, but so far he doesn’t have a way to pay for it.

“I don’t have a business. All I have is a solution,” Hirsch told me. “That’s why we’re here, to try to meet people and start figuring out a business plan.”