Over the past several years Congress and the state legislatures have extensively debated "opt-in" vs. "opt-out" as a policy matter that impacts consumer privacy rights. While extensive polling has clearly indicated that consumers are strongly concerned with preserving their privacy, the economic side of this issue has received relatively scant attention.
Those arguing against the opt-in model usually say it is too expensive for businesses to adopt and operate. However, this argument is based on flawed assumptions that incorporate a fundamental misunderstanding of consumer behavior relating to sales lists and the resulting cross-marketing that flows from them.
The vertical industries that comprise the financial service disciplines provide a dramatic illustration of this costly, but all too common, mistake.
In 1999 Congress enacted, and President Clinton signed into law the Gramm-Leech-Bliley Act (GLBA). GLBA essentially deregulated the financial services industry, and in doing so, swept away a long-standing barrier between banks, insurance companies and securities firms. This set off a tidal wave of acquisitions, joint marketing and affiliations between these institutions. "One-stop financial shopping" and intensive cross-marketing flowed from these structural changes. The price tag to obtain this legal sea change in Washington, which was then passed on to the states? A reported $300 million in lobbying costs, making it, by some accounts, the most heavily lobbied bill in U.S. history.
The heart and soul of GLBA is its presence of opt-out provisions and absence of opt-in requirements. This means that if consumers do not want their confidential financial information (CFI) shared they must instruct their financial institution not to disseminate their CFI. In addition, GLBA was written so loosely that the consumer is unable to even opt out in some instances. When this part of GLBA is triggered, the consumer loses the power to control the CFI that is possessed by the financial institution.
Furthermore, the lion's share of opt-out notices prepared and mailed out by most financial institutions to satisfy their obligations under GLBA were so cryptically written and misleading that consumers by and large did nothing when they received them. By doing nothing they did not opt out. Their silence became their "consent" in this topsy-turvy world and the consumers' CFI became subject to virtually unfettered information exchange and cross-marketing. No, it is not your imagination that you are receiving more junk mail and unsolicited sales telephone calls during dinner.
Shortly thereafter, this amoral institutional behavior triggered a backlash in the state legislatures and Congress. Lawmakers introduced opt-in measures by the score. They were, in turn, routinely defeated by the same financial service special interests that enacted GLBA. The strategy is simple: Deploy an army of well-financed lobbyists, both locally--where the bill is introduced--and from the East Coast, if the opt- in measure begins to move through the legislative process. In addition, arm this gaggle of lobbyists with a seemingly bottomless pit of money to make generous, strategically placed political contributions. The message to lawmakers is simple: "No changes to GLBA. Period."
Interesting issues arise, however, when one asks whether GLBA's opt-out provisions are economically sound for the very institutions that spend fortunes enacting and defending the new federal law from change.
First, there is the consumer reaction to opt-out and how the financial services industry implemented GLBA. To say that consumers are disappointed with their banks, insurance companies and brokerage houses are suspicious regarding how these vertical industries use their CFI is an understatement. A cardinal rule in financial services' sales is that success is based on relationships, not transactions. A sale that will endure or lead to more business is more easily accomplished through truly voluntary opt-in leads, not the default leads that so often appear on an opt-out list. The monetary loss through lapsed business and refusals to purchase new financial products due to the resulting lack of consumer confidence is real, although difficult to quantify.
Second, there is the fundamental flaw inherent in the opt-out business model. Mike De Castro with Imagination of San Francisco, a direct marketing expert with more than 25 years of experience, has studied sales results using opt-out and opt-in lists. He has concluded that opt-out lists are over five times more expensive to use than sales lists generated by opt-in methods. In one of DeCastro's studies, it cost almost $6 to acquire a customer using an opt-out list and just over $1 using an opt-in list. He qualifies these figures by arguing that the success of list-based sales campaigns depends 40 percent on the list, 40 percent on the offer and 20 percent on creativity. However, even given these other variables, the implications are clear.
Opt-out advocates are operating from a model that may yield high initial returns in terms of many inexpensive leads. These leads, however, tend to be low quality and lead to a poor sales conversion rate. Conversely, an opt-in system may produce fewer starting leads, which are relatively expensive, but they will be of higher quality, and result in substantially more sales per dollar invested than the opt-out list.
Given all this, it is difficult to understand the political position of the financial service institutions and the heated nature of the opt-in vs. opt-out debate. Perhaps the vice presidents of marketing of the top 250 financial services companies obtained an MBA from the same school at the same time.