Will Voters Opt for "Opting In"?

If the crusade to have a privacy initiative on the ballot in California is successful, other states could follow

By Jane Black

Here's a guy who's putting his money where his mouth is. On July 5, Chris Larsen, CEO of online lender E-Loan (EELN ), donated $1 million to help get a financial privacy-protection initiative onto the California state ballot, if not in 2003 then in 2004.

His cash could be key to strict privacy regulations being enacted in the Golden State. For the past three years, the California legislature has wrangled -- to no effect -- over measures aimed at tightening the rules governing how banks, insurers, and lenders disseminate customer information to third parties and affiliated companies. But all attempts to get a so-called opt-in bill to the governor's desk have stalled.

So, Larsen wants to do an end-run around Sacramento and put the question directly to voters: Should financial-services companies have to receive explicit permission from customers before sharing sensitive, personal data? If Californians vote yes, they could lead the way for the rest of the nation in changing the way financial-service companies do business.


  For someone at the forefront of a huge movement, Larsen keeps a remarkably low profile. Privacy advocates call the 41-year-old entrepreneur a "decent, upstanding" businessman. Yet they're not ready to anoint him the Ralph Nader of financial privacy.

Larsen wouldn't have it any other way. For him, the fight for better privacy in the financial world isn't personal -- it's just good business practice. "It's clear to me that the advancements in technology will be great, powerful, and scary," says Larsen. "We need a knockout blow against privacy fears that will benefit consumers and the economy."

Larsen is the first to admit that his efforts will benefit his company. Since 1997, E-Loan, which offers mortgage, auto, credit-card, home-equity, and business loans over the Internet, has provided more than $8.5 billion to consumers. He thinks E-Loan's revenues will grow dramatically if U.S. consumers have more faith in the Internet.


  "The irony is when people are afraid of what happens to financial data, they choose to go into a bank branch, even if it's owned by a bank spending millions of dollars to fight privacy legislation," says Larsen. "They choose that over E-Loan, which is opt-in and does regular privacy audits, because it feels less scary."

The CEO's work to legislate financial-services firms isn't his first foray into the privacy arena. He was instrumental in making credit scores -- a number that tells lenders whether a consumer is a good credit risk -- more transparent to consumers. Often called FICO scores, they're important because they can drastically affect the rates consumers pay for mortgages, home loans, even car insurance. According to E-Loan, a consumer with a FICO score of 700 will pay approximately $382 per month for a $20,000 auto loan over 60 months. The same loan for someone with a score of 580 is $495.

In 2000, E-Loan decided to make FICO scores available to customers for free. But Fair Isaac (FIC ), the company that calculates them, objected (see BW Online, 4/4/02, How Fair Is Fair Isaac?). After a congressional subcommittee threatened legislation if the scores weren't made available, Fair Isaac launched a Web site last year called myfico.com that allows consumers access to their credit report and FICO score for only $12.95. Then in May, it launched a simulator to help consumers figure out how to improve their scores.


  "I credit Chris with loosening the credit score logjam," says Beth Givens, director of the San Diego-based Privacy Rights Clearinghouse. "The fact that he's in business gives him more credibility." Few Silicon Valley executives have come out strongly against data collection and sharing.

So just how did a businessman like Larsen get so concerned about privacy? For one, he comes from a politically active family. His father, a die-hard Democrat, was a member of the International Association of Machinists & Aerospace Workers. "He was the kind of guy who got mad as hell about corrupt company management and the political process. He was the kind of guy who took Watergate personally. Some of that rubbed off on me," Larsen laughs.

Given that legacy and Larsen's own long involvement in the technology business (his first job was creating computer designs of wind tunnels for NASA) and studying in socially liberal Denmark, his quest to spend a million bucks to change an industry makes more sense.


  Larsen is more the pragmatist than his father, however. He and other privacy advocates admit they would prefer to see financial privacy legislation passed in the California legislature rather than wage a tough, expensive initiative campaign. The legislative process allows more room for compromise. Once an initiative is put on the ballot, it's language is set in stone. And in order to appeal to voters, that language will likely be controversial with opponents. Chief among them: U.S. banks, which have vigorously opposed new regulations.

One area of common ground between the two sides is that the financial institutions also want to keep the debate in the legislature. Their reasons are different, however: The banks have more sway with legislators than with voters, as a recent referendum in North Dakota showed. On June 11, 72% of North Dakotans voted to overturn a 2001 state law that allowed financial institutions to share or sell customer information to third parties unless customers told them not to. According to some estimates, the banks outspent consumer advocates 10 to 1 in their losing battle.

If Larsen & Co. do get an initiative on the ballot, financial services companies will certainly fight it. Lisa McGreevy, director of public affairs for the Financial Services Roundtable, a coalition of the 100 largest financial institutions, says information-sharing is critical. "Information is what the New Economy is all about. This is not a debate about privacy but how products and services are delivered." She points out that $37 billion is lost to fraud each year and says sensible sharing of information can help prevent it.


  The California Banker's Assn. also swears to fight opt-in privacy regulation, which it says would hamstring banks without helping consumers. In a statement the association said: "Consumers are being misled to believe that they currently do not have the ability to further protect their own privacy and control the use of their information, when in fact, California consumers can already do those things. They can already opt-out of information-sharing programs, place their names on a statewide 'do-not-call' list for telemarketers, and have protections and assistance programs not available in other states should they become victims of identity theft."

Maybe. But opt-in legislation would make it far easier for consumers to understand and manage their personal data. And if Californians vote in favor of opt-in, it could set the stage for national reform. After all, California led the way in the 1970s for property-tax reform and in the '90s for term limits.

"Someone like Larsen is critical to communicate that this can be good for business," says Shelly Curran, a policy analyst at the Consumers' Union. Here's hoping Californians and financial-services firms listen to him carefully.

Black covers privacy issues for BusinessWeek Online in her twice-monthly Privacy Matters column

Edited by Douglas Harbrecht

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