Database nation: the upside of "zero privacy"

Reason, June, 2004 by Declan McCullagh

Optional Costs

Constitutional questions aside, how would an opt-in rule work? Consider how it would affect the MBNA Corporation, a financial services company that became a multibillion-dollar success story not long after it was incorporated in 1981. MBNA grew to more than 51 million customers through its aggressive "affinity" program, which let a number of groups--NASCAR, universities, the Atlanta Braves, and so on--market credit cards imprinted with their own logos. Not counting its existing customers, in 2000 MBNA had a database of 800 million names of prospective cardholders provided by affinity groups, but it could afford to send only 400 million solicitations.

Writing in the Duke Law Journal in February 2003, Indiana law professor Fred Cate and Georgetown business professor Michael Staten described how MBNA winnowed its list down to an affordable size through aggressive information sharing. MBNA first looked at public records and then, by exchanging information with its affiliates, tried to evaluate the creditworthiness of the remaining names on the list. The remaining 400 million people received solicitations with the endorsement of the affinity group to which they belonged.

Staten and Cate's conclusion: "Mandatory opt-in requirements on MBNA's operations would impair MBNA's affinity group business model, raise account acquisition costs and lower profits, reduce the supply of credit and raise credit card prices, generate more offers to uninterested or unqualified consumers and raise the number of missed opportunities for qualified consumers, and impair efforts to prevent fraud and identity theft." Under an opt-in rule, recipients of the offers would "be more risky and less profitable than MBNA's target group reached under the current rules. As a result, MBNA's delinquency and charge-off rates will rise, relative to its current experience, thereby imposing additional costs that will be passed along to all of MBNA's customers."

MBNA's experience highlights how data exchanges fuel the economic engine of an information society. Choking a society's data flow by setting the default rule to "no" restricts that fuel. An opt-in regime suffocates the economic activity that takes place when businesses use personal information to offer new products and tell customers about them without obtaining explicit permission in advance. Because it assumes customers who have expressed no preference would object to a solicitation, it is more expensive than an opt-out approach.

"Suppose you're a financial company and you have an idea," says Solveig Singleton, a lawyer at the pro-market Competitive Enterprise Institute in Washington, D.C. "Say you'd like to offer a mortgage for first-time home buyers. You design a flyer and look at your expenses and realize it would be pretty expensive to send it to everyone. Instead, you want to get some information to lower your costs and [target just a subset]. If you don't have that information, the costs of identifying your potential customer base are so high you don't offer the product at all."