Our banking clients often question the difference between a product and an offer. We welcome this question, because it shows a concerted effort to understand and follow the rules! Although the answer is not as simple as we might like, we can look at what the regulations clearly define and use logical reasoning to form our approach.
The Consumer Financial Protection Bureau (CFPB) establishes that a “financial product or service” is one that a financial holding company provides by engaging in activities that are financial in nature, or incidental to such financial activity (12 C.F.R. § 1016.3(m)). It further clarifies that financial services include an evaluation or brokerage of information collected from a consumer involving a request or application for products or services. This definition is found in Regulation P, which governs the privacy of consumer information.
This broad definition provides institutions the flexibility to evolve the way they conduct business, without needing to ensure that every new idea falls within a particular category. It also allows regulators vast oversight of every type of financial activity an institution can dream up.
The fact is, for compliance professionals, there’s no definition of a “banking offer” from any regulator to make our jobs easier. A way to determine the difference between a product and an offer (and why it might matter) is to consider their functions. A product or service facilitates a financial institution’s long-term relationship with the client. A wide range of options will typically be available, and the ongoing relationship will evolve based on the mix of products and services the client pursues in order to meet their goals.
Different from a product or service, an offer is the strategic tool used by banks to get potential customers in the door to learn more about the product or service. The one-time bonus awarded when a new customer opens and funds a checking account does not facilitate the relationship between the two parties itself, rather, it is the catalyst for the customer to choose one bank’s checking product over another. The “ongoing relationship” lens is not perfect, as an offer may be a rewards program to earn points (“on-going”) or, alternatively, more of a singular event in the one time bonus. Regardless of the reward type, identifying a well-defined incentive to contract a new product or service is an important distinction between the product itself and the offer.
Another important difference between an offer and a product is that only one can stand alone. A product or service exists without the involvement of an offer, but an offer requires that something else backs it up–otherwise, there’s no reason for the offer to be pursued.
Knowing that an offer serves to entice the customer, we can view it through a marketing and advertising lens to make sure offers are presented properly. Regulation DD (12 C.F.R. § 1030), issued by the CFPB to implement the Truth in Savings Act (TISA), requires certain disclosures “so that consumers can make meaningful comparisons among depository institutions.” Regulation DD provides a helpful definition of a bonus: giving a customer an award of more than $10 during the span of a year in exchange for opening, maintaining, or renewing an account, or increasing an account balance. A supplement to the regulations provides some additional commentary on the definition.
Regulation DD requires the following account disclosures as applicable: rate information, compounding and crediting, balance information, fees, transaction limitations, features of time accounts, and bonuses. Specifically, for bonuses, the institution must provide the amount or type of any bonus, when it will be provided, and the minimum balance and time requirements for obtaining the bonus.
Since we’re considering an offer as an enticement, it’s also helpful to look at Regulation DD’s governance of advertisements. As expected, an advertisement cannot be false or misleading, and an account cannot be described using a term like “free” if there is the possibility of imposing a maintenance or activity fee. If an advertisement mentions a bonus, it must clearly and conspicuously state the following as applicable: the “annual percentage yield” (use of this term is required), time requirement to obtain the bonus, the minimum balance required for the bonus, the minimum balance required to open the account if it’s greater than the amount required for the bonus, and when the bonus will be provided.
Understanding that regulators have not clearly defined an offer and the parameters surrounding how offers should be presented, we can still differentiate between their purposes. Even without clearly established rules for offers, we can logically apply the requirements for advertisements and bonuses to ensure that offers are presented in the most effective and compliant way possible.
