September was a big month for the financially underserved. First Apple Pay spotlighted how mobile payments are likely to disrupt banking, and especially branches. Then Wal-Mart and Green Dot launched the GoBank checking account. These shifts raise huge questions. What will now happen to lower-income and vulnerable customers -- and for them? And how should public policy try to shape these trends?
The answer is that things will soon get much better, or much worse, for the underserved, depending on what both government and industry do next, including on the Community Reinvestment Act.
The worst of times?
For decades, federal policy has pushed for widened access to financial services, especially through CRA’s mandate that banks affirmatively help meet credit needs of low- and moderate-income areas in their markets. I was present at birth for CRA, staffing the bill on the Senate floor and then becoming the first Deputy Comptroller of the Currency to implement it. In those ancient times -- over 35 years ago – nearly all banking was locally-rooted and branch-based. Today it’s mostly virtual, increasingly national and global, and often not even done by banks.
Nevertheless, CRA’s focus remains local, and it still emphasizes branches. Advocates love branches for giving neighborhoods economic ballast, both bringing and demonstrating stability. They also like branches’ face-to-face service, which is preferred by many lower-income consumers caught in the “digital divide.”
So what will happen now to these consumers -- and to banks’ unique CRA mandate -- if we really see widespread shrinkage and repurposing of branch networks? I think we will. Pew research shows most people now bank online, and also that mobile banking rose from 18% of cell phone users to 35% in only about two years. Like post offices, banks simply have too many costly buildings housing activities that have moved to the internet.
If banks are going to close or reorient branches in affluent areas, they will certainly do so in less profitable lower-income markets. CRA pressures will slow this process, but I cannot imagine CRA preventing it. If somehow it did, we should worry that depository institutions – the only providers covered by CRA -- would become competitive losers to leaner, more profitable companies, a trend that would ultimately constrict access. Beyond some point, government can’t force the most expensive delivery channel into the least profitable markets, no matter how much affected consumers might prefer it. New approaches will have to come.
Or the best of times?
But here’s the good news. Lower-income customers do not lag behind the general population in using mobile phones. In fact, they lead. They also lead in using phones for financial tasks like bill-paying. Ironically, the very digital divide that has constrained their online banking – the cost of PC’s and internet access – makes them disproportionately ready now to leap straight to mobile. While these generalizations mask great complexity, it is still true that a huge, growing group of underserved consumers already have a mobile financial tool in their hands and know how to use it. This creates a historic chance to widen access to good and affordable financial services.
Or, wait, maybe it’s still the worst….
Or does it? If millions of lower-income people do adopt mobile, they’ll soon face a whole new set of problems. As with subprime mortgages and high-cost short-term lending, some providers will target them to exploit unsophistication or desperation. Underserved consumers will also be confused (won’t we all?) by novel services coming from a proliferating set of providers. And consumer advocates suspect the new channels, despite their low cost, will actually bring high prices and hidden fees, not affordability.
Or, ok, so it’s all the above
In short, the mobile payment revolution is like the French revolution Charles Dickens famously called the “best and worst of times.” Like all innovation, it will bring both good and bad. And optimizing that balance will be hard with today’s regulations, including CRA. The agencies have been updating CRA through helpful new questions and answers (Additional materials here), but fear that opening a deep review could become politically controversial. Meanwhile, again, the creaky old CRA law applies only to depository institutions – i.e. a shrinking share of financial services -- and is still anchored in geography, not technology. It is also enforced solely by the prudential bank regulators, not the CFPB, structurally impeding holistic new regulatory thinking.
Some questions: Will people in lower-income neighborhoods be cut off from branches? Should banks actively help them switch to mobile? Should doing so win CRA credit? How about CRA credit for signing families up as a team, so young members can teach older ones? How will elderly consumers be impacted by mobile overall? (Elizabeth Costle of AARP notes that aging may reduce people’s fingerprint definition, potentially impairing fingerprint-based authentication). Will/should banks and nonbanks open new low-cost facilities in needy areas? Storefront? In stores? Kiosks? Will GoBank be a good model? Would Skype-based video service work for people wanting personalized help? Where do community banks and credit unions fit in? Should the agencies collaborate on research? Pilot tests?
A banker I know visited his company’s branch in a major Asian city, in a mall at night. The small space was packed with customers huddled around staff using tablets to meet people’s needs, as in an Apple store. The next morning he stopped by the bank’s marble-clad flagship branch. A long row of teller windows were staffed, ready, and idle. Only two customers had come all day. This may be the future.
Let’s go back to Dickens: the regulators will do a “far, far better thing” if they can meet this revolution with fresh ideas.
What ideas do you have for them, and for bank and nonbank providers? Please share your thoughts in the comments.