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Jo Ann Barefoot explores how to create fair and inclusive consumer financial services through innovative ideas for industry and regulators

Community Reinvestment Act: Thinking Outside the Box

Blog

Community Reinvestment Act: Thinking Outside the Box

Mallory Kwiatkowski

What does modernizing the Community Reinvestment Act have to do with standardizing shipping containers? I’ve been pondering the parallels.

At LendIt in San Francisco (which attracted over 5,000 people this year), I held a main stage fireside chat with Chris Larsen, the Executive Board Chair of Ripple (here’s the video, which LendIt says has been the most-watched of the conference). I’ve known Chris for years and also had him as a guest on my podcast show, so I encouraged him to share a metaphor he often uses to explain how we should change the global payments system.

In the book, The Box, Mark Levinson chronicles the mid-20th century move to standardize shipping containers. Previously, cargo was loaded onto ships item by item, and then at the destination was unloaded dockside the same way. Then it was reloaded, again by hand, into new vehicles to travel onward by road or rail. The introduction of standard-sized containers enabled packing and stacking without wasted space and, more importantly, rapid transfer of the containers between ship, train and truck. Loading costs per ton plunged from $5.86 to $.16. World trade surged.

Ripple hopes to create a comparable transformation for payments, by developing an interoperable “internet of value” that enables everyone, everywhere, to transact in the global economy, at nearly no cost, whether they use dollars, rupees, yen, XRP, Bitcoin or anything else. Ripple is building rails on which such a system can run. In our chat, I said to Chris that of all the impressive things happening in fintech, this seems like the one most likely to change the world.

And as Chris explains, the world will change most for those at the bottom. Several billion people today are locked out of the mainstream economy because they don’t have a safe, easy, affordable way to transact. It’s one reason that central banks worldwide view payments modernization and fintech as priorities not only for financial inclusion, but for economic growth.

Which brings me to the U.S. Community Reinvestment Act -- another government strategy seeking to empower lower-income people by widening access to financial services. Last week I did an interview with Charles Lane of National Public Radio, discussing the Treasury Department’s report on updating the venerable 41-year-old law. As Treasury and others have noted, CRA was enacted in a bygone age -- before interstate banking, much less online banking, not to mention mobile banking. Cell phones didn’t exist in 1977. The World Wide Web was more than ten years in the future. Not surprisingly, CRA was designed, and still is, to encourage banks to serve lower-income people in the geographic areas around the institution’s physical branches.

That’s a problem, since most banking today happens online and a growing share happens on the phone. Banks’ CRA efforts, accordingly, are increasingly mismatched with the actual needs and preferences of the consumers this law is supposed to help, in an age when lower-income and minority customers are disproportionately high users of mobile phones, including for financial tasks. Many of these consumers never had desktop computers and so leapfrogged straight to mobile services when they could, as did hundreds of millions of others in the developing world (more people today have access to cell phones than to plumbing). 

Moderating the compliance panel at LendIt

CRA needs to be retooled to reflect and leverage modern banking, but there’s a much bigger opportunity. It also needs to leverage fintech. The mobile phone is the most democratizing force in the history of finance. That’s partly because it can do for finance what shipping containers did for trade, cutting costs to a fraction of traditional levels. It’s also because services delivered through the phone reach everyone. And it’s also because these services can actually be better, offering far more benefit, with vastly more interaction. They can enable people to save and invest easily, to budget easily, to make payments easily, to manage bill-paying easily, to manage their debt easily, to smooth income and expense volatility, to fend off predatory practices, to protect loved ones with mental or aging challenges, to understand finance and their own financial health easily, and affordably. They are converging, moreover, with other innovations, from blockchains that can reduce banks’ operating costs to new kinds of underwriting data that can accurately assess risk of lending to people who lack traditional credit histories.

New technology can make the world look a lot more like one CRA’s sponsors originally hoped for. I know, because I was there. I was on the Senate floor staffing the bill the day it passed. A year later, I became Deputy Comptroller of the Currency as the OCC began to implement it. The law has accomplished a lot over these decades, and we should keep its strengths in tact. But we should also do better, rewarding banks for driving financial inclusion and consumer financial health with new technology, outside the old box.

Recent Events
LendIt Fintech USA, April 10, San Francisco, CA
Bank Director “The Reality of Regtech”, April 18, New York, NY
- World Bank/IMF Spring Meetings - Financial Inclusion Workstream, April 19, Washington DC
Women in Housing and Finance Annual Symposium, April 25, Washington, DC

My New Barefoot Innovation Podcasts
Affordable Financial Advice - Nerdwallet CEO Tim Chen
Sponsor Bank: Cross River Bank's CEO Gilles Gade
Digitally Native Finance Starling: CEO Anne Boden
Collaboration Innovation: Charlotte Crosswell and Dan Morgan of Innovate Finance

Upcoming Events
Texas Bankers Association Annual Conference, May 3, Houston, Texas
Women Corporate Directors Global Summit, May 10, New York, NY
Comply 2018, May 16, New York, NY
- FCA TechSprint, May 22-25, London, UK (By invitation only)
 -CFSI’s Emerge, June 6, Los Angeles, CA
North Dakota Bankers Convention, June 11-12, Fargo. ND
American Bankers Association Regulatory Compliance Conference, June 26, Nashville, TN

This Month’s Must-Reads
GAO report on Artificial Intelligence - I participated in their forum
March Capitol Hill CFSI Fintech Panel - Via Kate Flocken's Medium article
Bank Director Magazine - Ready for RegTech? 

Be sure to follow me on twitter and facebook.  As always, check the website for more updates. Most importantly, keep innovating!

Jo Ann