Fireside chat with Richard Cordray at Money 2020

Last night I had a fireside chat with CFPB Director Richard Cordray on the main stage at Money 2020.  It was the first time a federal agency head has addressed the world's largest financial conference (11,000 people this year), and he did not disappoint.

Director Cordray explained how the CFPB will play its leading role in regulating financial innovation. Not surprisingly, he called on the thousands of innovators in the audience to design products that help, not harm, consumers. He said startups should have compliance in their DNA, from birth.  He promised to make enforcement tough but fair.  He announced the first-ever report on the Bureau's Project Catalyst, its regulatory "sandbox"-type program that tests innovative concepts that raise regulatory questions.

And then he said two things that are making news today.

First, he said the CFPB is going to assure that consumers can control their own financial data, including to let third parties help them manage their finances. Today's personal financial management (PFM) tools increasingly work by having the customer allow access to bank account information for analysis of income and spending flows.  Examples are Mint and Digit (see my podcast with Digit CEO Ethan Bloch about making saving easy, automatic, and even fun).  In recent months, banks have voiced concern that such solutions may not be reliably safe, and some institutions have cut off access or made these new tools much harder to get. While consumer safeguards may be needed, the core principle of customers' right to their data is fundamental to achieving the promise of fintech. It's also enshrined in the law, in Section 1033 of the Dodd-Frank Act which empowers the CFPB to write rules on the issue. Director Cordray last night announced a priority to move forward in securing these rights.

Second, the Director also said the Bureau will take on the thorny issue of how lenders can use nontraditional data in evaluating credit risk. Many people (including me) believe that new kinds of data are a key to widening financial inclusion (especially when paired with low-cost mobile services). Tens of millions of Americans have thin or no credit files, or complex situations that prevent accurate underwriting under traditional scoring. Today's big data and machine learning make it possible to fine-tune risk assessment of these people and find the many who are actually creditworthy.  That effort collides, however, with the equally powerful policy goal of fair lending. Use of alternative data is so novel that lenders can't tell what factors can be considered without potentially violating the laws against discrimination through "disparate impact." Some data types will undoubtedly have disproportionate adverse effects on one group versus enough in terms of race, gender, ethnicity, and other borrower characteristics. When such effects occur, the burden shifts to the lender to demonstrate not only that the data accurately predicts credit performance, but also that there are no alternatives with less discriminatory results. Precisely how to do so is unclear.

This uncertainty inadvertently undermines the policy goal of encouraging lending to creditworthy consumers who have moderate incomes. Most such loans are not highly profitable anyway, when done responsibly.  When they also carry extremely high regulatory risk, many lenders simply avoid the market. In other words, the goals of consumer protection and inclusion can work against each other.

Today, new technology makes it possible to have both -- if regulators provide ground rules on using non-traditional data that are clear enough to follow without enforcement fear. The CFPB has embarked on a path to provide it.

In our fireside chat last night, I said data is the circulatory system for innovative finance, the life's blood. If it can't readily flow and be used - within appropriate safeguards - finance will develop heart disease. The system will be weakened by blocked arteries and loss of oxygen, and some parts - with high potential to help consumers -- will die. Last night, the CFPB took on not one, but two, of the policy challenges most crucial to building a healthier financial system for everyone. Good for them.


Director Cordray's speech             

New report on Project Catalyst  

New CFSI report on principles for data aggregation  

My New Motto: Don't Be Boring

As someone who’s spent decades fascinated by consumer financial protection, I feel entitled to state the following truth.  One of the core problems is that the whole topic bores everyone to death.  Okay, not everyone – there are many lawyers and regulators and (I say this affectionately) compliance geeks who love it, but are there any consumers who do?  Anywhere?

The question is on my mind after a recent lunch with my former colleague Lyn Farrell of Treliant Risk Advisors.  As a top-tier consultant, Lyn travels every week and long ago attained super-elite Global Services status on United Airlines.  When our conversation turned to our favorite topic of how consumer financial information can be made more useful, Lyn caught me by surprise by asking if I’ve seen United’s new onboard safety video.  She proceeded, on the basis of having seen this little film exactly one time a  week ago, to describe it to me in detail with nearly full recall, scene by scene.

It’s hard to imagine disclosure information more boring to a seasoned traveler than the standard safety briefing.  The script usually still tells us how to fasten a seatbelt -- by inserting the flat metal fitting into the buckle and pulling the strap until the belt sits low and tight across our laps, and then to release by pulling up on the metal tab.  Those words were written during an ancient era before cars had seatbelts, which according to Wikipedia ended 46 years ago.  Is there anyone older than a toddler who travels in an airplane and does not know how to buckle a seatbelt? 

The fact that the script starts with this instruction and its accompanying how-to explanation sends an immediate signal to everyone on board:  stop listening, because we are not saying anything useful.  If the rest of the briefing is better, few people ever find out because they haven’t heard it.  And how about that language?  How many of us could even define the noun, “fitting”?  It’s a good thing we already know how to put on a seatbelt.

Various airlines – famously Southwest – have tried to recapture our attention to the safety briefing through humor, and now United has decided to change it up in their video.  Here is the link

Notice some things.

It makes you chuckle.  It’s not hilarious, but it makes you smile and even laugh, and more than once.

It surprises you repeatedly, both with its setup and at specific moments, such as when you first realize the woman has turned her sheet of paper into an origami airplane.

It’s culturally and visually rich.

It depicts sensory variety -- people stowing underseat luggage by sliding it through sand on a beach, people hanging in the air in a gondola, no one at all in an airplane.

It takes you on a journey not only with your eyes, but also with your ears as the iconic United theme, Rhapsody in Blue, plays in different musical styles for different kinds of places (more sensory engagement).

It includes cute animals.

I suppose it may get boring to see the video over and over, but it caught Lyn’s attention, and mine.  I’d love to know what “innovator” had the bright idea to break the old boring information out of the old boring mold, and whether they’ll change it again when people lose interest.

Meanwhile, there are lessons for consumer financial disclosure.  Granted, it’s a stretch for regulators to inject cute animals into their mandates.  Still, they – and financial companies too – should think about how to convey information in ways that are fresh, engaging, visually appealing, and actually interesting.  They should also think about ways to avoid shutting down the consumer’s interest at the very first glance, with the equivalent of a seatbelt-fastening tutorial.  They should make information highly useful. 

The CFPB has consciously moved in this direction, and more would be welcome, at least to actual consumers.

So, here is my new motto for consumer financial protection – DON’T BE BORING!

Tell me what you think.

Protecting people from themselves?

I’m thinking about this topic in drafting my book’s chapter on the current regulatory environment.  For those who have commented on my first post, thanks so much for the input.  I’ll welcome more ideas.

A core dilemma in consumer financial protection is how much the government should protect people from themselves, given that over-protection can do as much damage as under-protection by raising costs and drying up markets that consumers want and need.  This issue arises most dramatically regarding expensive products aimed at vulnerable consumers, where regulators worry that people can easily be preyed upon or are simply at high risk of making “bad choices” that will hurt them.   An example is payday and other short-term lending, with which the CFPB regulation-writers are currently grappling.  Should the government bar some options outright because too many people who choose them suffer harm, or should people be free to make such choices, or is the answer somewhere in the middle?

Even among mainstream consumers, there is a thorny question on how to assign “fault” when consumers have difficulties.  People get hurt in their financial dealings for a range of reasons involving varying kinds of fault by them and by others.  Sometimes they just make poor choices – spending, borrowing, or paying too much, saving too little, signing up for a financial product without studying it or comparing options  – even though the financial products they’re using are completely fair.  At the other end of the spectrum, sometimes people are intentionally preyed upon by unscrupulous providers that target and trick and exploit consumers who are vulnerable due to lack of education or sophistication, or are financially desperate.  In between, there is a wide spectrum of scenarios in which people get into bad situations where the fault, if there is some, could be thought of as shared.  Yes, the consumer could have done a better job of reading and understanding the product terms, but likewise the provider, knowing most people will not understand a complex product, could have made the terms more clear.  Most of these situations have, at their core, the problem that the consumer does not thoroughly understand the product.  Classic market forces often fail in consumer financial transactions because the “willing buyer and willing seller” do not have equal knowledge.  The seller almost always has an advantage.

Most financial transactions live in this murky middle ground.  Providers correctly meet legal requirements but offer complicated products they know most consumers don’t understand.  Consumers largely ignore the disclosures and sign up without comprehending the product, based on their trust in the provider and generally being too busy to delve into detail.  Buried in the product’s complexity are, often, features that work to the provider’s advantage.  The consumer could theoretically have found these features and sought to negotiate them or to find another provider, but didn’t.  Then something happens to bring this feature to the surface, and the consumer feels harmed.  Whose fault is that?

Before the financial crisis, the prevailing view was these kinds of problems were consumers’ fault – that if the provider had met the technical legal requirements,caveat emptor should rule.  Post-crisis, the regulators, and especially the CFPB, are emphasizing that products also must not be “unfair.”  Despite some legal case history on UDAAP  (the ban on unfair, deceptive, and abusive practices), it is not clear how these emerging standards should apply.

The issue can be framed as a question:  which party should have to be the active player, and which can be passive, in assuring that consumers have good outcomes?  Must the provider actively try to assure that consumers understand all adverse product terms, and maybe even try to assure that people make “good” choices, or even make the choices that are “best” for them?  Or should the provider be free simply to offer products that meet legal requirements, and put the onus on the consumer to be the active player who must understand and choose well? 

Again, the latter system has largely prevailed in the past and hasn’t worked terribly well, as evidenced in the subprime mortgage crisis, for one.  However, forcing the provider to be responsible for customers making “suitable” choices (a concept that shapes securities law), raises profound questions as well in terms of consumer freedom, risks of adverse customer stereotyping, the huge difficulties of enforcing subjective standards, and the potential to drive providers out of important markets due to fear of regulatory risks they can’t assess.

And what if the regulators decide, instead, to divide up responsibility between the customer and provider differently based on types of products, providers, and consumers?  How should they decide – using what criteria – on where to draw those lines? 

Again, please share your thoughts and stories with me, whatever your perspective and experience may be.

photo credit: Matt Van Buskirk

The Conundrum - How do we create a better system for consumer financial services?

THE CONUNDRUM

I’m working today on my book’s opening chapter, tentatively called, “The Conundrum.” 

How do we create a better system for consumer financial services?  We want it to have certain traits:

• High protectiveness -- against unfair, deceptive, and abusive practices and discrimination
• High availability – with many competing choices, and easy to access
• High affordability – with competitive prices, and with basic services for lower income people

And a corollary is that the system needs innovativeness, to keep all three of these traits improving over time.

Here’s the conundrum:  these characteristics don’t go together.  If we push for more of one, we generally get less of another.  High protectiveness, in the form of government regulation, tends to reduce availability and affordability, because providers respond by offering less of the highly-regulated product and/or by building regulatory costs into what consumers must pay.  Those effects are mostly invisible, but are very real. Conversely, low regulation can incent high availability, but can leave consumers at risk, especially since financial services are so complex that most people don’t understand them well.

Our system currently pretends these tradeoffs don’t exist.  Broadly speaking, politicians, regulators and advocates seek ever-higher protectiveness, as if this has no drawbacks for consumers.  Meanwhile the financial industry and its champions do the opposite, arguing for low regulation as if free markets never cause consumer harm.  Both sides usually mean well, but both views are wrong, or at best incomplete.

My book is going to grapple with this and argue for fresh thinking.  As I start this journey in chapter 1, the questions are clearer than the answers, but I’ve mapped out much of what lies ahead. 

First, the most critical thing – the reason for high hope – is that we can now leverage innovative technology as it changes everything – how financial services are designed, delivered, priced, selected, used, and regulated.

Second, we should accept that the old system’s reliance on mandatory consumer disclosures was a logical approach that has mostly failed.  Instead of burying consumers in paper and boring them with mouse-print, we need to provide  interesting information, especially in their smart phone.   This will improve protectiveness, availability, and affordability, all at once.

Third, let’s face the fact that disruptive innovative technology is about to blow the circuits of the regulatory machine.   Regulatory change takes years.  Market change – big change – is coming daily.  Old industries, and the old regulatory agencies built long ago to oversee them, are being undermined and superseded by whole new financial products and channels and whole new consumer behaviors.  We are going to have bad outcomes – under-regulation, over-regulation, inconsistent regulation, and outright wrong regulation – if we don’t begin to think differently.  One key, here, is that a new agency is on the scene, the Consumer Financial Protection Bureau, with a new design and new kinds of powers, that could make things much better, or potentially much worse.

Financial services can’t solve all the world’s economic and cultural problems, but they matter.  Optimizing the conundrum’s three traits can help people of every age, race, income level, and lifestyle build flourishing lives, whether they are students, retirees, workers, new immigrants, growing families, or entrepreneurs, whether financially on track or at risk, whether financially sophisticated or vulnerable.

I’m collecting stories as I write, from consumers, providers, advocates, regulators, educators, from in the U.S. and beyond, everyone.  Good stories and bad stories.  Please email me, and I’ll blog about what I learn from you as the book takes shape.