Heading to Harvard – a senior fellowship to write my book on innovation and regulation

I’m delighted to share some news about me.  I’ve been offered a Senior Fellowship at Harvard’s Mossavar-Rahmani Center for Business and Government in the John F. Kennedy School of Government to write my book.

A year ago, I left Treliant with plans to produce “the book that hasn’t been written on the financial crisis,” exploring what happened to consumers and what should happen now.  As I worked on it, though, I found the topic morphing under my fingertips at the keyboard.  My research, conversations, and thinking kept bringing me back to one theme, one force that will make consumers’ lives dramatically better, or frighteningly worse – or both – in the years ahead.  That force is technology.

Exactly a half-century ago, Ralph Nader’s book Unsafe at Any Speed launched the consumer movement and with it, a long public policy push to protect people through regulation. I participated in some of this in my early Washington career. Looking back, the phrase that comes to my mind is, it seemed like a good idea at the time. Actually, some regulatory reforms were clearly beneficial.  Others, not so much – many brought costs that outweigh their benefits. Still others originally made sense, but lost usefulness over time. Those, along with many that outright failed, generally linger on.

Through it all, our laws, rules, and regulatory agencies have accumulated and political debate has gradually calcified around a binary argument in which one side almost always wants more regulation, and the other nearly always wants less.

My book will argue that what’s needed today is different regulation. The existing framework was created to address 20th century issues using 20th century logic and methods. Suddenly, now, the digital age is making it both possible to do vastly better, and necessary to rethink what and how we regulate. With innovation rapidly reshaping consumer behaviors and disrupting traditional industries, change will overwhelm many aspects of the current system.  

I’m going to propose a new approach. It will put the consumer at the center. It will push aside deadlocked debates, explore today’s top consumer risks and opportunities, assess diverse regulatory approaches, and offer a new framework. We’ll look at the tech trends, industry activities, innovation models, consumer habits, demographics, regulatory tools, and political realities, among many things. We will aim for the tech alchemy that expands access and fairness together, instead of trading one against the other.

In the end, I’ll suggest both practical, short-term steps and a strategic vision for the future.

Importantly, my book’s scope will reach beyond financial services, to tackle a broad spectrum of consumer protection regulation and industry practice.

My working title right now?  Safe At Any Speed: Protecting Consumers in the Digital Age. 

Or maybe, “Regulation Innovation,” a seeming oxymoron….

The Mossavar-Rahmani Center at Harvard “sponsors research, facilitates dialogue, and seeks answers to problems at the interface of the public and private sectors.”  Its Senior Fellows are remarkable people ranging from top federal and state executives to leading thinkers in business and law.  I am honored to join their ranks. 

My appointment begins July 1. I’ll be moving there for a year in September to do research and writing, teach a study group, convene thoughtful people, and learn from Boston’s fast-flowering culture of tech innovation.

I will continue my other consulting, public speaking, podcasts, and (soon-to-launch) series of video briefings on regulatory compliance strategy (albeit with tightened prioritization).

I’ll also be continuing to write this blog. My journey over the past year included having a significant health issue arise last summer. I’m fully well now, but it’s a reasonable guess that cutting edge technology saved my life by both detecting and treating the problem. No one is more passionate than I about the promise of innovation. Still, too many technophiles don’t pause to ponder the coming risks.

This blog, and my book, will strive to understand both the upside and downside of innovation, and how best to foster and leverage the good while preventing the bad.

It’s a daunting task. If you’re like me, reading this already has you thinking of issues, themes, objections, and ideas.  Share them with me!  Let’s have a conversation, here. And invite your friends – including from outside financial services – to subscribe to the blog and podcasts by email, enter your email address at www.jsbarefoot.com, and join in the brainstorming.

We need two things – courage to see and speak the truth, and cross-pollination of insight.

Tell me what you think!

Disrupting the Law (War and Peace-Style): My new article in Fintech Law Report

Last January I spoke at a round-table about the four huge, converging tech trends that are on a collision course with consumer financial regulation. The event prompted an invitation from my friend Jim Sivon of Squire Patton Boggs  to write an article based on my talk for Thomson Reuters’ Fintech Law Report.

Lawyers being, well, lawyers, the magazine wanted a lengthy piece – 10 – 30 pages.  (I sometimes think attorneys and academics are the only folks still reading long material outside of books, as time and attention spans relentlessly shrink.)

I told Jim my piece would come in at the low end of the range. As I wrote it, though, I changed my mind.  I was fascinated by the journey this article brought on, trying to envision the actual world these tech trends are creating, and then trying to predict how the regulatory system will, and should, respond.

The article turned out to be l-o-n-g.  It’s not quite War and Peace (1,456 pages), but pretty close -- the longest thing I’ve written in ages other than my own evolving book.

I mention the length because I don’t want you to open it, start reading, put it aside until you have free time, and then never come back – since schedule slack will never come.

Instead, if you’re overloaded, start by scanning through the article.  It has two halves.

The Four Tech Trends:  The first part outlines the four big transformative tech trends. I’m pretty sure you’ll find some things here – maybe a lot – that you don’t know or haven’t thought about.  As the article explains, these trends are not only coming fast. They are also converging.  Once they intersect, everything will escalate and accelerate.

The Regulatory Disruption:   The second half tries to envision how law and regulation will cope with this shifting kaleidoscope of tech-driven change.

The article is HERE. 

Remember:

Financial services is the first industry to face tech-driven disruption while also being very highly regulated.

The innovation will both help and harm consumers. Regulators will be hard-pressed to allow the good and block the bad.

Innovation will not only make it necessary to update laws and rules. It will also make it possible to do better, at last.

Enjoy the article. Share your thoughts here at the blog. And subscribe by email…click HERE.

Harvard and Hogwarts: Magic for the payment system

Reducto!

That’s Harry Potter’s spell for making things blow up, which came to my mind last month at the Harvard Innovation Project conference, sponsored by PYMNTS.com and moderated by Fox Business anchor Liz Claman.

We met on the still-snowy Harvard campus in Memorial Hall, whose dining area strongly evokes its counterpart at Harry’s school, Hogwarts. A huge stained glass window and vaulted, timbered ceiling soared above long rows of tables where participants excitedly discussed the tech wizardry that’s exploding traditional payments.

As with fictional magic, these innovations have enormous power to do both good and ill, depending on who wields the wand and why. We saw delightful technologies that can bring almost unimaginable convenience and empowerment to consumers. Nearly all of them, though, can also be used for “dark arts” innovation that could confuse consumers and undermine privacy, data security, and control.  

These highlights – all intertwined – still have me pondering:

“Uberization”

First, a goal of many innovators is to make the payment process disappear for the consumer, submerging it invisibly into the experience being bought. People call this “Uberization,” since an Uber ride ends with our simply exiting the car – the trip payment, tip, and documentation were prearranged and are already done. 

Technology will enable this approach to spread. We will travel, for instance, with logistics being made and adjusted for us automatically as we move – flights, cars, schedules changed based on local traffic, and so on – with the payments handled invisibly. Similarly, in-store mobile payments will increasingly let us skip the checkout line and just walk out the door, barely noticing how much we’ve paid. This will bring great convenience but will also cause concern that consumers will spend more than they mean to. 

At the same time, though, mobile payments will fuel the growth of PFM apps – personal financial management – that can greatly increase awareness and smart management of our money activities.

Which trend will dominate, and for which groups of consumers? Will new technology make people better, worse, or neither at managing their financial lives?

The Internet of Things (IoT)

A second critical question is what principles should guide the burgeoning Internet of Things? Now that tiny computers are embedded in everything around us, the wizards are beginning to connect them with each other and with the larger world. These feed the big data ecosystem with information about us, and also enable us to do new things, or old things more conveniently.

Thus we learn that Amazon will give us a button for the laundry room so that when detergent runs low, one touch will bring us a new supply. We can control our home’s lights and smart thermostat remotely from our phone. Smart devices range from cars, cameras, keys and cell phones to TV’s, watches, baby monitors, and refrigerators. The mobile devices know where we are. Most know when we’ve used them. When did we leave our house, and return? Who was driving our car last night?

Sir Tim Berners Lee, creator of the Worldwide Web, told the Harvard group that if his house key really must communicate with his door lock, he would prefer the dialogue to be just between them, not stored in the cloud and accessible, legally or illegally, by others. With a wry smile he said, “We all ought to be very afraid, all the time.”

What principles should guide the linking and use of our data, and what control, if any, should consumers have?

Harry’s Invisibility Cloak

That brings me to privacy. Harry Potter has a rare magic tool -- an invisibility cloak that enables him to walk unseen among unsuspecting people. The devices around us are like this, watching us and listening without our noticing.

The X-Box that manages my living room flat screen sees and hears me whenever I’m near it – that’s how I can command it by voice or have it coach me in a workout. Merchants are using GPS to offer us nearby bargains, and using facial recognition cameras to analyze our reactions to products. Our devices capture the entertainment we choose, the topics we Google, what we buy, where we travel, and much more. We are rarely, or never, conscious of being invisibly observed and reported on, to unknown people with unknown plans for us.

We click “I agree” to all this, because we need our digital lives. Is this good, or bad? Should consumers have more granular control? Should companies only collect data needed for a narrow purpose, rather than all they can gather? Should consumers be compensated for their information? Would compensation and constraints impede pro-consumer innovation? Do people care? Is privacy dead?

Platform 9 ¾

The Harry Potter wizards enter their world at London’s King’s Cross train station, Platform 9 ¾, where a seemingly solid wall is a magic gateway to an alternate universe.

Those of us in financial services think of “payments” as a financial topic. Really, though, today’s payment innovations are a passageway into a new universe in which people will have whole new kinds of powers operating under whole new sets of rules. Massive data, analytics, and mobile technology are converging to make payments not a discrete process, but rather an integral, unseen component in our shopping, communicating, socializing, learning, playing, sharing, relaxing – nearly every aspect of our practical, economic, social, and emotional lives.

Are our industry and regulatory frameworks prepared to optimize this new world for consumers?

Wizard Wisdom

Hogwarts headmaster Albus Dumbledore says to Harry, “It is not our attributes that make us what we are, Potter. It is our choices."

What choices should financial services companies, innovators, and policy makers be discussing amidst all this tech magic? 

I would love to hear your ideas.

Too Busy To Think

I had lunch with a wise woman recently, a friend who is positioned through role and experience to see all the important trends in banking.  Over hot clam chowder in a snowy old city, we talked about innovation.  We compared notes – what we’ve been seeing, hearing, doing.

We agreed that today’s technology change is too big, and moving far too fast, for either banks or regulators to absorb it without wrenching disruption. Some shifts are still mostly hidden because they have not yet converged. When they do, everything will accelerate.

My friend put down her spoon and looked at me.  She said, “A lot of bank executives listen to these predictions and say, that’s all fascinating but I don’t have time to think about it.  Everyone has a mountain of practical things on their desks -- regulation, especially.  Plus they figure the big changes are far in the future. They think they’ll be able to address them later – or they plan to retire before they have to.”

She’s right, and it worries me. Every bank is working on tech issues of course, but many will be blindsided and broken by what’s coming at them.  If they disappear, customers will be hurt, even while benefitting from innovation.  And the regulators themselves face incredible challenges.

We explore these issues here at my blog (and in coming podcasts), so please keep coming back. Meanwhile, try the suggestions below, no matter how busy you are.

1. Move tech innovation from the edges of your work to the center.  The future hinges on it.
2. Name a chief innovation officer, on the senior team, and immerse the bank and board in learning.  Start with these topics: mobile payments, big data, artificial intelligence, natural language voice technology, and of course data security (plus, pay attention to digital currency).  Send your people to tech events like Money 20/20, Finovate and Singularity University. Watch TED talks. Read Wired and Fast Company.  
3. Shift from product- and channel-centric thinking to being customer-centric.  Then build solutions to wow customers and make their lives better, rather than using technology to automate what you already do.
4. Connect your innovation team at the hip – the business, IT and risk/regulatory people should sit in the same place and do it together. This is how nonbank innovators create new things.  It works better than silos.
5. If you’re going to close branches (and even if you aren’t), help your lower-income and senior customers switch to mobile, now.
6. Obsess on deserving your customer’s trust. Consumers will be choosing financial offerings through their cell phones, using simple tools that amalgamate information about product terms, complaints, customer ratings, comparison pricing, and much more. It is going to get easy to do this. People will migrate to providers they are sure they can trust about every single thing -- every product, rate, fee, sales tactic, everything.  Some will use a nonbank middleman, to help them select. Be ready to win that contest.

Here are two quick reads:

First, BNA’s Chris Bruce has a great overview of the fintech issues that will dominate this year (and was nice enough to quote me).  It’s below:

Reproduced with permission from Daily Report for Executives, 17 DER S-28 (Jan. 27, 2015). Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>

Bloomberg BNA - "Finance Tech: Cybersecurity, Payment Processing, Virtual Currency, Patents"

Second, consider this analysis of exponential technology growth by venture capital investor Niv Dror. It will stay in your head and make you think.

DIARY OF A MAD FINANCIAL SYSTEM

December’s release of early findings from the U.S. Financial Diaries Project should change our thinking on how to expand financial access.

The financial lives of lower-income families are mostly a closed book, poorly understood by both financial companies and policy-makers seeking to meet their needs.  Since generalized consumer data mask vast complexity in how underserved households operate, the Diaries project was launched to dig deeper.  Led by the Center for Financial Services Innovation (disclosure -- I serve on CFSI’s board of directors) and NYU Wagner’s Financial Access Initiative, the work is supported by the Citi Foundation, Ford Foundation, and Omidyar Network.  NYU’s Jonathan Morduch and CFSI’s Rachel Schneider organized a unique research team that intimately observed and chronicled the real financial lives of 200 families for a year. 

The results explode much of the conventional thinking about financial health and access. 

Volatility is the key

Amidst many rich findings, one key insight stands out:  For many struggling families, the problem is not insufficient income.  It’s insufficient stability – volatility and unpredictability, in both income and expenses.

Even in households whose annual income exceeds their annual bills, unmanageable dynamism in both inflows and outflows leaves many people in periodic deficit.  Since they lack a savings cushion and good options in today’s financial services market, these shortfalls create huge and lasting damage.

This means that addressing instability, itself, is critical.  Unfortunately, that focus is largely absent from traditional thinking.  For decades, public policy has assumed that these consumers mainly need more availability or affordability of standard bank products.  Even our terminology reflects this – we call people “underserved,” or “under-banked” and define the solution as easier “access” to banks.  Efforts ranging from the Community Reinvestment Act to regulatory jawboning urge banks to offer more products like basic checking accounts and especially credit – mortgage credit in particular.  While these measures have yielded benefits and remain important, they have settled into a fairly stale policy debate over a narrow set of options.  The Diaries research should catalyze new thinking. 

The researchers found widely varied consumer situations, most of which elude conventional stereotypes. Many participants work full-time, and more.  Some own their homes.  Some have college educations.  Some clearly are upwardly mobile, budgeting, building credit scores, and even saving.  They range from two-parent families to single mothers and mature single men, and include new immigrants and urban and rural households from coast to coast. Some participants rely on seasonal income (one in the tax advice industry) and on sporadic sources like caring for foster children or renting out rooms.  Some have bank accounts, mortgages, and credit cards. All, though, live at the financial edge, vulnerable to – and often in unsustainable debt because of – unexpected shortfalls. 

The Diaries participants use an array of financial strategies that weave together the formal and informal economy. Many rely on family for emergency loans and/or in-kind help, often in reciprocal arrangements that can work well for all. Some have both bank accounts and payday loans.  A high percentage have at least one serious health problem and manage that cost by adjusting medications (medicalexpense is a key source of volatility). Nearly half don’t have credit cards; of those who do, about a third are maxed out. Many are very savvy about their financial lives, managing income and outflows with precision timing to cover their bills (see my 6/30 blog post “Underserved and Underestimated").  Many use the Earned Income Tax Credit essentially as a forced saving mechanism. One person “saves through Mom” as the spending gate-keeper. Many save “in a sprint” when needed, or “save for soon” to meet upcoming needs but not long goals like education, retirement, or accumulating a financial shock absorber.

New ideas

The Diaries’ December kickoff featured Vox.com’s Danielle Kurtzleben and a panel of Professor Morduch; the Urban Institute’s Ellen Seidman; former CFPB official Raj Date; and Bill Bynum of Hope Credit Union in Mississippi, who also chairs the CFPB’s Consumer Advisory Board. The panel and invitation-only audience voiced optimism that the financial system can actually solve much of this problem.  Raj Date noted that people either borrow at 0% from friends and family or at 300% in payday loans, arguing for something in between (his company, FenwaySummer, offers a subprime credit card). Ellen Seidman cited the need for more community-focused institutions like the Hope Credit Union run by Bill Bynum, who pointed out that over 90% of post-recession branch closings have been in low- and moderate-income census tracts.

The session left me pondering the mismatch between the current system and financially-marginal families.  American Express estimates 70 million Americans live at the edge of the formal financial system, spending a lifetime average of $40,000 in unnecessary fees -- $89 billion in fees and interest in 2012.  This is a huge market with clear financial capacity.  These consumers can’t readily access mainstream products partly due to the volatility problem, which clearly limits creditworthiness by traditional standards.  Still, they can and do pay for financial services, at high prices, mainly at non-banks and in the informal economy.  Could new insights like the Diaries findings, combined with new technology and fresh thinking, bring them better options?

Here are some thoughts:

• Payday Lending and Bank Overdrafts: 

CFPB is considering how best to regulate these two financial products that aim to cover emergency cash shortfalls.  The Bureau should study the Diaries’ sharp distinction between consumers whose problems are inadequate income versus volatility.  Aaron Klein of the Bipartisan Policy Center has framed this as differentiating insolvency from illiquidity (see link here). Insolvent consumers are inevitably harmed by getting credit.  Illiquid consumers, in contrast, can benefit from emergency credit if it doesn’t trap them. This argues for practical regulatory standards on ability-to-pay and more broadly, rules that enable banks and non-banks to offer fair, profitable, and innovative products.

• Savings: 

As Bill Bynum noted at the Diaries event, most people experience financial volatility, but affluent people weather it through savings (and access to well-priced credit).  Maybe it’s time for both policy-makers and industry to emphasize savings options and incentives, and deemphasize credit. Ideas include more focus on automatic and opt-out savings arrangements and innovative savings rewards programs, including ones styled on sweepstakes and lottery models that foster wide engagement.

• Insurance: 

The classic financial tool for covering unpredictable events is insurance.  Advocates have long critiqued traditional credit insurance as a high-cost add-on that sometimes overstates coverage and/or is sold too aggressively -- not to mention that it only pays off the related loan.  Innovators have begun talking about broader, affordable insurance for people who live within their means but face timing shortfalls. Solutions should, again, distinguish between illiquidity and insolvency, and regulators should prevent abusive designs and sales practices.  Meanwhile, the continuing policy debate on health insurance reform should include focus on the outsized impact of unexpected medical expenses on financial system access, upward mobility, and government dependency, regardless of what the ultimate outcomes may be.

• Alternative structures: 

Another promising approach lies in linking successful nontraditional and informal financial arrangements into the mainstream system.  One example is Jose Qunonez’ Mission Asset Fund in San Francisco, which tracks repayment records of people borrowing within Latin American-style lending circles and creates data usable by mainstream credit bureaus, helping borrowers build formal credit scores.  There’s also growing exploration of how to use big data to develop nontraditional but predictive metrics on creditworthiness.

• Mobile PFM: 

Lower-income people are disproportionately high users of smart phones, including for financial tasks (see my 10/12/14 blog post The Benefits of Bitcoin).  This is a game-changer, potentially opening whole new ways for people to improve their financial lives.  Over time, PFM – personal financial management – in smart phones will permit effortless savings, budgeting, warnings against dangerous product terms, and much more. Think about BBVA’s Simple.com account, which takes the “simple” but powerful step of displaying the customer’s “safe to spend” number more prominently than the account balance.  Such services won’t help all consumers but as PFM tools evolve and converge, they could revolutionize consumers’ options and behaviors.

• Regulatory clarity: 

As I argued in Forbes last fall, a major barrier to widened financial access is the industry’s fear of enforcement and reputation risk in areas where regulatory standards are subjective and evolving, such as in defining discriminatory lending and “unfair and deceptive” practices.  The more regulators can reduce this uncertainty, the more financial companies, especially banks, will do in underserved markets.

• Community Reinvestment Act: 

It’s time to revisit CRA, which dates from 1977 when banks were local, banking was branched-based, and policy concerns focused overwhelmingly on access to credit, especially mortgages. The bank supervisory agencies are gradually updating CRA policy through new question-and-answer guidance. Their thinking should incorporate the Diaries insights and consider giving banks CRA credit for innovations of the kinds outlined above.

• Innovators:  

Speaking of innovation, both startups and the innovation labs at big financial companies are busily leveraging technology to reach traditionally underserved consumers affordably and in ways that offer better choices, better information, and more control.  Regulators should encourage these efforts, and carefully not stifle them, while also watching for signs of emerging abuse.

• More research:  

We need more research like the unique but costly Diaries project, deepening the insights, identifying high-impact solutions, and also looking at the longer-term patterns of these consumers.

If fewer people struggled with financial volatility, vulnerability, and damage, the larger economy and society would benefit.  So would financial companies serving them profitably as an “emerging” market, much like today’s expanding markets the developing world.

Follow the Diaries work here.  And if you haven’t seen American Express’ film Spent, download it for free and share it with your organization. 

Please also think about fresh ideas, for industry, regulators, innovators, advocates, or academics.  Send me your thoughts, and please share the blog with colleagues and others who might be interested!

The Benefits of Bitcoin

I had a birthday this month and two of my children – both in their 20’s -- gave me a joint gift. This left my daughter in London owing money to my son in Boston. She paid him in Bitcoin.

Granted we’re not typical since (full disclosure) my son works for Circle, a startup aiming to bring digital currency to the mass market.  While digital money is nowhere near being practical and safe for mainstream consumers, it has huge potential to get there and to bring us all enormous benefits.  It’s a mistake to dismiss it as either unserious or as intrinsically more risky than worthwhile.

Non-mystique

For most people, the first hurdle in understanding digital currency is to get past the weirdness factor, which is huge.  We hear about how Bitcoin was created anonymously, was arguably not legal, and sprang from conspiracy theories on the illegitimacy of the Fed.  We hear the odd words – the “block-chain,” “crypto-currency,” the “keys” stored in secure cold vaults, the “mining” that creates Bitcoin as big computers solve complex mathematical problems.  We are asked to trust that the supply will be permanently limited by some shadowy non-governmental entity.  We read of exotic-sounding scandals – Silk Road, Mt. Gox, mentions of murder for hire.  I’ve been in numerous sessions with very sophisticated financial people who just cannot wrap their heads around any of it. 

However, using Circle, and presumably its competitors, is simple as pie.  You sign up online, link your bank account or credit card, and voila, you have a Bitcoin account to spend as you want.  I just bought a shirt on Overstock.com and sent $50 to my London-based daughter.  It was in her account a minute later.

Digital currency is confusing because it doesn’t fit into any pre-existing categories. Government agencies are variously trying to regulate it as a currency, a payment system, and an investment asset.  It has attributes of all these, but it isn’t fully any of them.  That said, its main disruptive power, and potential consumer benefit, is as a new and better payments system. 

Benefits

Why better?  Because this innovation can make moving money essentially instant and free.  It can do this because the money moves on the internet. Remember how people originally found it hard to believe the internet is free, or later that Skype’s internet phone calls are free?  Digital currency is like that.  It simply bypasses the old infrastructure.  And its disruptive potential is huge because that old payments infrastructure is the opposite of instant and free – it is expensive and slow, domestically and more so in international payments. 

Here are a few recent examples from my own life.  I got a $15 late fee on a monthly payment I make automatically from my online bank account, which inexplicably took ten days to reach a huge national company.  Sending funds “online” to my Boston son always takes over a week, because my bank generates a paper check and puts it in the mail.  For my daughter, things are worse.  Before she and her husband moved from Washington, DC to London they visited their local branch of a huge bank to arrange to wire money into a new account at a UK bank.  When they got to London, they learned the branch’s instructions were wrong and spent hours trying to get their money, including 40 minutes of hold time during a call with their U.S. bank. We ultimately solved it through my personal banker, who also waived the wire fee and helped in other ways because I have more money than my kids do. I appreciated it of course, but financial systems should work for everyone.  I recently met a man who spent over $300 wiring a fairly small sum to his mother in eastern Europe.  It’s a situation ripe for disruption.

Think of all the consumer problems caused by slowness.  If payments were instant, a huge share of overdrafts -- and overdraft fees – would disappear as people stopped misjudging when deposits and debits would hit their accounts. Instant payments could also enable underserved consumers to drop costly check-cashing services, because they could pay pressing bills electronically as soon as they received the money to cover them. Real-time accurate balances might even foster better habits as people regain financial clarity and control, especially if they adopt phone-based mobile tools like ApplePay (See my prior blog post on Disruption).  Imagine also transferring money internationally with no currency exchange rate risk, or without even touching sovereign currencies at all.

Those benefits all flow from speed.  Now consider costs.  If money can move nearly for free, banks’ costs for low-balance checking accounts would plummet, widening access to mainstream banking.  International remittance charges would plunge too. Furthermore, near-zero costs enable tiny payments.  Whole industries’ online business models could shift as high-priced bundled content, like newspaper subscriptions, could profitably be divided and sold in small units, such as single articles for a few cents. In the developing world, people could access a new formal, regulated, transparent, cost-effective system far more fair than old markets, and far safer than cash.  My son at Circle likes to say someone in Kenya will be able to send 17 cents to someone in India, at no cost.

Risks

These potential benefits clearly bring enormous consumer risks.  For one, digital currency vehicles like my Circle account fluctuate in value with Bitcoin.  A mainstream system will have to protect people’s money or be limited to those who can afford to lose it. Business models will emerge with hidden pricing that will raise concerns. Global activities will strain our regulatory structures. We now have “ransomware,” in which computers are encrypted and held hostage until the attackers are paid off in Bitcoin. Threatened legacy industries will adopt both business and political tactics that could cause harm. Massive challenges lie ahead in consumer education, disclosure, privacy, data security, taxation, anti-money laundering, and fraud, although some of these cut both ways.  Digital currency is much more traceable than cash, partly because the whole system’s activities are open and visible on the internet.  On the negative side, instant money movement can obviously abet laundering and fraud, which is one reason the current system contains delays. 

Smart observers also warn, rightly, that nothing that’s highly regulated -- as this ultimately will be -- can stay “free” forever. 

Unlike many other payments innovators of recent years, Bitcoin is an open platform upon anyone with a good idea can build. Like the internet itself, it will undergo cycles of rapid innovation – it’s currently in the equivalent of the pre-Netscape era. Since it’s an evolving protocol rather than a static technology, no one knows what it will bring (including whether Bitcoin itself will be the dominant digital medium).  Still, some version of digital currency will likely become a major force, because its intrinsic advantage is so great.  Already central banks and payment system leaders are exploring how these innovations could strip time and costs out of today’s antiquated payments flow, and also how both traditional and new systems might harmoniously coexist in a new framework allowing digital-age progress while preventing most harm. People interested in consumer access and protection should join in this dialogue.

Let me know what you think.  And for one further note, see below.

My daughter’s anecdote

In case you’re interested, here is my daughter’s account of the London transfer fiasco.  Gotta love that last sentence….

To make a long story short - Nick went in to a (bank’s name) branch, told them we were moving to the UK, and asked how we could transfer our money to a UK bank once we opened an account.  They told him it would be no problem - that we'd just need to call once we had the new account and pay a $40 transfer fee- and gave him a sheet with our account information before sending him on his way.

Once we had moved and opened our account in the UK we called (bank name) to try to initiate the transfer.  We were on the phone, mostly on hold, for nearly an hour before we hung up on them out of frustration.  We were transferred between four different people who all gave us different information.  The second person tried repeatedly to sell us a product for bill paying exclusively in the USA. It was completely irrelevant to our current situation (which he, the bank employee, admitted) but still tried to make us answer the question "do you think you might ever use this product in the future" repeatedly. 

The next two transfers went up the management chain but ultimately we were told that we had been given the wrong information in the branch, and that we had to do the wire transfer in person, which we were at that point clearly unable to do as we had already moved.  Effectively (bank name) told us we could not have our own money.

Other solutions suggested by the highest-level person we spoke to were to increase the amount of money we could withdraw from the ATM (which would have incurred a fee each time we made a withdrawal). Useless.  We were also told to deposit a check with the British bank but were informed that it would take a while to clear and no one could estimate how long that could take. 

The best and worst of times for underserved consumers: revolution, mobile, and CRA

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.

Disruption!

My new opinion piece in Forbes crystallizes my belief that everything is about to change for financial consumers, the industry that serves them, and the government officials trying to protect them.

I think consumer financial services face the same kind of disruption that has transformed whole business sectors in recent years, ranging from how Amazon and online shopping changed  retail stores, to the breaking and rebuilding of business models in music, publishing, video, travel, taxis, and many more.  For financial services, the drivers are innovative technology, shifts in regulation, and changing demographics and lifestyles.

The risks and potential benefits for consumers are unlike anything we have seen in our lifetimes.  The industry will change radically, leaving a very different and dynamic competitive map.  As my Forbes piece argues, our regulatory system will need to be completely rethought.  It is simply not designed to meet the challenges ahead.

The My Forbes op-ed coincided with release of the I-Phone 6.  Apple Pay is going to supercharge financial change.  Think about this:  the I-Phone arrived in 2007, the same year the financial crisis hit.  Ever since, the industry and regulators have been busy with crisis-related work, while an even bigger challenge has been building up, in plain sight but not clearly seen.

Please read the Forbes piece linked above, tell me what you think, and come often to my blog as we explore this uncharted frontier.

I'll soon be offering podcasts and video briefings on these critical challenges, for boards, executive teams, business leaders, risk and compliance people, regulators, policymakers, advocates, and consumers.  I promise they will be unlike anything you'll find elsewhere.

Meanwhile, please follow me on Twitter and connect with me on LinkedIn.

Let's prepare for creative destruction!