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.