In a new report, the CFPB discusses its approach to FinTech and financial innovation, its Project Catalyst initiative, and marketplace developments the CFPB views as potentially beneficial for consumers. The report, entitled “Project Catalyst report: Promoting consumer-friendly innovation-Innovation Insights,” was released in conjunction with remarks given by Director Cordray at Money 20/20, a large conference focused on payments and financial services innovation. Launched in November 2012, Project Catalyst is the CFPB’s initiative for facilitating innovation in consumer financial products and services.
In his remarks, Director Cordray responded to widespread criticism of the Bureau’s heavy-handed enforcement actions against start-ups, stating that the CFPB’s enforcement actions against FinTech providers “should not be misread or overstated.” He stated that the CFPB is seeking to hold FinTech providers to the “same standards” and “same expectations” that apply to other providers of consumer financial products and services and is “not looking to punish anyone merely for raising novel issues that present unsettled points of law or questions that fall into unforeseen cracks in the regulatory framework.” He described the CFPB’s enforcement actions to date as having “addressed basic meat-and-potatoes issues such as companies that promise one thing to their customers and do something quite different.”
In addition to reviewing Project Catalyst developments in his remarks, Director Cordray stated that the CFPB is “gravely concerned by reports that some financial institutions are looking for ways to limit, or even shut off, access to financial data rather than exploring ways to make sure that such access, once granted, is secure.” His comments appear to be directed at institutions that have not permitted their customers to use third-party financial aggregators that allow consumers to compile their financial information from multiple banks in one digital setting. In what seemed to be a warning, Director Cordray stated “Let me state the matter as clearly as I can here: We believe consumers should be able to access [their financial data from financial providers with whom they do business] and give their permission to third-party companies to access this information as well.”
Director Cordray’s remarks and the report indicate that, in the CFPB’s view, financial innovation offers both benefits and risks for consumers and requires the creation of a “level playing field” for all market participants. In the report, the CFPB provides examples of how new or improved financial products and services can benefit consumers, such as through expanded access, improved consumer control, and lower prices, but also warns that it “will take action as necessary to protect consumers from innovations that may be unfair, deceptive, abusive, or discriminatory.” The “level playing field” comment appear to signal additional regulation and enforcement activity in the FinTech space, notwithstanding the Bureau’s repeated attempts to claim that it is not attempting to stifle financial innovation.
With regard to Project Catalyst, the report discusses the project’s goal of establishing effective communication channels with entrepreneurs and innovators, the CFPB’s efforts to coordinate with various state and federal regulatory agencies and international regulators, and its one-day “Office Hours” program held periodically throughout the year in San Francisco and New York “at which companies and other interested parties can engage directly with subject-matter experts at the Bureau.”
The report also reviews the CFPB’s trial disclosure waiver policy and its no-action letter policy. (We have written about the no-action letter policy’s numerous shortcomings, including its failure to provide immunity against private litigation or enforcement actions by other federal and state government agencies.) In addition, the report discusses various CFPB “research collaborations” such as its pilot program with American Express to evaluate the effectiveness of certain practices to encourage prepaid card users to develop regular saving behavior.
The last section of the report discusses various “marketplace developments that may hold the potential for consumer benefits.” According to the report, Project Catalyst learned of these developments through its engagement with “a variety of Fintech and other market participants.” Such developments include:
- The development of cash flow management tools to help address the mismatch or time lag between expenses and income, such as services that enable an employee to access accrued wages earlier than his or her regular payday or deduct a portion of his or her wages and apply it to recurring payments to help the consumer with the mismatch of timing and frequency between when income is earned and when bills are due.
- Efforts to develop compliant ways to incorporate non-traditional data sources and employ machine learning techniques in underwriting methods to expand access to credit.
- The availability of personal financial management tools that allow consumers to allow third-parties to access their financial records. (As noted above, Director Cordray, in his remarks, stated that the CFPB is concerned by reports that some financial institutions are looking for ways to restrict third-party access to financial data. In the report, the CFPB states that the loss of such access “could cripple or even entirely curtail the further development of such products and services” and states that the CFPB “is interested in supporting the ability of consumers to access and share personal information about their own financial lives with others where they believe it is in their best interest to do so.”)
- The entrance into the student loan market of FinTech companies that offer borrowers with high-rate student loans an opportunity to refinance at lower rates (with the CFPB noting that such companies “also report that certain practices by incumbent student loan servicers” may increase cost and present consumer risks, such as problems in obtaining accurate payoff balances from the originator.)
- The attempt by several companies to adopt or build more modern technology platforms to improve mortgage loan servicing, such as the use of machine learning to detect at an earlier stage when borrowers are likely to suffer financial distress.
- The development by FinTech firms of tools to improve consumer access to and understanding of their credit scores and history, such as streamlining the process for consumers to dispute errors on their credit reports directly.
- Efforts to make peer-to-peer payments more consumer friendly, such as through the development of services that enable consumers to transfer money quickly at lower cost by relying on digital channels.
- Offering of services that facilitate savings, such as services that help consumers determine how much they can afford to save based on their income and expenses and automate their savings.