Americans' Financial Lives "in ruin," CFPB Nominee Says
Americans' Financial Lives "in ruin," CFPB Nominee Says
Walmart Poaches Goldman Execs, US "Superapps" Are Anything But
Hey all, Jason here.
When I first got into financial services, my concept of regulators was as the “police” of the ecosystem: that most companies followed the law, and the regulators were there to investigate and punish the ones that don’t (how young and naive I was!)
The reality is much more complex. In practice, regulation isn’t always black or white, and management’s decision making is often about degree of risk, likelihood of getting caught, and the size of penalty if they do. Legal expenses and regulatory fines are often thought of as just a cost of doing business.
Ostensibly independent agencies with mandates set by Congress have politically appointed directors. Business models or practices that may be legal or only impact a small slice of consumers may earn a disproportionate amount of regulatory scrutiny as ‘easy targets’ - think small-dollar loans and overdrafts, anything involving military service members, and the credit bureaus.
Thus it becomes important not just to pay attention to regulatory agencies, but to the regulators themselves — and that’s how I came to watch 3+ hours of Senate confirmation hearings this week. I tried to add a little humor to this analysis with some choice GIFs — enjoy!
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Chopra and Gensler on Track for Confirmation
This past week, I tuned in to watch the confirmation hearings for Rohit Chopra, for CFPB Director, and Gary Gensler, for SEC Director. These hearings are largely staged political theater, with the nominees trying to say as little as possible and committing to nothing. Senators use their questions to score political points with their constituencies or get air time for pet causes.
While this hearing hewed pretty closely to that formula, the Senators’ questions and Chopra and Gensler’s answers offer clues about what the priorities are for the soon-to-be-confirmed CFPB and SEC Directors.
COVID and Economic Fallout Frame CFPB Priorities
Chopra’s written statement is worth taking the time to read (it’s only two pages).
Combined with his testimony in the confirmation hearing and publicly available data from the CFPB complaints database, we can draw some informed predictions about the CFPB’s regulatory agenda.
Six Key Themes from Chopra’s Testimony
One: COVID, Economic Dislocation, Racial Inequities
The economic dislocation caused by COVID -- and its uneven impact -- were themes woven throughout Chopra’s answers. Unemployment, risk of eviction or foreclosure, debt collections, and errors on credit reports are major problems, and disproportionately impact communities of color who have orders of magnitude less household wealth to help weather the storm.
As the end of the pandemic begins to come into view, protections and accommodations will begin to expire - potentially putting additional burdens on these groups.
Chopra has made clear that protecting consumers’ rights, especially vulnerable consumers most impacted by COVID and the current economic climate, will be an overarching theme should he be confirmed.
Two: Big Tech, Data Privacy, Security, and Transparency
One somewhat surprising recurring theme in Chopra’s answers was “big tech.” Several of his answers focused on big tech, in some cases to seemingly unrelated questions.
There’s no doubt that big tech has and will continue to wade into financial services, so it is worth taking a minute to parse and contextualize his statements (emphasis added):
“It will also be critical for the CFPB to take a hard look at how big tech companies and others are entering financial services, the impact on our privacy and our personal data. So we must look at today’s problems but also anticipate tomorrow’s risks.”
“We also need to understand more clearly how mass data collection on all of us is impacting our privacy, the security of our data, and ultimately the decisions made by these algorithms. I think there’s real questions about transparency. I’ve noted that there are many types of algorithmic decision making where simply people are unable to ascertain why a certain decision was made. It has raised questions about discrimination…”
Combined with Chopra’s statements on competition and fostering a level playing field, I read these answers mostly as a warning to “big tech.” Tech no doubt has the potential to lower costs and expand financial inclusion; the warning here feels directed at companies accustomed to trading in user data to drive advertising revenue (Google, Facebook, Amazon).
Comments on “how data is used” and “transparency” are clear nods to the potential for discriminatory outcomes and potential fair lending problems from novel data sources (eg, non-FCRA compliant) and innovative approaches to underwriting risk, like machine learning and artificial intelligence.
Incumbent banks are likely more attuned to ECOA risk and have guard rails in place to what data sources are used and how; Chopra has put big tech (and fintech, for that matter) on notice that the CFPB will take data privacy / data security seriously, and that appropriate controls need to be implemented to monitor and mitigate risk of discriminatory impact from evolving technologies and practices.
Three: Competition on a Level Playing Field
The idea of fair competition and a “level playing field” came up in both Chopra and Gensler’s testimony. Responding to a question from Senator Jon Ossoff (D-GA), Chopra said (emphasis added):
“Too big to fail is a huge problem Congress sought to fix in Dodd-Frank, and we should continue to ensure that that happens. We want to make sure there’s a market structure where small banks, small financial institutions can compete fair and square.”
On its face, this response implies that smaller banks are uniquely and always disadvantaged vs. the largest institutions. While in many cases that is true, particularly in the cost of meeting regulatory requirements, it isn’t always the case.
Some of the most profitable banks (on an ROE basis) are small banks; pressed to innovate, they’ve developed new business models and distribution channels by partnering with fintechs. A carve out from interchange caps has also fostered brisk business in small banks serving as sponsor banks for “challenger” bank fintech products.
Asked specifically about Walmart’s not yet defined fintech and the prospect of it seeking an ILC charter on the heels of news it had hired key execs from Goldman Sachs’ Marcus, Chopra’s answer is notable (emphasis added):
“I don’t want to see a banking system or financial services system where new marketing entrants cannot get in, cannot compete and win the day. Dominant players should not be able to squelch out competition…”
I read this as broadly good news for fintechs, commercial businesses, and even big tech wanting to offer financial services, either via partnerships/embedded financial services, or by seeking a national bank or Industrial Loan Company (ILC) charter. They will need to play by the same rules as everybody else, but incumbents shouldn’t count on Chopra to help enforce their regulatory moat.
Now, the CFPB itself isn’t charged with granting charters -- but Chopra, if confirmed, does get a seat on the FDIC board, which itself has authority over applications for deposit insurance.
Four: Credit Reporting and Debt Collections
The three major credit bureaus make a pretty easy political target across party lines. Typical consumers probably understand that their credit score is important to their ability to and cost of accessing credit, but they are almost certainly less knowledgeable about the intricacies of furnishing, accessing, and using credit data by the different players in the system.
The bureaus are big and seemingly opaque and unaccountable, making them the perfect target. Biden took swipes while campaigning, by proposing a public credit reporting agency to be housed within the CFPB.
In his prepared statement, Chopra also points the finger at credit bureaus, linking them to other hot topics like debt collectors and medical debt, saying (emphasis added):
“Consumers continue to discover serious errors on their credit reports or feel forced to make payments to debt collectors on bills they already paid or never owed to begin with, including for medical treatment related to Covid-19. Many of these longstanding, pervasive problems will make it more difficult for our country to sustain a full recovery.”
In his testimony to the committee, he also said of credit bureaus (emphasis added):
“Consumers are the product, usually, not the customer.
That’s some of the big issues we’re facing not only when it comes to credit bureaus, but also the mass databases collected by big tech companies that are increasingly part of financial services.”
Beyond more rigorous enforcement of existing consumer rights under FCRA, it’s unclear what action if any a Chopra CFPB would take to reform the credit reporting industry.
The topic of a public credit bureau within the CFPB wasn’t mentioned in Chopra’s prepared testimony and didn’t come up during the hearing.
Five: Student Loans and Servicers
Student loans and student loan servicing get relatively short shrift -- the topic isn’t even mentioned in Chopra’s prepared testimony. However, having served as the first Student Loans Ombudsman, you can be sure the issue won’t go unexamined by a Chopra-led CFPB.
In his testimony to the committee, he stated (emphasis added):
“It is critical for regulators not to make the same mistakes that were made in the lead up to the financial crisis. The costs of inaction were too high, and some of the same issues that we saw in the mortgage servicing market, I think were creeping into the student loan servicing market.
We are at a critical moment when so many borrowers are going to have to restart their payments, and servicers communicating and make sure borrowers can navigate their options, and it is all done lawfully, that is very critical.”
The CFPB is limited in its power here; it can ensure that borrowers’ rights under the law and the terms of their loan agreements are protected, including protections granted by the CARES Act and other COVID-relief legislation; but more impactful measures on student borrowing will need to come via executive action or Congress.
Six: Innovation Opportunities in Payments
I’m surprised with the frequency that payments come up, both in Chopra’s testimony and Gensler’s.
From his testimony to the committee, Chopra seems to view payments both as an area of competition with other countries (China) and an opportunity to innovate to consumers’ benefit (emphasis added):
“One of the things that our Federal Reserve chairman has talked about and others is modernizing our payment system, so that we can have a more real-time system. We cannot be falling behind other countries. We see that China is, in many ways, investing in faster payments, in a stablecoin. These are things that will help consumers and businesses get money faster to their benefit, and I strongly support efforts to modernize that payment system so that everyone can have equal access.”
“The faster consumers can control their money, and sometimes they have to wait days and days for it, that makes it hard for them to make ends meet. I referenced to one of your colleagues the importance of us having a modernized payment system. All of these actions will make it easier for consumers to have control of their own destiny and ultimately lead a strong financial life.”
SEC: Stable, Competitive Markets and Investor Protection as Guiding Principles
Remember, this was a joint hearing; Gary Gensler was also testifying before the committee. He got a slew of questions on topics like what constitutes “material” when it comes to disclosure requirements, NASDAQ’s proposed board diversity rules, digital assets / crypto, and, of course, payment for order flow.
Like Chopra, Gensler talked a lot without really saying that much. If Chopra’s refrain was “consumer protection,” Gensler’s was “investor protection,” a mandate he argues includes protecting investors from fraud, manipulation, and scams.
When it comes to specific issues like the rise of “free” brokerages like Robinhood, practices like payment for order flow (PFOF), and crypto-assets, Gensler is taking a measured, technology-agnostic approach.
He stuck to his talking points and his emphasis is squarely on investor protection and the efficient, fair, orderly, and competitive operation of markets. Some key quotes…
On payment for order flow (emphasis added):
“Just a couple of handful of financial firms are buying most of the retail flow in America. I think it raises a question of.., what if a company, through the natural economics, network economics, collects and concentrates and dominates a field?
What does that do to the pricing of capital in this country? …and best execution [for retail traders], what does it mean to be best execution in this context?”
“Technology has provided greater access, but it also raises interesting questions. And the one that you mentioned about ‘gamification’ also raises interesting questions about what does it mean when balloons and confetti are dropping and you have behavioral prompts to get investors to do more transactions on what appears to be a free trading app, but then there’s this payment behind the scenes, this payment for order flow…”
On crypto assets (emphasis added):
“These innovations have been a catalyst for change. Bitcoin and other cryptocurrencies have brought new thinking to payments and financial inclusion, but they’ve also raised new issues of investor protection that we still need to attend to.”
“It’s important to stay true to our principles of investor protection and capital formation, but at the same time be technology-neutral.”
And on payments (emphasis added):
“Central banks around the globe are really looking at how to provide more inclusive payment structures, more inclusive payment tokens, and so that’s one area as a catalyst for change. But also other payment system providers looking to say, how do we provide payment systems that operate 24 hours a day, 7 days a week, and at lower cost?”
Walmart Poaches Goldman Consumer Banking Execs
News broke last week that Omer Ismail, a Goldman Sachs partner who just months ago was promoted to the top post for Goldman’s fledgling consumer banking efforts, jumped ship in a surprise move — for Walmart.
Dave Stark, a longtime Citibank vet who oversaw partnership initiatives for Marcus, including Apple Card, is following Ismail out the door. (I worked with both Ismail and Stark during my time at Goldman.)
A couple quick thoughts on this:
The move definitely caught Goldman powers-that-be off guard. Ismail only took the reins from Harit Talwar in November; Stark made partner in 2018, but this is a title people rarely give up willingly.
A puff piece on the 15 execs guiding Marcus that turned up in Business Insider a few days after these exits feels like Goldman doing damage control.
Details remain slim on the Walmart & Ribbit fintech (I did a deep dive into the history and possibilities here.)
Given Ismail’s background in investment banking and private equity and Stark’s background in credit risk and partnerships, I’d say the odds have increased that Walmart’s fintech will make a major acquisition, offer some type of credit product (sorry Capital One and Affirm!), and — just maybe — pursue (or acquire) an ILC charter (again).
US Fintech “Superapps” Aren’t So Super
I’ve noticed a trend in the last couple months of US consumer fintechs beginning to refer to themselves as “superapps.”
Paypal, Revolut, M1 Finance, and Unifimoney, among others, have all begun touting themselves as “superapps.”
While some of these fintech “superapps” do offer third party services by way of integrations (think TransferWise built-in), white labelling, or a marketplace, none of them offer the type of operating system-like functionality of the apps that coined the term, such as WeChat, Grab, and Baidu.
Given the robust app ecosystem in developed countries, there already exists a “best in class” app for most every vertical; this dramatically reduces the utility and likelihood of a WeChat-style “superapp” emerging in the US or UK, for example.
Instead, this feels like the latest play for nascent startups to describe themselves as anything other than what they are - financial services companies.
By calling themselves “technology companies” or, now, “superapps,” they give investors a fig leaf to cling to in order to justify valuation multiples that a “bank” or “financial services company” wouldn’t.
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