It would be an understatement to suggest that the industry is worried about the Consumer Financial Protection Bureau, but it does seem that the initial fear – almost panic – has moderated as the industry and our new regulators get to know each other.
Certainly there is plenty of concern. Hedge fund investor Tom Brown, never shy in stating his opinion, articulated the “it’s-a-disaster” argument. But as Jack Milligan wrote in Bank Director and Robert Johnson and Ken Rees discussed in an American Banker op-ed, the CFPB is doing many things right. They’ve won praise for their industry outreach. They’re focusing on leveling the playing field between banks and non-banks (e.g. payday lenders), and that is a good thing for our industry. They act like a think-tank, open to new ideas. They’re taking their time – the regulatory process as a whole takes time – so there will be no sudden moves and surprises.
So, why the worry?
The CFPB is new and different and bankers don’t like new and different on the regulatory front. The agency is politically charged and we are uncomfortable playing in that arena, particularly given the recession-based backlash against the industry. It has a broad mandate, more open to political influence, and we worry about where it might go – if not now, then certainly in the future.
All valid reasons for concern, for sure, but the greatest impact may come from new approaches to consumer complaints and from new disclosure requirements.
Give Us Your Complaints
The CFPB is building a huge database of consumer complaints. In fact, they invite complaints, especially about issues on their radar. The main landing page for the CFPB broadcasts: “Give us your input on prepaid cards. Consumers use prepaid cards to pay bills, make purchases, and to get cash. While these cards often look like and in some ways act like debit cards linked to bank accounts, they’re often very different. We want to learn more so that we can understand what protections might be needed for consumers — and we want your input.”
And they are making these complaints public, starting with release of credit card data: “No longer will consumer complaints only be known to the individual complainant, bank, regulator, and those in the public willing to pursue this information through the Freedom of Information Act. Instead this data-rich window into consumer financial issues will be widely available to everyone: developers, policymakers, journalists, academics, industry, and you. Our goal is to improve the transparency and efficiency of the credit card market to further empower American consumers.”
All of this is unique for a regulatory agency, but maybe just an extension of the “lay-it-all-out-there” world of Twitter and Facebook. And perhaps that’s not a bad thing. Banks that pay close attention to the needs of their customers and who build a strong reputation for service will do well in this environment. But such transparency will also generate pressure for lines-of-business to think even more broadly about compliance, not as a firm set of rules but as a broad set of attitudes about what is acceptable and what is not.
Second, there will be increased emphasis on disclosure, including for deposit products. The CFPB has clearly stated their “know-before-you-owe” philosophy. Director Richard Cordray summed it up with his comment that he wouldn’t accept a 70-page staff report without a clear and concise one-to-two-page executive summary so why should we expect consumers would “know” the contents of current book-length mortgage disclosures before they “owe”?
But it’s not just about loans – the focus is on mortgages this year, deposit products next year.
According to the influential Pew Charitable Trust report on checking account transparency, the median length of checking account disclosures is now down to 69 pages, improved from 111 pages in 2011! Wells Fargo, JPMorgan Chase, Regions and TD Bank have already adopted new short-form disclosures based on Pew’s model for checking accounts and many others have also changed their overdraft fee charges to bring them more in line with Pew’s recommendations.
However, such disclosures, which make it easy to compare fees between different checking accounts, carry the risk of commoditizing pricing if banks don’t provide clearly differentiated value propositions for their deposit accounts. Let’s face it – most banks haven’t done a very good job of differentiating their products or services. This is especially true for community banks, which generally can’t leverage breadth of distribution into pricing power, or don’t have the scale and skill to create uniquely differentiated offerings. For them, commoditization of pricing will further narrow spreads and shrink the meager remaining sources of fees.
So should you be worried? Certainly. But you should be less worried about an agency run amok and more about the changes in products, services – and competitive environment – that will result.
Is there time to adjust? Absolutely. The direction of the CFPB is clear, and change won’t happen overnight, but it is coming. And you can prepare for this new environment today by adopting the following measures:
Re-evaluate your service delivery infrastructure. This goes beyond simply “smile-at-customers” or “respond-to-complaints-within-24 hours” mandates to include collecting consumer perceptions about your bank and services and acting on them for continuous improvement.
Re-build your core checking products. There are many reasons to do this, not the least of which is the changed revenue model as a result of lower fee income, depressed margins, and shifts to alternative channels. But the CFPB’s planned disclosures, and potential price commoditization, will make it more difficult for financial institutions whose core products were built for a pre-crisis environment.
Start now. Large institutions are already addressing these issues and they have the resources to do it. U.S. Bancorp CEO Richard Davis reflected the consensus opinion with his comment that the regulatory threat had mostly passed, by which he meant the big hits had already occurred and the future direction was clear. Yet, community banks still need help addressing the new complexity of the banking environment and the time to start is now.
Mr. Kerstein is president of Austin, Texas-based Peak Performance Consulting Group, which specializes in retail and community banking. He can be reached at email@example.com.
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