By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in India and other parts of Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as writes occasional travel pieces for The National.
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Whenever I read the words “financial innovation”, I tend to break out in hives. So imagine my distress when yesterday, the Consumer Financial Protection Bureau– which is supposed to be one of the good guys in the financial regulation story– yesterday issued its Project Catalyst report: Promoting consumer-friendly innovation. (I have embedded the full report below). I quote from CFPB director Richard Cordray’s message introducing the report:
The Bureau’s Project Catalyst initiative, which we launched in 2012, is another example of our commitment to innovation. This office was a novelty at the time for a financial regulator, being solely dedicated to promoting consumer-friendly innovation in the marketplace. From the start, we viewed an emphasis on consumer-friendly innovation as a key component of the Bureau’s mission of making financial markets work for consumers. Project Catalyst works toward this goal through outreach to and collaboration with a variety of institutions, including financial companies (both large and small and both banks and non-banks), startups, and non-profits. We believe that innovative developments hold great promise for making markets work better both for consumers and for providers of financial services.
Through Project Catalyst, we engage with innovators in a number of ways. Project Catalyst’s Office Hours program brings us face-to-face with innovators to exchange information about how they are developing new products and services. Project Catalyst also has established policies and programs to collaborate with innovators to help advance consumer-friendly innovation…. (Project Catalyst report p. 2)
Okay, perhaps I exaggerate a bit. Maybe I don’t actually break out in hives but my fingers certainly start to itch and the only sure cure is to sit down and draft a Naked Capitalism post explaining the grift du jour. Because innovation in this context is almost always a synonym for looting, or for otherwise engaging in financial legerdemain. After all, the whole mortgage backed securities racket was a textbook example of financial innovation– and look where that got us. Or, as Lambert has written here:
Readers will recall that I have often flagged “innovative,” along with “disruptive,” “startup,” “founder”, and (in the business context) “ecosystem” as bullshit tells, and recommended that if you hear such con artist’s patter in a crowd, you should put your hand on your wallet or clutch your purse more tightly.
Financial innovation usually provides an excuse to skim off rich fees, which are particularly problematic in the consumer financial products sphere, where the consumers targeted for some of the sparkliest innovations are precisely those who can’t afford to pay such fees: the un- and under-banked.
At this point, it’s worth reviewing just how many US households lack access to basic financial services. Quite conveniently, the Federal Deposit Insurance Corporation (FDIC), last week issued the annual FDIC National Survey of Unbanked and Underbanked Households, which summarises the latest numbers on these phenomena (as of 2015). Take a look at this report, or, if you’re short of time, at least the executive summary.
More than a quarter of US households are either unbanked and underbanked, according to FDIC definitions, and are therefore forced to rely on alternative financial services (AFS) to address basic banking, financial, and credit needs.
In 2015, 7.0 percent of U.S. households were “unbanked,” meaning that no one in the household had a checking or savings account. At 7 percent, the unbanked rate was lower in 2015 than in any of the past years of the survey, but only fell by 0.6 percentage points from the first year the FDIC survey was conducted, 2009 (from 7.6 percent). In number terms, this translates to approximately 9.0 million U.S. households and includes 15.6 million adults and 7.6 million children (FDIC executive summary p. 1).
An additional 19.9 percent of U.S. households in 2015 were “underbanked”, which the FDIC defines as a household in which someone had a checking or savings account at an insured institution but also obtained in the past year financial services or products outside of the banking system from an AFS provider. AFS products include auto title loans, check cashing, international remittances, money orders, pawn shop loans, payday loans, refund anticipation loans, or rent-to-own services. The 2015 US underbanked rate was 20 percent, unchanged from 2013. In number terms, this translates into approximately 24.5 million U.S. households and includes 51.1 million adults and 16.3 million children (FDIC executive summary p. 1).
The FDIC survey revealed that unbanked and underbanked rates were higher among black and Hispanic households, less-educated households,lower-income households, working-age disabled households, and younger households (FDIC executive summary p. 2).
What reasons do unbanked survey respondents give for not having bank accounts? The most common was “Do not have enough money to keep in an account,” with 57.4 percent of unbanked households identifying this as one reason, while 37.8 percent cited this as the main reason. Other cited reasons were: “Avoiding a bank gives more privacy” (28.5 percent), “Don’t trust banks”(28 percent), “Bank account fees are too high”(27.7 percent), and “Bank account fees are unpredictable”(24.0) (FDIC executive summary p. 3).
Obvious Solution Ignored
The obvious solution to the unbanked and underbanked problem would be for the federal government to set up a Post Office Bank. Many countries have post office banks, which offer various types of basic financial products at reasonable rates. I’ve little to add here to Lambert’s excellent summary of the rationale for a Post Office Bank and to what Yves has also written about the report the Inspector General of the Postal Service wrote boosting the concept.
Another helpful change would be to reinstate usury laws– so that the sky would no longer be the limit for the fees that purveyors of both AFS and ordinary financial services (e.g., credit cards) could charge consumers for their products. Since the unbanked themselves identify high and unpredictable fees as reasons for not opening bank accounts and consuming traditional banking services, perhaps by offering basic products, at lower cost, they could be drawn into the system. Just a thought– albeit another rather obvious one.
Why: Because Markets
But in the US, neither solution is on the potential policy table. Why? The answer: Because markets. As regular Naked Capitalism readers well know, the standard neoliberal solution follows that template. So not altogether surprisingly, this area– access to basic financial products at a reasonable price– is yet another where the Obamamometer and his minions have underperformed, needlessly complicating the issue by chasing private market solutions and thereby not making much of a dent in the problem.
CFPB Chugs Innovation Kool-Aid
In this Project Catalyst report, the CFPB has not just swallowed but chugged the innovation Kool-Aid. Although the agency has both authority and potential to reshape the consumer financial product universe, so far, its actual performance has underwhelmed. The jury’s very much still out as to the effectiveness of both its rule-making and enforcement initiatives. I’ll mention just a couple of signature examples on the rule-making side. We continue to await the long-promised payday lending rules– and these of course, apply almost exclusively to the un- and under-banked. And for what now seems an eternity, the agency has been dancing around the issue of restricting mandatory arbitration clauses— under which consumers “voluntarily” and in advance waive access to going to court in disputes over credit cards and common financial products in favour of arbitration processes heavily stacked against consumer interests. Expect to see final regulations issued sometime later this year or early next in both areas, and the shape of these two sets of rules will tell us how seriously the CFPB regards its consumer protection responsibilities.
The other place to assess the CFPB’s effectiveness is on the enforcement side, where its performance has been underwhelming– most recently in its settlement with Wells Fargo over its egregious cross-selling practices. In her first of several posts on the issue, Yves called out the CFPB as a “toothless tiger” for agreeing to a $100 million settlement with the bank:
This “record breaking fine” is a rounding error compared to Well’s Fargo’s second quarter profits of $5.6 billion. Not surprisingly, investors shrugged off the fines. The bank’s stock traded up by 13 cents on Thursday, closing at $49.90. In other words, to the extent bank execs do “think again” before permitting fraud to take place on their watch, the lack of any impact on sacrosanct share prices and on the officials personally says they should see if they can get away with it, since the downside is inconsequential.
Project Catalyst
This is only intended to be a short post, and I’d like to zero in on only two problematic aspects of the Project Catalyst report, each concerning consumer credit.
Credit assessment
The CFPB is concerned to expand access to credit to consumers not included in the current system:
The Bureau estimates that 26 million Americans are “credit invisible,” meaning they have no credit history, and another 19 million have credit history that is either insufficient or too stale to generate a credit score. This problem disproportionately impacts Black consumers, Hispanic consumers, and those living in low-income neighbourhoods. Without a sufficient credit file, consumers face barriers to accessing credit, or are forced to pay higher costs for credit, which may prevent them from attaining meaningful opportunities.
Project Catalyst has met with a number of innovators seeking to expand access to credit or offer credit at lower interest rates to borrowers who may be excluded or mispriced by existing credit models. They see opportunities to expand access by incorporating non-traditional data sources and employing machine learning techniques in their underwriting methods. Other innovators report uncertainty about how to do this in a way that complies with the requirements of consumer protection laws. Project Catalyst recognizes that the use of non-traditional data and underwriting techniques may pose risks for consumers but remains interested in developments that would support expanded access to responsible credit while mitigating these risks (Project Catalyst report p. 22).
There are two problems here. First, is that the CFPB appears only willing to consider tinkering with the existing highly-defective and inaccurate credit reporting system. It wants more people to have credit reports, rather than recognizing the entire system is defective and that too much reliance is placed on it (not only for getting credit, but also for other purposes such as hiring decisions).
And a second problem is that overall, we need less household borrowing, period. Household borrowing is economically unproductive. The CFPB should be focusing on ways to reduce consumer indebtedness, rather than drawing more consumers into what will no doubt be “innovative” (aka high-interest, high-fee) debt traps.
Credit Reporting Accuracy and Transparency
The CFPB further tiptoes around the deficiencies in the current credit reporting system:
Consumers are often unaware of or confused about negative information in their credit files, such as items in collection. Project Catalyst has learned that a number of FinTech firms are developing tools and new approaches to improve consumer access and understanding of their credit score and history. For example, one approach being taken is to streamline the process for consumers to dispute errors on their credit reports directly. Increasingly, companies from large credit card companies to FinTech startups are also offering consumers more information about their credit scores and credit reports on a regular basis. Along with access to free scores, some companies also offer resources such as tools that model hypothetical scenarios and actions consumers might take to improve their credit standing. These insights may help consumers understand the impact of their behavior on their credit scores and prompt beneficial changes in their financial behaviour (Project Catalyst report p. 24).
Why is the CFPB leaving such important tasks to FinTech firms to address, especially “to streamline the process for consumers to dispute errors on their credit reports directly”? If the agency is concerned about accuracy in credit reports, why doesn’t it undertake to overhaul the credit reporting system, making it easy for consumers to challenge errors, requiring these to be corrected within a short, strictly defined time after the credit reporting service is informed of the error, ]and imposing large sanctions on firms that fail to correct mistakes?
The bottom line here: Why is Cordray cozying up to financial industry and start-ups, relying on them to correct real problems and deficiencies? As we all know, they’ve performed admirably in performing such functions in the past (irony alert). We don’t need another “business-friendly” regulator. Real regulators regulate. They don’t powwow and jolly about with the regulated.
I understand the CFPB faces hostility from the industry and from a significant number of members of Congress, and that anything it does will likely be challenged in courts. Some of these opponents are inherently hostile to the agency’s structure or mission (as I’ve recently written here).
Message to Richard Cordray: members of the financial industry aren’t your friends. No matter what you do, how many forums and seminars you conduct, and how reasoned and thorough your assessments are, this basic dynamic won’t change. You’re still going to get hauled into court. So please, accept that outcome as an inevitable. Start behaving like a regulator, and regulate, rather than relying on the innovation fairy to produce consumer-friendly financial products.
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Superb. Thank you, Jerri-Lynn.
If you want to see our Representatives really angry and fighting for “justice” for some of We the People (the Banksters) check out the c-span hearings with the CFPB. You will see how incensed and nearly rabid our Congress people can get when trying to right a wrong.
http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=374299
Perhaps, CFPB is throwing the Banksters a bone here?
And then there is this speedy ruling;
https://www.washingtonpost.com/news/get-there/wp/2016/10/11/federal-appeals-court-rules-the-structure-of-cfpb-is-unconstitutional/
Here’s my take on that court ruling (which I also linked to above): http://www.nakedcapitalism.com/2016/10/cfpb-looks-here-to-stay-what-does-the-future-hold.html
The obvious solution to the unbanked and underbanked problem would be for the federal government to set up a Post Office Bank.
It’s not just a solution for the unbanked but a MORAL IMPERATIVE that a monetary sovereign should provide inherently risk-free accounts and transactions in fiat for all its citizens and not just for depository institutions.
And since those accounts are inherently risk-free*, government-provided deposit insurance could and should be abolished too.
*Not just because the monetary sovereign can’t go broke but because it should not lend to the private sector either – to avoid violating equal protection under the law, typically in favor of the richer.
Post Office Banks are too sane to get any traction in this country. Because nail in coffin. PO banking would do away with the last vestiges of commercial banking – which is on such thin ice already. Obama saved the banks from their previous clever innovations by destroying the lives and savings of 10 million people via foreclosures; in turn destroying the real estate market and the stock market which then had to be kept on life support by infusions from the Fed which itself was forced to “innovate” with ongoing lavish gifts for the already-rich with the understanding that the rich would buy back their own crap and keep the economy from imploding… now there’s no functioning economy – nuthin’ left for purveyors of “credit” except to suck the life out of the “unbanked” – the last and final source of money for the banksters. Amazing. Does Obama think this is the American equivalent of giving loans to women in India? Obama’s model for the world: the universal pawn shop.
Well, I have hope the US will eventually do the right thing, having, as Churchill quipped, tried every thing else first! Besides, many more people understand the money and credit system than before the GFC.
You’ll never see our Congresspeople more incensed and nearly rabid with the quest for “justice” as you do when watching a Banking Commitee hearing on the CFPB. I mean our Representatives are out for blood in the name of some of We the People (the Banksters).
I tried to provide some links but was booted. Perhaps in light of the recent ruling of unconstitutionality of CFPB’s structure, CFPB are throwing the banksters a bone?
Our whole gov’t system, including all the regulatory agencies, has been designed to serve the interests of the elites, not the common citizenry. I’d have thought we’d have figured that out by now. At most, regulators like CFPB are created to mollify the angry peasants by showing them that “their” gov’t is doing something to protect them. Hell, even most of the low-level public servants believe that’s their job, too. But no political appointee is ever going to seriously go hard after the people whose dollars are lining the pockets of the politicians who appointed them.
The US gov’t system has always been about enshrining the rights of the powerful at the expense of the rest of us, while carrying on the charade that this is all for everyone’s benefit…and I don’t think any amount of whining from the plebes is going to change that basic M.O. The sooner we accept that the social contract is a philosophical fiction, the better off we’ll all be, imho.
Diptherio, one must admit that every government system in recorded history has been designed to serve the interests of the elites, so why should ours be any different. That it even pays lip service to such aims is progress that would astound (and annoy) most government officials who have ever lived — think Pharaohs, Roman Emperors, popes, Chinese dynasties, Confucius, the founders of this republic, Plantagenets, Henry Clay and so forth.
It looks like you have been hit by S.A.D. as so many of us in the northwest are at this time of year. I am not under the impression that you usually are so ready to knuckle under. Buck up, Bucky — we’re all bozos on this bus! :-)
Forgive please if this post appears multiple times. When I submit my browser just refreshes and places me at the top of the page, the post does not appear. Usually when a post is successful it appears immediately and my browser keeps me at the insertion point. I assume it’s the browser or local system, but so far can’t figure it out.
Unbanked. Underbanked. No access to basic financial products. Credit history. Expand access to credit. Improve the credit reporting system.
Yah, the words we use give us away. Yah, facilitate increased indebtedness, that’s the ticket. Make it easier to get those financial products. And correct the errors in one’s credit report. That’ll fix things, for all those people who live on the ragged edge because of credit and debt and NO FOKKING REASONABLE INCOME and looting.
And the remedy is what, again? A postal bank, another corruptible, divertible institution? Run by Whom? Some cadre of disinterested skillful honest capable civil servants?
A postal bank, another corruptible, divertible institution? JTMcPhee
Your concern is valid. Therefore a Postal Checking Service should be forbidden by law from:
1) Lending; this should be left to the private sector to avoid violating equal protection under the law.
2) Paying interest, since this would be welfare proportional to wealth, not need.
Nor should the poor be charged for services. Instead, let negative interest be applied to individual account balances above a certain amount, say, $250,000 US.
Good private and public institutions will always require persistent oversight from citizens, there is no magic form for good government or good business administration.
To the extent that one likes hot and cold running water, electricity, sewers and a good internet connection, one concedes one is going to live in a large, multilayered political and economic system.
For such a system to work well it requires constant maintenance and upgrades, ours has had neither for 40 years and we all (except for those few who have prevented that maint. and upgrades) suffer for that. Private looters, digital toll booths and financial scams will not reform themselves: if government isn’t the tool to correct that, what tool would you propose?
I was hoping some anonymous donor might act…
Because leaving it to the market has worked so well in the past…
It was only a matter of time ’til Dreadful Debbie and the payday loan thieves got to
the CFPB! Senator Warren Where are you?
Shilling for Bankster Moll Killary…
One major difference between Post Office Banks (Post Giro) and Traditional Banks is:
Traditional banks are debit transfers (credit the payor, then debit the payee) resulting in returned payments.
Giro (Post Office Banks) banks use credit transfers, first debit the payee, then credit the payor, so transactions cannot start if the payee does not have sufficient funds.
Returned items are a source of profit for the traditional banks.
In my rush to click send I believe I have payee and payor reversed.
A US Post office bank is not unprecedented. I’m a stamp collector, and have come across US post office banking stamps dating from the Roosevelt era. Wikipedia claims it existed until 1966.
The sad thing here is that a cornerstone of neoliberal consensus among US elites is that innovation is always good and innovation is what keeps the US out front. It could even be said that innovation plays the role of divine grace in this secular religion that rules Washington. The delusion is understandable I guess. After all, post WWII America had a very long spurt of prosperity that they would prefer to attribute to innovation instead of massive investment in our citizens and massive wealth sharing.
It’s not about innovation vs non-innovation; it’s about principles such as government should not insure privately created (“loans create deposits”) liabilities.
Let’s have a Postal Checking Service and make it as convenient to use as is technologically feasible so that no citizen need ever use a private bank or be limited to unsafe, inconvenient physical fiat, a.k.a. cash.
This reminds me of the Eagles song WASTED TIME. People don’t need credit, they need money.
But if they can’t get money, and disrupters want to get ’em into a credit ecosystem, it’s time to start singing . . .
Well baby, there you stand
With your little head, down in your hand
Oh, my God, you can’t believe it’s happening again
Your baby’s gone, and you’re all alone
And it looks like the end
[That’s when you still can’t find a job that doesn’t suck and leave you broke tryin to pay for being alive]
And you’re back out on the street
And you’re tryin’ to remember
How do you start it over
You don’t know if you can
You don’t care much for a stranger’s touch
But you can’t hold your man
[That’s when you’re back to lookin for a job, working for strangers who don’t give aa shlt about you, even though you’re depressed as hell]
You never thought you’d be alone
This far down the line
And I know what’s been on your mind
You’re afraid it’s all been wasted time
[This is a Peggy Lee moment, “Is that all there is? Is that all there is my friends . . . ]
The autumn leaves have got you thinking
About the first time that you fell
You didn’t love the boy too much, no, no
You just loved the boy to well, farewell
[That’s when you used to work really hard thinkin it would get you ahead, before you were indiscriminately fired in some private equity scam]
So you live day to day
And you dream about tomorrow, oh
And the hours go by like minutes
And the shadows come to stay
So you take a little something
To make them go away
I could have done so many things, baby
If I could only stop my mind
From wonderin’ what I left behind
And from worrying ’bout this wasted time
[That’s when you start thinking metaphysical thouhts]
Ooh, another love has come and gone
Ooh, and the years keep rushing on
I remember what you told me before you went out on your own
Sometimes to keep it together, we got to leave it alone
[Now you’re just lost. You need an income and you’re starting to think incoherently like a mystic]
So you can get on with your search, baby
And I can get on with mine
And maybe someday we will find
That it wasn’t really wasted time
Mmm, hmm mm
Oh, ooh, ooh
Ooh, ooh, mmm mmm
[Now you’ve lost it completely. If you were working the day job, it probably was . . . ]
***
How good were the Eagles? See for yourself on YouTube. Don’t waste your time wallowing in politics! Or at least not ALL the time.
I beg to differ. In the immortal words of Jeff Lebowski (the Dude): please man, anything but the Eagles!
Being someone pretty deeply involved in consumer finance, I sincerely believe that the elimination of federally-chartered banking preemption laws–as those laws relate to consumer credit card/finance usury rates, specifically–would work wonders for the pocketbooks of the middle class and the underbanked, throughout the country. (It would also pull the rug out from underneath the rent-to-own industry. Like the recent trend in the payday lending space, the rent-to-own sector would be forced to revert to installment loans.)
In tandem with that, focus upon a national political/lobbying effort to lower usurious state caps where rate limits were higher than, say, 15% a.p.r., and you’d have the makings of an even greater resurgence in the community banking and the small-regional banking sectors that would go a very long way to bringing back financial sanity to Main Street.
Bernie Sanders is spot-on when it comes to his proposal for sane consumer finance/credit card a.p.r. rates: https://berniesanders.com/issues/reforming-wall-street/
I realize the odds of this happening anytime soon are slim to none, but one can hope…
As someone who’s also worked quite extensively with some of this country’s (so-called) “leading” consumer finance scorecard developers, as well as with many of the industry’s major and “alternative” consumer credit data repositories, I’d also like to thank Ms. Scofield for what is nothing less than one of the most spot-on posts I’ve read, virtually anywhere, on- or off-line, about the core problems with the consumer/retail credit data (and credit-granting/underwriting) industry.
To state that: “There are massive/systemic flaws in the way consumers are evaluated for creditworthiness–and then granted or not granted credit–not just in the U.S., but throughout the world,” would be a gross understatement.
A minor crisis for a middle class person may be existential for a poor person. Without credit they may end up on the street, homeless, if they don’t have family or friends to help out, or government, or a pawn shop or the like. Some ethnic groups have credit circles, or extended family, which fulfill this purpose. But increasingly these safety nets are failing, putting even formerly middle class people on the street.
I think that government subsidized micro-credit of some sort is needed to supplement guaranteed benefits (food, health care, etc), but taking into account the money culture of the poor person (are they accustomed to paying back money debts, or do they reciprocate in other ways, or do they live a hand-to-mouth feast-or-famine existence, etc).
Financial innovation = toothless ufamizzum