It is often the case that consumer advocates and technology-driven financial innovators ("TDFIs") work in separate worlds, each striving to enhance financial opportunity afforded to low-income households but somehow interacting only within their own spheres.
Part of it stems from how they draw funding. With the rare exceptions, foundations pay for the work of advocates but financial institutions finance the innovation think tanks. When it is time to speak with regulators, they convene in separate meetings. Naturally, there is little cross-over in the attendance at their conferences. In fact, there is little that even looks similar about their conferences. I've attended both in recent years. Believe me, it is more fun to hang out with the TDFI-supporters.
The No-Action Letter
A comment period ending tomorrow could potentially provoke evidence of this contradiction. The CFPB is asking the public to weigh in on the idea of providing a conditional regulatory moat to selected financial products. The implied terms of the agreement are relatively simple: if both parties agree, then the CFPB will publicly commit to not interfering with a new financial innovation, provided that the firms involved share their data with the Bureau. For the Bureau, such a deal means that it can use real data to learn more about effective tools for realizing goals that will ultimately provide benefit to consumers. For the company, it means that it can proceed without uncertainty about the CFPB's purview.
It is important to underscore that the "Policy on No-Action Letters" would be a tool for only a select set of products. Recently, for example, the CFPB's Project Catalyst program established a partnership with H&R Block on a experimental tax-time savings product.
Catalyst's mission is to "support innovators in creating consumer-friendly financial products and services." A recent request issued by the Bureau asked for applications relative to new disclosure forms provides an example of the kinds of initiatives this mandate has fostered. This passage in that document outlines the legal authority granted in Dodd-Frank to the CFPB.
Section 5532(b)(1) authorizes the Bureau to issue model forms that ‘‘may be used at the option of a covered person.’’ Section 5532(b)(2) sets forth three ‘‘minimum’’ features such model forms must possess. These provisions do not limit the trial disclosures that the Bureau may approve under Section 5532(e). In that provision, Congress gave the Bureau authority to permit testing of disclosures that violate disclosure requirements imposed directly on covered persons by the Bureau.
There are two ways that people try to advance the interests of consumers
While consumer advocates will likely propose a cautious approach to any regulatory concessions, the innovation-inspired cohort will clamor to affirm the possibilities that would be affirmed from the concept.
The consumer movement was born from the combined sense that economic inequality was a threat to our society. It gathered energy from a growing perception that industrialized society was forsaking safety for profit. Although it could be traced back to the Progressive Movement, today's version is a strain of activism that began in the 1960s and early 1970s. Books by Rachel Carson (Silent Spring), Ralph Nader (Unsafe at Any Speed), and Michael Harrington ("The Other America"), this articulation of reform was built on the foundations of legal advocacy and government intervention. In most of its iterations, the point was to use legal reform to redress the perceived negative externalities of a modern industrialized economy.
Consumers advocates have done a great deal to level the playing field between large financial institutions and American consumers. After fifty years, the movement has helped to pass many important laws. Those achievements would include the Truth-in-Lending Act, the Truth-in-Savings Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act. The Consumer Financial Protection Bureau might not have come into existence without their work.
But recently, a new approach has emerged that focuses on adapting the power of free markets to drive the development of better consumer financial services. With very few exceptions, their plans involve the use of disruptive technology, and usually these efforts find their expression in the context of a start-up. These are the Technology-Driven Financial Innovators.
Operating through the framework of a start-up confers a number of distinctions upon TDFI, because it means that most are limited to only one idea, are usually very small, and can have short lifespans. They live in an ecosphere that draws its support not from foundations, as is commonly the case for advocates, but from venture capitalists. That context changes how these organizations plan for the future. The patience of a VC firm can be short. Compared to the slow deliberation of a rule-making, it can seem meteoric. The product-driven solution accepts risk; several failures are a small price to pay for one system-altering success.
In providing a tonic to the anxiety of regulatory uncertainty, the promise of a no-action letter makes those risks slightly less imposing.
The TDFIs deserve lots of credit, too. Notwithstanding that there is plenty of need to protect consumers from existing products, but we benefit when smart minds are put to the task of developing decent financial products for poor people. Banks do not put a lot of energy into serving low-income consumers. Remember what Jamie Dimon said about customers with less than $100,000 in investments and deposits? For better or worse, the typical bank's business model struggles to work with low-wealth individuals who often pose a lot of credit risk.
Both of these groups want to solve some of the same underlying problems. They exist to address problems related to access for safe financial services. But advocates and TDFI'ers work in systems with different institutional DNAs. It is the nature of a TDFI'er to say "yes" and the nature of an advocate to say "no."
A typical day in the life of a consumer advocate could include re-drafting a comment letter, attending a meeting or conducting a conference call, having a Starbucks, and fighting traffic on the way out of DC. The advocate is likely to have a law degree from a prestigious Ivy League school.
A typical day in the life of a start-up entrepreneur includes writing tons of code, convincing an investor to relax, having a Starbucks brought to your standing desk by an intern from an Ivy League school, and staying late at work rather than fighting Bay Area traffic. The entrepreneur is likely to have left college early.
What is the future for these narratives?
Do they both survive? Does one flourish while the other slowly withers away? Is there only room for one?
I hope that the first answer proves to be true. But a lot depends upon forces beyond their control. It is entirely possible that the advocates and innovators can co-exist without interfering in each other's efforts. They define success in different ways. There are few instances where one is competing against the other directly. They draw funding from different resources.
But it seems like the world is shifting to the favor of the TDFIs. In services, disruption is almost another name for digitization. There are a lot of people out there looking for a problem that can fit a pre-existing digital solution.
The markets are winning. It probably started with using tax-credits for neighborhood redevelopment efforts, but now it is everywhere. Technology has also been on a roll, too, and that favors anyone who can find a way to use a smart phone.
I also contend that the CFPB may become a threat to the profession of independent advocacy. It is an example of the old maxim of 'be careful what you ask for." Because:
- It would have been enough that the CFPB was set up with a sole mandate to protect consumers.
- It would have been enough if the CFPB attracted some of the most motivated and talented people.
- It would have been enough if the CFPB had the power to pull data at will.
- It would have been enough if the CFPB didn't take on a wide-reaching rule-making schedule.
- It would have been enough if the CFPB met with people from time to time.
Day-e-nu! The CFPB is all of that and more. But unfortunately, there is a negative externality to so much greatness.
Wait for Tomorrow, and the Tomorrows After It
We will have resolution on NAL shortly. Tomorrow is the final day for the comments. They should all be available on regulations.gov by the end of the week. Soon thereafter, the CFPB will announces its reactions to the input.
Both advocates and TDFIs should remain in a disparate from of dialogue for some time. I think we need both. There is much remaining to be done in terms of protecting consumers against financial institutions. The advocates, who tend to comment on policies that are already at scale, will be essential for that process. But finding solutions that meet mission and profit is also necessary. But even if only a few ever go to scale on their own, some will be absorbed by the financial behemoths. We need both.