Given the sharp rise of digital banking and fintech partnerships, high inflation, and rising interest rates, there is no doubt that the Consumer Financial Protection Bureau (CFPB) is stepping up oversight and discipline of traditional financial institutions.
Wells Fargo and Regions Bank are just two examples of what to expect from the CFPB in the current economic climate. The banks were hit with fines tied to past business practices. This should warn other financial institutions that certain practices need to be more closely monitored.
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The agency’s action against Regions Bank sets the stage for greater regulation of excessive overdraft and nonsufficient funds (NSF) fees. The CFPB penalized the bank for a fee structure discontinued over a year earlier. Concerns about heightened oversight have already impacted the revenue stream of financial institutions. Service charges for bank deposit accounts fell by 7.7% in the third quarter of 2022 from a year earlier, according to the Federal Deposit Insurance Corp. Fee income at federally chartered credit unions fell by 12.7% over the same period, based on data from the National Credit Union Administration. Credit card companies, banks, and credit unions should proactively review their fee policies and be able to provide documentation that proves their structure is in the best interest of the consumer.
Changes could extend beyond consumer fees. CFPB Director Rohit Chopra has emphasized a desire to support an open banking model in the U.S. This process uses APIs to allow third-party developers access to consumer data. This shift to transparency in the financial services industry could create challenges for established institutions. It would remove “obstacles for new market entrants,” thus creating more competition. More financial firms and nonbanks could produce more competition, hindering cash flows and overall revenue. However, the most significant concern tied to data portability is the potential for security breaches. Financial institutions outsourcing privacy solutions and software could potentially be liable for any data hacking crimes, which would be an additional fine on top of the extensive costs of maintaining those safeguards.
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A shift to digitalization across platforms has generated a need for partnerships between banks and fintech companies. This is evident in the growing Banking-as-a-Service (BaaS) space, where fintechs benefit from a partner bank’s compliance infrastructure and payment rails. CFPB Deputy Director Zixta Martinez last year made the bureau’s distaste for such relationships apparent, referring to BaaS as “rent-a-bank schemes.” Any regulatory lapses due to a fintech partner’s oversight could result in legal consequences for the financial institution and the fintech. Heightened suspicion and scrutiny in this area should signal the need for continuous partner vetting, intensive documentation, and increased specialized employment.
There is a potential revenue growth opportunity for banks among increased CFPB oversight in the Buy Now, Pay Later (BNPL) space. BNPL requires a fraction of the payment upon purchase and then auto-debits the subsequent installments bi-monthly or monthly. The CFPB has clarified that it believes the disclosures and terms should mirror those of credit card offerings. Financial service companies with experience in credit cards and related products should embrace BNPL as a way to add customers – assuming they can adequately manage credit risk.
The CFPB and other regulators, like the Office of the Comptroller of the Currency, will continue to closely monitor the internal workings of traditional financial institutions in the coming months due to emerging economic conditions and ongoing inflation. Financial institutions need to think and move proactively to get ahead and, in a way, regulate the regulators. Despite the uncertainty of the future, financial markets can be sure of their structure and the support they provide to their customers.
