Thank you all for inviting me to speak again this year. Last year, I spoke to you about the Consumer Financial Protection Bureau’s important new mortgage rules. I talked about how we are working to create a level playing field for all consumer financial products and services – among banks and nonbank firms in both the mortgage origination market and the mortgage servicing market. And I described how we are striving to strike the right balance as we write rules, conduct examinations, and handle investigations.
Much progress has been made on those fronts in the past year. The new mortgage rules went into effect – changing both the lending and servicing markets for the better. We have identified and focused on certain illegal and deceptive practices. We have broadened and deepened our supervision of mortgage issues and our efforts have become more developed and more refined. We have worked closely with supervised institutions to ensure they have a greater understanding of what we are doing and how we are doing it. Separately, we also have been hard at work supervising some new markets, such as debt collection, credit reporting, and student loan servicing. And, since I last spoke to you, we have directed an additional $4 billion in relief to consumers for violations of federal consumer financial law.
Let me express my appreciation again for the impressive history of The Clearing House, which dates back prior to the Civil War. At that time, banking and finance were on very uncertain ground in this country and the approaches taken in both the public and private sectors were haphazard and muddled in various ways. At first, your predecessors resolved to form The Clearing House as a means to settle checks. Today, your members are some of the largest and most successful financial firms in the world, and The Clearing House now plays a central and crucial role in our entire payment system.
Among other things, The Clearing House is one of two operators in the Automated Clearing House (ACH), which clears and settles the exchange of electronic transactions between participating depository institutions. In 2013, this network grew by 5 percent over the previous year. I am not sure if everyone in this audience is aware of the magnitude of this activity, but in 2013 the network processed nearly 22 billion ACH transactions with a total value of $38.7 trillion. That volume of transactions is more than double the Gross Domestic Product of the American economy, which is the largest in the world, and more than four times the GDP of the Chinese economy, which is the next largest. It is more than 80 times the amount of money that the Treasury Department prints every year. And if you had $38.7 trillion, it would equate to enough one-dollar bills to fill more than a hundred Empire State Buildings. By any measure, the amount of economic activity transacted through this ACH system is huge.
This growing and important system provides many benefits to many consumers. A recent study by the Federal Deposit Insurance Corporation found that 80 percent of households with a bank account use some form of direct deposit. Using the ACH system, consumers can receive their paychecks, get their Social Security benefits, or pay their mortgage loans or many other bills.
Today I want to talk to you about electronic payment networks in general. This includes the ACH system but it also includes debit card networks and the emerging domain of faster payments. While there are undoubtedly great benefits to the current system of electronic payment networks − financial transactions today would not be the same without them − at the Consumer Bureau we also have some concerns. We have concerns about consumers who are exposed to loss or theft or are otherwise mistreated. We have concerns about a general lack of transparency. And we have concerns about hidden and exclusionary effects on some consumers. Let me describe these issues in more detail as a means of sparking more consideration and discussion about them.
First, we have concerns that electronic payment systems can be misused to victimize consumers unless banks and the system administrators work to police and enforce safeguards. For example, the ACH system as it currently operates depends on the routing and sharing of sensitive bank account details. While seemingly benign, this routine practice can be fraught for consumers. It exposes them to great risks, particularly if unscrupulous people or businesses are granted access to their hard-earned money.
When bad actors take advantage of weaknesses in the automated payments system, consumers can find themselves paying for charges they never authorized or later revoked. Their information can also be compromised in other ways, just as the data breaches that have recently occurred at major retailers and banks can expose consumers and leave them vulnerable to theft. Or consumers may find themselves paying for more than the amount they authorized. Sometimes, they can find their accounts subject to ongoing “fishing expeditions,” as repeated and expensive attempts are made to collect a payment.
Through our Consumer Response unit, we have heard heartbreaking stories of these kinds of abuses. One consumer from Texas contacted us with a complaint about the Hydra Group, an online payday lender that operated through a maze of corporations based here and abroad. She told us that she went to an online lead generator to take out a short-term loan to cover rent and groceries after a period of unemployment. She said she got the loan she wanted through one online lender, but then, to her surprise, Hydra also deposited money into her checking account and began debiting the account for payment without authorization. That chain of events turned into a two-year battle with the company and, eventually, with the debt collectors who followed in its wake.
In September, the Consumer Bureau filed a lawsuit against the Hydra Group. Our investigation found that this lender used information bought from online lead generators to access consumers’ checking accounts to illegally deposit payday loans and withdraw fees without consent – exactly what it did to that consumer from Texas. The Hydra Group then falsified loan documents to claim that the consumers had agreed to the phony online payday loans. It was a cash-grab scam and it quickly added up to more than $100 million worth of consumer harm. After we filed suit, a federal judge froze the company’s assets and appointed a receiver to oversee the businesses and put an end to the illegal practices. Importantly, the Hydra group had been running its transactions through the ACH system.
While the Hydra Group’s actions may have been especially egregious, unfortunately too many online lenders are also abusing the electronic payments system. For example, J.P. Morgan Chase recently did some insightful research and reported that while return rates on payments for credit cards, mortgage loans, and auto loans show up on average at or below 1 percent, a staggering 25 percent of payments for payday loans are returned. Informal discussions with The Clearing House have confirmed these data about return rates more generally.
A number of factors may contribute to this astronomically high return rate for payday loans. But one that seems to be particularly common and troublesome is the practice of some online lenders repeatedly sending automatic debits to collect payments. We received a consumer complaint about a lender making nine separate collection attempts in a single day. When spread over a typical collection period, such practices could cost the consumer hundreds of dollars in bank fees and hundreds more in lender fees. In another complaint, a consumer with multiple loans from several online payday lenders was hit with 59 automated payment collection attempts through account debits over a two-month period. This consumer’s bank account was ultimately closed with charges of $1,390 in bank fees.
Surely, the financial institutions that accept these unscrupulous lenders and their payment processors as clients need to do a better job of ensuring that they are honoring the protections afforded consumers under the Electronic Fund Transfer Act. But more fundamentally, consumers expect their own bank or credit union to be on their side. They trust them to hold on to their money, and banks and credit unions need to be better about doing just that. Unfortunately, all too often the institutions are not living up to consumers’ expectations by failing to honor consumers’ stop payment and revocation orders or even refusing to allow consumers to close their accounts to halt the abuse.
We have heard specific complaints about these issues. One consumer from Maryland signed up her husband for a free trial membership at a local gym. When she tried to cancel after the trial period, the gym still took automated payments from her bank account. She contacted her bank and told them the charges were not authorized. But her bank denied her claim and the debits went on for several months, sending her account into the red and racking up more bank fees. Despite repeated attempts to have the payments stopped, and despite assurances by a bank representative that they would be stopped, the debits and fees continued.
Thomas Watson, who built IBM into a business powerhouse, once observed: “The toughest thing about the power of trust is that it’s very difficult to build and very easy to destroy. The essence of trust building is to emphasize the similarities between you and the customer.” In this case, her bank first lost her trust, and it eventually lost a customer.
There is no room for these kinds of practices in the payment system or the banking system. Various federal laws, such as the Electronic Fund Transfer Act and the Truth in Lending Act, are already in place to protect consumers as they make payments. And as you know, NACHA (formally the National Automated Clearing House Association) has its own rules to protect consumers and merchants alike.
But even if these rules were all that they should be, merely having rules and safeguards is not enough – they need to be policed and enforced aggressively if they are to have their intended effect of actually protecting consumers. As we see it, banks and administrators have important roles to play, and they need to be vigorous and proactive both to preserve consumer trust in the payment system and to protect their customer relationships. Consumers should not be subjected to unauthorized payments or fishing expeditions. If they do occur, consumers need protection. They need to be able to close an account to stop repeat billings. And they need to be able to reverse unauthorized charges.
Since I last spoke with you a year ago, we have seen good practices by some banks and credit unions that have developed screening mechanisms to detect abuse before authorizing charges. Other good practices we have observed include making it easier for consumers to dispute illegitimate transactions, promptly re-crediting accounts, and refunding related fees when an improper transaction goes through. But more needs to be done. We must shine a light on the murkier corners of electronic payment systems and related practices, and we must be vigilant about preserving consumer protections no matter how these approaches may evolve in the future.
There is a second set of concerns that I want to discuss with you. They have to do with the lack of transparency of the payment system as a whole, including the ACH system.
When consumers make a deposit into their bank or credit union account, it is often difficult for them to know when the money will be available for their use, which may be well after the funds actually clear. The rules and practices governing the availability of funds are quite complex. The rules allow for delay, and the policies and practices can differ from bank to bank. The rules vary for different types of deposits. The rules also vary based upon when and where a deposit is made. The rules can vary for different types of accounts. And the practices can even vary for different consumers within a single bank.
Similarly, consumers may face uncertainty about when some payments are debited from their accounts. Checks create the greatest uncertainty, of course, since consumers have no way of knowing when the person to whom the check is written will deposit or cash the check. Nor do consumers know how long this process usually takes. But debit card payments and electronic payment transactions can also carry uncertainty. Consumers often do not know when a transaction will hit their account, let alone the order in which their bank will choose to post the transactions. And unfortunately, the cost and consequences of this uncertainty can be very high for consumers.
For some consumers, these uncertainties are of little consequence because they are able to maintain a healthy cushion of funds in their checking accounts. But many other consumers struggle to keep up with their expenses and have no such cushion. Not knowing when a payment will be credited or a debit posted can cause them significant harm. For many of them, as they reach the end of a pay period, they find themselves playing a high-stakes game of chance without even realizing they are at the gambling table. They are writing checks, paying bills, or making purchases without knowing what will happen when these payments actually reach their accounts, resulting in inadvertent fees for overdrawing their accounts.
The results for many are a set of costs that they can ill afford – the high costs of overdraft and non-sufficient funds (NSF) fees. We published a report this past summer documenting how much these fees cost consumers. In this study of accounts at a number of large depository institutions, we found that 30 percent of consumer accounts incur at least one overdraft or NSF fee in the course of a year. We also found that one quarter of those incurred more than 10 such fees, and paid, on average, $380 in overdraft and NSF fees. In total, these fees represent over half of all checking account fees.
Of course, not every overdraft is the result of consumer uncertainty. There are no doubt times when consumers make a conscious decision to use overdraft as a very expensive means of bridging the gap to the next paycheck. But the fact that the median size of transactions triggering an overdraft fee is just $24 for debit-card transactions – and the median amount by which the transaction overdraws the account is even less – suggests that for many consumers the costs are as unanticipated as they are unwanted.
As you know, the Consumer Bureau is carefully studying whether regulatory changes are warranted to address some of these concerns. But we cannot ignore that one of the root causes seems to lie in the way that deposits and payments are processed by and between financial institutions today.
The third area of concern that we have with the payment system is that as it currently operates it can have a hidden consequence of leaving some consumers behind. Much of this effect can be traced to the inability of consumers to get ready access to their money – both inflows and outflows – without incurring extra costs.
According to the FDIC’s most recent study of the unbanked and under-banked, almost one in five consumers with incomes under $15,000 report having used a check casher, as do one in six consumers with incomes between $15,000 and $30,000. When these consumers receive checks, they typically fork over up to 3 percent of the face amount just to get immediate access to their money. These costs operate like a 3 percent increase in payroll taxes on low-income Americans.
The FDIC study tells a similar story with respect to the use of bill payment and other money-order services. For consumers living on the edge, expedited payments are often as important as expedited funds access if these consumers are to avoid costly late fees and the like. To be able to pay quickly and without extreme inconvenience, these consumers often resort to money orders. Indeed, among those earning $15,000 or less, almost two out of five report having used a money order service from a nonbank firm; one out of three who earn between $15,000 and $30,000 report having done so.
To be sure, many of those using check cashers or bill payers do not have a bank account either because they have opted out or been shut out of the banking system. But even among those with a bank account, one out of ten report having used check-cashing services and one out of four report having used money-order services. These numbers suggest that some consumers are willing to pay for faster access to their paychecks and faster payment services − services that many financial institutions simply do not provide.
This brings me to the final thing I want to talk about today, and that is faster payments.
For many years, the payment system has been much like the weather: a lot of people complained about it but no one did anything about it. But The Clearing House recently announced plans to build a real-time payment system. I want to applaud you for this initiative. The Clearing House and the Federal Reserve Banks are taking much-needed steps in the right direction.
Yet my first admonition to you would be this: make it an urgent priority. Move as quickly as you can. Others around the world have built faster payment systems, and you are doubtless aware that new avenues of competition are opening up around alternative payment methods. Obviously building a faster payment system is an enormous project that will cost, in total, billions of dollars. But that will be true whether you move sooner or later, so you might as well plan to move as soon as you reasonably can.
As The Clearing House and others move forward into the world of faster and even real-time payments, I have another admonition for you as well: as you go about this work, it is essential that the interests of consumers remain at the top of your minds. After all, the objective here is to maintain an effective payment system for the sake of your customers. You have secured their business over the years by enabling them to pay and get paid securely and conveniently. As you take this next important step into the world of real-time payments, you must focus on meeting these same goals. So let me run through some of our thoughts on this front.
First, faster payments should bring with them faster access to the funds that a consumer deposits. Our current set of rules and practices governing the availability of funds were built for a world in which there could be a significant time lag between a consumer making a deposit and the bank receiving final settlement for the deposit. As that time is reduced, these rules and practices must keep pace so that consumers – rather than their banks – are the primary beneficiaries of faster clearing and settlement.
Second, a faster payment system should include real-time access to information about the status of an account as well as protections from hair-trigger assessments of fees. The PIN debit system operated for years without assessing fees when an authorization is declined because of insufficient funds. We see no reason why this model cannot be readily imported into a faster payment system, rather than the model based on “bounced check” fees.
Third, faster payments must be accompanied by robust consumer protections with respect to fraudulent or otherwise unauthorized transactions and erroneous debits. Money may be able to move at warp speed with today’s technology, but consumers cannot. They will still need time to review their accounts, identify unauthorized or erroneous transactions, and dispute them with their bank just as they do today with ACH and other electronic payments. The goal should be faster payments, not faster unfixable errors, and certainly not faster unrecoverable theft from people’s accounts.
Fourth, and finally, a faster payment system should be accessible to all consumers and not just to the most privileged. Accomplishing this goal will require careful attention to how the costs of building a faster payment system are allocated and recovered.
With these guiding principles in mind, a faster payment system can be made to work for consumers as well as for financial institutions and their commercial clients. It can bring greater transparency and less need for people to go outside that system to obtain access to their funds and pay their bills. These would indeed be important advances for consumers.
We look forward to working with you as you move forward on this important initiative, even as we continue to work with you to identify and clean up the abuses that plague the current system.
At the Consumer Bureau, we embrace a vision of a consumer financial marketplace where people can see prices and risks up front and where they can easily make product comparisons; in which no one can build a business model around unfair, deceptive, or abusive practices; and that works for American consumers, responsible providers, and the economy as a whole. We believe many of you share that vision and want to see it fulfilled. No matter what payment system consumers will be using, we expect them to be able to transact securely and we expect them to be able to exercise control over their own money. That money should be safe in the bank, safe in transit, and returned promptly if that safety is violated. We look forward to working with you to achieve these goals. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.