Good morning, and thank you, Ravi. I want to thank everyone at the CFPB and the CFTC for all of the work they put in to hosting financial regulators from around the world here in Washington.
Since becoming CFPB Director, I’ve had the great fortune to talk with so many heads of central banks, consumer protection, investor protection, privacy, and competition regulators about ways to spur progress in financial services. There are a few things that routinely come up, especially related to ensuring that startups and new businesses can emerge, bring their services to market, and challenge incumbents.
First, Big Tech firms pose a number of challenges when it comes to promoting fair competition and innovation. Big Tech platforms have enormous scale and are increasingly operating as gatekeepers that have the market power to impose their own regulations outside of the government. They determine who gets access to certain critical functionalities and on what terms.
I’ll give you one example that we have spent a lot of time evaluating in the United States, and I know many other regulators participating in the Global Financial Innovation Network (GFIN) have focused on this issue as well.
Consumer point-of-sale payments have increasingly shifted over time from cash, to cards, to now mobile devices and wearables. That shift has placed a new intermediary at the heart of many transactions: mobile operating systems.1 The policies and decisions made by two dominant operating systems, Apple’s iOS and Google’s Android, now dictate the nature of many payments.
Apple has decided to restrict third-party app access to the Near Field Communication (NFC) technology on iOS devices, so consumers can only use Apple Pay for popular contactless “tap-to-pay” transactions. Banks and other incumbent payment firms are shut out from using this payments functionality on iOS devices. Financial firms must pay Apple to allow their payment method to be used on Apple Pay. This can restrict consumer choice and innovation.
While Google does not restrict access to the NFC device or charge fees, it may be monetizing Google Pay through different means. Specifically, Google collects an immense amount of consumer data when consumers use the product. Google appears to use this data to develop new services and also in its advertisement business, among other things.
More generally, Big Tech companies have a strong incentive to harvest all aspects of a consumer’s transactions, since this data can advantage the rest of their businesses. For example, Big Tech firms can use detailed payments data to develop personalized pricing algorithms for e-commerce or increase engagement with behavioral advertising.
Big Tech firms have also sought to develop their own currencies, which raise a whole host of consumer protection, national security, and financial stability concerns.
Second, many agencies around the world are actively discussing accelerations in artificial intelligence. Here in the United States, advanced computational methods in financial services have been common for decades. For example, credit scores generated from algorithms have long been part of our financial system.
AI certainly poses new risks, or at least exacerbates old ones. While many new approaches may be necessary, it is clear we must all make use of existing laws and regulations on the books. In the United States, and I know in most, if not all, GFIN countries, there is no “fancy new technology” carveout to existing laws. Even if firms are using a complex new algorithm or AI model, they must follow the law.
In the United States, we have laws that require lenders to provide consumers with accurate information about the reasons they were denied credit.
In today’s marketplace, creditors are increasingly using complex algorithms, marketed as artificial intelligence, and other predictive decision-making technologies in their underwriting models. Creditors often feed these complex algorithms with large datasets, sometimes including data that may be harvested from online surveillance.
As a result, a consumer may be denied credit for reasons they may not consider particularly relevant to their finances. In the worst cases, this can amount to financial censorship or discrimination.
In September, CFPB released guidance to make clear that lenders must be able to accurately inform consumers as to why an adverse credit decision was made and explain specifically what factors led to the decision.2 For instance, if a creditor decides to lower the limit on a consumer’s credit line based on behavioral spending data, the explanation would likely need to provide more details about the specific negative behaviors that led to the reduction beyond a general reason like “purchasing history.”
Beyond applying the laws already on the books, we are all going to have to work together on the implications of AI for fraud and manipulation, financial stability, privacy, and more issues that may challenge our current regulatory, supervisory, and legal capacities.
Third, many agencies around the world are reviewing the appropriateness of special regulatory treatment for an individual market participant to promote innovation.
Many years ago, regulators began to form programs to understand new financial services offerings. These were sometimes called “sandboxes.” Many regulators, including the CFPB, began to issue letters offering legal immunity from regulations to an individual market participant.
We undertook a review of these policies. Our key findings included:
- Individual firms receiving special regulatory treatment used this status to implicitly market themselves to investors and the public as endorsed or given exclusive rights.
- Individual firms receiving special regulatory treatment did not fully adhere to the terms of the immunity they received.
- The programs did not appear to promote market-wide innovation.
While the CFPB continues to look for ways to promote competition and innovation, we have shifted our emphasis to identifying roadblocks to market entry and competition. We are also increasing our efforts to provide guidance on emerging business models.
GFIN was created, in part, to help coordinate effective regulatory responses to the use of emerging technologies in financial services. I know GFIN members represent a range of international agencies, including central banks, capital markets and derivatives regulators, and consumer protection authorities. As the consumer finance regulator in the U.S., this is an especially critical moment for international collaboration.
Historically, domestic consumer finance markets across jurisdictions could be quite idiosyncratic. The specific industry players were often different across countries. Our various cultural differences around borrowing and lending also led to distinct product developments and market structures. Whereas there has been a strong case for international collaboration around commercial banking, capital markets and derivatives activities for decades, the case was weaker for consumer finance. Whether it’s Buy Now, Pay Later or digital payment fraud, we have more and more in common.
Over the next two days, I urge you all to consider how each of your agencies can respond to these issues both individually and collectively through groups like GFIN. Thank you.