Good morning. Thank you to Great Falls College MSU for hosting the Consumer Financial Protection Bureau and thank you to everyone who has joined us. On this trip to Montana, we’ve been lucky to meet with local bank employees, small businesses in the region, and military families at Malmstrom Air Force Base.
Today, we are here to talk about relationship banking, particularly in rural communities. As always, my remarks reflect the views of the CFPB and do not necessarily represent the views of any other part of the Federal Reserve System.
In 1984, the United States had nearly 18,000 banking institutions. Last year, that number declined to fewer than 5,000. What was once a decentralized consumer finance landscape, primarily populated by local financial institutions, is now dominated by large banks that have gobbled up many of those small players.
Banking has changed significantly and today what we have are, essentially, several different business models. Let me run through these for context.
Relationship, Transactional, and Algorithmic Banking
First, while there are no well-established definitions, relationship banking is a model used to serve families, businesses, and communities as individuals, with an emphasis on providing customized help, rather than assembly-line style service. At this point in the United States, relationship banking is geared toward high net-worth individuals who typically enjoy a wide range of banking services, often through local, regional, and national private wealth managers. For most households and small businesses, this kind of relationship banking is becoming harder to find.
Then there’s transactional banking, which relies on highly standardized or mechanized products and processes. Typically, transactional banking is governed by terms and regulations imposed by the financial company on the consumer without flexibility or negotiation. When a customer has a problem, they typically cannot go to the individual that originally signed them up for the product. Transactional banking typically involves significant scale. In other words, big operations with lots of customers. Many of the big banks that took over smaller banks in the past several decades have versions of this business model.
And, third, more recently, many financial institutions and tech companies are shifting toward what I call algorithmic banking, which relies on using vast quantities of data about an individual through tracking and surveillance to make predictions about their behavior and banking habits. Advanced computational models make determinations about what products will be offered to you and whether you will be approved. I expect that we will see more and more of this type of banking as Big Tech conglomerates enter financial services.
Banking in Rural Communities: Banking Deserts
This new banking landscape has completely changed the way we all save our money, apply for credit, and live our financial lives. It has presented challenges for many, but it has been particularly hard on rural America. Montana is no exception.
Consolidation and new banking models happened at relatively the same time that many rural communities lost access to local banks. When farmers and ranchers started to capture smaller and smaller shares of the food dollar, family farms started to scrape for every penny, and populations started to decline, the big banks saw less of an incentive to have a brick-and-mortar presence in small towns.
When the banks shuttered, nothing replaced them. Instead, we see “banking deserts,” communities lacking access to in-person banking facilities. There are large swaths of areas with no bank branches all over the United States because of bank consolidations but 65 percent of existing banking deserts and 81 percent of potential banking deserts are located in rural areas.
From Alaska to Appalachia to family farms and ranches in Montana, there is a wide range of diverse people, economies, and ways of life, when we talk of “rural America.” But there are common threads. One of them is that Americans who live in rural areas tend to use physical bank branch services more than the rest of the country.
This is partly because rural economies and rural businesses require specialized expertise to meet their credit needs. When taking out a loan to buy large parcels of land, it helps to have a banker who understands local zoning. Rural banking is also different than city banking because the agricultural economy is different. For example, the financial health of farmers depends on unpredictable precipitation and extreme weather events, not to mention highly volatile commodity prices that can upend expectations seemingly overnight. When Main Street banks pack up and leave town, and when issues are instead funneled through national call centers, there is a loss of local, on-the-ground knowledge that is the basis of good customer service, and good banking.
Depository institutions operating the transactional banking model, largely through mobile and digital platforms, have tried to fill the banking desert gap. Indeed, many banks have poured big money into creating scalable, more digital-centric banking. Now people can bank at 3 a.m., loan approvals are done in split seconds, and virtual assistants have replaced bank tellers.
But these business models that privilege automation at the expense of high-quality human interactions don’t always deliver the best outcomes for consumers. Nor do they always fix the problems from the past. For example, while we know that human discretion without appropriate guardrails presents a risk of discrimination, automated systems present their own dangers too, as algorithmic bias can also unfairly distort outcomes.
The CFPB’s own examinations have found that customers report a struggle to obtain basic information when humans are replaced by call center menus and algorithms, or when companies try to cut corners by slashing customer service costs. Struggles include that it takes too long to get problems solved, that customers have to repeat information to multiple people, and that employees aren’t knowledgeable about their situation. Other studies have shown that customers report being more satisfied with an outcome to a complex problem, such as disputing a fee or taking out a loan, when they interact with a person instead of a screen.
Good customer service means supporting customers and providing knowledge and resources.
Rural communities, like all communities, know this all too well because of their special banking needs. They deserve to be able to bank like they want to – with customer service that understands them and caters to their needs. We should all be able to ask basic questions about our bank accounts and get clear answers. It’s reasonable to expect shorter wait times and informed customer service personnel who can solve problems without bouncing a customer from department to department.
Relationship banks do not create fake accounts or pass the buck when customers face problems. A key element of relationship banking is one where banks respond to customers with clear answers, can translate into better banking for individuals but also for the banks. When banks put effort into service, responsiveness and customer care, problems get solved and customers get the products that best match their needs.
Key Initiatives to Reinvigorate Relationship Banking
At the Consumer Financial Protection Bureau and at federal banking agencies, we are taking a number of steps to help revitalize relationship banking, especially in rural communities.
First, we will be looking to ensure that big banks are not simply sending people through call center mazes in order to get them to give up on asking for help with their account. A decade ago, after the financial crisis, Congress recognized the need for stronger customer service and responsiveness. In Section 1034 of the 2010 Consumer Financial Protection Act, lawmakers specified that consumers have rights to obtain timely responses to their questions about their accounts at big banks.
Today we are launching a Request for Information to find out how people can assert their rights to better customer service with their depository institution. We want to hear from bank and credit union customers about their customer service experiences. We want to know what information would be helpful for consumers to obtain from their banks. We want to know what kinds of account information they are seeking. Are they able to obtain it in a timely manner? If not, what are the obstacles? Is this preventing them from achieving their banking goals?
Second, federal banking regulators are reviewing bank merger policies and have proposed an overhaul of the Community Reinvestment Act rules. Yesterday, I had a chance to visit Belt, Montana, to visit Belt Valley Bank and meet some of their dedicated employees and customers. I heard how critical the bank is to the local community and the negative repercussions of what would happen if a national chain took it over. The Federal Deposit Insurance Corporation recently launched a review of Bank Merger Act policies. Merger applications are only supposed to be approved when they can meet the convenience and needs of the community, and we intend to take a close look at how to improve the process. In addition, federal banking regulators are also soliciting comment on a modernized framework for the Community Reinvestment Act. I voted in favor of this proposal because I believe new rules can make a difference in making sure rural communities receive the investment and attention they need.
Third, the CFPB is working to ensure that algorithmic banking is not being given special treatment and must follow the same set of rules that relationship banks follow. In March, the CFPB published a policy confirming that financial companies must explain to applicants the specific reasons for denying an application for credit or taking other adverse actions, even if the creditor is relying on credit models using complex algorithms. We have also ordered several of the Big Tech giants, including Facebook, Apple, and Google, to provide information to the CFPB about their efforts to take more control over payments systems and how they will use customer data to feed their algorithms.
In the end, the CFPB wants institutions of all sizes to foster an inclusive relationship banking model that meets consumers’ reasonable expectations of good customer service. It’s not too high of a bar to set for people to be able to ask basic questions of their banks, and for the banks to respond to them in a timely manner.
We are here today to hear from you about all of your experiences and concerns. Thank you again to everyone for hosting us for this session.