Good morning, and thank you for being here today.
In the last few decades, sectors across the economy have become more concentrated and centralized. A key priority for the Consumer Financial Protection Bureau is to ensure that consumer finance markets are fair, transparent, and competitive.
When it comes to our financial lives, a handful of very large banks and financial firms control much of the market. This has left many families with fewer viable options, and many people feel stuck to the provider they signed up with years and years ago. One of the main drivers of these trends is the simple fact that it is too hard to switch providers. Since many deposits and payments are now automatic, people feel that if they make a mistake when switching, they’ll face a nightmare of errors and fees. And sometimes, when people close an account, like a credit card, they worry that their credit score will take a hit.
Today, the CFPB is proposing a rule to activate a dormant authority under a 2010 law to accelerate much-needed competition and decentralization in banking and consumer finance by making it easier to switch to a new provider. The Personal Financial Data Rights rule would help address many of the root causes of sticky banking – by giving people more power to walk away from bad service and enabling small community banks and nascent competitors to peel away customers through better products and services with more favorable rates.
With strong data protections to prevent misuse and abuse of personal financial data, bringing this 2010 legal provision into reality can lead to a more open and decentralized banking and finance system where consumers can more easily switch, escape junk fees, and obtain better service, rather than feeling stuck and taken for granted.
First, I want to share how activating this dormant authority will jumpstart competition. Second, I’ll describe how our proposed rule guards against abuse and misuse of sensitive personal financial data. I’ll close with information on our timeline and next steps.
Jumpstarting Competition in Banking and Consumer Finance
In some markets, competition is fierce. When you go to a restaurant that is overpriced with lousy service, it will be hard for that restaurant to stay in business. That’s because customers will stop coming back and they’ll tell others to stay away.
But sometimes, markets are structured in ways that don’t allow us to easily vote with our feet. In the 1990s, wireless phones quickly grew in popularity. Choosing a wireless phone provider was a high-stakes decision. That’s because switching was an enormous headache. If you switched your carrier, you couldn’t take your phone number with you. You’d have to tell everyone about your new number and the costs of making a mistake were high, especially for those operating businesses or dealing with medical care.
The Federal Communications Commission eventually developed a policy requiring wireless number portability. This dramatically changed the calculus for switching. Rather than being locked in, you could now switch with less hassle, and that led to better prices and service.
Many consumer finance markets are also structured in ways that don’t allow consumers to exercise their power. In some markets, like credit reporting and mortgage servicing, consumers don’t even get to choose who they have to work with. In others, like credit cards and deposit accounts, financial firms have learned that they don’t need to provide great rates or customer service for a sustained period of time. Instead, they can attract customers with teaser rates, change them whenever they want, and make it bureaucratically difficult to switch.
American families can see the imbalance between them and their financial providers. As market interest rates have risen, many struggle to find credit cards and loans at affordable rates, and, yet the largest banks have not been paying those same families much more for their savings. Millions of families are being paid interest rates as low as 0.01 percent on their bank accounts, even though other institutions are offering rates that are way higher, even up to 5 percent.
This reflects the current reality that many banks design their products – sometimes purposely – so that it’s a hassle to switch, just like wireless phones used to be. On average, Americans have had the same checking account for 17 years. If switching were easier, American families could earn billions of dollars more in interest each year.
The same is true when it comes to borrowing. The credit card market is dominated by a handful of big players. Most have hiked their interest rates they charge on monthly credit card bills substantially. While market interest rates have gone up, they’ve gone up even higher than the index rates. For example, many credit cards are priced with a certain number of percentage points, or spread, above the Prime Rate. Our analysis of the credit card market reveals average credit card rates at their highest spread above the Prime Rate – since 1995.
Of course, prices are only part of the equation. Quality service also matters. In a competitive market, companies have an incentive to provide great customer service. But when a company knows you’re unlikely to leave, they don’t have the same incentive to serve you well.
The CFPB’s proposed rule would require that financial firms offering transaction accounts – like checking accounts, prepaid cards, credit cards, and digital wallets – give you access to your personal financial data, so you can share or transfer the data to another provider.
This will make it much easier to switch. You won’t lose your transaction history, which effectively serves as a life ledger. You won’t have to start over with a new firm that has less history with you and that is less likely to offer you better deals.
In addition, bringing in your personal financial ledger to a new provider will let them consider your full financial history when offering you a loan, instead of relying on a summary from the credit reporting conglomerates. This means that individuals without years and years of credit history or those who may have had stumbles in the past can now be evaluated based on their current income and expenses. It will also allow people to better manage their finances by bringing their banking and loan information into one place.
This helps small financial institutions and startups as well. They’ll be able to receive data from consumers more quickly and with fewer bureaucratic stumbling blocks, rather than processing reams of printouts of bank statements in different formats. This can help them avoid unnecessary costs and focus on providing better service at better rates.
Guarding Against Abuse and Misuse of Data
Next, I want to discuss how our proposed rule guards against exploitation of our personal data.
Exploitation of personal data by bad actors is a real concern, and financial data is a particularly valuable commodity. We have seen firsthand how some financial firms, including major players in China, are ingesting data in ways that raise risks of invasive financial surveillance and censorship.
That is why our proposal sets out a clear prohibition. Companies receiving data can only use it to provide the product people asked for, and for nothing else. When a consumer permits their private data to be used by a company for a specific purpose, it is not a free pass for that company to exploit the data for other uses.
Importantly, the rule says that firms that receive financial data to provide a specific service cannot feed the data into algorithms for unrelated activities, such as targeted advertising and marketing. Firms couldn’t collect data to provide a service, and then also monetize it by selling to data brokers. Authorized data also couldn’t be used to train artificial intelligence that manipulates consumer behavior.
And firms would not be able to hold onto your personal financial data indefinitely. If a consumer chooses to end a relationship, the firm would have to stop collecting and using the consumer’s data as well as delete the data it already possesses.
The CFPB’s effort will help to accelerate the shift to what is known as “open banking.” A more decentralized market structure will give consumers more control and minimize the ability for companies to take customers for granted.
Our proposed rule builds on existing efforts in the industry today to promote decentralization. For firms operating globally, it also aligns with many of the guidelines in place or under consideration in other major jurisdictions around the world.
After reviewing comments on the proposal, we will look to finalize the rule by next fall. We will also be issuing additional information on how industry standard-setting organizations can obtain recognition from the CFPB. Market players will be able to look to these standards, which will evolve with time as technology progresses, to be part of the new open banking ecosystem in the United States. We also intend to cover additional product types in future rulemaking, to continue to foster more competition and consumer choice throughout the market.
Over time, I hope our work to activate this dormant authority, jumpstart competition, and promote decentralization in finance will help American families put billions of dollars in their pockets, while allowing small players startups to go head-to-head with major market players.