Good morning and thank you for being here today.
Over the last few decades, sectors of the economy have become more concentrated and centralized. One of the Consumer Financial Protection Bureau’s key priorities is to ensure that consumer financial markets are fair, transparent and competitive.
When it comes to our financial lives, a handful of large banks and financial firms control most of the market. This has left many families with fewer viable options, and many people feel stuck with the provider they signed up for years ago. One of the main drivers of these trends is the fact that it is very difficult to change providers. Since most deposits and payments are now automated, people think that if they make a mistake when migrating they will be faced with a nightmare of errors and fees. Sometimes people worry that their credit score will drop when they close an account, such as a credit card.
Today, the CFPB is proposing a rule to mobilize dormant authority under a law passed in 2010 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 poor service and enabling small community banks and emerging competitors to fleece customers with more favorable rates through better products and services. .
With strong data protections to prevent misuse and misuse of personal financial data, the implementation of this 2010 legal provision could lead to a more open and decentralized banking and financial system where consumers can switch more easily, avoid insignificant fees, and receive better service. than feeling stuck and taken for granted.
First of all, I want to share how activating this dormant authority can revitalize competition. Second, I will explain how our proposed rule protects against misuse and misuse of sensitive personal financial data. I’ll close with information about the timeline and next steps.
Fast Start Competition in Banking and Consumer Finance
Competition is very intense in some markets. When you go to a restaurant that is overpriced with poor service, it will be difficult for that restaurant to stay in business. This is because customers will stop coming back and tell others to stay away.
But sometimes markets are structured in a way that doesn’t allow us to easily vote with our feet. The popularity of cordless phones grew rapidly in the 1990s. Choosing a wireless phone provider was a very risky decision. Because switching was a huge headache. If you’ve changed your carrier, you won’t be able to keep your phone number with you. You’ll have to tell everyone about your new number, and the cost of making a mistake is high, especially for those doing business or dealing with medical care.
The Federal Communications Commission eventually developed a policy requiring wireless number portability. This changed the migration calculus significantly. Instead of being locked in, you can now switch with less hassle, leading to better prices and service.
Many consumer financial markets are also structured in ways that do not allow consumers to exercise their power. In some markets, such as credit reporting and mortgage services, consumers can’t even choose who they work with. For others, such as credit cards and savings accounts, financial firms have learned that they don’t need to offer high rates or customer service over extended periods of time. Instead, they can attract customers with teaser rates, switch at will, and make switching bureaucratically difficult.
American families can see the imbalance between themselves and their financial providers. As market interest rates rise, many people are struggling to find affordable credit cards and loans, yet the biggest banks aren’t paying the same families more for their savings. Millions of families are paid interest rates as low as 0.01 percent on their bank accounts; other institutions offer much higher interest rates, even up to 5 percent.
This reflects the current reality that most banks have designed their products – sometimes deliberately – to make switching difficult, just like cordless phones used to be. Americans have had the same checking account for an average of 17 years. If the transition were easier, American families could earn trillions 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 large players. Many have significantly increased the interest rates they charge on their monthly credit card bills. While market interest rates rose, they even exceeded index rates. For example, many credit cards are priced with a certain number of percentage points, or spreads, above the Prime Rate. Our analysis of the credit card market reveals that average credit card rates are at the highest spread on Prime Rate since 1995.
Of course, prices are only part of the equation. Quality service is also important. In a competitive market, companies have an incentive to provide excellent customer service. But if a company knows you’re unlikely to leave, they don’t have the same motivation to serve you well.
The CFPB’s proposed rule would require financial firms that offer transaction accounts such as checking accounts, prepaid cards, credit cards, and digital wallets to give you access to your personal financial data so you can share or transfer the data to another provider.
This will make switching much easier. You won’t lose your transaction history, which effectively acts as a life ledger. You won’t have to start over with a new firm that has less history with you and is less likely to offer you better deals.
Additionally, bringing your personal financial ledger to a new provider will allow them to consider your entire financial history when offering you credit, rather than relying on summaries from credit reporting companies. This means people who don’t have years of credit history or may have stumbled in the past can now be assessed based on their current income and expenses. It will also allow people to better manage their finances by gathering their banking and credit information in one place.
This also helps small financial institutions and startups. Instead of processing masses of bank statement printouts in different formats, they will be able to receive data from consumers faster and with fewer bureaucratic hurdles. This can help them avoid unnecessary costs and focus on providing better service at better prices.
Protection Against Misuse and Abuse of Data
Next, I would like to discuss how our proposed rule protects against the 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, obtain data in ways that increase the risks of invasive financial surveillance and censorship.
Therefore, our proposal introduces an explicit ban. Companies that receive data can only use it to provide the product people want and nothing else. When a consumer consents to a company using their private data for a specific purpose, it does not allow that company to use the data for other purposes.
More importantly, the rule says that companies that obtain financial data to provide a particular service cannot feed the data into algorithms for unrelated activities such as targeted advertising and marketing. Companies couldn’t collect data to provide a service and then make money by selling it to data brokers. Authoritative data also cannot be used to train the AI that drives consumer behavior.
And companies can’t keep your personal financial data indefinitely. If a consumer chooses to end a relationship, the firm will be required to stop collecting and using consumer data in addition to deleting data it already has.
The CFPB’s efforts will help accelerate the transition to what is known as “open banking.” A more decentralized market structure would give consumers more control and minimize companies’ ability to take customers for granted.
Our proposed rule builds on existing efforts to promote decentralization in the industry today. For companies operating globally, it is also compatible with many guidances in effect or under evaluation in other key jurisdictions around the world.
After reviewing comments on the proposal, we will seek to finalize the rule by next fall. We will also publish additional information on how industry standards-setting organizations can receive recognition from the CFPB. Market players can expect these standards, which will evolve over time as technology advances, to become 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 encourage greater competition and consumer choice across the marketplace.
Over time, I expect that our work to mobilize this dormant authority, accelerate competition, and promote decentralization in finance will help put trillions of dollars in the pockets of American families while allowing small-player startups to compete head-to-head with big market players.