CFPB Launches Office to Spur Competition in Financial Services

The CFPB announced Tuesday it is opening a new office to spur competition in financial services by, among other means, giving consumers “their walking rights to switch providers.”

The CFPB’s news release said the new Office of Competition and Innovation is “part of a new approach to help spur innovation in financial services by promoting competition and identifying stumbling blocks for new market entrants.”

It replaced the Office of Innovation, which focused on an application-based process to confer special regulatory treatment on individual companies.

The CFPB said the new office will support a broader initiative to analyze obstacles to open markets, better understand how big players are squeezing out smaller players, host incubation events and make it easier for people to switch financial providers.

CFPB Director Rohit Chopra called competition “one of the best forms of motivation.”

“It can help companies innovate and make their products better, and their customers happier,” Chopra said. “We will be looking at ways to clear obstacles and pave the path to help people have more options and more easily make choices that are best for their needs.”

Greg Mesack, NAFCU’s SVP of government affairs, said “NAFCU appreciates the CFPB’s intention to promote competition and innovation within the financial marketplace,” but that the CFPB should provide more information on “how they intend to accomplish these goals without imposing more regulatory burdens on credit unions.”

“Creating a competitive space for financial services is always welcome,” Mesack said. “However, the CFPB should be attentive on how existing and proposed rulemakings are stifling innovation.”

Charla Rios, a researcher at the Center for Responsible Lending focusing on payday lending and predatory debt practices, said the non-profit group hopes CFPB’s announcement signals a shift away from the practice of exempting financial start-ups and digital products from regulations that protect consumers.

“We will continue urging the CFPB to ensure that families are protected from abusive financial practices from both traditional and ‘fintech’ entities and look forward to learning more,” she said.

The CFPB has a statutory mandate to promote fair, transparent and competitive markets.

Digital technology is transforming the markets, including how payments, deposits and lending are provided and who provides them. Big banks, fintech, big tech, incumbents and small start-ups are all jockeying to be in front.

The CFPB said its Office of Competition and Innovation will focus on “how to create market conditions where consumers have choices, the best products win and large incumbents cannot stifle competition by exploiting their network effects or market power.”

“Families, honest businesses and the entire economy benefit when consumer finance markets are fiercely competitive, rather than dominated by a handful of firms,” it said.

The new office will:

• “Give consumers their walking rights to switch providers” by exploring ways to reduce the barriers to switching accounts and providers. “Competition is more vibrant when people can switch to a new provider easily, creating pressure on incumbents to maintain high levels of service and giving new entrants an opportunity to win customers.”
• Research structural problems blocking successes. The new office will be housed in the CFPB’s Research, Markets, and Regulation division, which the CFPB said will give it “greater access to resources to look at market-structure problems that create obstacles to innovation.” For example, the CFPB said this could include greater explorations of the payment networks market or the credit reporting system, both of which are essential to our financial system but have only a few dominant players.
• Understand how bigger players can gain advantage over smaller players. “Sometimes start-ups simply get run over by bigger players,” the CFPB said. “For example, big companies can easily pitch new products to their large customer bases and stymie outside players who may have more favorable products. Big tech companies, with their huge reaches, are also seeking new ways to join consumer finance markets and may threaten fair competition.”
• Identify ways to address commonplace obstacles. “Innovators may not be getting their products or services to market because of more practical problems like access to capital or talent. Or they may not launch because they don’t have access to the large volumes of digital data stored by the big banks. A future rulemaking by the CFPB under Section 1033 of the Consumer Financial Protection Act will give consumers access to their own data,” the CFPB said.
• Host events to explore barriers to entry and other obstacles. The CFPB said the new office will hold open houses, sprints, hackathons, tabletop exercises, war games and other events. “Entrepreneurs, small business owners and technology professionals will be able to collaborate, explore obstacles and share frustrations with government regulators. Results will be shared publicly,” the CFPB said.

In addition to replacing the Office of Innovation, which opened in 2018, the Office of Competition and Innovation replaced the Project Catalyst, which launched in 2014. The Office of Innovation’s primary purpose was to process applications for No Action Letters and Sandboxes that applied to an individual company’s specific product offering.

“After a review of these programs, the agency concludes that the initiatives proved to be ineffective and that some firms participating in these programs made public statements indicating that the Bureau had conferred benefits upon them that the Bureau expressly did not,” the CFPB said.

The CFPB also encouraged companies, start-ups, as well as members of the public to file rulemaking petitions to ask for greater clarity on particular rules. The CFPB said this will “help level the playing field and foster competition by ensuring any actions the CFPB takes will apply to all companies in the market.”