In this week’s Alternative Commercial Finance Update, we’ll look at the industry response to the Consumer Financial Protection Bureau’s (CFPB) new rule under Section 1033 of the Dodd-Frank Act and trends in the pay-by-bank market.
CFPB’s rule on open banking
In our last update, we mentioned a webinar on the CFPB’s new rule under Section 1033 of the Dodd-Frank Act, hosted by our Chris Friedman and Mike G. Silver. That webinar is still available by registering at this link.
The CFPB intends that the rule, announced on October 22, 2024, will promote open industry standards in banking by requiring banks, credit unions, and nonbank financial services providers—including payment apps—to make consumers’ data available to them and define obligations for third parties accessing consumers’ data. CFPB Director Rohit Chopra stated that the rule will give consumers the power to get better rates and services in their banking products. Director Chopra has promoted the rule at the DC Fintech Week, the Eighth Annual Fintech Conference in Philadelphia, and Money 20/20. While the rule regulates third-party access to data, consumers may allow lenders to access data on their income and expenses and overcome shorter credit histories. Consumers may thus benefit from using alternative sources of credit in lieu of, or in addition to, credit cards.
Yet the rule is already under attack; several banks filed a federal lawsuit challenging the rule one day after it was published, alleging that the regulatory structure would be unnecessarily burdensome on banks while the private-sector banking industry has already developed secure data sharing practices. Moreover, the plaintiff banks allege that the industry has already moved past “screen scraping,” a method in which third parties use consumers’ login information to access their account details and which the rule is designed to combat, with the use of application programming interfaces (API), which are software protocols that allow applications to communicate with each other. While the CFPB’s stated intent is that the rule will promote open banking by requiring financial services providers to provide free access to data to third parties at consumers’ request, the plaintiff banks allege that the third parties may fail to adequately safeguard consumer financial data. The CFPB and plaintiff banks also dispute whether the rule will actually stop the practice of screen scraping and whether banks will be forced to disclose data upon third-party requests.
Pay-by-bank services
One of the alternatives to credit cards that may benefit from the new regulatory landscape and disclosure of financial data to third parties is the pay-by-bank movement.
In September, Walmart announced that it partnered with a fintech to offer pay-by-bank to its customers as an alternative to credit and debit cards. The new method allows customers to more easily add their bank account and for transactions to instantly be reflected in their account balances, replacing an earlier method (Walmart Pay) that took several days for purchases to appear. One concern in motivating customers to try this service is the lack of points or rewards customers would receive by making the same purchases on a credit card.
In an interview with PYMNTS, executives at Plaid and AWS noted that we can predict industry response to the open banking movement in the United States by looking at the banking industry in the United Kingdom after open banking became a regulatory requirement there in 2017. There, consumers have come to expect a consistent experience across platforms and more convenience in signing up for payments by using a stored identity and account rather than individually inputting card or account details in every online transaction. The executives note that customers may be incentivized to try pay-by-bank services by offering rewards or cash-back similar to credit card points and by guaranteeing fraud prevention of the same or better quality compared to traditional payment methods.
While Walmart and other retailers clearly hope that customers will routinely use pay-by-bank in consumer purchases, Plaid CEO Zach Perret predicts that pay-by-bank will largely be used in place of paper checks for recurring expenses like mortgage and utility payments rather than for groceries, restaurants, and coffee shops. He predicts that credit cards and tap-to-pay methods linked to credit cards will continue to be the preferred choice for consumers making everyday purchases, as the level of convenience to the customer is similar. However, merchants and retailers are likely to encourage pay-by-bank methods to avoid incurring credit and debit card swipe fees.
News and views
Racial disparity in small business lending
This week, the CFPB released the results of a study it conducted on the racial disparities in bank responses to Black and white small business owners seeking business loans. The CFPB used trained “secret shoppers” to visit 50 bank branches in Virginia and New York and analyzed the bank representatives’ encouragement to apply for a loan, level of information provided about requested loan products, suggestions for other loan products, customer service, and the amount of business and credit information requested. The study found that Black participants received less encouragement to apply for a loan but more encouragement to use credit cards and home equity loans. The study follows a rule finalized by the CFPB in March 2023 that requires small business lenders to collect more data about applications they receive, increase transparency in the industry, and reduce discrimination.
Webinar: The CFPB in 2025: Assessing the Impacts of the Election
Companies and individuals regulated by the CFPB, as well as anyone interested in consumer financial services regulation, are invited to register and attend a webinar on November 22 from 12:00 p.m. – 1:00 p.m. CT on potential CFPB changes in light of the election, hosted by our own Mike G. Silver, Chris Friedman, and Marci Kawski. Visit this link for more information and to register.
News you can bank on
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