WASHINGTON - Just two days after Apple unveiled its new program designed to speed the adoption and use of mobile payments, Consumer Financial Protection Bureau Director Richard Cordray cited the burgeoning field as a key area of concern.
Speaking before the agency's Consumer Advisory Board meeting, Cordray said the CFPB needs to ensure it keeps up with advancements in mobile banking and online payments.
"The worthy challenge for any system of financial regulation is how to make sure our oversight of the marketplace can keep up with these far-reaching shifts," Cordray said. "We must grasp both the pace and the direction of fundamental change. And we have to understand and encourage the tremendous benefits of innovation without undermining the equally important goal of protecting consumers in the marketplace."
Although Cordray made no mention of Apple Pay, the company's initiative to allow consumers to make payments using their iPhone 6 or smartwatch, it's clear the CFPB is paying close attention to the rapidly growing mobile payment system.
"In short, at the Consumer Bureau, we are not content just to watch technology unfold before considering and taking appropriate action as it affects consumers in the financial marketplace," Cordray said. "We intend to move forward alongside industry, keeping an eye out to protect consumers as these new technologies develop, not simply after-the-fact."
Apple joins a growing list of companies trying to enable customers to pay by smartphone or wearable devices. Apple Pay would essentially digitize a customer's credit card in a transaction that the company says will be more secure than using a regular credit card. By relying on the existing card framework to launch its mobile payment initiative, Apple would be working within an area that already has regulatory rules of the road.
But the CFPB has begun a look into whether more oversight is necessary. It released a "request for information" in June on mobile banking and financial management services. Part of this request is seeking information on how mobile payment products can help consumers who are underserved by banks. The comment period closed Wednesday but Cordray said the agency may decide to seek public input again on the same topic in the future.
The CFPB has also been careful not to insinuate that it is trying to cut off innovation for financial technology. Indeed, Cordray said that it might be a boon for certain consumers.
"In this modern age where people can manage their money on the go, there is great potential to provide access to more consumers, to help them build financial capability and allow them to take greater control of their financial lives. At the same time, using mobile devices for all sorts of banking services can make some transactions cheaper or faster or both," he said. "But we need to make sure that the legal and regulatory framework can keep up effectively, so that all consumers can be well served and remain protected, whether they are opening their wallet or scanning the screen on their smartphone."
During the advisory board meeting, a panelist from non-profit Mission Asset Fund, which offers peer-to-peer loans for people who cannot get traditional financing, gave a presentation on how technology can boost credit access.
The San Francisco-based group essentially finds a group of people who lend to each other, called "lending circles," and Mission formalizes it through a promissory note with zero-interest and no fees. Mission can then report to the credit bureaus under the premise that it helps build credit scores for borrowers with weak or no credit history so they can eventually get financing at a regular financial institution.
"There are people in the shadows people who are invisible to the credit markets and they really are strapped because of high-cost products" that they can't afford, said Jose Quiñonez, executive director of Mission Asset Fund. "Our clients are facing barriers to middle-class financial products and services. And we found because of that, it is stunting their economic potential."
The group predicts that at least 54 million people are "invisible" to the traditional credit markets. There are other nonprofits as well as some credit unions and banks that offer small-dollar financing for underbanked consumers. But Quiñonez said they are working with state lawmakers and other financial institutions to recognize it as a "bona fide" financial product.
"This is an activity that is good for [consumers] and it's also good for banks because we're extending the pool of borrowers for them to engage" with when their scores improve, he said. "We hold firmly that this is bona fide financial information. This is not less than."
Rachel Witkowski is a community banking reporter at American Banker
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