In Meeting With CUs, CFPB Director Says He’s Focused on 1 Question; Also Has Concerns Over Core Processors – Reprinted with Permission from CU Today
The director of the Consumer Financial Protection Bureau told members of the Credit Union Advisory Council and the Community Bank Advisory Council that he wants them focused on one question, while also expressing concerns over consolidation among core processors and what it means to smaller financial institutions.
Chopra, who is relatively new to the position and who also sits on the FDIC board, said that one question is: “What do we want the future of the consumer finance ecosystem to look like?”
That question is an umbrella over other issues he has directed the CFPB to explore, according to Chopra, who said that since he arrived at the Bureau he has been concerned it is highly responsive to the large banks it supervises, but “less attuned to the needs of local businesses financial institutions who are impacted by changes in consumer financial markets and regulations.
‘That Needs to Change’
“That needs to change, and I have welcomed the opportunity to directly engage with state banker associations and credit union leagues across the country to make sure entities with relationship banking models are not shut out of the CFPB’s work,” Chopra said.
The CFPB advisory councils are meeting this week and will be focused on competition, scale, and technology in the consumer finance infrastructure, and its connection to relationship banking, according to the CFPB.
“Technology has the ability to make our banking system more vibrant and competitive,” Chopra said in remarks to the councils. “But how can we make sure that tech companies, gatekeepers, and middlemen don’t gain too much control and make it harder for smaller players and new entrants? How do we also make sure that technology promotes relationship banking, rather than undermining it?”
Chopra said restoring relationship banking in the age of digitization is a key priority for the CFPB as it explores how to “preserve the benefits of local knowledge and direct customer relationships in a world where scale and automation feel like a business imperative to remain viable? How do we make sure that technology can be a vehicle to create more competitive intensity, rather than reinforce the power of dominant incumbents?”
The ’Core’ Questions
Chopra said one issue he wants council members to focus on is core services providers that many small banks and credit unions use.
“In a market where small financial institutions need to compete head-to-head with big players, I am concerned that the core services providers that small players rely on have too much power in the system,” Chopra told attendees. “Community banks and credit unions know the rhythms of the daily lives of their clients and communities – making them integral to the financial marketplace. Small financial institutions play a pivotal role in many markets, but especially small business lending.
“Many small financial institutions are worried about the rising costs of and limited flexibilities offered by core services providers,” Chopra continued. “While we are seeing many upstart players seeking to enter the core services market, Fiserv, Jack Henry & Associates, FIS, and Finastra remain the largest providers. These four provide numerous functions to financial institutions to fulfill the technical delivery of core bank functions, including deposit taking, payment facilitation, loan origination, account opening and servicing, fraud management, and compliance.”
Chopra said Fiserv, Jack Henry & Associates, FIS, and Finastra serve 78% of all U.S. banks.
‘Stand in Line, Write Check’
“The consolidation of the providers among these four is affecting service and cost – with one community bank CEO aptly framing the problem as ‘stand-in-line and write a big check’,” according to Chopra. “In an age of constant tech innovation, with many younger consumers craving digital banking solutions, patience is not a viable solution.”
Chopra said the Bureau is concerned over the “downstream effects” of consolidation in the core services market, including making it “harder for local financial institutions to switch providers or use add-ons from outside technology providers, which allow the major incumbents to charge exorbitant amounts of money for their services, while discouraging them from quickly adapting their own products and services to fit with an ever-evolving banking tech landscape.
“Local financial institutions’ entire suite of online and tech services have become intertwined with single providers as banks are coerced into complex and tome-like contracts that come with costly and unnecessary extra non-core banking services, longer contract periods, and stiff penalties and fees for ending contracts early or making other contract changes,” Chopra added.
One FI’s Predicament
Chopra related that the Bureau was told by one financial institution that it has 36 separate contracts – each with their own expiration dates and time periods – with a single provider.
“Without robust legal and business development departments, such contract structures are not a long-term model for responsiveness and adaptation to customer needs and digital banking innovations,” he said. “The high costs, unescapable contracts, consolidation, and slow reaction times are harming local financial institutions’ abilities to keep up with their bigger competitors.”
‘Unsustainable’ Situation
Calling the current situation unsustainable, Chopra said he has asked Bureau staff to work with core services providers and our federal partners, including to answer questions related to banks’ collective bargaining on core services’ contracts.
“We will also work with other agencies to examine third-party service providers and potentially referring complaints to other law enforcement agencies,” he stated.
