RegFi Episode 46: Consumer Banking in a Rapidly Changing Competitive and Regulatory Environment
31 min listen
RegFi co-hosts Jerry Buckley and Sherry Safchuk are joined by Kelvin Chen, Senior Executive Vice President and Head of Policy at the Consumer Bankers Association, to discuss the rapidly evolving business and regulatory environment in which consumer bankers are operating and the initiatives CBA has underway to enhance consumers' understanding and experience.
Links:
- Consumer Bankers Association
- CBA "Credit Card Confidence"
- Orrick Financial & Fintech Advisory
- RegFiPodcast.com
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Jerry Buckley:
Hello, this is Jerry Buckley, and I am here with RegFi co-host Sherry Safchuk. Today, we are joined by Kelvin Chen, Senior Executive Vice President and Head of Policy at the Consumer Bankers Association. Kelvin brings to that position a wealth of experience in government and the private sector. Notably, before joining CBA, Kelvin led the regulatory affairs at Barclays US Consumer bank. And before that, he led Capital One’s bank regulatory and policy team. In government, he created and led the Federal Reserve Board’s Innovation Policy Team in the Division of Supervision and Regulation, and he previously led the CFPB’s policy development around emerging payments. He’s also spent time in the earlier part of his career as a litigator in private practice.
Kelvin, we’re delighted to have you with us. For the benefit of our listeners, let’s get started by talking about the Consumer Bankers Association itself, its members, its mission, and how it interacts with other banking trades at both the national and the state level.Kelvin Chen:
Absolutely. And Jerry, before I lean into it, I just got to start by saying thank you for having me here. I’m a big fan of the podcast and just any opportunity to be in your orbit and Sherry’s orbit, I’m just greatly appreciative of. So thanks so much on behalf of me and the CBA.
And so the Consumer Bankers Association, we’re a trade association that’s a little over 100 years old. We’re the only ones that focus solely on retail banking. And so, where banking hits consumers, we want to be kind of the prime voice. And so, we do a couple of different things. We have committees in which like 600 or so different bankers get together to compare notes on various issues. We run an executive banking school that is akin to like a banking specific MBA program, including where people actually go on campus or get back in flip flops and live in dorms for a week in the summers.
But we also do advocacy. And so, I lead up our advocacy work across our lobbying, our regulatory, policy, communications and a new data functionality. And our goal there is just really to help our members, retail banks, speak with one voice in D.C. through issue alignment and also just storytelling.Jerry: And as related to the other groups, such as the American Bankers Association, the Independent Community Bankers, and the state associations, how do you interact with them? Kelvin: We try to be good neighbors. And so, there’s so many of the issues that we touch on. So, for instance, just this week, us, the American Bankers Association, and the Bank Policy Institute were in front of Senate staff, educating them on all the things that bankers do on the fraud side. And so, we really make a point to try to link arms on issues where possible.
But then we have different areas of expertise. So, ABA represents a broader waterfront. As mentioned earlier, we focus on the consumer issues, but also by a function of our charter, we focus on our bylaws. We focus on folks that are above the $10 billion mark, people that are subject to CFPB supervision and enforcement. And so that also may kind of impact where we are a louder voice or in other areas where we’re more supportive. I joke with my team a lot that sometimes you’re lead guitar and sometimes you play tambourine, but we just want to be good band members wherever we are.Jerry: That’s good. Well, I’m sure you’re always in tune. Sherry? Sherry Safchuk: Kelvin, let me join Jerry in welcoming you to our RegFi podcast series. Last week, the Consumer Bankers Association, or the CBA, launched the Credit Card Confidence Campaign. So congratulations, first off, on that one. Can you tell us a bit more about the campaign? Where did the idea come from? What did you envision? What do you hope consumers get out of it? Kelvin: Sherry, thanks so much for asking. You know, when I took this job a year ago as a lawyer/reg affairs person, I never would have thought that I’d be this excited about a TikTok campaign. But in many ways, it’s a good example of the work we’re trying to do to combine our data work and our regulatory expertise, but also our communications prowess and to try to hone complex messaging and distill it into simplified ways.
So, when I think about this campaign, it’s a website, but it’s also work with about a half dozen TikTok influencers, where we’re trying to educate consumers on how to choose their first credit cards. And there’s a couple of things that goes into that, right? Part of this is we, one, want to offer best in class consumer education, right? And so, if you go on the website, www.creditcardconfidence.com, you’ll see it’s hopefully a kind of slick looking website, but there are deep links and sites into things like the CFPB’s Card Act report and a lot of kind of very granular data there. Because the goal is to pull that out and get that information to consumers in an easy to understand way.
The thing I note there is that in the Card Act report, for instance, the CFPB notes that although 95% of balance transfers are for 0% and they only cost 2.8% on average, 50% of millennials and 61% of Gen Zers didn’t know that they qualified for balance transfers. And so, the CFPB kind of leaves that as an open question. We are trying to fill in that gap a little bit.
The other aspect of what I think of as trying to be best in class in consumer ed is just trying to be a little unbiased in the information that we give folks. So, when I was thinking about this earlier, I was at the CFPB research conference and happened to sit next to one of my mentors at the CFPB that knows more about credit cards than most people in government. And so, I asked him, I said, “Hey, who does credit card education well?” When we’re trying to do our lit review and see whether there’s a there. And he couldn’t give me any names because in this space, so much of the card education is really inherent, embedded in that is some form of lead generation, right? There’s some aspect of converting people over to specific brands. And so, in this case, we wanted to help people give them rule of thumbs without driving them to specific products.
Along the way, you know, we’re trying to help provide simple advice that then also helps clarify a lot of misconceptions about the credit card market. There were hearings of the Department of Transportation and the CFPB on the perceived over complexity for reward products. The CFPB has recently been leaning in on this notion of shrouded pricing, that card products and other products lure consumers in with one thing and then gouge them with other things. Whereas, we really think that with a three question process, you can pretty easily get people to the right spots. And that’s where I’d really close with this also is that we’ve really been thinking a lot about behavioral economics with this as well and using this as an opportunity to test and learn there. And so, Daniel Kahneman writes about how If you can make a message that is easier to understand that even rhymes or makes people smile or more likely to accept that heuristic as truth.
And so, we try to take away a lot of this complexity and we intentionally model, we have a quiz on our website that’s intentionally modeled after like a Cosmopolitan — like a Cosmo-like quiz but it’s only three questions long. But if you go through that, I think it really avoids all of the concerns that the regulators have about shrouded pricing and overcomplexity and kind of shows how a lot of those concerns are Misfounded.Sherry: I mean, that sounds really helpful. And I recall my first couple of credit cards not knowing anything about balance transfers, maximum amounts, things of that nature, APR, interest rate. So, it sounds like this will be really helpful.
I just want to pivot because I know there’s so much going on in the public policy arena related to consumer lending. Could you share with our listeners what issues the CBA is prioritizing now and also describe how the association is trying to move the needle in these areas?Kelvin: Thanks, Sherry. I mean, gosh, in the last couple of months of this administration, right, because whoever wins, there’ll be regime change. You know, we see the regulators pushing out the last of some pretty dramatic rulemakings. And so, we’re really just kind of holding on for dear life as we deal with we in the industry help navigate what’s coming across the board.
In terms of what I expect to see that we’re most focused on, there would be the CFPB’s late fee rulemaking on credit cards, the CFPB’s overdraft rulemaking as it relates to overdraft services and deposit products, their Dodd-Frank Act Section 1033 open banking proposal, and then the Fed’s surprise Regulation II for debit interchange. And there’s a lot of other stuff too, right? There’s this thicker rulemaking that would basically rewrite privacy for the U.S. and the like.
The thing I would note is that we have particular roles in each of these, including in some cases being a plaintiff in the lawsuit and the credit card litigation space. But what I would say is kind of taking a step back and looking more thematically across the different rulemakings, there are kind of two big focuses we’re trying to bring to bear.
One is that we’re really trying to encourage the regulators and kind of to some degree publicly hold them accountable for relying on accurate facts and data when they’re doing the rulemakings, right? We may have different opinions about what the right policy outcomes are. That’s kind of what elections are for. That’s why we have these various experts, but we can’t have different facts. And so, when we had the CFPB come in with, say it’s late field rulemaking, you may recall the ANPR, like the advanced notice of gross rulemaking with several, several years ago. That rolled out with the notion that there was a lack of competition in the credit card space. There are a lot of reasons why you might have certain thoughts about credit card late fees. But a lack of competition, like the CFPB’s own Card Act report, not only notes the 4,000 plus issuers that are out there, but also that there were $53 billion in balance transfers in one year. So even though it’s lower than the CFPB would want it to be, that’s as large as the seventh largest issuer, just wiping out its whole holdings.
And so, we’ve made it a point to call out the Bureau, respectfully, using their own data when we feel like they are being fast and loose with data. And so, we actually have a website, cfbbfactcheck.com, but it’s a broader fact check campaign where over a dozen times we’ve called out the Bureau and said, hey, we appreciate your saying this, but just keep in mind that your data says otherwise. Another example of this and why it matters is in the roll up to the CFPB’s overdraft rulemaking, for instance, they put out a piece saying, hey, the CFPB’s Making Ends Meet Survey shows that many consumers that rely on overdraft products could have and should have used their credit card products instead. Now, that could be a great point. However, if you dig a little deeper, the CFPB’s Making Ends Meet Survey is populated by the CFPB’s credit card panel, which means that everyone they surveyed necessarily had a credit card or at least a credit score. And that ignores like the one in 10 Americans that lack credit reports. Sorry, the one in 10 Americans that lack credit scores, and then the other one in 10 Americans that lack credit reports. So, the one in five Americans that are credit invisible, and many of whom may need to rely on overdraft products. So those are the kinds of things we try to highlight.
And that kind of goes to the other point we really focus on, and that’s the concern that a lot of these rulemakings, although they may be well-intentioned, may ultimately harm or debank Americans, right? So, overdraft products, if you eliminate that, given that these folks already don’t have access to credit cards, you know, our survey research shows that for frequent overdrafters, they’re as likely to have to pawn an item or sell an item as they are to be able to charge for an item. Yet most of these folks, because they’re over drafting for products like groceries or utilities or rent, would still need to consummate the product or worse, face a fee that’s higher than an overdraft fee. Similarly, with credit card late fees, the collateral impacts of that could be higher cost of credit for a lot of people that pay their bills on time, basically moving the sticks on them.
So, I want to be careful about not sounding too much like a partisan or an industry shield here. The thing I would emphasize is that I was a CFPB alum. I worked under Rich Cordray, and I spent more all-nighters in two years working on one particular empirical piece there than I did in seven years of private practice in New York litigating. And, you know, a lot of this we do because we believe that you need credible, durable regulators and you need credible, durable regulation. But for that to happen, right, you have to start with the facts and really focus on consumer impacts.Jerry: Well, you know, Kelvin, you were at the Fed, as was mentioned, and before that at the CFPB, and you played an important role in promoting innovation. Of course, since your time in government, there have been some huge advances in the development of generative AI and machine learning generally.
Given that you studied systems engineering and mathematics at the University of Pennsylvania, I admire you for that because that wasn’t my strongest suit, which is why I went to law school. But given the fact that you did and also went to law school and have deep experience in the regulatory arena, you may be as well qualified as anyone to offer your thoughts on this question.
As you know, the premise of our RegFi podcast series is that financial regulation, driven by technology, will change more over the next 10 years than in the last 50. Looking ahead over the next decade, how do you see advances in technology impacting the way in which federal regulators carry out their mission?Kelvin: Jerry, thanks for asking. And by the way, you’re way too complimentary. The systems engineering major is sadly kind of engineering for people that don’t want to be engineers anymore but need to graduate on time. So, if it came with air quotes, it would be air quotes systems. Not to disparage all the other system engineers out there, but hopefully not too many of them are listening to regulatory-focused podcasts.
So, thank you for asking that, Jerry. There’s a couple things to keep in mind. Part of this is, you know, I’ve recently been reading the “Only the Paranoid Survive”, like the Andy Grove book on technological change, because I’ve just been really interested about the rise and fall of Intel. Part of this is because me and my 13-year-old have lost a ton of money investing in chip stocks recently.
One of the things that the author talks about there is he says, look, you’ve got to recognize strategic inflection points and really adjust accordingly. The thing that I think when we think about technological change, and this is a little bit, this is to some degree, everything I’m going to say here is the same thing you may have heard, you know, one of your guests might have said 10 years ago, but it’s part of this is the regulators, I think still need to realize this, is that I think as regulators carry out their mission, they really need to be mindful that banks are at a strategic inflection point. And it’s a strategic inflection point that in which they’re competing with a broader market that has already priced in a lot of these changes, right? And so part of this is, understanding the breadth of the competition that we’re facing.
So for instance, if you look at Apple Pay, because of the fee that Apple Pay is reported to charge on its tap-to-pay antenna there, that is basically, once you kind of back out rewards and other costs, that would end up taking as much as a third or a half of the revenue that banks make on their credit card transactors, because the margins on transactors are so thin and so interchange-based. And, you know, every day, banks are facing competition like that with non-banks for consumers and for capital with, you know, with embedded finance. The notion is that everyone now is a payment company.
And so that’s what banks are up against. And I think regulators really need to grapple with that. And I would know kind of two of the many different phenomenon, but two phenomenon that I feel like regulators could really be better about recognizing as they do their work.
One is that, we live in this very interconnected world when we’re doing business. There’s kind of a famous tech creed by a guy named Steve Eag about how all the world has moved to APIs. We did a version of this when I was at the Fed, I wrote a speech with Lael Brainard where we talked about Pokemon Go, and we used that as an example of how that relates to banking. And the notion there is that Pokemon Go is an app that is actually built on many different APIs, right? You have iPhone APIs for sensors. You have a map that’s driven by Google’s API. You have Twilio APIs for texting. All of this is built on the Amazon Web Services API. Now that’s the world that we’re in now where people are building their products by linking these APIs together. And banks are no different. We’re just part of that stack for other businesses, right? So, banks are there for access to deposits or for credit modeling, for the cards that go into the tap to pay.
The lesson with Pokemon Go though is that in 2016, when they launched out, they happen to use the wrong API for verifying user identity, right? And so, they had one API that was supposed to just go to Google and say, you know, Jerry Buckley, you can log in with Google and just Google would verify that this is you and not you, right, based on that password combination. Instead, they used the wrong API and gave Pokemon Go outdated access to all of your emails, right, content, text, email, and the like. Thankfully, that’s just Pokemon Go, right? And so they solved it. They figured it out. They moved on with it.
In banking, though, right, this is much more, like the consequences are much bigger. And yet, you know, we have, you know, we’re all waiting for a CFPB open banking rule that will come out next month that will require sharing, require it for free forever, which is one, a whole set of concerns, but also doesn’t address liability and a lot of third-party risk management questions, which here we are again, eight years after Pokemon Go and we hadn’t kind of learned that.
The other aspect that I would raise there is just how fast stuff grows in the non-bank space. And sorry to keep going back to cheesy video game analogies, but during the pandemic, there was a game called Among Us, which is a super lightweight game where you’re trying to figure out who the bad guy is amongst your friends, who’s actually sabotaging you. Among Us was released by a company called Innersloth in 2018. It kind of kicked around, like it had an average of eight users at a time for a long time. But because of the way the internet spikes, some celebrity video game folks on Twitch started playing it, and it went up to 500 million monthly active users by November 2020, including daily active users, 60 million at a time, right? The thing I would emphasize there is not only how fast it grew, but that at the end of that year of all that massive growth, they still only had four employees. And I guarantee you, like one of them, not one of them was probably a compliance or risk management officer.
But that’s the world that that banks are having to navigate. And both in terms of competition, but also in terms of who we’re trying to bring into our systems as well. I think that, to some degree, our prudential regulators, by their missions, have to bake some of that into their thinking because of just the safety and soundness side of things and just operational risk. I think one aspect that I’m slowly starting to recognize as we all kind of go through this kind of 14-year experiment post-Dodd Frank about the cleaving of consumer regulation from prudential, is that with consumer regulators in which they aren’t tasked, nor are they really taught about safety and soundness, like they haven’t baked in a lot of these concerns. So, when you think about things like the need to scale, the need to kind of work at the need to digitize, they haven’t brought that in, which is why possibly you have a consumer regulator that says, gosh, you can’t use chatbots. When it’s like, how can you scale from eight users to 500 million a month without chatbots and the like? Similarly, when you hear some of the concerns about growth or mergers and the like, I get it, but we’re kind of in a world where scale is the only way in which you can handle both some of the growth constraints here, but the operational compliance risks or the operational compliance costs.
And so again, I don’t want to spend the whole time trashing our regulators, but I do think that it’s something that we’re all learning together, and that I hope that they’re also kind of processing along the way.Jerry: How do you make the connections between what’s going on in the marketplace and the regulators themselves? How are we going to have the regulators up on what is actually happening in their regulated entities? Can we find a way to communicate better? Kelvin: Jerry, I confess that I studied for your podcast for this conversation by listening to one of one or two of your older episodes, just to kind of reacquaint myself with the format. And I was delighted to hear you have Raj Date on early on. I recall, when I was trying so desperately to get over to the early CFPB, I was coming from another consumer protector regulator and loving it there and had a great job. But there was a sense that the new CFPB that was being created did it differently. And I’ll note that when Raj stood up the CFPB he did all the stuff that was required by the statute and then he did all the things that were smart to do right he had an office of regulation, you know, rule writers he had uh group of PhD economists and the like. But Raj also created a group of market experts. And the idea behind it was to bring in people that had been in industry that had faced these kinds of pressures that can help then make sure that when the rule writers, the examiners think about things, they’re approaching them with industry concepts in mind.
And so, the example that I would use here, and I hope he doesn’t mind me raising him by name here, there’s a guy, John McNamara, that now leads the Office of Markets at the CFPB. John is such an asset to, and I almost feel like, I hope I don’t paint John by having a trade association say wonderful things about him. But John, before he joined the government, ran a company that focused on debt collection servicing. And so you’re talking about a guy that probably lost sleep at night, you know, took home stress trying to figure out how to keep folks employed while also doing things in a compliant way that really kind of grappled with how you do business. And as you may recall, Dodd-Frank gave these new debt collection authorities to the CFPB that in things and forms of examination and rule writing that had never been at the federal level. And John, in a clear-eyed way, and I think he’s done such a wonderful job being an asset to leaders on both sides of the party, making sure that the agency does things in a thoughtful way, addressing the things that really matter.
You know, I worry that now, with certain leaders and certain ways of thinking, that industry background is viewed as a strike against you and a lack of commitment to consumer protection, or a lack of commitment to government service. And I just think that’s super dangerous because of, to your point, then you start to lose the ability to connect the dots here. Whereas, again, and I’m putting words down in Raj’s mouth, when I thought of like the Raj Date G-person, I guess it’s impolite to say G-man now, but when I thought of like the Raj Date G-person, in my mind it was always like a superstar that understood how industry worked, that understood how regulation work and could synthesize that. And I just hope we can, as the pendulum swings kind of find some way back to that at the CFPB and other regulators.
Jerry: Very insightful point. Sherry? Sherry: I agree. I think that’s fascinating. Another area where there’s a ton of growth is artificial intelligence, AI, where we’ve seen a proliferation of state laws enacted, and we’re seeing a patchwork of legal requirements. We’re seeing this with privacy, and now we’re seeing this with AI, with California taking the lead.
Having this piecemeal approach, as you know, in the absence of kind of federal standards, can make compliance more expensive than it needs to be. Do you have any thoughts about the prospects of national legislation related to the standards for the use of AI?Kelvin: Sherry, thanks so much for raising that. I mean, it’s such a serious concern here, and not just on the AI side. One of the phenomena that we’re seeing now is that more and more states are kind of leaning in on areas that you would typically expect national regulators to be the sole voice, and that the arguments for national bank preemption, or at least just a consistent set of rules, are just so important right now.
I will say on AI, I am cautiously optimistic about there being some more clarified standards, at least as it relates to financial services. And the reason being is because I think you can do it short of legislation. So, in the banking side, and I want to be really, this is not me saying we’ve got all the answers here, but there is a vocabulary and a discipline that lends itself very easily to controlling the risks that are commonly associated with AI. And by that, I mean, when you think about artificial intelligence, right, folks are worried about whether your data is, is tainted or sufficiently representative. People are worried about using the right model and the like, ensuring that there’s a right person in the middle, that there’s appropriate transparency. But because of the mix of third-party risk management, fair lending law, but most importantly, model risk management on the regulatory side, there’s a wonderful vocabulary there. And importantly, a long history of working with your regulators to find the right approach, not just through examination, but through conversation as well, right?
And so, when you look at SR 11-7, Supervisory Letter 11-7 from the Fed, it touches on, it’s almost like exactly written for AI, right? They talk about embedding critical analyzes in both the development and the implementation and the use of complex models. They talk about having a second set of eyes, right? So, someone that’s independent that can weigh in on these issues. They talk about model validation. They talk about how hard it might be to have full transparency into certain models particularly vendor and vendor models, but then they then talk about compensating controls like circuit breakers and the like right. And so yes, inevitably there will need to be some evolution as we think about the approach to how you would apply that to these types of models. But a lot of lessons are there. There’s a lot of goodness there that you don’t have to reinvent the wheel with. And indeed, I think it’s a lot of it’s just a matter of educating particularly folks in the states about this.
The thing I would note though is SR 11-7 only applies to prudentially regulated institutions, right? So that’s an area where only banks are familiar with it, only banks are examined for it. However, post Dodd-Frank, we have the CFPB, right? And they exist to help create a consistent set of rules across banks and non-banks. And so, there’s really very little, I mean, we could have a whole separate podcast about kind of whether or not the prudential regulators committed a party foul by not going through the eight-day process for SRS or 11-7. So that’s, I would acknowledge that, but then whatever the procedural considerations were for that, the CFPB would have the same toolkit there, right? And so, there’s very little in my mind that keeps the CFPB from kind of filling in that void, protecting consumers and creating more consistency across. Because for most consumers, when they’re using an app, they don’t know if there’s a bank on one side or if it’s a non-bank or they don’t know where they are in that process. But the Bureau can reduce the risk to the consumer there by importing a set of rules that already exist, like a copy-paste, in which it’s almost beneficial to plagiarize there.
And so, I’m cautiously super optimistic about the prospects there. I haven’t heard the Bureau talk about it, but all the ingredients are there. And indeed, they’re even interested in AI, if they could just kind of focus on, this may be less sexy than some of the stuff that they’re currently talking about, but there’s so much good that can be done there. And I’m really ... Maybe this is naive, but my thinking is that because all the ingredients are there and there’s so much good that can be done, that it’s just a matter of time before the CFPB kind of connects the dots and does the right thing.Jerry: And would that result in preemptive, or would it be just leading by example for the states? Kelvin: I think it would have to go back and think about kind of some of the under Dodd-Frank, I guess it wouldn’t be preemptive, right? Because like the states can go beyond that with depending on how they want to approach it. But I do hope it would obviate the need for a lot of the states to lean in. And again, this would only be for financial services too, right? So, there’s a wide range, like I know that for instance, New York City has got a set of rules about like contracts with the city. So, like artificial intelligence for garbage routes and like trash pickup, like have now like a whole set of regulations coming out of that. The Bureau’s things wouldn’t touch that, but at least for our world, right, there could be peace on earth, if the bureau were to lean in on this and just do a copy paste and kind of you know have a good notice and comment process about how this should apply in their world. Jerry: It’s interesting because the nature of financial services regulation in some ways provides a template for other areas of commerce. Uh, really, you know financial services can because of its history and because of its regulatory format. It’s not perfect but it does provide a bit of a template for other industries, I think. Would you concur in that? Kelvin: Oh, yes sir, and you know what I love right because we spend so much time including the earlier part of this conversation talking about what folks in our world can do by learning from the outside world. But I do think that there’s a lot that we can teach the outside world. And, you know, as much as I, my job is about kind of pointing out areas where regulators could do better, right? A good notice and comment process, well-constructed rules, and, again, a long history of conversation with regulators about things like how you approach discrimination or how you think about models could hopefully help a lot of other industries out. Jerry: Well, I’m afraid that we’ve reached the end of our time, Kelvin. I know we could go on a lot longer, but thank you so much for joining us. Sherry: Thank you, Kelvin. Kelvin: Jerry, Sherry, thank you so much for having me. This is a lot of fun.