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CFPB Should Create Safe Haven for Innovators

The Consumer Financial Protection Bureau showed up in Silicon Valley earlier this month to announce a new effort to encourage innovation in consumer finance.

Coming from a regulatory agency, the debut was nothing short of remarkable.

Speaking to an assembled group of start-ups, venture capitalists and financial innovators, CFPB Director Richard Cordray unveiled Project Catalyst, the bureau's effort to make good on the second part of its dual mission of consumer protection and financial access.

Cordray spoke eloquently about the importance of innovation in the lives of consumers, even while recognizing the recent economic harm caused in the name of financial innovation.

Banking regulators like to make positive mention of innovation, largely to placate the banks they regulate. Cordray made his remarks at the Computer History Museum, in a room filled with technology companies marginally regulated by the CFPB, if at all, and he backed up his words with action. 

He announced data-sharing collaborations with three start-up financial providers – BillGuard, Simple and Plastyc – to understand how new approaches to financial services can positively shift consumer behavior. He also signaled the bureau's interest in working with providers to test alternative forms of product disclosure, particularly given how technology is changing the way consumers interact with information.

Project Catalyst is off to a strong start, and it will need a bold Act Two to keep up the momentum. As the CFPB fills out its innovation agenda, the agency should take on the most vexing challenges in consumer finance.

How do we solve the cash in/cash out challenge for cash-based consumers as money becomes increasingly digital? How do we increase direct deposit rates?

How do we encourage consumers to save, even small amounts, and, at the same time, make the economics of small savings work?

How do we extend credit to credit-challenged consumers at reasonable rates and in ways that don't trap them in debt?

How do we do business with consumers who have thin or nonexistent credit files? How can we leverage increasing amounts of social and other data to help consumers qualify for more and better products, on better terms?

How do we ensure that consumers understand the financial products in their wallets? How can we design products and experiences to nudge them toward optimal financial decisions?

Entrepreneurs and established firms alike are working on all of these thorny questions. The challenge is lack of clarity around the rules of the game. In some cases, the CFPB has signaled it will write new rules. In other cases, new products and approaches are not expressly addressed by existing regulations, making it hard for entrepreneurs and their financial backers to invest the time and money needed to build businesses.

There is only so much the CFPB can do to speed up the rule-writing process. Listening hard to innovators about new technologies on the horizon will be important to ensure that rules written today don't become obsolete overnight. But that alone won't ignite innovation.

The most important thing the CFPB can do to fuel entrepreneurial spirit is to create a safe place for innovators to try out new ideas. The CEO of tech start-up BillFloat, Ryan Gilbert, put it best when, during his remarks at the Project Catalyst launch, he suggested the CFPB create a sandbox for financial services experimentation.

Imagine if the CFPB set up a series of innovation labs, each one focused on solving a different consumer finance challenge. It could create something akin to an X Prize, encouraging companies to solve problems through competition. Or it could invite applications from both entrepreneurs and established financial companies and offer those with the most promising ideas a time-limited waiver or safe harbor for small, controlled pilots of products or features that aren't clearly covered by existing regulations.

The labs would need to be broadly inclusive given both the state of play in today's financial markets and the CFPB's own mandate to regulate products across different institution types. Other regulators should be included, too, to ensure a shared understanding of the impact of particular innovations on consumers, firms and the broader marketplace. If the CFPB likes what it sees, but the OCC or state regulators don't, then innovation will remain stymied.

Creating an innovation sandbox to tackle the most pressing consumer finance challenges is an incredibly tall order, but the CFPB may be up to the task. The CFPB is a start-up, as Cordray himself noted in remarks peppered with literary references, affording immense opportunities to build a different kind of regulatory agency.

Said Cordray: "Ernest Hemingway said that bullfighters are the only people who live their lives ‘all the way up.' It may sound odd to presume to say the same thing about government regulators, but we feel we are doing just that. And it is a marvelous feeling."

Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation. 




(10) Comments



Comments (10)
"Innovators" in mortgage design helped the "underserved" gain "financial access" with the compliance and consent of their government regulators. These innovative mortgages led to the biggest financial collapse in decades, and ultimately to the creation of the CFPB. Now you are asking the CFPB to give "innovators" are regulatory "safe haven"? The definition of insanity is repeating the same mistakes over and over again.
Posted by PTO | Wednesday, December 12 2012 at 5:47PM ET
No good deed goes unpunished by regulators.

Per Kevin Wack's article on 12/12 in American Banker,

"The difference between an innovative new credit product and a prettied-up payday loan may be in the eye of the beholder. But when that eye belongs to a regulator, the consequences can be devastating for a company. The recent demise of TandemMoney LLC, a South Dakota-based start-up that was partnering with two banks, appears to have been the result of unwelcome scrutiny from federal banking regulators....,Before TandemMoney closed its doors, it developed a prepaid debit card that allowed customers to borrow short-term money, but only if they set aside $20 in savings every month. Some advocates for the unbanked saw the savings requirement as an intriguing innovation, while other consumer advocates denounced the product, calling it a payday loan in disguise."

Rules driven bureaucracies like the CFPB (even if they have good intentions) abhore innovation and models they don't already have rules to govern. A safe harbor for innovation is a great concept, but CFPB is unlikely to get past the concern that just one idea might not be so good for consumers even if others open great new ways to deliver financial services. Unless a financial service is truly delivered for free, someone can claim there is consumer harm or abuse. Just ask TandemMoney LLC.
Posted by Brian L. | Friday, November 30 2012 at 5:26PM ET
In light of the innovative ways the financial industry finds to avoid compliance with any effort by states and the Federal Government to protect and defend the consumer against fraud,abuse and economic ruin,
I think we should urge the4 CFPB /Silicon Valley initiative to invent a "Bull
S--t" meter for articles like the above.
Then we could have classes in ethics and morality for Jamie.
Posted by stanbsch | Thursday, November 29 2012 at 5:47PM ET
We've already gone to hell in a handbasket and it's because of the methods by which we bank, borrow and manage our personal finances. It's an imbalanced relationship that has proven itself to be ineffective and broken. We need to find new ways of doing old things. Innovative methods of managing your personal finances has already proven themselves to out perform conventional thought and practice.
Posted by Bill Westrom | Thursday, November 29 2012 at 2:50PM ET
give me a break. another ridiculous, laughable scam idea for crybaby greedy finance "experts" to get a free pass / excuse to take advantage of regular folks by calling something "innovation?" Gawd. Look, this is easy. don't be a greedy, unfair a-hole in the first place and we can all avoid these gimmicks and problems. And by the way, stop whining about the CFPB in general. you know damn well the industry deserves to be even more highly regulated than it is and the CFPB is not bad or to blame. Go ahead and abolish the EPA and FDA and other protective agencies and all unions and see how quickly we all go to hell in a handbasket.
Posted by getreal | Thursday, November 29 2012 at 2:35PM ET
"What can CFPB take to promote innovation in the financial services industry?" Get the h-- out of the way. Bureaucracy is the antithesis of entrepreneuralism. The very idea is repugnant. Even if the current regime didn't have such a dismal track record of crony capitalism -- GM, Solyndra, etc.
Posted by formrbanker | Thursday, November 29 2012 at 2:27PM ET
The best thing the CFPB could do for financial innovation is to dissolve itself and leave the marketplace alone. We don't need this intrusive, big government, anti-profit, all powerful bully looking over our shoulders.
Posted by Johnny Tremaine | Thursday, November 29 2012 at 1:47PM ET
"Imagine if the CFPB..." regulates innovation. If Americans and particularly innovators do not get that the CFPB is all about centralized control, then they desire to lose their freedom.
Posted by parkerco | Thursday, November 29 2012 at 1:10PM ET
How can I get involved? Who do I contact to introduce a financial innovation with a 5 year track record of teaching consumers how to implement and execute better financial practices as it relates to better use of income to manage and control debt (debt; the underlying killer of all other financial endeavors), increase savings and gain greater degree of control, authority and influence over every dollar they earn and spend. We have extensive data to prove validity for both consumer and institutions. To whom can I introduce the data. Please contact me at
Posted by Bill Westrom | Thursday, November 29 2012 at 1:00PM ET
What are the oversight and accountability protections to ensure that the well-meaning Project Catalyst does not stray into an exercise of picking favorites and rewarding friends?
Posted by WayneAbernathy | Thursday, November 29 2012 at 12:48PM ET
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