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.