Now that the Consumer Financial Protection Bureau has become law, intense speculation has begun about who President Obama will nominate to lead the agency.
It is a critical question. The structure of the bureau endows the director with significant power and authority. Given how much is under the CFPB's purview, its first director will decide what issues get the most attention and set the bureau's agenda for years to come.
But the real question we should be asking is this: How will the new regulator define what is a "fair" financial product?
The purpose of the bureau is twofold — to ensure consumers have access to financial products, and that those products are "fair, transparent, and competitive."
The agency has the power to issue rules dictating the terms of a broad range of financial products and services — everything from mortgages and credit cards to checking accounts, check cashing and prepaid debit cards — offered by a wide variety of providers.
When writing new rules, the bureau will have to weigh the costs and benefits to both consumers and providers. It will have to take into consideration whether the rules will lead to reduced access by consumers to financial products, especially those in rural areas, at a time when the ranks of the financially underserved are swelling.
Beyond these statutory requirements, it is ultimately up to the CFPB to define high-quality financial products.
Therein lies the challenge. Financial products are complex. Unlike exploding toasters, what often makes financial products harmful is how consumers use them.
"The task is to calibrate the product to the consumer and to balance the benefits of use against the risks," Katherine Porter, an associate professor of law and the University of Iowa, wrote in a 2009 essay reacting to the original proposal for what was then being called a Consumer Product Safety Commission.
She continued, "The most difficult challenge of consumer credit regulation, is not to deem products per se safe for use but to proscribe in detail the way in which they can be used safely."
The bureau will need to pay particular attention to lower-income, underbanked consumers, where getting the balance right between protection and access will be perhaps most critical. To do that, it will need a nuanced understanding of consumer financial needs and behaviors, and the range of products and terms offered in the marketplace.
More data on underbanked consumers exists today than ever before. The "Underbanked Consumer Study," fielded by my organization in 2008, sized the market and provided insights into consumer behaviors and perceptions. The FDIC validated our findings in its 2009 "National Study of Unbanked and Underbanked Households," and plans to update its data every two years.
What's lacking is a comparable data set on product offerings for this market. The underbanked financial services marketplace is increasingly robust and innovative, but there is no central database of the products and services being offered.
My organization just started a survey to gather this information, with the twin goals of spurring further competition and providing policymakers with the data needed to inform critical decisions.
The Underbanked Industry Scan will for the first time chart the underbanked marketplace, cataloging and comparing the variety of underbanked-focused transaction, saving and credit products and services available and highlighting promising innovations.
The survey also seeks to uncover the key trends, opportunities, and challenges in serving underbanked consumers by targeting the full array of providers, including banks, credit unions, prepaid card companies, nonprofit providers, retail financial services outlets, check cashers, payday lenders, and other direct suppliers of products and services.
The results of the supply-side survey, coupled with consumer data, will help to create a set of operating principles that guide the provision of responsible and profitable financial services for the underbanked.
Through a series of structured conversations over the next six months with stakeholders across the industry, CFSI will craft a set of aspirational values delineating the quality of products and services that should exist.
The field has several years of experience to learn from and build on, and there is a growing consensus about the most crucial elements for serving the underbanked profitably and well.
But we tend to talk about them in anecdotes.
Our aim is to distill the principles from collective experience and then link them with examples of best practice from across the marketplace.
It will be at least six months before the Consumer Financial Protection Bureau is up and running. We should use that time to engage in a dialogue about what quality financial products look like, providing the director of the agency with additional perspective on this foundational issue.
