As the Senate prepares to vote on a financial regulation bill, one of the most powerful actions it can take to simultaneously strengthen consumer protection and increase access for the underserved is to ensure that nonbanks are effectively regulated at the federal level.
Nonbanks have long been a part of the broader financial services system. Consumers gravitate to these providers, either instead of or in addition to banks, for a variety of reasons.
Their hours and locations are convenient for time-strapped consumers operating on a just-in-time basis. They are less formal and provide a more relaxed customer experience. Most important, they fill needs that banks may not be able or willing to fill.
Consider the consumer living from paycheck to paycheck, whose employer doesn't offer direct deposit. Payday arrives, and she needs to turn her check into cash so she can pay her rent to a landlord, who doesn't accept checks. Her bank will provide her with the first $100, but no more until the check clears. So instead she heads to the grocery store and pays a fee to cash her check. She is paying for immediate liquidity, something most banks simply don't offer customers who lack available balances.
The result? According to my organization's 2008 "Underbanked Consumer Study," underbanked consumers more frequently conduct financial transactions at retail establishments than at banks or credit unions.
Nonbank financial services companies most often conjure images of check cashers and payday lenders. But these kinds of money-services businesses, or MSBs, are only a part of the landscape, which also includes money transfer companies, walk-in bill-payment providers and disruptive innovators like prepaid debit card providers, microlenders, alternative payments companies and retailers. Some of the most innovative new financial services businesses focused on the underserved are nonbank companies.
The number of MSBs is estimated at 200,000 or more, dwarfing the number of depositories. These varied businesses are regulated largely at the state level through a highly uneven set of laws and licensing regimes that barely keeps pace with the dramatic expansion and transformation of the MSB arena.
From all the talk in Washington, it would seem as if banks and MSBs operate in parallel universes. The fact is, banks and nonbanks are more likely to be collaborators than competitors.
Nonbanks rely on banks for capital and infrastructure. And banks rely on nonbanks for customer acquisition and distribution.
After 9/11, banks were essentially put in the position of having to regulate their nonbank partners, particularly around procedures to combat money laundering, leading many banks to cut ties to MSBs. The financial crisis has exacerbated the regulatory and reputational risk that banks face in doing business with nonbank financial services providers.
That in turn has led to capital constraints and a reduction of product offerings. While it may seem counterintuitive that increased regulation of nonbanks would lead to greater access, nonbank regulation at the federal level could mitigate the risks banks face and improve the environment for bank-nonbank partnerships. And that could buoy nonbanks' efforts to innovate.
Consumers generally don't know and don't care who is playing what role when they seek out financial services, as long as the product works and they know who to call when they have a problem. Our regulatory system should mirror the customer experience, rather than creating bright lines that consumers can't see.
By regulating banks and nonbanks under the same consumer protection standards, we can ensure that consumers continue to have the ability to shop with their feet and select the combination of products and services that best meet their needs, with the benefit of knowing the product is safe, regardless of who is providing it.
Without similar standards, we risk perpetuating the patchwork quilt of regulation, where a subset of firms falls through the cracks and wreaks havoc on both consumers and the financial system. Moreover, we dramatically hamper the ability of nonbank innovators to develop successful, scalable and responsible businesses to reach underserved markets, at a time when banks are increasingly challenged to serve the underbanked themselves.
Including nonbanks in the Consumer Financial Protection Bureau is an important first step toward rationalizing the regulatory system and ensuring it accurately reflects how consumers conduct their financial business.