The three-digit credit score has outlived its usefulness.
This was a strong message Thursday from Rohit Chopra, director of the Consumer Financial Protection Bureau at the Fintech Nexus conference in New York. It was one of many fintech-friendly points he made to an audience that offers alternative data and lending software to help banks rely less on the scores.
"Credit scores are often unreliable, inaccurate or in many cases people won't even have a credit score," Chopra said. "More lenders are getting insight on cash flow, what's coming in the account and what's leaving, that's going to give people insight on residual income, which really is in some ways going to back to the basics of banking, of saying how much money does someone have left in order to service some sort of new loan or financial obligation."
Chopra also said he'd like to give consumers the ability to threaten to switch banks more easily, and that that will be a factor in the data-sharing rules the CFPB is writing to fulfill the Dodd-Frank Act, which he said should be finished next year.
"I just want to see consumer finance where people aren't stuck," he said. "Where they can switch more easily and they can take their business elsewhere."
Though the Fed raised interest rates in recent quarters, the biggest banks have not passed on those rate hikes to depositors, Chopra pointed out.
"The more consumers have the ability to credibly threaten a switch, I do think that could help us help consumers capture more of those deposits and ideally get lower costs on their loans as well," he said.
Customers should stay with their bank because its pricing or service is good, not because it's so complicated to switch, he said.
"What you see a lot in banking is it's a bureaucratic nightmare to switch your products, move your money," Chopra said.
Chopra did warn the fintechs in the audience that as the sharing of bank account data grows, the agency is also concerned about not "creating an underworld of misuse of data," he said.
"Some people might see an open banking ecosystem as a ruse by which they can surveil people, take very detailed transaction data and frankly use it for other purposes, like surveillance-based advertising and things completely unrelated to financial products," Chopra said. "We're going to have to figure out, how do we stop that?"
The agency is considering putting limits on third parties' uses of data outside of financial services.
"We're going to need to think about who gets to be able to get that data and how do we make sure we know who they are so that we can properly police them," Chopra said. "We have learned a lot from the European Union, the U.K and others, and we don't want the early years of any open banking world to essentially be polluted by scams."
Fintechs need to create some self-policing rules, he said.
"You can't expect the regulators to get all of the details on standard setting on what types of technologies are going to be used," Chopra said. "You're going to see us try and create rules that are more timeless and there can be standard-setting by incumbents, by challengers, by consumers in a way that is fair and in a way that the regulators can point to."
Chopra had stern words for the buy now/pay later industry. In an analysis the CFPB did of some financial products, it found "the talking point that buy now/pay later is some big boon to those who would otherwise not be able to be served by the financial system was largely untrue," he said. "What we did find is that those with buy now/pay later loans are also very likely to have other types of credit."
Buy now/pay later products should have some of the same protections as a credit card, he said, especially in the way companies handle disputes and charge fees.
"You'll see us do more to try and make sure that buy now/pay later becomes more of a race to the top than a race to the bottom," Chopra said.
The CFPB is looking at buy now/pay later apps that create personalized shopping experiences.
"We're looking into what is all this data that's being harvested about people and how is it being used?" Chopra said.
The CFPB is also looking at peer-to-peer payment apps like Venmo and Cash App and their lack of deposit insurance.
"I want to make sure that when people think that their payments are stored in a deposit-like account, that it's truly safe," Chopra said. "We have argued that we may need to do some things in order to give people that confidence."
Before the CFPB was founded, regulation was tilted toward the big incumbent banks and often complicated and prescriptive, Chopra said.
"I think when you design the rules just for the biggest incumbents, you create problems," he said. "We are generally taking a new approach to regulating. We're looking more at how do you promote a competitive, decentralized market structure? How do you make sure that middlemen and gatekeepers don't get to eat a big part of the pie? And, ultimately, how do you create rules that promote switching and shopping?"
