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Is Regulation the Stumbling Block to Reaching Underbanked?

WASHINGTON — If a forum hosted by the Treasury Department this week on economic inclusion showed anything, it was that bankers, financial technology firms and policymakers continue to struggle with how to bring more people into the financial mainstream.

On one side were financial technology firms and bankers who argued that regulators are handcuffing them in their efforts to reach the underbanked.

"We all want to be more inclusive and we want to make sure that along the way that we don't exploit the people we are trying to help," said William Lansing, chief executive officer of the credit scoring company FICO, while speaking on a panel at the forum hosted by the Treasury Department this week. "Rulemakers should really focus hard on the unintended consequences" of tough regulations.

Lansing said the challenge is time.

"We have so much work to do and in my view the fastest way to make that happen is to enlist the private sector and get the for-profit guys to go after it hard," Lansing said. "These banks need certainty, they need to understand how they will be free from penalties if they experiment in these areas."

He mentioned a concept called "sandboxing" where new products could be tested on a smaller scale as a potential fix.

But regulators said it's not their intent to slow the process, emphasizing that they recognize innovation must take place but saying they must still be alert to the potential for abuse.

"Regulators have to recognize that they cannot simply hold onto the status quo and fight change," said Consumer Financial Protection Bureau Director Richard Cordray at the event. "We don't need to interfere with innovation…as long as it moves in a consumer-friendly direction."

At the very least, both sides agree that more needs to be done.

Treasury Secretary Jack Lew said that Treasury and the United States Agency for International Development convened the forum to identify strategies that could accelerate financial inclusion, pledging that the administration "will intensify our efforts over the coming year to improve access to the financial products and services."

Federal Deposit Insurance Corp. Chairman Martin Gruenberg added that "economic inclusion goes to the core of our mission."

He noted that the FDIC studies the issue by conducting a biannual survey of households that either do not have a bank account or are underbanked — meaning that they turn to higher priced nonbank alternatives like payday loans. The most recent survey, which was conducted in 2013 and released last fall, revealed that 7.7% of U.S. households were unbanked and almost 20% of households were underbanked.

Elizabeth Littlefield, president and CEO of the Overseas Private Investment Corporation, a government institution that supports private investment in the developing world, said "banks and business can be a force for good."

"I think there is a deep misunderstanding of the role of the private sector period, and a deep suspicion of the private sector that we see pervading the sustainable development goals," she said.

One of the bigger players in providing low cost financial services is Green Dot, whose CEO, Steve Streit, appeared on the panel with Lansing and Littlefield. He said his company, which is regulated by the Federal Reserve Board, has been given some leeway.

"By running that bank in a very clean way ... you get permission to do cool things like be able to give millions of Americans without a bank [account], a bank account and design [Customer Identification Program] protocols … to make sure we can do things unique to our customer set," he said.

One of the products Green Dot offers is a debit card without a checking feature, something the FDIC's advisory committee on economic inclusion has also identified as an effective tool for providing financial services. It has also designed a set of standards for so-called "safe accounts" built around the concept.

But while Streit said his bank has been able offer new products, there is an "unintended web of regulation" which he compared to the board game Operation where you get buzzed every time you have a slipup.

"You really have to be careful that doesn't inhibit in an unintended way innovation and speed and pace," he said.

Lansing also said that burdensome regulations have raised the barrier of entry into the banking system so high that it is keeping out new entrants.

"We are making it really hard for small guys to enter and that is where on the margin we start to serve the underserved, and that is where we need to look at the uncertainty and unleash the free-market force," Lansing said.

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