More Populism, the Consumer Financial Protection Bureau and Why We Need To Keep An Eye On How Consumer Sentiment Plays Out In the Months To Come
We’ve been talking much about the Occupy movement - not just for what it is, but for what it could mean. The tension with consumers and the financial institutions they love to hate, it seems, just won’t end. The thunder of the occupy movement should resonate beyond the town greens they occupy, to influence those in power to act with legislation or other regulatory reform, on top of what is already out there for the financial services industry. Every week that goes by, it seems, the plot continues to thicken.
In fact, recently, the anti-bank populism underpinning the Occupy movement was directed at credit cards; however, the originator of the attention was something of a huckster himself. Recently, the Associated Press reported that “a new Facebook page called ‘Balance Transfer Day’ is urging fans to send a message to big banks by applying for credit cards with lower interest rates.” The only problem was that the creator of the page was himself an opportunist who operated an enterprise that profits off credit card applications.
This mishmash of populism, overlayed with fraud and colored by confusion, has put the newly created Consumer Financial Protection Bureau in the spotlight. Recently, the Republican majority in the House united to block the nomination of Richard Cordray, former Treasurer and Attorney General of Ohio, to the head of the Bureau.
The Wall Street Journal referred to him as the “Banker-Basher-In-Chief.” South Carolina’s Senator Lindsey Graham calls the Bureau something out of the Stalinist Era. Republicans want to reform the Bureau and Dodd-Frank when and if they can.
This may foreshadow what may come for our industry. It is a very political climate, with consumers uniting and demanding reform on one hand, and a political majority in the House representing commerce, banks and business trying to suppress any regulatory reform.
The Bureau serves to protect the interests of consumers from any financial services or other related products from financial industries that specifically affect consumers. Recall that the Board is a result of the Dodd-Frank legislation where the terms and conditions of card- holders were specifically a point of contention. At present, they are floating the idea of a prototype credit card agreement written in plain English for card companies to adopt and utilize in lieu of the often incomprehensible legalese found amidst the tiny print of a card agreement.
The prototype agreement that the board is offering for public comment is about one fifth the length of what typically exists for consumers. The terms and conditions are simplified and organized into three key sections - easy-to-follow and easier at least, to comprehend. It’s just one more sign, that some reforms were on the radar of legislators when they cast their net and now the stipulations in past legislation are finding their way where they were intended. The compass seems to be pointing towards the true north of the populist sentiment and concern, where consumers just seem to be leaning in large numbers.
“Regardless of populist sentiment, the political environment does not appear favorable to additional regulatory reform for credit and payment card issues in the foreseeable future,” says Ben Woolsey, Director of Consumer Research at CreditCards.com. “The primary threat on the regulatory front would come from the newly formed Consumer Financial Protection Bureau, but given the fierce political resistance toward the proposed director and the mission and power of the bureau, it is unlikely it will be able to accomplish anything close to its original mission.”
The populist sentiment is influential, however, it may not gain enough traction to make drastic change. It very well may, however, favor the business plans of smaller community-based enterprises. This could be a positive for small businesses who often suffer from card fees – particularly for smaller value purchases.
“The populist protests against the banking industry may likely result in more regulatory efforts to impose fee restrictions on consumer banking, though they are unlikely to pass through a divided Congress,” says John Heaney, Brand Director of SparkBase, headquartered in Cleveland, Ohio. “The more likely result of the protests is the promotion of assorted Shop Small and Shop Local initiatives that encourage consumers to focus their spending on smaller, community-based businesses. Small business that anticipate and exploit these sentiments and respond with ways to capture these consumers with mobile stored- value wallets or gift cards can entice shoppers from their big box competitors and convert them to loyal customers.”
We’ve discussed the advent of mobile payment solutions and systems many times before, but it’s worth a revisit. Every holiday, a new population of smart devices find their place with consumers of all ages. Merchants have aligned their offerings to make buying with such devices oh so easy. Mobile purchasing is not yet complete, but suffice it to say that the market for mobile payments may be one of the most emergent trends in the transaction industry. As a result, watch for signals that the mobile environment might be further regulated.
One hypothesis as to why mobile transactions may receive more regulatory scrutiny is that the technology is perhaps, more vulnerable. Fraudsters are finding ways to exploit the unknowing mobile user.
“We’re seeing a dramatic shift in consumer behavior, with increasing demand to conduct transactions and track all reward program activity on their mobile device,” says Heaney. “Consumers want immediate access to their assorted accounts, want to store value on their phones that can be redeemed instantly in-store and want to connect and engage with merchants on their devices on their own time and their own terms. Financial institutions that want to impose unyielding structure and processes on consumers will be abandoned for more flexible and responsive providers.”
Forget not the controversy with Bank of America and their $5 debit fee. Times could not be more tense over how those in the transaction industry, or anywhere within the financial services industries, should behave.
“Bank of America’s retraction of their proposed $5 debit fee was predictable in light of the relentless media attention fueled by the assorted Occupy protests,” says Heaney. “Their debit fee was a continued focal point of the protesters’ anger and was an easy target for politicians and protesters alike. In light of the firestorm of media attention devoted to one bank’s response to Dodd-Frank regulatory limitations on debit card fees, banks will be more circumspect in their efforts to replace this lost revenue, likely by requiring higher account balances or direct deposit in order to avoid account fees.”
Like the controversy of the $5 debit card free, consumers don’t expect a fee to accompany the convenience of their new technology. But those in the supply chain stand to lose if those fees are not fairly imposed on transactions – particularly on mobile technology transactions. So, the debate over fees for new and innovative technology will continue to brew.
“As the news business has learned, it is difficult to begin charging for something that has been provided for free – the genie proves most difficult to get back in the bottle. As checking accounts serve as gateway product relationships to cross-selling of more profitable deposits, loans and services, the retail banking industry may have to accept them as a loss-leader rather than standalone profit drivers.”
Specifically, mobile technology may be the acid test for how, if any, a fee structure is to be introduced into mobile transactions. The convenience of the technology is attractive, but all players in the supply chain are profit-driven and seek a bottom line for providing their technology.
“The trend towards mobile computing is inevitable and accelerating,” says Heaney. “The potential impact on existing financial transactions and financial institutions may be profound. The large issuing banks will lose influence as nimble digital competitors with entirely different business models emerge and strengthen. While some emerging competitors in the payment space, e.g. PayPal and Square, are targeting small brick and mortar businesses, a more significant impact will be generated by entirely new mobile payment systems that enable stored-value payments, person-to-person transactions and a variety of wireless and contactless POS payment systems. Although many of the large banks are cognizant of these emerging technologies, most aren’t capable of the innovation necessary to respond with new products and new ways of conducting business. Instead, we’re likely to see them attempt to simply replicate their existing physical processes in the digital arena and call it ‘new’ while wondering why they continue to lose transaction activity to smaller and more agile competitors.”
Not everyone is concerned about mobile technology as a competitive threat. Could it be that concern over mobile payment technology to the traditional debit and credit card industry is overstated? Or is it a case that the technology is not yet mature and consumers aren’t quickly adopting apps and PayPal and setting up accounts?
“I don’t foresee mobile payments through tablets or smart phones posing a threat to the financial services industry, as credit and debit cards are still the primary products tied to consumers’ mobile devices and facilitate the transactions behind the scenes,” says Woolsey. “Unless a wireless carrier or major non-banking entity gets into the payments processing [or] settlement space and attempts to dis-intermediate the major financial industry players, there shouldn’t be any threat to the industry due to mobile payments adoption. However, the Internet era has shown that no industry is immune to being suddenly and dramatically disrupted. Time will tell if someone builds a better mousetrap.”
So what does this all mean?
The entire financial services industry is in the midst of a somewhat historical time. Protests abound. Innovative payment technology continues to grow. Fraud and security breaches are omnipresent. Regulatory reform is swinging into play and financial service firms have a hangover from it. Merchants have found some fee relief as have consumers – but it may not be enough. Our elected officials have their hearts, minds and hands filled with much to chew on.
Standby for heavy seas. 
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