‘I want to see consumer finance where people aren’t stuck’: CFPB’s Chopra

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 offering alternative data and lending software to help banks rely less on results.

“Credit scores are often unreliable, inaccurate or in many cases people don’t even want a credit score,” Chopra said. “More lenders are getting insight into cash flow, what’s coming into the account and what’s leaving, it’s going to give people insight into residual income, which really in some ways goes back to the fundamentals of banking, to say how much money has some quit to service some kind of new loan or financial obligation.”

Chopra also said he wants to give consumers the ability to threaten to switch banks more easily, and that will be a factor in the data-sharing rules the CFPB is writing to meet the Dodd-Frank law, 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 the business elsewhere.”

Although the Fed has raised interest rates in recent quarters, the largest banks have not passed these rate increases on to depositors, Chopra pointed out.

“The more consumers have the ability to credibly threaten a switch, I think that can 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 the rates or services are good, not because switching is so complicated, he said.

“What you see a lot in banking is that it’s a bureaucratic nightmare to switch products, move your money,” Chopra said.

Chopra warned 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 data misuse,” he said.

“Some people might see an open banking ecosystem as a ploy that they can monitor people, take very detailed transaction data and frankly use it for other purposes, like surveillance-based advertising and things unrelated to financial products,” Chopra said. “We have to figure out, how do we stop it?”

The agency is considering placing restrictions on third parties’ use of data outside of financial services.

“We need to think about who is going to be able to get this data and how do we make sure we know who they are so we can police properly,” Chopra said. “We’ve learned a lot from the EU, the UK and others, and we don’t want the early years of an open banking world to be essentially contaminated by fraud.”

Fintechs need to create some rules for self-policing, he said.

“You can’t expect the regulators to get all the details about standard setting about what types of technologies are going to be used,” Chopra said. “You’re going to see us try to create rules that are more timeless and that can be standard setting by incumbents, by challengers, by consumers in a way that’s fair and in a way that 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 that “the talk that buy now/pay later is a huge boon to those who would otherwise be unable to be served by the financial system was largely untrue,” he said. “What we found 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, particularly in the way companies handle disputes and charge fees.

“You’ll see us doing more to try to make buy now/pay later 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 at what is all this data 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 their payments are being held in a deposit-like account, that it really is safe,” Chopra said. “We’ve argued that we might have to do some things 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’re generally taking a new approach to regulation. We’re looking more at how do you promote a competitive, decentralized market structure? How do you make sure middlemen and gatekeepers don’t get to eat a big piece of the pie? And finally, how do you make rules that promote exchange and shopping?”