How will Biden’s order fostering competition affect credit cards?

In the spirit of encouraging financial marketplace competition, President Joe Biden has directed, in a July executive order, the Consumer Financial Protection Bureau to take action against abusive practices by financial services firms. This would ensure that those who engage in unfair practices do not gain an “unfair advantage” over those businesses that follow the law.

The same executive order also asks the CFPB to focus on rulemaking that would encourage portability for consumers’ financial transaction data.

Aims to foster competition

According to Biden, in his executive order, “Robust competition is critical to preserving America’s role as the world’s leading economy. Yet over the last several decades, as industries have consolidated, competition has weakened in too many markets, denying Americans the benefits of an open economy and widening racial, income and wealth inequality.”

So how will this directive impact the American consumer? The CFPB declined to comment on the matter.

Ed Mierzwinski, senior director of the federal consumer program at the U.S Public Interest Research Group, observed, “I see no fallouts for law-abiding firms. Wrongdoers will, of course, see heightened enforcement actions. Enforcing the competition laws and stopping rampant consolidation of markets serves nascent competitors, promotes innovation and gives consumers more choices.”

And according to Ebony Sunala Johnson, associate general counsel for the Consumer Bankers Association, “How expansively the bureau interprets this UDAAP directive will depend on bureau leadership. The directive may impact many product lines including credit cards if Enforcement looks for new and novel intersections of UDAAP and competition.”

There could be another positive fallout, too. Earlier this year, the Federal Trade Commission lost some authority to impose restitution payments due to a Supreme Court order. The CFPB’s heightened scrutiny on abusive practices could help pick up some of this slack while Congress ponders the matter of how far the FTC’s reach extends.

See related: Does the CFPB’s task force further consumer protection?

There may be clampdown on credit reporting bureaus

Even before the executive order was issued, the CFPB had been trying to get tougher on so-called unfair, deceptive and abusive practices (UDAAP). For one, it had rolled back some of the initiatives deemed to be more pro-business than consumer-friendly that were put in under Kathleen Kraninger, the previous CFPB director.

The previous regime had lightened its UDAAP efforts, but Dave Uejio, CFPB acting director, rescinded that policy after taking office earlier in 2021. And the CFPB has also gone back to collecting data under the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act), an effort that had been paused under the previous management.

It seems encouraging competition would mean being harder on mergers so that there’s adequate choice for consumers. According to Mierzwinski, “It specifically looks at slowing the growth of mega-banks by no longer allowing mergers to be rubber-stamped. U.S. PIRG studies, over the last 30 years, have consistently shown that big banks charge bigger fees. More competition means more choices and more opportunities to avoid big bank fees.”

There’s also been some consolidation in the consumer credit reporting space. For instance, Experian owns Clarity Services, Equifax owns DataX and also Work Number, an employment bureau. The three major credit reporting bureaus, which also include TransUnion, all own at least one tenant screening bureau. It seems the executive order will heighten scrutiny of such mergers.

Will swipe fees be impacted?

The topic of credit card swipe fees has been a contentious one for many years. While the Durbin Amendment that capped debit card fees only applies to that market, retailers are clamoring to extend that effort to all payments, a goal that could be facilitated by this executive order. It seems that swipe fees (charged by payments networks, including Visa and Mastercard) tend to have a regressive effect, with lower-income consumers who don’t typically reap credit card rewards subsidizing the rewards that more affluent consumers enjoy.

As for efforts to cap credit card fees, that would be a task for Congress, considering “that’s a high bar,” according to Mierzwinski.

Even prior to this executive order, it seems the Department of Justice’s scrutiny of Visa’s proposed acquisition of Plaid, a fintech firm that was developing a payments platform, led to that deal being scuttled earlier in 2021. The DoJ alleged that Visa was looking to eliminate this competitive threat to its online debit business through the acquisition so that Plaid wouldn’t take off.

Proposed rulemaking on financial data portability

In the matter of financial data portability, the Biden order enjoins the CFPB to begin or continue “a rulemaking under section 1033 of the Dodd-Frank Act to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products.”

Even before the executive order, the CFPB put out a notice of proposed rulemaking on this topic, inviting comments from the public by a Feb. 4, 2021 deadline. The notice stated that under section 1033 of the Dodd-Frank Act, subject to rules put in by the CFPB, “a consumer financial services provider must make available to a consumer information in the control or possession of the provider concerning the consumer financial product or service that the consumer obtained from the provider.”

While consumer-authorized data access offers the potential for improved financial services, more control over their financial lives for consumers and increased competition in the marketplace, it also comes with risks. For instance, consumers’ data could be exposed.

See related: A guide to credit card security

Make financial data portability work for consumers

The call for public comment on the proposed rulemaking elicited 100 responses from the public, with many pointing out the risks to consumers. For instance, Denise Marti noted the CFPB should not authorize any more ways for thieves to steal people’s money and ruin lives. “Make it better for the customers not the bankers! They get their money back,” Marti wrote.

Rick Lee, who described himself as a graduate student in cybersecurity law, noted, “Oftentimes companies choose to neglect data safety and protection over cost-saving measures. The lack of resources invested in security puts customer’s data and company data at risk.” Data holders, users and aggregators don’t have sufficient market incentives to make sure consumer data is safe, he added.

A comment from Truebill, a financial app company: “If financial institutions are given permission to charge for data access, there is a perverse incentive for them to make this costly in order to create barriers for other companies who wish to service customers.”

Commenting for payments network Visa, Ky Tran-Trong, vice president of global regulatory affairs at Visa, wrote, “We suggest leveraging existing laws and regulations that safeguard the security and privacy of consumers and their data, and regulating anew only where there is truly a novel need for additional protections, or to better position ecosystem participants to comply in a complex regulatory environment.”

Opportunity to make credit bureaus more accountable

Chi Chi Wu, an attorney at the National Consumer Law Center, sees data portability as an opportunity for consumers to use their own data, which could make for real competition to the big three credit rating bureaus. “The credit bureaus have created a credit reporting system that has unacceptably high levels of errors as well as a biased and dysfunctional dispute system,” Wu noted in her comments on the CFPB rule.

Use of customer-authorized data from checking accounts would allow for an analysis of the account’s cash flow and could also make for more accuracy. For instance, if an aggregator knows the consumer can cut off its data access if it’s not accurate, that could lead to more accuracy from the aggregator. Wu urged the agency to give consumers “the meaningful ability to shut off access whenever they want.”

The Fair Credit Reporting Act should apply to data aggregators who are providing information for purposes that are covered by the act, such as access to credit and employment, Wu added.

As to the timeline for rulemaking on this financial data portability rule, “The (regulatory) agenda shows that the next expected action regarding that rule will occur in April 2022,” a spokesperson for the CFPB said, via email. “This is a normal process and timeline for initiating rulemaking, particularly on such an important and complex topic.”