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CBA letter to CFPB Request for Information on Mobile Financial Services
Re: Mobile Financial Services Request for Information – Docket No. CFPB-2014-0012
Dear Ms. Jackson:
The Consumer Bankers Association (“CBA”) appreciates the opportunity to comment on the notice issued by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) asking for input on how mobile banking is helping consumers utilize products, manage finances, and achieve financial goals. CBA strongly believes mobile platforms are beneficial tools, allowing consumers to conveniently and safely access traditional banking services and products. In light of these possibilities, we look forward to working with the Bureau on this important issue.
Mobile Usage and Mobile Banking are on the Rise
Once mere communication tools, mobile phones have fundamentally changed society, enhancing the way we access information, interact, and conduct business. For many of us, mobile phones are our dependable assistant, providing us with the ability to get news, check the weather, communicate over various platforms, play games, and log onto countless applications. Through mobile banking, cell phones now have the ability to improve one of the most important aspects of any household – financial management – by providing consumers with greater access, reduced costs, increased money management tools, and enhanced financial education.
As of 2013, 87% of the adult U.S. population had a mobile phone, 61% of which were “smartphones” with Internet capability. Between 2012 and 2013, there was a 52% increase in smartphone ownership, with the adoption of smartphones highest among minority groups. Notably, 73% of Hispanic and 63% of African American populations use smartphones, compared to 58% of non-Hispanic whites. The Board of Governors of the Federal Reserve (“Federal Reserve”) recognized the potential benefits resulting from increased mobile phone usage, asserting “[t]he relatively high prevalence of mobile phone and smartphone use among younger generations, minorities, and those with low levels of income – groups that are prone to be unbanked or underbanked – makes mobile phones a potential platform for expanding financial access and inclusion.”
With the increase in mobile access, financial institutions have expanded their mobile banking5 and mobile payment services. In 2013, the amount of customers using mobile banking rose to 33% of all mobile phone users and 51% of smartphone users. Though expanding less rapidly, mobile payments reached 17% of all mobile phone users and 24% of smartphone users. These gains do not appear to be slowing – last year, 74,000 new users entered the mobile banking market each day. Further, 12% of consumers who do not currently benefit from mobile banking stated they will either “definitely” or “probably” use a mobile banking service within the next 12 months. Though speculative, planned use is strongly correlated to subsequent adoption. According to AlixPartners, consumers in the following age brackets are somewhat likely to extremely likely to adopt mobile banking within the next year: 60% of 18 to 25 year olds, 49% of 26 to 34 year olds, 37% of 35 to 44 year olds, 23% of 45 to 54 year olds, 19% of 55 to 64 year olds, and 14% of people over 65.
Evidence suggests those at risk for falling outside the mainstream banking system are more likely to engage in mobile banking than the general population. Notably, 19% of unbanked household reported they would likely engage in mobile banking within the next year, as opposed to 9% of fully banked households. Consequently, there is a burgeoning opportunity to serve unbanked and underbanked consumers who would otherwise be forced into the often unregulated and costly shadow banking system.
Mobile banking especially appeals to younger and minority consumers, who are generally more likely to be unbanked or underbanked. In 2013, consumers between the ages of 18 and 29 made up 39% of the mobile banking market, even though they only accounted for 21% of all mobile phone users; and the Hispanic population made up 19% of the mobile banking market, even though they only represented 14% of all mobile phone users. Moreover, AlixPartners found that smartphone/ tablet ownership among banked consumers is greater for Hispanic (76%), Asian (72%), and African American (69%) populations than the Caucasian population (59%).
Their research also concluded mobile banking adoption by the Hispanic (52%), African American (41%), and Asian (38%) populations outweighed the adoption by Caucasians (28%).
The Wide-Ranging Benefits of Mobile Banking Reach All Segments of Society
Mobile banking has the ability to improve how all segments of society manage and access their finances. Although all Americans stand to benefit, mobile banking “is poised to have the largest impact for the underbanked through its ability to meet day-to-day financial service needs. The anytime, anyplace, and actionable nature of [mobile banking] offers the potential to enhance sustainability of banking relationships.” By definition “unbanked” households “do not have an account in a federally insured depository institution” and “underbanked” are households that “have an account with a federally insured depository institution but also use [alternative financial services] to conduct transaction or credit services.”
As of 2013, approximately 17 million Americans were unbanked and 51 million were underbanked. 22 Mobile banking is in an excellent position to meet the needs of these consumers because 90% of underbanked adults own a mobile phone, with 71% owning a smartphone, as compared to 83% of the overall population. Mobile phone usage among the unbanked is growing, with 68% owning a mobile phone, 49% of which are smartphones. Moreover, 81% of unbanked households are lower income, earning less than $30,000 per year, and mobile phones are the only means of accessing the Internet for 45% of that income bracket. Further, data from AlixPartners suggests that minorities are more likely to access the Internet via mobile phone than Caucasians, with 76% of Hispanics and 73% of African Americans using their mobile device as compared to 60% of Caucasians.
Due to changing preferences, a similar opportunity exists for the younger generation. Of consumers between 18 and 45, 90% have cell phones, with almost two-thirds owning a smartphone, but only half to two-thirds of them are fully banked. As stated in a Center for American Progress (“CAP”) report, “mobile banking is a powerful tool for expanding access to banking services beyond the limits of traditional bank branches. It has enormous potential, particularly among the millions of Americans who may have a cell phone but do not have a bank account.”
Economic inclusion is vital to incorporate the 8% of Americans who do not have a relationship with a bank into the mainstream banking system, which provides consumers with safer products and wealth-building opportunities not available at nonbanks. Importantly, the mainstream banking system “improves a consumer’s ability to access a range of financial products and services, develop wealth, build a credit history, and access credit products.” This comment explores how mobile banking is already changing the financial landscape and improving the lives of the most economically vulnerable.
I. Increase Access
By nature, mobile banking can be used any place, any time. The “any place” capability expands access to millions of Americans who are unbanked or underbanked because they have difficulty visiting a branch due to distance, age, illness, or disability. According to a 2010 Pew Charitable Trust Study (“Pew Study”), 85% of unbanked Los Angeles residents choose their financial service providers – bank or nonbank – because of its proximity to where they lived. Demonstrating mobile banking’s influence, AlixPartners found that consumers switching banks valued mobile banking almost as much as account/ service fees and more than interest rates on deposits. Further, for customers who changed banks over the past year, 65% indicated mobile banking played an important or extremely important role when choosing to switch.
In our fast-paced, 24/7 society, being able to bank “any time” grants access to those who need more flexibility because they cannot visit a bank branch during normal business hours. The Pew Study found that 40% of those surveyed – both banked and unbanked individuals – were “very likely” to switch to a financial institution that operated during the evenings or on Sundays. The importance of flexible timing is conveyed by the prepaid card provider, NetSpend, who reported 40% of prepaid card loads and deposits occurred outside traditional banking hours.
In a 2011 report, the FDIC found the main reason consumers cited for using nonbank services was convenience, and nonbank credit products because consumers felt they were easier or faster to get than bank credit. Filling this gap, mobile banking offers a convenient platform for customers to bank anywhere, any time within the secure confines of the regulated mainstream banking system.
II. Decrease Banking Costs and Improve Money Management
Through mobile banking, consumers are able to save money in a variety of ways, including reducing their banking costs, employing real time money management, and utilizing applications to help reach their financial goals.
a. Lower banking costs
By expanding access, mobile banking gives consumers the opportunity to engage in the mainstream banking system, dramatically decreasing costs incurred at nonbanks for the same services, such as paying bills, cashing checks, getting small-dollar loans, and making remittance transfers. Currently, about 38% of unbanked households use nonbank check cashers, with fees that can escalate to 2% to 5% of their paycheck. 37 Mobile banking eliminates that expense with remote deposit capture (“RDC”), which allows customers to electronically deposit checks at any time by taking a picture of the check with their smartphone. Last year, over three-fourths of the 25 largest banks offered RDC, with over 25% of mobile banking users performing the service over a 12 month period. At a recent CFPB field hearing, CAP Director of Asset Building, Joe Valenti, asserted that RDC essentially gives consumers a “raise” by eliminating the need for check cashing services. Though funds are not always immediately available with RDC, many of our members are launching innovative approaches to meet consumer preferences. For example, Regions Bank gives customers different options depending on their personal needs, charging the following fees to post funds at specified times: 50 cents within two business days, $3 for the same night, and 1% to 3% of the check amount for immediate access, with a $5 minimum. This way, customers get much needed liquidity almost instantaneously, making expensive check cashers obsolete. This cost-saving technology is especially well-suited to serve the unbanked and underbanked because it provides the any place, any time convenience they value.
Consumers are increasingly using their phones to check account balances before making in-store purchases. Over a 12 month period, 69% of mobile banking customers checked their account balance on their phone before making a larger purchase, with half of them choosing not to make the purchase after learning their balance. Moreover, 89% of underbanked consumers used mobile banking to check their balance before making a purchase over a 12 month period. By creating a more informed consumer, remotely checking account balances also cuts down on overdraft fees that would have been incurred if the purchase was made despite insufficient funds.
b. Real time money management
Checking account balances before making a purchase not only decreases overdraft fees, but also fosters real time money management. Supporting this benefit, the Federal Reserve explained “[b]ecause many customers have near-constant access to their mobile phones, these devices have the potential to provide ‘just-in-time information’ that can influence consumer financial behavior and help them to make different, and perhaps smarter, financial decisions.” As noted above, knowledgeable consumers are better equipped to take control of their finances and often change their spending habits, resulting in reduced fees and increased savings.
Even without a smartphone, customers can manage their money by receiving the numerous text alerts provided by CBA members, including low balance alerts, statement notifications, payment due alerts, deposit or withdraw alerts, fraud alerts, credit balance notifications, and saving reminders. Studies indicate that 27% of customers who engage in mobile banking receive text alerts and, in 2013, 77% of the 26 largest banks offered text alerts. After receiving a text alert, consumers change their financial behavior by: transferring money into their account (47%); reducing their spending (37%); and depositing money into their account (32%).
Additionally, customers can use mobile banking to better manage their finances with bill pay, person-to-person transfers, and remittance transfers. These services are especially valuable to unbanked and underbanked consumers because they provide ways to stay current with bills and create a more reliable snapshot of their financial situation. As of 2013, 60% of both underbanked and fully banked mobile banking customers made a payment using their banks’ mobile app or website. In the same year, 27% of all mobile banking customers and 29% of underbanked customers utilized person to person payments using their mobile device. Beyond the financial benefits, these services save time otherwise spent paying the person owed, visiting a money transfer store, or getting a money order.48 And of paramount concern to CBA members, mobile remittance transfers promote customers’ safety by protecting them from the risks of carrying large sums of money.
c. Reach financial goals
By facilitating money management, mobile banking creates more informed consumers who have the resources to improve their savings and meet their financial goals. The FDIC highlights that “savings trackers could help consumers visualize the progress they are making toward their savings goals,” “embedded alerts and messages could motivate them to keep up with their savings plans,” and “automatic transfers between accounts could help customers set money aside for different purposes.”50 Reaching financial goals allows our customers to be prepared for all life’s challenges and stages, from saving for their child’s college to making a down payment on their dream home. Realizing this potential, many CBA members have created tools that allow customers to track finances, understand spending patterns, and monitor expenses.
Exhibiting these benefits, PNC Virtual Wallet helps consumers develop money management skills and avoid costly mistakes by giving them visual, interactive tools to manage their finances.51 Virtual Wallet contains a “Spend” account, an interest-bearing “Reserve” account, and a higher-yield “Growth” account to help customers segment their money for different needs.52 It uses a “Money Bar” to show a customer’s balance in segments of what is scheduled to come out and what is free to spend.53 Other tools visually illustrate where customers spend money by breaking down monthly spending into categories.54 To help avoid costly mistakes, Virtual Wallet comes with overdraft protection, alerts users with on-screen, email, or text alerts when they are most at risk for an overdraft, and even enables them to easily transfer money into the Spend account.55 The mobile banking format is tailored to appeal to today’s consumers, as 60% of Millennials indicate they use mobile banking more than any other banking method.56 Taken together, these features create a more informed customer who is better equipped to meet their financial goals and transition into adulthood with established credit and money management skills.
III. Foster Sustainable Banking Relationships
Mobile banking offers a new way to appeal to consumers that would traditionally avoid the mainstream banking system, establishing a relationship that otherwise would not have occurred. In fact, unbanked consumers are more likely to use mobile banking than the general population. In a 2012 report, the Federal Reserve found that the unbanked population were the least likely to not see any benefit from mobile payments, with 15% of unbanked, 30% of underbanked, and 40% of fully banked indicating they did not see a benefit.57 The fully bank’s comparatively high percentage may indicate satisfaction with their banking experience.
Building off these preferences, mobile banking has the ability to foster economic inclusion, while also engaging current customers. With mobile banking, we are better able to meet our customers’ needs, ensure disclosures are transparent, reduce unnecessary fees, and help prevent fraud. As discussed above, RDC, text alerts, money management tools, and other mobile banking features enable us to better serve our customers, building deeper relationships and keeping them in the regulated, secure banking industry. The high degree of satisfaction with mobile banking supports the notion that our customer relationships are thriving – 80% of respondents are extremely or very satisfied with their mobile banking experience at their primary bank. According to the Pew Study, banked households are more likely to save for the future, creating sounder financial futures for those with depository relationships opposed to those using non-bank products and services.
Mobile Banking is Primed to Improve Security and Decrease Fraud
While mobile banking provides ample benefits, privacy and security are understandable concerns when developing technology. Specifically, our members are focused on risks associated with misplaced or stolen devices and cyber-attacks. Financial institutions are innovators in information security, which is exhibited by the sector’s comparatively negligible amount of data breaches, accounting for just 3.7% of all data breaches in 2013. Despite the low incident rate, we are exceedingly concerned that our customers’ information is safe and are constantly developing technology to ensure its protection.
As many of us can unfortunately attest, the portable nature of mobile phones makes potential loss or theft an unavoidable reality. To combat the compromise of data, our members go to great lengths to secure sensitive information. For example, some members automatically log customers out when locking their mobile screen, require authentication to make a transaction, and send follow-up emails or texts to confirm transaction completion. While cyber-criminals will inevitably attempt to proliferate phishing scams and install malware in this digital age, our members continually monitor accounts for suspicious activity to shield consumers from attacks and protect their personal information.
In fact, mobile banking has the potential to provide greater security of sensitive financial information by employing cutting-edge programs such as document authenticity technologies, location-tracking capabilities, and biometric authentication. In terms of document authenticity, vendors have created programs that use a cell phone’s camera to scan documents to insert necessary information into a financial application, while letting banks assess the authenticity of the document. Location-tracking capabilities help banks combat fraud by allowing them to identify a customer’s actual location. Finally, biometric authentication, including facial, voice, and fingerprint recognition, is an innovative capability that enhances security and minimizes fraud.65 Moreover, these features have the power to increase consumers’ knowledge of mobile security practices and reduce their banking costs by diminishing fraud losses.
Federal Government Involvement
As mobile banking continues to improve the banking experience, we urge the federal government to provide a flexible regulatory structure that supports innovation and allows mobile banking to reach those who need accessible, cost-effective financial products the most – the unbanked and underbanked. Mobile banking has the opportunity to promote access, provide low-cost products and services, foster money management, cultivate long-lasting relationships, and strengthen information security – all of which are our members’ preeminent focuses. However, mobile banking will not be able to reach its full potential if growth is hampered by unnecessarily burdensome and expansive regulation, especially given the substantial regulatory cost already imposed on the financial sector.
I. Encourage Innovation
As seen in prior rulemakings, regulators understand the importance of fostering innovation. In response to the Federal Trade Commission’s (“FTC”) proposed amendments to the Telemarketing Sales Rule, Retail Payments Product Director Marie Gooding of the Federal Reserve Bank of Atlanta (“FRBA”) voiced concerns about the proposed rulemaking’s chilling effects on the use of different forms of electronic checks and payments. Specifically, Director Gooding cautioned “it is not clear to FRBA what the future might hold if the industry is free to innovate with [remotely created payment orders], but there may be upside possibilities both with respect to efficiency and the adoption of authentication that could offer much more consumer protection than what currently exists under the law that applies to checks.” She urged the FTC to delay the rulemaking until the industry and other stakeholders could collaborate with regulators to build “consumer protections into the mainstream uses of these payment orders before banning their use as a deceptive and abusive practice.” As a FRBA regulator, Director Gooding’s support of regulatory restraint to encourage innovation is especially noteworthy. Her comments underscore the importance of allowing technology to organically evolve to ensure innovators are free to create products that better protect consumers.
Equally important, overly broad regulation of unrelated financial products may inadvertently regulate mobile banking and payments. As an example, New York’s proposed rule establishing legal parameters around rapidly developing Virtual Currencies has the potential to encompass aspects of mobile banking. Under the proposed rule, Virtual Currency is “broadly construed to include digital units of exchange that i) have a centralized repository or administrator; ii) are decentralized and have no centralized repository or administrator; or iii) may be created or obtained by computing or manufacturing effort.” Further, the proposal defines “transmission” as the “transfer, by or through a third party, of Virtual Currency from one Person to another Person.” Under these definitions, the proposed rule may be construed to regulate Person to Person payments, tokenization, and other mobile banking features. As the digital world evolves, we urge regulators to construct laws with caution so unintended technology and services are not accidentally swept under the regulatory umbrella.
II. Promote the Already Effective Privacy Laws and Coordinate Between Agencies
The financial sector is one of the most regulated industries and already adequately protects consumer privacy interests through a myriad of federal and state statutes and regulations, while also voluntarily implementing guidances and industry best practices. Notably, consumer information is already being safeguarded by: the Gramm-Leach-Bliley Act (“GLBA”); the Fair Credit Reporting Act (“FCRA”); the Fair and Accurate Credit Transactions Act (“FACTA”); and the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (“Dodd-Frank”). 76 These laws already effectively protect consumer information, as seen by the low incidence of compromised data noted in the previous section.
Similarly, federal agencies are already adequately supervising mobile banking. Specifically, the FTC currently oversees mobile applications and holds companies accountable for inadequately protecting consumer information. Demonstrating this oversight, the FTC recently settled with two companies that allegedly disabled their secure sockets layer (“SSL”) certificate, which is used to encrypt consumer data and guard against hackers. In the consent orders, the FTC mandated the companies implement specific security programs according to detailed compliance procedures. The argument for maintaining the current agency oversight is strengthened by the confusion often created by fragmented laws, as described by Director Gooding. In her letter to the FTC, she stated “it is clearly preferable public policy not to create a fragmented ‘law of payments’ in which multiple federal agencies take differing and/or conflicting views….” In light of these concerns, we urge federal agencies to effectively coordinate and exercise restraint where other agencies are already successfully governing, which in turn will lead to more cohesive and straightforward regulation.
III. Foster Lower Banking Costs and Level the Playing Field
In the past, well-meaning regulation has increased costs for banks, driving them to eliminate affordable, highly regarded products. After the financial crisis, over regulation forced many of our members to stop offering free checking accounts and other valuable products and services, in turn unavoidably increasing fees to consumers. Despite the CFPB’s claim that mobile banking lowers transaction costs for banks, in actuality, mobile banking imposes great expense on our members through research and development, innovation, vendor management, system maintenance, and cybersecurity mearsure.
As overregulation increases the costs for banks, many startup nonbanks have entered the market free from banking regulatory burdens and capitalized on the uneven playing field. This inherent inequality makes it difficult for our members to compete with the rapidly expanding tech industry, giving way to a prevalence of unregulated financial applications. Not only is the uneven playing field unfair, it also gives startup products an advantage even when they may not have the most current customer information, creating an imprecise financial snapshot. Banks, on the other hand, maintain the consumer’s financial information that they push to applications and mobile services as transactions occur. Promoting a flexible regulatory structure allows banks to compete with unencumbered startups and design programs that are more responsive to consumer spending.
In light of these issues, we hope regulators will consider potential unintended consequences that may ultimately hurt the consumers we all seek to serve. Furthermore, lower income consumers disproportionately bear the brunt of overregulation because of their greater need for short term capital, relative hardship from higher fees, and increased risk of being pushed into the shadow banking industry. To best serve the unbanked and underbanked, we ask regulators to support the expansion of mobile banking by encouraging the creation of innovative products that increase access, decrease costs, promote mainstream banking relationships, and improve money management.
Building upon growing mobile availability and changing preferences, mobile banking is in a unique position to fill the needs of the unbanked and underbanked. As stated by the Federal Reserve, “[g]iven the prevalence of mobile phones – particularly smartphones – among minorities, low-income individuals, and younger generations, mobile technology has the potential to empower consumers and expand access to financial services for underserved populations.” We urge the federal government to support the potential benefits of mobile banking by allowing our members to maintain cost-effective products and services, while pursuing innovation.
Again, we appreciate the opportunity to comment and would be happy to be a resource as you explore the emerging world of mobile banking. If you have any questions, please do not hesitate to contact me at 202-552-6366.
Consumer Bankers Association