It is a given that markets are constantly being disrupted by innovation. I would argue that the financial services marketplace is also being disrupted by legislation and regulation. Let’s face it, the payments sector is hot right now. Issues that were once solely the province of industry publications are now widely covered by mainstream media. This fact is not lost on the legislative and regulatory community.
Last year we saw the creation of the Congressional Payments Technology Caucus, a bipartisan group of lawmakers designed to keep the U.S. Congress informed of the rapid changes in the financial services industry. Over the last year, the caucus has held briefings on issues ranging from EMV Migration to mobile payments. This year, the House Financial Services Committee and Senate Banking Committee have held numerous hearings on payments-related matters as well.
One of the more contentious topics addressed is Operation Chokepoint, a controversial campaign spearheaded by the Department of Justice in conjunction with several federal consumer protection and banking regulatory agencies (including the Federal Trade Commission and the Federal Deposit Insurance Corp.) to hold acquirer financial institutions and their payment processor partners responsible for allegedly illegal acts committed by merchants and other third-party payees.
This perhaps well intentioned program has moved beyond illegal acts to targeting legal activities that are perceived by some prosecutors and regulators as undesirable, which in turn has led to the denial of banking services to businesses that operate lawfully. Legislative attempts to rein in this initiative, led by Rep. Blaine Luetkemeyer, R-MO, have passed the House but face a future that is likely dependent on the outcome of the November elections.
Given this election season and the relatively limited number of working days remaining on the congressional calendar, it is unlikely that any significant financial services or fintech legislation will pass this year. Still, there is considerable opportunity for additional market disruption by federal regulators, particularly the Consumer Federal Protection Bureau (CFPB).
Those involved in the prepaid space await the CFPB’s long delayed final rule on prepaid products that have the potential to adversely impact long established business models-thereby driving some companies out of business.
Despite its popularity and the fact that consumers must opt-in to the program, overdraft services are viewed with skepticism, if not antipathy by the CFPB. The CFPB’s goal is to issue proposed rules on this in the near future. These rules have the potential to drive up cost and reduce access to consumers who have found these services to be beneficial.
Unlike other federal agencies, the CFPB will not be affected by the November elections. Created as part of the Dodd-Frank Act, the bureau was structured as an independent entity funded by the Federal Reserve, which insulates it from the effects of a change in the administration. The term of its current director, Richard Cordray, does not expire until 2018. And though this is currently being challenged in court, the director can only be fired for cause or malfeasance.
It is difficult if not impossible for legislation or regulation to keep up with technology advances and the dramatic changes they are creating in the payments marketplace. Such efforts should be flexible enough to accommodate these changes and not create their own disruption.