Welcome To
The Bottom Line

The landscape of US financial regulation is continually evolving. At the heart of this transformation is the Consumer Financial Protection Bureau (CFPB), an agency tasked with overseeing and enforcing consumer protection laws within the financial sector.

Several initiatives by the Consumer Financial Protection Bureau (CFPB) seem poised to increase competition between traditional financial services providers and fintechs.

An effort to regulate nonbanks has gained support from banks and credit unions. Still, the CFPB’s plan to make it easier for consumers to move accounts will pressure traditional financial institutions to offer more products and better services.

These initiatives are coming when the agency is scrutinizing overdraft and nonsufficient funds (NSF) fees, the CARD Act, and the terms and disclosures of Buy Now, Pay Later (BNPL) offerings – the latter a topic SRM recently wrote a report on.

All signs point to the need for banks and credit unions to buckle up in coming months. These expected changes will likely bring fintech even more into the mainstream and raise the stakes when it comes to recruiting and retaining clients.

Several high-profile banks, including Capital One, Citigroup, Wells Fargo, and Bank of America, have announced plans to either eliminate or dramatically reduce overdraft (OD) and nonsufficient funds (NSF) fees. It could be argued that these banks made this leap before regulators, including the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC), required them to do so.

The Biden Administration’s Executive Order for digital assets observed that one in six adult Americans are involved with cryptocurrency, while other surveys place this figure closer to one in three. At the same time, a solid majority of Americans indicate they’d prefer to conduct crypto dealings through their financial institution.

This seems like a dream scenario for banks and credit unions looking for opportunities to deepen client relationships and pursue new sources of fee income to replace the overdraft/NSF revenue and interchange that is increasingly under threat.

Financial institutions should brace for substantial regulatory change in the year ahead.

Turnover at the top of several federal agencies, including the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC), foreshadows more scrutiny for FIs.

Everything seems to be on the table, including timelines for implementing the Current Expected Credit Loss (CECL) accounting standard, data privacy, and Bank Secrecy Act compliance.

There are, however, several areas that we believe merit the most attention in the coming months.

As discussed in a previous blog, the Federal Reserve began seeking comments on proposed changes to Reg II of the Durbin Amendment in May. At that time, the Fed said that it felt the changes would be non-substantial and would not include more compliance obligations. Currently, the Fed bars issuers from restricting the number of unaffiliated networks for debit card transactions to fewer than two, including one signature network and one PIN network. The new proposal would make issuers responsible for ensuring that all transactions with US merchants can be routed across two unaffiliated networks.

While the Fed characterized this change as a simple clarification, it is anything but, as evidenced by the over 2,600 comments received. It is clear this issue is complex, substantial, and would increase compliance obligations.

We have sorted through the comments posted on the Fed's website and various government sites to summarize the key points for both sides of this argument.

Rumor is that a further tightening of the Durbin Amendment is on the near-term horizon for card issuers. The most concrete evidence is the Fed’s May request-for-comment on regulations for debit routing of online transactions.

The Fed wants to clarify the regulatory requirement that at least two unaffiliated payment card networks must be enabled for all debit card transactions, including card-not-present (CNP), and card-issuing banks and credit unions will be held responsible. Some terminology will also see standardization.

While the Fed positioned its query as a “non-substantive clarification,” many of the 453 comments submitted so far express a belief that the proposal, if enacted, would have a significant impact on issuers. Meanwhile, bankers are entering a period of uncertainty as they closely monitor the situation for implications to P&L.