Administrative Law Blog Essay

How the CFPB Can Enhance Competition in Consumer Finance Right Now

Earlier this summer, President Biden delivered on a highly anticipated campaign promise to crack down on corporate monopolies and boost competition across the economy. In a comprehensive executive order, President Biden pledged to take a “whole-of-government” approach to rigorously enforcing the nation’s antitrust laws, documenting how rising corporate consolidation harms consumers and small businesses in technology, health care, agriculture, and more. He also suggested specific actions that relevant federal departments and agencies could take to implement the order.

In one example, President Biden encouraged the Consumer Financial Protection Bureau (CFPB) to use its authority in Section 1031 of the Dodd-Frank Act to crack down on “unfair, deceptive, or abusive acts or practices in consumer financial products or services” to ensure “the proper functioning of the competitive process.” The order also suggested that the CFPB consider clarifying consumers’ rights to their financial data, allowing consumers to “more easily switch financial institutions and use new, innovative financial products.”

This is a significant development. Although much of the public debate on monopoly power has centered on a few giant technology companies, corporate consolidation and anti-competitive practices are rampant in the consumer financial services industry and deserve greater scrutiny.

Over the last forty years, the banking industry has become much more concentrated. In 1980, the ten largest banks held 13.5 percent of all banking assets, but by 2010, they held roughly fifty percent. By 2018, the top six banking institutions had assets worth fifty percent of U.S. gross domestic product. The top four banks – JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America – also issued more than half of all credit cards in the U.S. in 2018.

At the same time, the frequency of bank mergers continues to accelerate. There were over 10,000 more commercial banks in the U.S. in 1984 than at the end of 2020, a loss driven predominantly by acquisitions. During that same period, the Justice Department has not challenged a single bank merger, and the Federal Reserve approved ninety-five percent of merger applications in 2018, setting a new record. Now, experts predict there will be a new wave of bank mergers and acquisitions as the economy recovers from the COVID-19 pandemic.

As a result of these trends, banks are becoming even bigger. Despite being fined billions after a historic account fraud scandal, Wells Fargo has still managed to triple in size since the financial crisis, and JPMorgan Chase and Bank of America have both grown by more than fifty percent. In 2019, regulators also approved the largest bank merger since the financial crisis, which joined BB&T and SunTrust to form the eighth largest bank in the U.S.

Big banks tend to reap significant competitive advantages from their size. They are often able to borrow at more favorable rates than their smaller competitors, and because there remains a perception that the federal government will bail out giant banks during periods of financial stress, there is no countervailing pressure on banks to prevent them from growing even bigger.

In addition, many of the largest banks share the same group of institutional investors. The five largest U.S. banks all have the same four institutional investors in their top five shareholders. In 1999, there was a sixteen percent chance that two financial institutions would share an investor with more than five percent of shares in each company; by 2014 those odds jumped to ninety percent. Some banks’ asset management divisions even own shares in their competitors.

All of these factors had a detrimental impact on consumers and small businesses. Bank mergers have led to numerous branch closures in low- and middle-income neighborhoods, contributing to the proliferation of predatory lenders in these areas. More recently, experts found that small businesses were less likely to receive emergency loans from the federal Paycheck Protection Program if they were located in states with a lower share of mid-sized and community banks. And banks with common ownership arrangements are strongly associated with higher consumer prices.

Beyond consolidation, there are also numerous examples of banks engaging in anti-competitive practices to protect their advantage. In 2019, the European Union fined major global banks including Citigroup and JPMorgan Chase for manipulating foreign currency markets and also penalized Bank of America for illegal practices restricting competition in government bond markets. These three financial institutions were consequently banned from participating in a large European Union recovery program this year.

In an economy that increasingly values – and monetizes – data, large banks have also sought to undermine the ability of third parties to access consumer data, even when a consumer has expressly authorized a third party to do so. Large banks have even bankrolled new trade associations to set industry standards and technical guidelines that protect their turf.

All of these examples point to a need for stronger antitrust scrutiny and more competition in the consumer financial services industry. As encouraged by President Biden in his executive order, there are a few leading ways that the CFPB can use its authority to crack down on unfair, deceptive, or abusive practices (UDAAP) in consumer financial products and services. In March, the CFPB issued a statement that it “intends to exercise its supervisory and enforcement authority consistent with the full scope of its statutory authority.” In the past, the CFPB has been called on to use its UDAAP authority to police practices related to student loans and home mortgage modifications. The four ideas detailed below likewise fall within the full scope of the CFPB’s statutory authority.  

First, the CFPB should investigate hidden and deceptive bank fees. For example, banks should be prohibited from marketing “free” checking accounts to consumers if those accounts enable overdrafts – and the high fees that accompany them. Like airline companies that market fares without including fees for checked baggage, seat selection, or other add-ons, banks that employ this tactic are misleading consumers to gain an edge over their competitors. These practices fundamentally hurt competition, penalizing banks that offer more transparent pricing and creating a race to the bottom that puts consumers last.

Second, and similarly, the CFPB should require banks to make fees associated with sending or transmitting money more transparent. Although the agency, following its creation, put into place rules governing remittance transparency, a lack of active enforcement has too often rendered these guidelines symbolic. Banks typically charge costly fees for services such as wire transfers and foreign transactions, but do not always disclose those fees in advance. That’s because these fees represent an enormous source of revenue for these institutions. For example, nearly ten percent of the Spanish bank Santander’s 2016 global profits came from fees the bank charged on remittances, and those fees were six times greater than the fees offered by a prevalent non-bank competitor. This is in line with a World Bank analysis which found that traditional banks charge substantially more for remittances than other vendors. These practices deceive consumers and harm competition, making them ripe for more rigorous CFPB oversight. 

Third, the CFPB should investigate abusive practices used by bank account screening consumer reporting agencies (CRAs), such as ChexSystems. Like financial institutions conducting credit checks on consumers before issuing them a credit card, banks also may consult reports from a bank account screening CRA to determine whether to approve a consumer’s application to open a new account. However, unlike credit reporting companies, bank account screening CRAs mostly supply banks with information on negative events, such as overdrafts or non-sufficient funds transactions. This makes it almost impossible for consumers with a ChexSystems report to open a new checking or savings account, and an investigation by the San Francisco Office of Financial Empowerment found that these reports also help to explain the persistently high unbanked rates in communities of color, including among people who were previously banked. 

Finally, the CFPB should heed the guidance in President Biden’s executive order to issue a formal rulemaking under Section 1033 of the Dodd-Frank Act to establish a strong consumer data access right and make it easier for consumers to switch financial institutions. In the meantime, it should vigorously enforce Section 1033 to stop banks from blocking consumers’ ability to access and share financial data with competing firms. Large banks have already been working to entrench their advantage, giving preferential treatment to in-house products and undermining services that rely on access to consumer financial data to operate. Without clear guidance from the CFPB, these trends will worsen, resulting in more friction – and fewer choices – for consumers.

In the last year of his administration, President Obama issued an executive order to promote competition across the economy, instructing agencies to use their authorities to pursue “specific actions” to “detect abuses” and “address undue burdens on competition.” Some have argued that the language in that order was too general, leaving agencies to question what steps they should take to implement the order and ultimately weakening the order’s overall effectiveness.

This time around, President Biden has spelled out the details, offering specific suggestions for departments and agencies across the government to boost competition. It is essential for the CFPB to implement those ideas, including in the ways outlined here, to crack down on anti-competitive tactics, boost competition, and level the playing field for consumers across the financial services sector.