In its effort to combat what it calls “junk fees”, the CFPB conflates advancing consumer protection with curtailing market power.  This won’t work — that which is anti-consumer can take place in a super-competitive market (think subprime mortgages) and that conducted in a market powerhouse (innovative financial-inclusion products) may be very much to a consumer’s benefit.  Thus, if the CFPB makes a muddle of its two worthy goals, it will scramble its policies.  This will create a patchwork of conflicting actions that sometimes put consumers at great risk, sometimes put market integrity in peril, and sometimes do both at the same time.

Let me be clear: this critique isn’t an attack on either of the Bureau’s goals.  Consumers should not be duped into seemingly low-cost financial services only to be saddled with predatory after-charges; conversely, dominant providers should not be allowed to exploit their power no matter how low direct prices may seem to fall.  As we’ve learned the hard way from tech-platform firms and as the CFPB has rightly pointed out, that which is “free” can be very, very expensive.  For how, see our 2019 report.

However, taking two things you don’t like and combining them doesn’t result in something that’s double-bad.  Instead, one element in the mixture can counteract the other, the two elements together turn explosive, or the two together just make an ineffectual mess.  For the CFPB to maximize the likelihood of getting as much as possible towards each of its worthwhile goals, it needs to hone its critique from the rhetorical to the analytical.  For example, a threshold question the Bureau has yet to ask is which profit margins are exploitative profit margins.  In its request for information, the agency says that junk fees are those above a provider’s marginal cost after taking risk into account.

How much above is too much above?  What counts as a marginal cost?  Will the Bureau agree with a firm’s risk-pricing determinations or demand that markets it thinks worthy be cross-subsidized or discount-priced in some way?  Will the Bureau start to make judgments about how much computational capacity a company needs to offer a service, what salaries it should pay its staff, and whether brick-and-mortar facilities are worth it?

Also, how to price in the cost of regulation so that Bureau decisions do not automatically favor the unregulated and thus expose consumers to a raft of indirect costs?  As we noted in an assessment of a new BIS fintech study, traditional delivery channels through regulated companies cost more but also protect better.

The CFPB also needs to put some analytical rigor behind its assertions that the bigger the bank, the badder it becomes.  We once had many, many community banks but it wasn’t always the nirvana of community and consumer services cast in nostalgia’s warm glow.  Yes, there were noble bankers dedicated to their communities with the purity portrayed by Jimmy Stewart.  But banking then lacked the competitive pressure born of branching and the discipline demanded by outside investors.  More than a few small banks were family affairs in which a charter passed from father to son buoyed by shareholders who similarly stayed the same year in, year out.  Judged by bank consolidation, there wasn’t any, but the same could often be said also of racial, gender, and most other forms of equity.

If the Bureau’s policy is only that “we know junk when we see it,” then it will pick consumer-finance winners by opaque decisions that give undue administrative power to often-unaccountable officials.  Over time, seemingly-arbitrary boundaries between junk and fair may well distort markets to the point at which the entire enforcement process loses the credibility needed to ensure effective intervention quickly against truly-predatory providers.

I’ve been doing this long enough to have seen the dialectic of over-regulation lead to undue laxity that does dreadful damage to vulnerable consumers.  We really don’t need to do that all over again.