This article in Computerworld was triggered by a speech made by CFPB director Cordray in which he described the challenges associated with regulating the use of big data:
“When it comes to fintech, banking and payments, big data comes with some powerful pros and cons. The big advantage is that big data can make banking services useful and viable to a huge slice of the population that can’t access it today. The greatest drawback is that, in doing so, it will make ultrasensitive personal financial information far more distributed, and therefore easier to steal.
That sets up a policy struggle for federal and state regulators, which was illustrated last week by a speech from the director of the Consumer Financial Protection Bureau (CFPB), Richard Cordray.
Cordray made clear that he doesn’t want to stand in the way of progress or the access that big data can offer but that he needs to protect consumers and put in safeguards in case something goes wrong.
“Can the use of alternative data to create or augment individual credit scores increase access to credit for consumers by helping lenders better assess their creditworthiness? Will this lead to more complex lending decisions for both industry and consumers, and what risks would that pose?” the director asked. “How might the use of alternative data, new modes of analysis, and new technologies affect costs and services in making credit decisions? Certainly it could mean a faster application process, lower operating costs for lenders, and lower loan costs for borrowers, all of which could benefit consumers. What forms of alternative data might be prone to errors, and how hard will it be for consumers to identify such errors and get them corrected? How may the use of alternative data affect certain groups or behaviors in ways that might run afoul of the fair lending laws or create other risks for vulnerable consumers?””
The article goes on to point out that banks are in a race with Fintech companies which leads to this characterization of banks technology prowess:
“Fintech startups have a key advantage that is fully the banks’ doing. Most banks’ technological comfort zone falls somewhere between Luddite and Pennsylvania Dutch.
That means that the potential tech value-adds from startups are massive, and this gets us back into Cordray’s dilemma. He knows the startup tech is needed by consumers, but he also knows that they’re not likely to be the data’s shrewdest protectors.
In his speech, Cordray spoke of the vast array of potential data sources that startups and banks could leverage, if they wanted.
“Alternative data may draw from sources such as rent or utility payments, which in general have not been traditionally defined as credit. It may draw from electronic or other records of transactions, such as deposits, withdrawals, or account transfers. And it might include other personal information, such as the consumer’s occupation or educational attainment,” Cordray said. “Other forms of alternative data may spring from new sources that never existed before, such as the use of mobile phones or the Internet. By filling in more details of people’s financial lives, this information may paint a fuller and more accurate picture of their creditworthiness. So adding alternative data into the mix may make it possible to open up more affordable credit for millions of additional consumers.”
Cordray asked, “How might the use of alternative data, new modes of analysis, and new technologies affect costs and services in making credit decisions? Certainly it could mean a faster application process, lower operating costs for lenders, and lower loan costs for borrowers, all of which could benefit consumers.”
The director also expressed an interest in having federal regulators move where the laws are especially unclear. “The purpose of policy is to mitigate regulatory risk for products that promise substantial consumer benefit, where there is substantial uncertainty about how they may be viewed under existing law,” he said.
The article ends indicating that it is a good thing that somebody in government is thinking about these issues because startups tend to seek forgiveness rather than permission.
Overview by Tim Sloane, VP, Payments Innovation Advisory Service at Mercator Advisory Group
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