PYMNTS.com is presenting its annual Twelve Days of Christmas Series. Yes, we’re early, but we figured that during the real twelve days most of you will be sipping eggnog, playing with your iPads, and spending time with your loved ones. So we’ve decided to make the clock tick twelve work days before Christmas.
For payments there is no partridge in a pear tree, no maids-a-milking, and surely no gold rings coming the industry’s way. So we’re going to focus on the twelve exciting developments, for better or worse, we think will be happening in payments in the coming year.
On the first day of Christmas…
Did Payments Get a new Mom, or Enter Rehab
The payments industry got a new master who will start flexing her muscles after the New Year. The Consumer Financial Protection Bureau (CFPB) which, housed in the Federal Reserve Board, is the regulator of almost anything that smacks of being a financial services product targeted to consumers And everything that the payments industry currently offers to people. The CFPB will likely be overseeing the payments industry for many generations. New regulatory agencies have the gift of eternal life. They seldom die.
The CFPB was born with a set of genes from a group of people known as “behavioral law and economics” scholars. They rely on what economists and psychologists have learned about how people actually behave, and in particular how they make choices, to devise laws and regulations that prevent companies from luring consumers into bad choices and helping consumers make the right choice. It remains to be seen how influential behavioral economics will be at the new agency. A lot depends on who gets hired into key positions in the next few months as the agency builds up its staff. The early hires will set the course for the agency and will have a lot of influence on how it evolves.
It seems quite likely, though, that behavioral economics will become a significant part of the toolkit of the new agency. And, if so, that means the CFPB will be paternalistic. That means it will do things to try to prevent consumers from making bad choices even though the consumers want to make those choices and aren’t really being deceived. To see the approach, consider how behavioral law and economics thinks about the problem of people eating food that tends to make them fat. The non-paternalistic approach would say that what people eat is up to them and the government should keep its nose out of my cheese fries. The behavioral law and economics folks would say that that’s the “present you speaking.” Today, you are impulsive and you can’t help yourself. But “your future self” will regret having indulged yourself, expanded your waistline, grossed out the opposite sex, and clogged your arteries. Your present self doesn’t like me telling you what to do—just like you didn’t like Mom telling you to study hard and eat your broccoli—but your future self will be thankful. So, see, the government is really just doing what your future self wants.
But should the government be like Mom loading your plate up with veggies and exhorting you to eat them, or should it be like rehab where you can’t get a drink to save your life? That turns out to be the key question for how the CFPB will influence the payments industry going forward
The “soft paternalism advocates” say regulators should be like Mom. For obesity, they advocate things like putting the healthy food first in line in the buffet and the fried stuff at the end. That “nudges” consumers to make the right choice. But, look, if you want to load up with the fries and burgers instead of the tofu and broccoli you can still do it. The “hard paternalism advocates” want to be more like rehab. They would ban the bad stuff or make it so expensive that people curtail their impulsive ways.
The original bill submitted to Congress gave the CFPB te explicit powers to be a hard paternalist. The agency could for all intents and purposes prevent financial institutions from offering products that consumers wanted to buy and force FIs to sell consumers products designed by the agency. Theability of the agency to require institutions to offer “plain vanilla products” was the key here. Congress wouldn’t go along with that. Still, the CFPB ended up with lots of tools at its disposal to make it very uncomfortable for financial institutions to offer the payments equivalent of the cheese fries.
Some of those in the behavioral law and economics field don’t like hard paternalism. They want the government to be like Mom. The reason is that the government may not be so good at figuring out what your “future self” really wants. And there is something unsettling about the government preventing people from exercising free will even if it what people are doing is stupid. One man’s boneheaded is another man’s nirvana. These soft paternalists could win the day at the CFPB and then focus the agency on nudging consumers and the industry, with a light hand, to better products.
Either way the Age of Paternalism for the financial services industry is probably upon us. It will shape what payment card companies can and can’t do for many decades to come.