Thank you for inviting me to be here. My name is Graham Steele, and I am the Assistant Secretary for Financial Institutions at the Treasury Department. It is a privilege to speak with you today.
As the Assistant Secretary for Financial Institutions, I oversee a broad policy portfolio, including developing the Department’s policy views on banks, credit unions, and the insurance sector, as well as cybersecurity and critical infrastructure, community development, and consumer protection. As the title would suggest, financial institutions are at the heart of my portfolio, and payments is a key area of focus.
Payments have long been one of the core financial services provided by financial institutions, along with the provision of credit and deposit-taking. At the same time, payments is a dynamic and fast-evolving space. The landscape is shifting at an unprecedented rate, with new systems and technology, intermediaries—and even new forms of money—emerging all the time. These developments carry novel and significant implications for the financial system and for consumers and are confronting policymakers with renewed questions about the roles and objectives of the public and private sectors.
At a high level, the role of the public sector is to promote both competition that benefits consumers and the marketplace and responsible behavior and practices that protect consumers and the financial system, including through regulation. This balancing role remains a constant for government, though a dynamic, competitive market presents new questions and issues to consider on how best to strike that balance. One question that has come into focus in this Administration is whether competition in payments and certain areas of financial markets is driving advances that benefit consumers, after holistically considering the new risks they present.
For consumers, a competitive marketplace means more choices, better service, and lower prices. By contrast, lack of competition can result in sustained market power, and diminished innovation, product quality, and access. In our report on Assessing the Impact of New Entrant Non-bank Firms on Competition in Consumer Finance Markets released last year, we explored trends across consumer financial services markets and identified evidence both of increased competitive pressures from new entrants as well as increased complexity, presenting both opportunities for increased consumer benefit as well as risks.
New entrant non-bank firms are offering digital applications to make payments online and through mobile devices that have expanded accessibility for consumers. These payments firms generally provide a front-end digital user interface for consumers to make payments to other parties on the same platform. At the same time, due to their near-exclusive access to the Federal Reserve’s payment services and the ability to settle obligations in central bank funds, incumbent depository institutions play a critical role in retail payments and most payments in the U.S. rely on interbank payment services as part of their settlement processes. As highlighted in Treasury’s report on The Future of Money and Payments, broadening the range of institutions that are eligible to participate in instant payment systems—subject to appropriate conditions and guardrails—could help to enhance speed and efficiency, competition, and inclusion in payments, including for cross-border payments.
Open Banking is another innovation with the potential to promote greater competition in payments. In Europe, regulatory frameworks such as Revised Directive on Payment Services (PSD2) have been at the forefront of policy development, setting standards to enable secure, consumer-permissioned data sharing, which can expand access and promote competition. The U.S. has been slower, due in part to policy uncertainties and competitive tensions among stakeholders in the consumer finance ecosystem. Promoting Open Banking could help new entrants into the payment space to offer new products and services that compete with the legacy products and services offered by incumbent firms.
By contrast, the entrance by Big Tech into financial services could also have different, but nonetheless profound, effects on the payments landscape. As we noted in our competition report, these firms’ potential to scale rapidly, due to network effects and strategic complementarities, could result in increased market concentration. The historical separation in the United States of banking and commerce was motivated by a desire to prevent conflicts of interest, avoid excessive concentration of economic power, and limit contagion between affiliates—where the failure of a commercial platform leads to impairment of the safety and soundness of the affiliated bank. Big Tech’s involvement in financial services presents many of these historical issues, in addition to novel banking and commerce concerns. Big Tech firms may have incentives to leverage their existing commercial relationships, consumer data, and other resources to enter new markets, expand their networks and offerings, and scale rapidly to achieve capabilities that other firms do not have and cannot replicate. They may be able to use data advantages, network effects, acquisitions, predatory pricing, and other tactics to gain or entrench their market power to the detriment of competition and, ultimately, consumers.
Finally, the public sector has a unique additional role in payments, through the Federal Reserve System’s role as a provider of core market infrastructure. The launch of the real-time gross settlement rail, FedNow, creates new possibilities for innovation and competition in the provision of instant payment services. The introduction of FedNow adds a second set of instant payment rails alongside the existing private sector Real-Time Payments network operated by The Clearing House.
There is room for incumbent and new entrant firms to innovate expand access and choice in products and services that meet consumers’ needs—particularly those that are persistently underserved or unserved. Increased competition and innovation can bring positive change to the provision of financial services, but risks must be monitored and addressed to ensure that consumers are protected and that payment solutions promote their financial well-being.
To best promote healthy, responsible competition, policymakers must be clear minded about the objectives of regulation and be cognizant of opportunities and risks related to market innovations. Regulation is an important tool for ensuring that innovation is done responsibly. While Treasury has generally recommended establishing a federal framework for payments regulation, in order to protect users and the financial system and support responsible innovations in payments, there are some specific areas that warrant immediate attention.
One such area is consumer data. Data is at the heart of the digital financial services ecosystem. The rise of fintech firms and their reliance on consumer data has raised valid concerns over privacy and security risks. New technologies and permissioned data sharing can beneficially expand access to financial services, but it is critical that consumer privacy and control be protected. The CFPB’s ongoing work on a rulemaking implementing Section 1033 is of paramount importance for personal data rights and helping to resolve core issues that have inhibited consumers’ control over their data. This effort is important to provide additional clarity and security in the data sharing landscape and contribute to further progress in Open Banking.
Additionally, Treasury supports the CFPB’s recently announced efforts to consider regulatory proposals relating to data brokers and data boundaries, thereby enhancing transparency and holding covered entities accountable for their data practices. Treasury has previously recommended that the CFPB consider whether and how it may directly supervise data aggregators, who store vast and ever-growing amounts of consumer financial data, generally without the kind of supervision of their data practices applicable to regulated depository institutions. The banking agencies have also issued guidance regarding the oversight of bank partnerships with third parties, including fintech firms. These regulatory and supervisory actions can help promote healthy competition that ultimately benefits consumers.
Another area that has been in focus is consumer fees. Despite other innovations, credit cards and debit cards remain the most prevalent instruments for consumer payments. Across the Administration, agencies have sought to target hidden fees and charges, as appropriate, to shore up competition by promoting fair and transparent pricing across the U.S. economy. In the payments space, the CFPB is working to finalize a rule aimed at reining in excessive credit card late fees. Here again, regulation has a role to play to protect consumers and promote healthy, competitive markets that are free of hidden or excessive fees.
It is also imperative to address the issue of fraud, especially in the era of digital transactions. With the increased speed and accessibility of digital transactions has come increased complexity in fraud and scams, particularly those targeting vulnerable populations. Addressing risks requires consideration of technological and policy solutions. This could include consideration of tools like advanced cryptographic methods, multi-factor authentication, programmatic anomaly detection, as well as prudent operating and governance procedures with strong oversight and protections.
In conclusion, the payments landscape is rapidly evolving, presenting both opportunities and risks. The public sector plays a critical role in ensuring healthy competition, protecting consumers, and promoting responsible innovation. Through thoughtful regulation and supervision, we can strike a balance that benefits consumers and the broader financial system. By addressing key areas such as consumer data, fees, and fraud, we can create a more transparent, accessible, and competitive payments environment that meets the needs of all consumers. Thank you.