CFPB director criticizes small banks’ core service providers Finance & Banking

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United States: CFPB director criticizes small banks’ core service providers

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Recently, CFPB Director Rohit Chopra spoke at a joint meeting of the Community Banking Advisory Board and the CFPB Credit Union Advisory Board where he expressed concern that the major service providers that many small banks and credit unions rely on “have too much power in the system.” “Although they provide basic banking functions such as taking deposits, facilitating payments and granting loans, the director notes that local banks and credit unions report dissatisfaction with the towards vendors in terms of their speed of innovation, product deployments, compatibility with third parties and technological sophistication.

According to the director, this dissatisfaction is part of a larger concern, with the market for major service providers strongly consolidated with four providers serving 78% of all US banks. According to Chopra, this level of consolidation impacts small lenders in several ways, including (i) coercive, complex, tome-like contracts that come with unnecessary non-essential additional banking services, longer contract terms and heavy penalties and fees for terminating early contracts or making other changes to the contract; (ii) service providers charging exorbitant amounts for their services; and (iii) unmodeled contractual structures for long-term responsiveness and adaptation to customer needs and digital banking innovations.

In response to this situation, the CFPB intends to work with core service providers and federal partners to address issues related to banks’ collective bargaining on core service contracts. The CFPB also intends to work with other agencies to review third-party service providers and potentially refer complaints to other law enforcement agencies.

Put into practice : With this latest statement from the CFPB, financial institutions and service providers should review their contractual arrangements to ensure fair and value-driven services, in addition to adaptable and flexible services. Core service providers should also consider “unbundling” their core services so that banks can choose the services that benefit them the most, which addresses banks’ concerns about paying for unnecessary and costly non-core banking services.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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