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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.

Introduction:

As the Assistant Secretary for Financial Institutions, my role encompasses a diverse range of responsibilities within the Treasury Department. These include developing policies related to banks, credit unions, the insurance sector, cybersecurity, critical infrastructure, community development, and consumer protection. With my portfolio centered on financial institutions, one of my key areas of focus is the realm of payments. However, this field is undergoing rapid evolution, necessitating careful consideration of the roles and objectives of both public and private sectors.

The Changing Landscape of Payments:

Payments have always been foundational to financial services offered by institutions. Alongside credit provision and deposit-taking, payments play a vital role in facilitating transactions. Nevertheless, the payment landscape is experiencing unprecedented shifts, characterized by the emergence of new systems, technologies, intermediaries, and even forms of money. These developments bring novel implications for the financial system, consumers, and policymakers. They prompt us to reevaluate our understanding of the roles and objectives of the public and private sectors.

The Role of the Public Sector:

One of the primary responsibilities of the public sector is to strike a balance between promoting competition that benefits consumers and the marketplace, and ensuring responsible behavior and practices that protect both consumers and the financial system through regulation. As the market becomes more dynamic and competitive, new questions arise about how best to maintain this balance. In the current administration, one key question pertains to whether competition in payments and certain financial market segments is driving advancements that truly benefit consumers, after considering the new risks they might present.

Promoting Competition in Payments:

Competition in the payments sector is essential for consumers as it translates to more choices, better service, and lower prices. Conversely, a lack of competition can result in sustained market power, diminished innovation, product quality, and reduced access. In a report released last year, we examined trends in consumer financial services markets and found evidence of increased competitive pressures from new entrants, as well as increased complexity, which presents both opportunities and risks for consumers.

One notable development is the rise of new entrant non-bank firms that offer digital payment applications, expanding accessibility for consumers. These firms typically provide front-end digital platforms for making payments to other parties. However, incumbent depository institutions, due to their near-exclusive access to the Federal Reserve’s payment services and the ability to settle obligations in central bank funds, continue to play a crucial role in retail payments. The majority of payments in the U.S. rely on interbank payment services for their settlement processes. Broadening the eligibility of instant payment systems to include a wider range of institutions, subject to appropriate conditions and safeguards, could enhance speed, efficiency, competition, and inclusion in payments, including for cross-border transactions.

Open Banking is another innovation that has the potential to promote greater competition in payments. In Europe, regulatory frameworks such as the Revised Directive on Payment Services (PSD2) have been instrumental in enabling secure, consumer-permissioned data sharing, expanding access and promoting competition. In the United States, despite policy uncertainties and competitive tensions among stakeholders, promoting Open Banking could enable new entrants to offer innovative products and services that compete with those offered by incumbent firms.

The Influence of Big Tech:

The entrance of technology giants into financial services could have various effects on the payments landscape. As highlighted in our competition report, the potential for rapid scaling, attributed to network effects and strategic complementarities, may lead to increased market concentration. Historically, the separation of banking and commerce in the United States aimed to prevent conflicts of interest, excessive concentration of economic power, and contagion between affiliates. Big Tech’s involvement in financial services raises these historical concerns as well as new challenges related to banking and commerce. These firms may leverage their existing commercial relationships, consumer data, and resources to enter new markets, expand their networks, and rapidly develop capabilities that other firms cannot replicate. They may utilize advantages such as data insights, network effects, acquisitions, predatory pricing, and other tactics to gain or solidify their market power, potentially undermining competition and ultimately harming consumers.

The Public Sector’s Role in Payments:

In addition to promoting competition, the public sector plays a unique role in payments through the Federal Reserve System’s provision of core market infrastructure. The recent launch of FedNow, a real-time gross settlement rail, introduces new possibilities for innovation and competition in instant payment services. FedNow will operate alongside the existing private sector Real-Time Payments network, offering incumbents and new entrants opportunities to innovate, expand access, and provide products and services that meet consumers’ needs, particularly those who are underserved or unserved. While increased competition and innovation can bring positive changes to financial services provision, it is important to monitor and address associated risks to ensure consumer protection and financial well-being.

The Importance of Regulation:

Regulation plays a vital role in fostering healthy, responsible competition. Policymakers must have clear objectives for regulation while being aware of opportunities and risks presented by market innovations. Establishing a federal framework for payments regulation, as recommended by the Treasury, is vital for protecting users, the financial system, and supporting responsible innovations. Several areas warrant immediate attention, such as consumer data. Given the central role of data in the digital financial services ecosystem, concerns about privacy and security risks have arisen. While permissioned data sharing and new technologies can expand access to financial services, safeguarding consumer privacy and control is crucial. Ongoing rulemaking efforts related to consumer data rights, such as the implementation of Section 1033 by the Consumer Financial Protection Bureau (CFPB), are paramount. Such efforts contribute to enhancing clarity, security, and progress in Open Banking.

Additionally, the Treasury supports the CFPB’s proposed regulatory initiatives concerning data brokers and data boundaries. These endeavors aim to enhance transparency, hold covered entities accountable for their data practices, and consider the direct supervision of data aggregators. The banking agencies have also issued guidance regarding oversight of bank partnerships with third parties, including fintech firms. These regulatory and supervisory actions promote healthy competition, benefitting consumers.

Addressing Consumer Fees and Fraud:

While innovations abound, credit and debit cards remain the most prevalent instruments for consumer payments. To ensure fair and transparent pricing across the U.S. economy, various agencies within the administration have targeted hidden fees and charges. The CFPB is finalizing a rule specifically aimed at curbing excessive credit card late fees. Regulating consumer fees ensures that consumers’ financial well-being is protected and promotes healthy, competitive markets free of hidden or excessive charges. Additionally, addressing the issue of fraud in digital transactions, particularly those targeting vulnerable populations, is imperative. Combating these risks requires consideration of both technological and policy solutions, such as the implementation of tools like the AI legalese decoder. The AI legalese decoder can help identify and analyze patterns indicative of fraud, enabling proactive measures to mitigate risk and protect consumers.

Conclusion:

In conclusion, the landscape of payments is evolving at an unprecedented pace, bringing both opportunities and risks. Maintaining a balance between competition and consumer protection is essential. The public sector has a crucial role to play in promoting competition, regulating the industry, and providing core market infrastructure. By establishing federal frameworks, addressing consumer data concerns, overseeing fees, and combating fraud, policymakers can foster an environment that supports responsible innovation and ensures the well-being of consumers. Importantly, innovations like the AI legalese decoder can further enhance our ability to navigate the challenges and complexities of the evolving payments landscape, ensuring that the interests of consumers and the financial system remain protected.

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