Electronic bill pay and remote deposit services have joined the list of services that mobile users expect from their institutions. Mobility continues to grow in banking services, with nonbank, “disruptor” providers vying for consumers’ relationships.
Unlike nonbank competitors however, banks must innovate while keeping an eye firmly on compliance. Lengthy disclosures, particularly for loan products, are not mobile-friendly and can result in slower rollouts of mobile products. So how can banks meet their customers’ expectations while also satisfying disclosure requirements?
It is a conundrum shared by banks and regulators alike.
“The financial industry has a responsibility to meet the public demand for mobile products, and regulators have to recognize that demand and start building in appropriate regulations for those products,” says Umpqua Bank Chief Compliance Officer Elizabeth Clarkson. This responsibility also could be shared by nonbank firms, now that regulators have them on their radar.
About 90% of the U.S. adult population has a mobile phone, and approximately 62% to 64% of consumers own smartphones, so it’s not surprising that consumers are increasingly using these devices to manage their financial lives. The March Federal Reserve Board report, Consumers and Mobile Financial Services 2016, indicates that 43% of all mobile phone owners with a bank account had used mobile banking in the 12 months prior to the survey, up from 39% in 2014 and 33% in 2013.
Keep disclosures relevant
Based on his remarks at a recent industry conference, Comptroller of the Currency Thomas Curry agrees with Clarkson. “If banks are to remain relevant in a changing world, they have to be able to adapt quickly to changes in technology and business practices,” he said. “So it’s important that regulators are open to the changes that are underway in both technology and business practices, and that we are able to evaluate both the risks and the opportunities that innovation presents.”
Curry was discussing the OCC white paper, Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective. Published in March, it discusses principles that OCC will use to guide the development of its framework for evaluating new and innovative financial products and services. The principles outline OCC’s support for responsible innovation and the agency’s intention to foster an internal culture receptive to it.
The white paper acknowledges that mobile payment services and mobile wallets are changing the way consumers make retail payments and that new distributed ledger technology has the potential to transform how transactions are processed and settled. New technology services offer the prospect of a banking relationship that exists only on a smartphone, tablet, or personal computer.
The Consumer Financial Protection Bureau is similarly open to innovation around disclosures in the mobile environment. David Mayorga, a CFPB spokesman, says the bureau favors innovations that “increase the likelihood that consumers will read them; enhance consumers’ understanding about fees and terms and conditions; and allow consumers to compare costs and make the right choices that fit their needs.”
Mayorga says CFPB has finalized a trial disclosure program and a no-action letter policy “designed to help foster a consumer financial marketplace where companies develop safe, innovative products and approaches that can help make people’s lives better. The trial disclosure waiver policy is designed to allow financial services providers to take advantage of new technologies in designing and testing improved alternative federal consumer disclosures. The no-action letter policy establishes a process for companies to apply for a statement from bureau staff that would reduce regulatory uncertainty for a new product or service that offers the potential for significant consumer-friendly innovation.”
Umpqua Bank has not yet taken steps to change the presentation of disclosure requirements on mobile devices, but “we’re definitely looking at that and considering different ways we can do it,” says Clarkson, noting that one of the challenges is regulations that are “behind the eight-ball in keeping up with technology.” She notes, however, that the Military Lending Act has an “interesting” provision requiring lenders to provide an 800 number for verbal disclosures.
“We’re going to have to get very creative when we go down this road,” Clarkson says. “Key information will need to be provided up front, whether in text, voice, or video. There is no way around it.”
Customers will have to be able to demonstrate they received the disclosure. “The disclosure is going to have to be delivered in a manner where it can be retained and consumed in a manner that the customer can find it,” notes Clarkson.
With a more complex product, key information would need to be provided as customers go through the application on their devices. Clarkson expects a detailed packet of information would have to be provided via a more traditional channel as follow up. Legal documents and information about fair lending, equal opportunity, and multilingual disclosures are not currently available for mobile devices.
At Bank of the West, compliance and business teams work together on challenges unique to mobile and digital disclosure, says Michelle Scott, a bank spokesperson.
“As an example, last year during our rollout of online and mobile banking enrollment on a smartphone, we leveraged disclosures that feature a ‘Send by email’ function,” she says. “The ‘Cancel’ and ‘I Accept’ buttons are always visible at the bottom of the screen so customers can easily accept the ‘Terms & Conditions’ and move on to their banking functions.”
Jordan Fylonenko, a spokesperson for Quicken Loans, which offers the mobile-based Rocket Mortgage, says that “any disclosures, whether they be digital or presented in a paper package, need to be easily understandable, practical, and conveniently accessible for all clients. For example, when it comes time to close a mortgage, Quicken Loans arranges for a closing agent or notary to meet the client wherever they desire to review and sign the necessary closing documents.” It’s a “mobile human” strategy for now.
Fylonenko also points out that Quicken Loans is one of the first lenders to allow customers to e-sign their loan application package. “With Rocket Mortgage, the application process, as well as the majority of the underwriting, can be completed online,” he explains. “Quicken Loans requires final closing documents to be ‘wet signed’ with a notary or closing agent. As consumer behavior continues to evolve and technology progresses, we foresee the entire process, from application to close, being conducted online.”
Innovation in compliance
Industry consultant Jo Ann Barefoot says that she believes regulators are embracing the upside of innovation that benefits consumers, but also are addressing downside risks.
“Regulators have a cultural reflex of seeing things negatively,” says Barefoot, noting that the OCC white paper is “a sign of a shift in regulatory thinking, and it will cause the regulators to evolve and be more electronic and digital and mobile. I’m optimistic about it. People are using technology to comply with regulations.”
Barefoot, also a member of the Banking Exchange Editorial Advisory Board, expects that mandatory disclosures will be layered, with mobile disclosures containing a link to more information. While there are some concerns about the effectiveness of mobile disclosures, Barefoot notes that “we already have the issue of effectiveness with paper disclosures.”
On the upside, mobile and online devices present the opportunity for interactive disclosures. As an example, Barefoot says that a potential borrower could use an electronic slider to determine how a loan payment would be impacted by interest rate changes or the amount of a down payment.
On the horizon are a number of issues driving change. Barefoot says innovators starting with a blank screen want to design products for an optimal user experience (UX), and that UX goal may lead the way toward better disclosures.
She also expects an upsurge in third-party evaluation of financial products and choices. “That will bypass the disclosure efforts,” she suggests, noting that CFPB’s shopping tool for consumer loans and NerdWallet are already helping consumers to evaluate products.
“I think Yelp-style evaluation of products will emerge. It’s harder to evaluate a loan than a restaurant meal, but I still think there is a big move toward transparency,” according to Barefoot, a former senior national bank regulator who also has served with a CFPB advisory group. Barefoot adds that consumers will use Google to research financial products and institutions and also look at customer reviews.
“Personal financial management technology will educate people in the moment,” says Barefoot. “We’ll move away from classroom-style to more just-in-time education. They’ll have a tool to help them evaluate everything from consumer scores to the complaint database.”
In May, the Treasury Department issued its long-awaited report on marketplace lending, Opportunities and Challenges in Online Marketplace Lending. In the list of recommendations, the report noted that “smart disclosure” is a concept that the Obama Administration has favored since 2013, and noted that online lending would be a good product to apply this concept to. The intent would be to have providers issue information in formats that third parties could capture and reissue in digested form to enable better comparison shopping.
The report states: “In such complex markets [including lending], it can be prohibitively time consuming and complicated for consumers to read and process all the relevant disclosures on their own. In the context of online marketplace lending, smart disclosure will allow third-party companies and nonprofits to create comparison shopping sites for loans, similar to popular travel and flight comparison shopping sites today. Consumers can then use these sites to more easily compare terms to determine which specific offer might best fit their needs. To expand the use of smart disclosure in marketplace lending, Treasury recommends the CFPB and FTC include the use of smart disclosure in its guidance and standards on consumer disclosures.” [Emphasis added]
Not so fast . . . .
Although Barefoot believes mobile technology will become dominant for bank customers, she believes mortgages are the least likely product to be mobile because homebuyers need time to pause and think.
Brandon Dingeman, senior digital product manager at Wolters Kluwer, agrees that “the long, arduous process of mortgage lending isn’t likely to be completed end-to-end on a mobile device, but it could be started on a mobile device.”
“Quicken is doing that,” says Dingeman. “There has been some reluctance among banks to adopt mobile technology because of budgetary constraints and because it’s outside their wheelhouse.”
Dingeman says that customers are pushing banks to provide more technology, so smaller banks are turning to third parties to develop this capability. “Larger institutions have those applications,” he says. “In order to compete, small banks know they have to get there.”
Brent Gohl, also a senior product manager at Wolters Kluwer, says some mobile bank customers don’t have a computer at home, so they will want all products to be as mobile as possible, including the disclosures for those products. He says banks need the infrastructure in place to support mobile disclosures so that when mobile disclosures become the norm, banks would be able to provide them. “The competitive nature of banking will drive adoption,” he says.
Ultimately, though, banks will have to balance costs, creativity, compliance, and consumer preference.
“You need to do it smart,” cautions Umpqua’s Clarkson. “You need to understand your customer and your market. I don’t think customers want to get a loan over their phone. We need to understand what the customer is demanding and how wide the demographic making that demand is. We should not try to present everything on mobile ‘just to be cool.’”
Adds Clarkson: “Mobile is a good entry point. You don’t need to deliver every service you have through your mobile channel. You want customers to reach you easily and be able to reach through to other services. That’s important.”