CONSUMER PROTECTION AND FINANCIAL INCLUSION.

• Author: Johnson, Brian

Thank you very much for the invitation to be here with you today. I understand that today's summit is the first event as part of Cato's new "Initiative for Financial Inclusion." Cato has been recognized for decades as a vanguard of the liberty movement, and I am grateful that your scholars, especially Todd Zywicki and Diego Zuluaga, are focused on this vital issue. We at the Bureau have much to learn from you. I look forward to a continued dialogue about your innovative policy proposals to expand access to financial services and bolster consumer protections.

My remarks today are focused on the relationship between financial inclusion and consumer protection. But before I begin, let me dispense with one minor formality: "While I am here today as a representative of the CFPB, my remarks do not constitute legal interpretation, guidance, or advice of the CFPB, and any personal opinions or views expressed are my own and may not represent the official views or position of the CFPB in all cases or in connection with specific matters."

Some Basic Definitions

Let me start with basic definitions. The phrases "financial inclusion" and "consumer protection" can mean different things to different people in different contexts, so let me clarify.

Financial Inclusion

For purposes of my discussion here today, financial inclusion is "the availability and equality of opportunities to access financial services." Because consumers are best off if they choose the financial services that they believe are best for them, this definition of financial inclusion implies the absence of conditions that impede the ability of consumers to make such choices.

Many conditions can thwart the ability of consumers to make these choices. Most clearly, if providers of financial services prohibit or limit consumer product choices due to unlawful discrimination, based on race or other unlawful factors, it undermines financial inclusion. Consumers can also be excluded from financial services for a variety of other reasons. Some consumers, for example, may live too far from a brick-and-mortar bank branch or other financial service provider to purchase the services they want. Other consumers may have no credit file or a thin credit file at consumer reporting agencies, which may preclude them from obtaining loans they otherwise would receive.

Now, I think the empirical research is clear, and we would all agree, that financial inclusion is positive for consumers. It facilitates income mobility, wealth-building, and consumer welfare.

And so the task before us at today's summit is to consider how best we can collectively promote financial inclusion in light of rapid technological change. One of the most obvious examples of such change is the near-ubiquity of Internet access and cell phones. According to Pew Research, for instance, 77 percent of U.S. adults now own smartphones, including a full two-thirds of adults earning less than $30,000 per year (Smith 2017). Instant connectivity breaks down geographical divides and is a driver of a vibrant new mobile banking and FinTech ecosystem. Another example of change that holds promise is the ability of financial services providers to employ machine learning or AI to better determine creditworthiness, streamline the loan process, and generally improve the customer experience for the borrower. Like all new technology, innovations can present potential risks, but expanding financial choice and opportunity, coupled with increased market competition, undoubtedly benefits consumers and should be encouraged. Indeed, William Nordhaus (2005) famously found that, on average, consumers capture roughly 96 percent of the social returns from technological advances.

And I realize that it is fashionable these days to refer to innovation as a new and distinct concept, but really innovation has been and always will be the main catalyst of the market system. Change and innovation are what drive market activity. Absent barriers to entry, firms that fail to satisfy constantly changing consumer preferences typically lose customers to competitors and, if they lose too many customers, they fail. Entrepreneurs are driven by market opportunities to anticipate and satisfy consumer...