CFPB director notes concern over service providers’ hold on small institutions; have ‘too much power’

Core services providers that small players in financial services – such as community banks and credit unions – rely upon have too much power in the system, the director of the consumer financial protection agency charged Thursday, and the agency is concerned about that.

Opening meetings of the community bank and credit union advisory councils, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra said small financial institutions are worried about the rising costs of and limited flexibilities offered by core services providers. He said local financial institutions depend on core services providers being agile, responsive, and cost-effective in order to compete and serve their clients and customers in their communities.

But, he asserted, the core services provider market is heavily consolidated. He said Fiserv, Jack Henry & Associates, FIS, and Finastra serve 78% of all U.S. banks.

“The consolidation of the providers among these four is affecting service and cost – with one community bank CEO aptly framing the problem as “stand-in-line and write a big check.”

“In an age of constant tech innovation, with many younger consumers craving digital banking solutions, patience is not a viable solution,” he said.

He said CFPB is concerned because of the “downstream effects of this on relationship banking and consumers.”

“The contracts written by the major core services providers are making it harder for local financial institutions to switch providers or use add-ons from outside technology providers, which allow the major incumbents to charge exorbitant amounts of money for their services, while discouraging them from quickly adapting their own products and services to fit with an ever-evolving banking tech landscape,” he alleged.

He said high costs, unescapable contracts, consolidation, and slow reaction times are harming local financial institutions’ abilities to keep up with their bigger competitors.

The bureau director said he hoped the members of the council will guide the agency on how technology and software providers can create a more competitive market “that helps every institution, regardless of size, compete for customers.”

“We need to chart this course together, or local relationship banking will fade into history,” he said.

Director Chopra’s Opening Remarks to the Community Bank and Credit Union Advisory Councils