Credit Union Takeaways from the White House’s Executive Order

Based on the industry’s reaction, you’d think the banking sector had been singled out in the Biden Administration’s recent Executive Order addressing market competition. The wide-ranging document actually encompasses 72 initiatives, with financial services the last category listed- well after healthcare, agriculture, and transportation, and in less detail.

Nonetheless the two areas the Order directs regulatory agencies to pursue touch on longstanding banking hot topics, which explains the outsized response. It will be some time before we know how these directives play out (the wheels of regulation turn slowly), but let’s consider the areas under scrutiny.

First, it’s worth noting that at no point are credit unions mentioned in the documentation- even when listing the “agencies responsible for banking,” the NCUA is notably absent. It would be naïve to assume there won’t be spillover effects for CUs, however.

Heightened Scrutiny of Mergers

The Order correctly states that the number of US banks has declined by a remarkable 10,000 over the past 40 years, the vast majority through mergers and acquisitions (though not mentioned, CUs have seen similar proportional declines). Since the overall Order addresses market competition, the implication is that banking has become uncompetitive.

The fact remains, however, that the US still has far more banks- not to mention credit unions- than any other country. Meanwhile, fintech companies are rapidly entering the fray offering additional alternatives to traditional banking products. While the Order rightly points out that rural and minority communities have been disproportionately impacted by consolidation, this is more likely the result of branch closures than acquisitions themselves. It’s less clear how this Order can solve the latter.

My speculation is that the Order aims to increase M&A scrutiny for the 150 or so largest banks, those with over $10 billion in assets. The other 4,800- as well as virtually all credit unions- can probably breathe easier. For those looking to sell, arguably this could mean fewer potential buyers to drive up the price. The megabanks haven’t been shopping in the community bank aisle for a while anyway, however.

Account Portability/Open Banking

The topic of bank switching costs carries a potentially far great impact for institutions of all sizes. The order explicitly “encourages the CFPB to issue rules allowing customers to download their banking data and take it with them.” There’s plenty to unpack here- for starters, the mere letters CFPB send shivers up the spine of many bank and credit union leaders.

Additionally, the notion of “taking your banking data with you” implies that transaction data is in fact owned by the account holder rather than the bank. Although US banking practices have been trending in this direction, rarely has it been so clearly stated. Hopefully, the regulators will recognize that data portability is more easily declared than executed and that the vast majority of credit unions and community banks will need the help of their core and digital banking providers to make this a reality.

Most importantly, although the words “open banking” does not appear, the Order’s description essentially mirrors the conditions that set that process in place in the UK and much of Europe. Again, the US has already been trending that way; it will be helpful to formalize the rules of engagement. This is certainly not an area in which credit unions can afford to be caught flat-footed.

For reference, here’s the entirety of the passage included in the White House’s Fact Sheet:

Banking and Consumer Finance

Over the past four decades, the United States has lost 70% of the banks it once had, with around 10,000 bank closures. Communities of color are disproportionately affected, with 25% of all rural closures in majority-minority census tracts. Many of these closures are the product of mergers and acquisitions. Though subject to federal review, federal agencies have not formally denied a bank merger application in more than 15 years.

Excessive consolidation raises costs for consumers, restricts credit for small businesses, and harms low-income communities. Branch closures can reduce the amount of small business lending by about 10% and leads to higher interest rates. Even where a customer has multiple options, it is hard to switch banks partly because customers cannot easily take their financial transaction history data to a new bank. That increases the cost of the new bank extending you credit.

In the Order, the President:

• Encourages DOJ and the agencies responsible for banking (the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) to update guidelines on banking mergers to provide more robust scrutiny of mergers.
• Encourages the Consumer Financial Protection Bureau (CFPB) to issue rules allowing customers to download their banking data and take it with them.