Recently, CFPB Director Rohit Chopra spoke at a joint meeting of the CFPB’s Community Bank Advisory Council and Credit Union Advisory Council in which he expressed concerns that core service providers that many small banks and credit unions rely on “have too much power in the system.”  Despite providing core banking functions such as deposit taking, payment facilitation, and loan origination, the Director notes that local banks and credit unions report dissatisfaction with providers in their innovation speeds, product roll-outs and third-party compatibility, and tech sophistication.

According to the Director, this dissatisfaction is part of a broader concern with the core services provider market being heavily consolidated with four providers serving 78% of all US banks.  This level of consolidation, according to Chopra, impacts smaller lenders in multiple ways, including (i) coercive, complex and tome-like contracts that come with unnecessary extra non-core banking services, longer contract periods, and stiff penalties and fees for ending contracts early or making other contract changes; (ii) service providers charging exorbitant amounts of money for their services; and (iii) contract structures not modeled for long-term responsiveness and adaptation to customer needs and digital banking innovations.

In response to this situation, the CFPB intends to work with core services providers and federal partners to answer questions related to banks’ collective bargaining on core services’ contracts.  The CFPB also intends to work with other agencies to examine third-party service providers and potentially referring complaints to other law enforcement agencies.

Putting it Into Practice:  With this latest pronouncement from the CFPB, financial institutions and service providers should be reviewing their contract arrangements to ensure fair and market value-driven services, in addition to services that are adaptable and flexible.  Core service providers should also consider “unbundling” their core services so that banks can choose the services that benefit them the most, which addresses banks’ concerns regarding paying for unnecessary and costly non-core banking services.