Retail Financial Innovation

Over the last two decades, we have witnessed what can arguably be called a revolution in retail consumer finance. Perhaps the hallmark of this revolution has been the dramatic expansion of unsecured lending through the proliferation of credit cards. This growth has not been limited to unsecured credit, but also includes mortgage and home equity lending. One of my themes this morning will be that these trends are the result of a wave of innovation, largely related to information technology, that has brought widespread change to financial services and other industries. At the same time, as retail credit extension has grown we have also seen a significant expansion of regulations pertaining to the extension of such credit, and a growing concern in some quarters that American households have lost control of their finances to a dizzying array of new products and options. My second theme concerns the relationship between these two broad developments. I will argue that there is a natural tendency for credit expansions like the one we've seen to lead to calls for new regulation. My hope is that understanding this relationship will better equip us to assess current conditions in retail credit markets, including legislative and regulatory proposals, and to think clearly about the industry's future direction.