Move over, banks. FinTech is here, only projected to grow bigger, and if you want to survive, you’ve got to innovate.
That’s one of the many messages contained in a highly anticipated white paper released last week by the U.S. banking industry’s chief watchdog, the Office of the Comptroller of the Currency (OCC), which among listing guidelines for the creation of any future regulations regarding financial technology, aka “fintech,” also called upon banks and non-banks to provide input to help draft its regulatory policy.
The 11-page report, titled “Supporting Responsible Innovation In The Federal Banking System: An OCC Perspective,” outlines the many challenges facing traditional banks and savings institutions post-global financial meltdown posed by the explosive growth of fintech and related trends and innovations. The industry-wide analysis, which included data from bankers from community, midsize and large banks, academics, consumer groups and other regulatory bodies, among others, to gain a better understanding of emerging technology and new approaches in financial services to craft a framework for “evaluating financial innovation.”
In its research, the OCC learned about a wide array of concerns from all stakeholders, including that the “rules of the road” governing these services and products “are unclear.” Banks expressed uncertainty about the agency’s expectations regarding third parties and non-banks, while the latter sought a better understanding of the supervisory environment and associated regulatory requirements as they expand their relationships with banks.
In announcing the government’s foray into assessing how to govern this largely unchecked sector of the economy, Comptroller of the Currency Thomas J. Curry acknowledged to an audience at Harvard University on March 31 that fintech “does pose challenges for traditional banks.”
“It challenges them to develop and maintain a clearer understanding of the evolving needs and preferences of the consumers, businesses and the communities they serve and seek new ways to reach those who have sought financial services outside the banking system. That is a good and healthy thing,” Curry said.
The fintech boon has also challenged risk-adverse regulators to consider how to appropriately police this expanding banking and wealth management sector favored by millennials, without stifling innovation.
The OCC, an independent bureau within the U.S. Treasury Department, sent a clear message that it plans to be a friendly partner in the future of fintech.
“This framework is intended to improve how the OCC evaluates innovative products, services, and processes that require regulatory approval and identifies potential risks associated with them,” the white paper states.
Fintech has been a disruptive force in the financial industry. Much like how the newspaper and the media industry had to join forces with social media innovators to remain relevant, traditional banks are now exploring how they, too, can engage customers through fintech.
Marketplace lending, an outgrowth of the convergence of technology and finance, was a $12 billion industry in 2014, according to report published by Morgan Stanley last May titled “Global Marketplace Lending: Disruptive Innovation in Financials.” The study also forecasted the global marketplace to grow to $150-$490 billion by 2020. Marketplace lenders will boast a 6-percent market share by that time, the report estimates.
The same report found that Millennials favor “fast, convenient, and cheaper credit.”
“They have a distinctly different financial habit,” Jo Ann Barefoot, senior fellow at the John F. Kennedy School of Government’s Mossavar-Rahmani Center for Business and Government, told New York Financial Press. “There’s a lot of data showing that they’re skeptical of banks…they don’t feel loyalty to banks, and also, a lot of them don’t have credit cards—that’s a lesson they’ve seem to have taken from the financial crisis.”
Barefoot, an angel investor and advisor to fintech startups who also served as the OCC’s first-ever female deputy director, agreed with Curry, who in his speech characterized its move into regulating fintech a “watershed” moment.
“I think what the OCC has done is a real breakthrough,” she explained. “They’re asking every national bank…to begin factoring this into their strategic planning, and they’re thinking about technology and so on and that’s going to make everybody in the industry take it seriously, including the people who are less inclined to go in that direction.”
The white paper noted that technological innovation is largely occurring outside the banking industry, “often in unregulated or lightly regulated fintech companies.”
In 2015 alone, the number of fintech companies in the United States and U.K. increased by more than 4,000, the white paper notes. Investment in such companies has also been staggering: to a tune of $24 billion worldwide since 2010.
The OCC highlighted at least eight “guiding principles” that would help create “responsible innovation.” Among its goals is to “provide a clear path” for banks and other stakeholders to seek guidance from the agency. To do so, the OCC is considering ways to expedite its review process while also effectively assessing potential risk factors. One of the ways it may accomplish that goal is by creating its very own office of innovation, the white paper noted.
The OCC currently appears content with sparking a discussion about a possible framework for continued innovation, as opposed to issuing guidelines without giving a voice to fintech startups and banks.
“The paper recognizes that the regulatory environment can be risk averse, and that both our employees and the banks we supervise—as well as fintechs—might view us as inhospitable to innovation,” Curry said during his speech.
“After all, innovation is not risk free,” he continued. “But it can be managed, and we want to foster an internal culture that is receptive to new technology and new ways of doing business.”
When it comes time for regulators to police fintech, Barefoot, noted: “They won’t have to start from scratch, but they will have to think differently about it.”
“The big thing the comptroller did was explicitly announce that they’re undertaking a shift toward embracing the upside potential of innovation in addition to addressing the downside risk,” Barefoot said.
The OCC requests written comments be submitted to the agency by May 31 at innovation@occ.treas.gov.
(Photo credit: Comptroller of the Currency Thomas J. Curry at John F. Kennedy School of Government’s Mossavar-Rahmani Center for Business and Government on Thursday, March 31, 2016. Credit: Harvard University.)