Banking Industry Landscape

On March 31, 2016, the Office of the Comptroller of the Currency (the OCC) released a whitepaper addressing responsible innovation in the federal banking system, particularly as it relates to financial technology, or “fintech” for short. The report does not discuss any specific regulatory proposals that the OCC is considering, but rather contemplates the “guiding principles for the OCC’s approach to responsible innovation.” The report recognizes that the OCC anticipates a shift in the banking industry as fintech and other innovations continue to be a driving force for change.

The OCC is soliciting public comments on the whitepaper and particular questions, which are summarized below. All comments must be submitted to the OCC by May 31, 2016.

The whitepaper focuses on a path to developing the framework that will guide the OCC’s evaluation of innovative products, services, and processes in the banking industry. Such innovations may include the expansion of mobile payments, blockchain technology, online lending, internet distribution, and algorithmic underwriting and portfolio selection. The whitepaper suggests that innovations may spring from collaborative efforts between banks and technological innovators. The whitepaper does not tackle the more specific issues facing banks related to current regulatory limitations, nor does it address whether the regulations and constraints imposed on banks will be imposed equally on all fintech providers, whether or not they are also traditional banks.

According to a recent research report, investment in financial technology has expanded from $1.8 billion in 2010, to $19 billion in 2015. The number of bank branches and staff in banks is expected to decrease significantly in the next decade as the use of mobile and internet banking grows. These systemic shifts give rise to the adaptive move by the OCC toward regulating banking as it may be affected by the innovations of the future.

The OCC’s attitude toward the current trends in banking is transitional. The OCC states both that fintech offers the opportunity for wider distribution of banking services, particularly to underserved populations, and that fintech should not become a substitute for the “stabilizing force” of a physical bank. It is likely this shifting attitude underpins the central concept of the whitepaper: “responsible innovation” rather than mere “innovation.” The OCC provides the following definition of “responsible innovation:”

 

“The use of new or improved financial products, services, and processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with sound risk management and is aligned with the bank’s overall business strategy.”

The OCC’s comments immediately following the definition highlight the key prongs of “responsible innovation” that signal the agency’s priorities:

  • the importance of meeting consumer needs;
  • effective risk management; and
  • corporate governance.

The OCC’s Guiding Principles

Much of the whitepaper is devoted to eight guiding principles that OCC plans to use to develop a “framework for understanding and evaluating innovative products, services and processes.”

1. Support responsible innovation

The OCC is considering how to streamline and improve its internal processes to review innovative products, services, and processes offered by banks or other entities. The agency may either create a centralized office on innovation or designate an existing group within the agency to be the central point of contact for innovation and provide a clear path for seeking the OCC’s advice. Additional proposals may include process improvements to expedite regulatory decisions or potentially allow pilot programs to test innovative ideas.

2. Foster an internal culture receptive to responsible innovation

The OCC acknowledges that traditionally risk-averse regulatory agencies can be viewed as an impediment to innovation. The Comptroller of the Currency has committed to promoting a culture at the agency that will be open minded and more receptive to innovation in banking.

3. Leverage agency experience and expertise

Currently, OCC examiners work closely with banks and are supported by experts who are knowledgeable in a variety of regulatory arenas. With this approach to innovation, the OCC will consider designating experts on responsible innovation to be resources for bank supervision and to advise banks or other entities in the development of innovative products, services, and processes.

4. Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers

Recognizing that certain populations—young adults, minorities, and low- and moderate-income consumers—are underserved by traditional banking, the OCC sees responsible innovation as a way to expand services to these demographics. Innovative products could increase access to financial services for individuals and their communities by spurring small business development and community investment.

5. Further safe and sound operations through effective risk management

The OCC plans to improve its ability to understand and monitor risks facing the industry, including cyber risk, and also risks arising from innovation itself. The OCC warns that banks must be wary of risks arising from in-house development, third-party collaboration, and business combinations.

6. Encourage banks of all sizes to integrate responsible innovation into their strategic planning

The OCC encourages banks to incorporate responsible innovation into their strategic plans, while keeping in mind that the decision to offer innovative products, services and processes should align with the needs of their customers, strategic plans, and appropriate levels of risk.

7. Promote ongoing dialogue through formal outreach

The OCC will maintain an ongoing dialogue with banks, innovators, and consumer groups to better understand trends in innovation in the banking industry and communicate regulatory guidance. The OCC also intends to bring together banks, innovators and regulators through a series of workshops and meetings.

8. Collaborate with other regulators.

The OCC will coordinate and work with the CFPB and other state and federal banking regulators to encourage a consistent understanding and application of regulations related to innovation.

In his remarks introducing the whitepaper the Comptroller said, “Not every innovation is appropriate for a regulated financial institution, and not every innovation that is appropriate for a regulated institution is appropriate for all regulated institutions. But avoiding new approaches completely is equally dangerous.” It is encouraging that the OCC has recognized the trends in the banking industry and is taking steps to adapt and support the responsible innovation in the future.

Comments on the Whitepaper

In connection with the whitepaper and future dialogue, the OCC is soliciting public comments on the whitepaper and particular questions. All comments must be submitted to the OCC by May 31, 2016. The additional questions the OCC has asked are:

  1. What challenges do community banks face with regard to emerging technology and financial innovation?
  2. How can the OCC facilitate responsible innovation by institutions of all sizes?
  3. How can the OCC enhance its process for monitoring and assessing innovation within the federal banking system?
  4. How would establishing a centralized office of innovation within the OCC facilitate more open, timely, and ongoing dialogue regarding opportunities for responsible innovation?
  5. How could the OCC provide guidance to nonbank innovators regarding its expectations for banks’ interactions and partnerships with such companies?
  6. What additional tools and resources would help community bankers incorporate innovation into their strategic planning processes?
  7. What additional guidance could support responsible innovation? How could the OCC revise existing guidance to promote responsible innovation?
  8. What forms of outreach and information sharing venues are the most effective?
  9. What should the OCC consider with respect to innovation?