Seeking to demonstrate its support for technological innovation, the Office of the Comptroller of the Currency (OCC) released a white paper offering a framework for approaching "responsible innovation." The white paper signals that the OCC's embrace of innovation will be tempered by concerns about risk management.

What happened

In its white paper, the OCC observes that the financial services industry is rapidly changing, with advances in financial technology disrupting the way traditional banks do business. National banks have responded by developing ways to make their operations more efficient, the OCC said, as well as investing in FinTech firms or new financial technology.

Defining "responsible innovation" to mean "[t]he 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 agency cautioned that not all innovation is positive.

In published remarks before the Harvard Kennedy School's New Direction in Regulation Seminar on March 31, 2016, Comptroller Thomas J. Curry noted that "responsible innovation is one that is consistent with sound risk management practices. That means that the bank understands the product and the risk it carries, and has the capacity to manage those risks. It also means the product is compatible with safety and soundness and consistent with the bank's strategic business plan. And finally, responsible means that it complies with laws and regulations, particularly those aimed at protecting consumers."

"The OCC will support innovation that is consistent with safety and soundness, compliant with applicable laws and regulations, and protective of consumers' rights," the agency wrote in "Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective."

The white paper offers eight principles that are intended to guide the OCC's development of its understanding and evaluation of innovative products, services and processes that OCC-regulated banks may offer or perform:

  • Support responsible innovation. To help support responsible innovation, the OCC is considering several reforms, such as the creation of a centralized office on innovation to serve as a forum to vet ideas before a bank makes a formal request, for example. Other possibilities include a less formal process where an existing unit within the agency assumes responsibility as the central point of contact on innovation as well as allowing banks to test or pilot new products or services on a small scale before committing the necessary resources for a full rollout. In addition, the agency plans to evaluate whether it can streamline some of its licensing procedures and consider whether additional guidance on new product development would be helpful.
  • Foster an internal culture receptive to responsible innovation. The OCC recognized that it has a reputation for having a low risk tolerance for innovative products and services and a deliberate and extended vetting process that can discourage innovation. The agency intends to evaluate its policies and procedures and enhance communication both inside the OCC and with stakeholders "to foster a more receptive culture and to improve the awareness and knowledge of financial innovations." For example, the OCC has already created an internal working group on marketplace lending and plans to augment its internal training.
  • Leverage agency experience and expertise. The OCC staff has a wealth of knowledge about the financial industry, the white paper notes, and the agency will make the most of expertise from OCC staff when considering innovation. In addition, the agency may draw on the support of designated lead experts within the agency.
  • Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers. "Current innovations in the financial industry hold great promise for increasing financial inclusion of underserved consumers, who represent more than 68 million people and spend more than $78 billion annually," the OCC said. Innovative technology should not be a substitute for the stabilizing physical presence of brick and mortar branches, but new products—online and mobile banking, saving, budgeting, and financial management tools and improved payment services, for example—can help address unmet financial services needs of the unbanked and underbanked.
  • Further safe and sound operations through effective risk management. While striving for innovation, financial institutions must ensure that corporate governance and risk management meet supervisory expectations when considering new products, services and processes. Innovation can present new risks, the OCC cautioned, ranging from cyber risk to risks to customer data through data aggregation and third-party use.
  • Encourage banks of all sizes to integrate responsible innovation into their strategic planning. Innovation should be responsible and consistent with customers' needs and the bank's strategic plan. "A bank's decision to offer innovative products and services should be consistent with the bank's long-term business plan rather than following the latest fad or industry trend," the agency said.
  • Promote ongoing dialogue through formal outreach. To keep abreast of continuing trends and developments in the financial industry, the OCC plans an ongoing dialogue with all stakeholders to understand the reasons and customer needs driving changes and to promote awareness and understanding of the agency's expectations related to responsible innovation. The OCC plans a variety of workshops and forums as well as "innovator fairs," and will provide resources and guidance on its website.
  • Collaborate with other regulators. The OCC plans to collaborate with other regulatory authorities at the state, federal, and international levels to promote a common understanding and consistent application of laws, regulation, and guidance, the agency explained.

The OCC is seeking feedback on the white paper and specifically requests comments about how the agency can facilitate responsible innovation by institutions of all sizes and what additional guidance (or revised existing guidance) could support responsible innovation. The agency also asked about challenges community banks face with regard to emerging technology and financial innovation as well as whether establishing a centralized innovation office within the OCC would benefit responsible innovation. Comments will be accepted until May 31.

Why it matters

The white paper represents the OCC's "vision for responsible innovation," Comptroller Thomas J. Curry explained in a preface to the publication. The OCC has signaled, however, that it will continue to focus on the risk associated with innovative technologies, noting that "effective risk management is essential to responsible innovation."

The agency seems particularly interested in the promise innovation holds for expanding services to consumers, including the "underbanked," observing that "[t]echnology, for example, can promote financial inclusion by expanding services to the underserved. It can provide more control and better tools for families to save, borrow, and manage their financial affairs." Indeed, the OCC may be the most receptive to innovations purported to benefit these groups.

The OCC has scheduled a forum on responsible innovation for June 23.

To read the OCC white paper, click here.