Community banks that have not considered the potential for partnership with nonbank financial technology (fintech) companies, alone or in collaboration with other community banks, may not be accounting for the full range of strategic risks to their business.
Strategic Risk Defined and Applied
In a brief but wide-ranging talk before the Annual Community Bankers Symposium on November 18, 2016, Comptroller Thomas J. Curry defined strategic risk as having “the right plan to meet your business goals in your market.” As applied, that means fashioning new questions that examine whether the bank is serving its long-term business model, not simply whether its products are meeting profitability goals. And perhaps the greatest disruption to financial services business models has been the emergence of fintech. Driven by consumer preference and technological innovation, fintech’s potential to upend the industry should prompt each bank to ask itself whether partnering with a nonbank fintech company is necessary to further the bank’s objectives and enhance its customer relationships.
But developing new questions should not b e as daunting as it sounds. Curry’s definition merely reformulates for the business the OCC’s supervisory strategy for community banks, in which exams are tailored to the “specific risks and particular circumstances of that bank.”
That community banks must consider the sorts of innovations typically associated with their larger cousins is due in part to two other topics addressed in Curry’s talk: the OCC’s responsible innovation initiative, and the OCC’s facilitation of collaboration among community banks.
Responsible Innovation Initiative
The OCC’s responsible innovation initiative has led to the formation of a stand-alone Office of Innovation, including the addition of a Chief Innovation Officer, which will be fully operational early in 2017. Per Curry, the office will function as “the central point of contact and clearinghouse for requests and information related to innovation.”
Perhaps most valuable to community banks will be the new availability of OCC officials outside of formal supervision channels, akin to “office hours.” Still, the office will also educate on innovation-related issues that might ultimately spur collaboration among community banks.
Collaboration among Community Banks
The OCC has encouraged collaboration among community banks, even publishing a guide in January 2015 on the opportunities available through collaboration. Curry revisited two of these opportunities during his talk: cost reductions in overhead related to third-party servicers and complementary business partnerships with nonbank fintech companies.
Of course, collaborating to reduce costs does not relieve community banks from their oversight, monitoring, or control responsibilities over third-parties and the internal structures necessary to accomplish them. Thus, a review and evaluation of existing processes and controls may be a prudent first step for any community bank considering collaboration.
While a fintech partnership may not ultimately align with its strategic plan, any community bank that neglects to evaluate its potential, alone or in collaboration with other banks, risks losing ground to those competitors that have studied the issue and found a way to proceed.