In a recent speech at the 41st Annual Central Banking Seminar, sponsored by the Federal Reserve Bank of New York, Federal Reserve Board Governor Jerome H. Powell discussed financial innovation. Powell is rumored to be President Trump’s leading contender for Federal Reserve Board Chair, and a formal announcement could be made as early as later this week.
His remarks focused on how technology is changing the delivery of retail banking and payments services, and he discussed the roles of banks, fintech companies, and other stakeholders in moving the United States forward to a better payment system. He also reviewed the Federal Reserve’s collaboration with these payment system stakeholders in pursuing that goal. He argued that, “for policymakers as well as the private sector, the challenge is to embrace technology as a means of improving convenience and speed in the delivery of financial services, while also assuring the security and privacy necessary to sustain the public’s trust.”
With respect to retail banking innovation, Governor Powell noted the role of fintech platforms in supporting access to credit through “innovative approaches to gathering and analyzing data,” which “may allow a lender to quickly monitor and analyze more up-to-date data from a broader range of sources, including those outside of the traditional lending process, to verify an applicant’s identity and make inferences about the applicant’s overall financial health.” He observed that “[w]ith this additional information, the bank would have a more complete picture of an applicant’s day-to-day activity and overall financial capacity, and potentially a greater ability to provide credit to customers, including some who might have been otherwise denied a loan based on traditional data.” He also noted that fintech companies are finding ways to use banks’ data, in some cases without entering into an explicit partnership with the bank. One example of this is how fintech companies, with customers’ permission, “have increasingly turned to data aggregators to ‘screen scrape’ information from financial accounts.” Reiterating concerns that other policymakers have expressed, Governor Powell cautioned that these technologies also pose issues regarding data security and safety, as well as consumer privacy and protection.
As with retail banking, Governor Powell discussed how retail payments “will need to evolve to meet consumer expectations of constant connectivity and instant access while assuring security and privacy.” He observed how innovation in retail payments can also offer tangible benefits to consumers beyond convenience, such as improvements in security, especially the ability to authenticate consumers and detect fraudulent transactions. “Consumers will not store their funds in a system that is not secure and will not want to transfer funds out of an otherwise secure system if the process is cumbersome,” he stated.
Although his remarks highlighted payments innovations from fintech firms and banks alike, he emphasized the “special role of banks in the payments process, and how banks are needed in order to create innovations that can be used broadly across the economy.”
Governor Powell also provided an overview of the Federal Reserve’s efforts to improve the U.S. payments system (which we reported on previously), and noted that the Federal Reserve plans to launch a study in early 2018 analyzing payment security vulnerabilities and will establish work groups focused on approaches for reducing the cost and prevalence of specific payment security vulnerabilities.