By John K. Higgins
04/25/2016 9:30 AM PT
Information technology – especially the Internet – can have a positive impact on the US financial system. However, if used improperly, such tools can have a devastating impact on the financial sector and consumers.
The Office of the Comptroller of the Currency, a unit of the US Treasury Department, has launched an initiative on the future of e-commerce finance in the light of technological innovations. While recognizing the benefits of the technology, the agency is also concerned about the negative impact it has on financial markets and how it should direct its regulatory program in the future.
The OCC is soliciting input from the IT industry, financial companies and the general public and has published a white paper outlining its concerns. The deadline for comments on the white paper is May 31st.
The benefits of IT in the financial sector include improved transaction productivity, consumer convenience, and system reliability. The dangers include data entry errors, consumer record vulnerability, and privacy issues.
SUBSCRIBE TO THE ECT NEWS EDITOR’S PICK NEWSLETTER »
The emergence of fintechs
What also worries the auditors is the use of technology to create new types of financial intermediaries that would not exist without the internet. They are commonly referred to as “fintech companies” and include new services such as online payment providers, online commercial lenders, and peer-to-peer lending platforms. The OCC is concerned that some of these new facilities may not receive adequate funding.
The OCC is also concerned about innovative financial products that might mirror the unconventional mortgage institutions that were linked to the 2008-2009 financial crisis.
“But given the lessons of the financial crisis, when some innovative products like sub-prime mortgages and engineered securitisations were used in ways that had disastrous consequences for individuals, communities and our economy, we want to be sure they were overseeing them To innovate banks and credit unions in ways that are safe, sound and consistent with consumer protection laws and regulations, “said Thomas Curry, US currency auditor.
“In short, what we’re trying to promote is responsible innovation,” he said at a Harvard University forum in March, where he previewed the OCC program.
The OCC establishes, regulates and supervises all national banks and federal savings banks as well as federal branches and agencies of foreign banks. Their goal is to ensure that these organizations operate safely, provide fair access to financial services, treat customers fairly, and comply with laws and regulations.
The OCC whitepaper is entitled “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective”. The agency is concerned about its own ability to become more agile and faster in its regulatory processes in order to promote what it considers to be appropriate innovation, as disclosed in the document. These efforts include leveraging and enhancing technological know-how within the agency, as well as reaching out to the finance and technology sectors for advice.
OCC offers a list of concerns
Other problem areas include ensuring that banks, non-banks and fintech providers use appropriate risk management tools to address cybersecurity vulnerabilities in relation to existing services, as well as services or products resulting from technological innovations.
While mobile technology and social media could improve access to financial services in underserved communities, the OCC raised concerns about the importance of brick-and-mortar banking in such communities.
Importantly, in its traditional role of ensuring stability in the financial sector, the OCC has raised the question of how fintechs will address this problem.
“Our job is to make sure banks of all sizes are able to weather economic storms so they can continue to serve their communities and their customers,” said Curry.
“I would be concerned about the staying power of some of the new types of lenders. One of the great virtues of community banking is that they know their customers and have behind them in good times and bad that an algorithm selected would fare in a downturn, “he said.
The OCC’s framework for the innovation initiative consists of several elements, spokesperson Bryan Hubbard told the E-Commerce Times. They include the following:
- Make sure we are able to identify and understand new trends and technologies, as well as the emerging needs of consumers of financial products.
- Make sure we are able to quickly evaluate products that require regulatory approval and identify the risks involved – and the safeguards required to manage those risks.
- Be a point of contact for banks and savings banks looking for guidance on our supervisory expectations when considering new and innovative products.
Financial groups value effort
Business groups generally supported the OCC initiative. “The agency’s focus on responsible innovation is in line with our core belief that banks should be empowered to innovate and that consumers should trust that they have the same protection when doing business with financial services providers – banks or non-banks -” said Rob Nichols, president and CEO of the American Bankers Association.
“Banks are helping consumers by offering innovative products and forging new partnerships. The OCC’s efforts are an important part of a wider discussion on how fintech fits into the current regulatory structure,” he said.
“The payment transaction industry is heavily regulated at the state and federal level. We urge all regulators to work together to avoid duplication and unnecessary regulatory burdens. The OCC encourages regulatory collaboration and coordination, and we welcome that approach, ”said Scott Talbott, senior vice president of government affairs for the Electronic Transactions Association.
“We are seeing more and more regulators investigating the modern electronic payment system. It is wise to take the time to understand how technology is transforming payments, benefiting consumers, merchants and the economy. The key is regulators’ next step: moderate reaction or overreaction? ”He told the E-Commerce Times.
“It’s the age-old question of how regulation and innovation can be reconciled. The OCC hits the right note by acknowledging this debate and recommending caution, ”said Talbott.
The document lacks specificity and is mostly about high level principles, said Randy Benjenk and Michael Nonaka of Covington & Burling in an analysis of the OCC white paper. For example, the OCC failed to address “the sometimes significant legal and regulatory barriers faced by banks” in relation to innovation.
Investments by the banking sector in fintech companies would continue to be subject to the activity restrictions and additional requirements of the National Bank Act, the Housing Loans Act and other important laws. Fintech companies that provide services for banking organizations may also be subject to the provisions of the Banking Services Company Act.
“The whitepaper also does not address the relevance of the banks’ assessment areas for the performance assessments of the Community Reinvestment Act with increasing online and mobile banking use. In addition, the document does not address the charter of fintech companies, although the comptroller’s comments are published along with the white paper on the subject, “said Benjenk and Nonaka.
The analysis also failed to address the broader question of whether new types of regulation should apply to innovative methods of providing financial services, whether or not banks provide them.
“Nonetheless, the White Paper clearly provides impetus for further discussion on banking innovation issues and signals a new focus by the OCC on addressing the issues in a way that aligns the industry’s commercial interests, consumer interests, and security and reliability considerations brings ”, said Benjenk and Nonaka.
The OCC will host an innovation forum in Washington, DC on June 23rd