Comptroller of the Currency Thomas J. Curry recently presented the OCC’s initiative on supporting innovation in national banks and federal savings associations. This initiative comes in response to the increasing disruption of traditional banking by financial technology (FinTech) companies as well as the adoption of more innovative strategies by national banks. The OCC believes that federally chartered institutions are uniquely positioned to be at the forefront of innovative practices, given the stability of funding sources, capital, and customer relationships, along with well-developed risk management programs. The goal of the initiative is for the OCC to both promote and support innovation in a responsible manner while maintaining alignment with its mission of ensuring a safe and sound, fair, and compliant banking environment.
The OCC has defined responsible innovation as “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 agency recognizes that banks must be receptive to new products and approaches to succeed in this rapidly changing environment. However, the OCC also emphasizes effective risk management and corporate governance and reminds financial institutions of the negative impacts of innovation that occurred during the previous financial crisis. The white paper states that “the OCC will support innovation that is consistent with safety and soundness, compliant with applicable laws and regulations, and protective of consumers’ rights.”
The white paper notes that many of the financial technology innovations are occurring outside the traditional banking industry in the unregulated or lightly regulated non-bank FinTech space. The agency also notes that the number of FinTech companies in the United States and United Kingdom has increased to more than 4,000 companies, and that investment in these companies since 2010 has totaled more than $24 billion. The OCC outlines the competitive advantages of both traditional banks and FinTech companies and emphasizes that banks and non-bank innovators can employ their respective advantages and benefit from strategic collaboration.
OCC Guiding Principles on Responsible Innovation
In an attempt to control the risks associated with innovation, the OCC has developed its own framework for understanding and evaluating innovative products and services. The agency will follow eight guiding principles when evaluating products and services associated with OCC-regulated banks:
- Support responsible innovation;
- Foster an internal culture receptive to responsible innovation;
- Leverage agency experience and expertise;
- Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers;
- Further safe and sound operations through effective risk management;
- Encourage banks of all sizes to integrate responsible innovation into their strategic planning;
- Promote ongoing dialogue through formal outreach; and
- Collaborate with other regulators.
The overarching theme of the white paper and guiding principles is the OCC’s openness and willingness to incorporate responsible innovation into the traditional banking system, and assist banks in adjusting to this new environment. The agency is in the process of considering various approaches to support its supervised banks in developing innovative products and services. However, the OCC still cautions that banks must consider the traditional strategic planning criteria when deciding to offer innovative products and services, which would include a thorough review of all risks involved, including but not limited to financial, reputation, and compliance risks.
The OCC also emphasizes that when it evaluates financial innovation proposals from national banks, it will especially consider its guidance on third-party relationships. The OCC notes that when FinTech companies partner with a national bank or federal savings association, they are inherently consenting to a certain degree of OCC oversight of that relationship. To clarify expectations and promote better understanding of the regulatory requirements, the OCC plans on evaluating existing guidance on new product development and third-party risk management to determine whether additional guidance is appropriate to address the needs of banks and their customers.
Conclusion and Action Steps
National banks and federal savings associations, as well as potential non-bank partners, should assess the proposed framework and make a strategic determination on whether to incorporate innovative financial products and delivery mechanisms. The white paper signals a shift in thinking on the regulatory appetite for innovative new products and services, and can potentially allow companies under the supervision of the OCC a more structured framework to make positive developments for both consumers and shareholders.
OCC-regulated institutions should:
- Consider using innovative financial products and services to better meet the needs of their markets, including financial services geared to low- and moderate- income consumers;
- Make financial innovation a component of their business strategy, where appropriate;
- Add the risks of financial innovation into the appropriate risk management governance, policies and reports, including risk appetites, risk assessments, and vendor management risk policies; and
- Enhance their vendor management operations as applied to third parties that are supplying innovation-related services.