The Office of Comptroller of the Currency (OCC) initiated a working group in 2015 to begin to assess the evolution of technology and innovation in financial services, resulting in publication of a white paper at end of Q1, and requested industry comments on strategic questions. The dialog will continue later this month, at an OCC sponsored Forum on Responsible Innovation in the Federal Banking System.
Now, to those of us in long term industry roles, the reputation of traditional banking evokes images of conservative, risk-averse and an operational focus. New technologies, mobile, emerging payments, tend to focus media headlines on new entrants to banking and the risk potential that these disrupters will displace traditional banks for capturing the financial needs of customers.
The technology evolution has shifted to new types of service providers, instead of the traditional “core processor” business model – cloud technology, smart phone apps, have changed how banks view third party relationships.
This new Finance + Technology space, or Fintech is growing rapidly. A recent industry report indicated that investment in financial technology has grown from roughly $1.8 billion in 2010, to $24 billion in 2015. The total number of Fintech companies has surpassed 4,000 between the U.S. and U.K., creating new niches for providing services to financial services companies.
Part of the concern is that new entrants may not understand the fiduciary obligations traditional banks have in our U.S. Payment System, and could create risks or unintended harm to consumers. However, the pace of technology will always be ahead of regulatory guidance, so different approaches need to be taken. Similar to how change was adopted in the “DOT COM” era of the 1990’s we are facing a new “Bubble” in the evolution of payments, cloud technology and customer experiences.
“Without change there is no innovation, creativity, or incentive for improvement. Those who initiate change will have a better opportunity to manage the change that is inevitable.”
William Pollard, a Quaker writer often quoted on change and innovation
I think that concept is astute in that there are tipping points where change takes us to the next level; and should not be resisted. Creating barriers to change will actually help disenfranchise traditional players in financial services. Pollard considered this theme by stating that
“Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.”
RESPONSIBLE GROWTH: COMPARING DEFINITIONS
Like most writers and bloggers, we like words and how words work together to create messages or themes. In breaking down this concept of responsible innovation, let’s look at each word separately. Instead of taking a Black’s Law Dictionary approach, I started with www.dictionary.com for the leading definition of each word:
Definition of Responsible: Answerable or accountable, as for something within one’s power, control, or management (often followed by to or for)
Definition of Innovation: Something new or different introduced
I like the synergy that responsible conveys a message about accountability, but balances that oversight message with what a person or organization can actually manage or achieve.
Innovation is not just about ‘big ideas’ that create the next patent, but can be simple concepts that introduce new functionality, new ideas, or something different. Technology alone is changing our perception of innovation with gadgets, devices and internet connectivity. The “internet of everything” is changing our expectations for innovation as consumers and as banking customers. Risk and Reward tend to go hand in hand, but risk needs to be balanced with understanding the implications and potential for negative outcomes. The OCC defined Responsible Innovation in a way that balances these outcomes, with a focus on ensuring alignment to the business strategy of the bank or service organization.
OCC Definition of Responsible Innovation:
“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 OCC FRAMEWORK FOR RESPONSIBLE INNOVATION
The OCC Framework included these concepts or guiding principles:
- 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 sized to integrate responsible integration into their strategic planning
- Promote ongoing dialog through formal outreach
- Collaborate with other regulators
Key tenants in the starting dialog on Responsible innovation focus on messages that Risk should not impede progress; Technology can promote inclusion for underserved consumers; Demographics are changing customer needs; and that banks and Fintech companies can collaborate vs. compete. To demonstrate that outreach, the OCC started a strategic dialog on responsible innovation, by asking for industry collaboration and feedback on key questions:
1. What challenges do community banks face with regard to emerging technology and financial innovation?
2. How can the OCC facilitate responsible innovation by institutions of all sizes?
3. How can the OCC enhance its process for monitoring and assessing innovation within the federal banking system?
4. How would establishing a centralized office of innovation within the OCC facilitate more open, timely and ongoing regarding opportunities for responsible innovation?
5. How could the OCC provide guidance to non-bank innovators regarding its expectations for banks’ interactions and partnerships with such companies?
6. What additional tools and resources would help community bankers incorporate innovation into their strategic planning processes?
7. What additional guidance could support responsible innovation? How could the OCC revise existing guidance to promote responsible innovation?
8. What forms of outreach and information sharing venues are the most effective?
9. What should the OCC consider with respect to innovation?
WEIGHING THE RISKS & OPPORTUNITIES FOR BANKERS
In thinking about these questions, I think it is important to weigh the risks and opportunities, and differences between national banks and community banks. The 2015 Community Banking in the 21st Century Research & Policy Conference published a study that estimated that compliance costs community banks $4.5 billion annually. But from an objective perspective of profitability, it can be said that they represented 22 percent of community bank net income in 2014.
That’s disproportionate and the regulatory burden is more difficult for community banks to manage while working to grow and adapt to technology and payments innovation.
In fact, a recent ABA Survey of Bank Compliance Officers stated that the regulatory burden limited the expansion of bank products and services due to compliance. The survey found that the increased costs of compliance have led nearly 50% of banks to reduce their offerings, which creates opportunities for non-financial disrupters to emerge
While the dialog will continue over the next quarter as the conversation expands with the public forum bringing banks, consumer agencies, regulators, financial technology companies together to expand the options and concepts for oversight in Fintech without creating barriers to innovation, here are some thoughts to consider from a service provider point of view:
- Size Matters – Balance the needs and resource differences between national banks and community banks, but also for start-ups or mature service organization. The risk needs to be balanced with the type of service being provided to “right size” compliance obligations.
- Know Your Customer – Banking organizations and service organization need to ensure they have mechanisms to monitor and assess changing customer needs. Consumers have become more demanding on what they expect, and that requires processes that can be adapted to pilot innovation and later operationalize the requirements into existing compliance management systems.
- Leverage Industry Associations – Self Regulatory models have been successful in bridging the gaps between technology evolution and new regulations. Digital marketing is successful with collaboration on ad networks, just like Direct Marketing Association principles enable innovation in channel marketing.
- Continue the dialog – Achieving responsible innovation will be an ongoing discussion between service organizations, banks, and regulators that can demonstrate how the framework can promote the dialog and not risk creating an “examination mindset” that diminishes traditional banking organizations from embracing innovation.
Linnea Solem Chief Privacy Officer, Vice President Risk and Compliance for Deluxe Corporation is a former Chair of the Shared Assessments Program. Linnea is a management professional with 20+ years financial services experience in areas eCommerce, technology, business development, marketing, information practices and risk management. She is a Certified Information Privacy Professional and led Deluxe’s compliance initiatives for Y2K, GLB, Check 21, and Red Flags Legislation. You can connect with Linnea on LinkedIn.
Reposted with permission from Deluxe Blogs