Regulators Open Up to FinTech
With the milestone of Varo Bank receiving its national bank charter, the door is now officially open for FinTech companies to become registered and licensed on their own — no need for a partner bank. The US regulatory agency that oversees bank charter approvals is the Office of the Comptroller of Currency (OCC). Back in May 2020, Brian Brooks stepped is as the agency’s new director — with an intense focus on sustainable innovation, expanding charter approvals, and ensuring national banks serve the needs of their communities.
Under his direction, many modern themes are being rigorously evaluated: the importance of branches despite a move to digital, the creation of a federal payments charter, and industry collaboration of how financial institutions store and transact in cryptocurrency.
Despite other agencies and organizations not being in alignment with the new vision from the OCC, expanding the perspective of regulators and opening frameworks towards financial innovation will be a key theme in this decade. The time is here for the regulatory environment to work with (and not against) the technological change.
Here are some critical takeaways from the OCC’s new director (from a 1:1 with The Financial Brand) that will influence the future of the US financial services ecosystem:
In this time of COVID, modernizing the financial system to meet the needs of all in the US has become a critical priority. Visiting a branch or handling cash is something being avoided. Technology is pushing these trends forward even more as demand for innovation increases;
2020 is the year when financial institutions needed fintech companies to digitize important tasks (such as KYC and identity verification, or risk assessment); FinTechs needed banks to provide the capital to fund government loan programs for businesses in need. Both sides came out with clear wins as partners;
The current state of AI’s adoption has been minimal due to lack of dialogue among regulators, especially in discussing risk and reward. The clear benefits for AI in credit would create inclusion for individuals unable to qualify under current credit scoring models, and improving risk management to capture closer to 100% of credit performance (thereby minimizing defaults or declines for credit-worthy applicants);
The inherent strength from government is assessing risk — not building products, servicing customers, or innovation. Managing a set of frameworks for consumers and businesses to live by or run their company should be the true focus at all times. The OCC doesn’t look to innovate banking or financial services; however, the demand from the general public (seen through market demand and choices) dictates that the US should also look forward in that direction;
As this market trend further develops, the OCC will continue to prioritize safety and sustainability in products and business models, regardless if they come from fintech firms or banks. Opening access in include more the companies at the forefront of this movement, enables visibility from the OCC to continue its vigilance, respond quickly to poor financial practices, and provide consumer protection;
Cryptocurrency is another area being examined in detail, especially in granting national banks the ability to be custodians. With millions of individuals and companies owning some form of crypto, it makes sense to provide the safety from institutions. If physical assets are already being held in custody (such as gold or fine art), providing consumer protection in crypto should also be considered. Similarly, remaining competitive as a country when it comes to blockchain and possible central bank currencies will be a critical theme for the future — the dollar (as-is) won’t be able to retain its leadership with digital tokens;
In terms of institutional players in the banking ecosystem, the largest national banks will continue to function as they do today but with variances in service delivery towards mobile. Maintaining global reach in terms of scope and money movement will help retain this leadership position.
Community banks will enhance their offerings and position in the next 10 years as trust centers within their local jurisdictions. Technology partners and innovation will help this group catch up to the service level from larger players, while maintaining their current role of specialized, small scale banking.
Mid-sized, regional banks are the most at risk to be left out — without scale or deep loyalty from a community base of clients. These institutions are likely to narrow down their scope and offerings to target top user growth segments and remain viable.
Overall, the new outlook of the OCC is a hopeful sign that other agencies in the US (such as the FDIC, IRS, and SEC) will come together to share in a similar vision. By registering more companies as depository, the OCC increases its scope and governance with each new bank charter. This extended supervision allows financial activity from various platforms (such as “shadow banks”) to be closely assessed for risk on an ongoing basis.
Being inclusive of more market makers and players provides the opportunity of increased oversight and consumer protection — both critical for the future decade of financial services. //
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