We attended a full day session at the OCC in Washington D.C. last week about responsible innovation. It was essentially a 300+ person discussion around the March white paper the OCC produced (HERE). We give the OCC props for organizing this first class workshop that brought lawyers, fintech, banks, community activists, consultants and regulators together to exchange ideas. While the conference was chocked full of ideas and lessons, we distill our top 10 takeaways below:
- General Theme: The OCC is trying to figure innovation out and trying to find ways to support it without sacrificing risk management/proper governance. Specifically, the policy question is how far to regulate innovation and where to draw the line. The OCC demonstrated that they are very open to feedback and used the Forum as a vehicle to not only disseminate information but to gather thoughts as well. To date, most regulatory bodies have taken an “observational approach” only interjecting themselves when banks run afoul of traditional risk management practices. Going forward, this may change, and we would predict, given the feedback from this conference, that all the regulatory bodies take more of an active role in the coming years concerning the process of innovation and promoting a set of new principal-based guidance.
- Strategic Plan: It is highly likely that the OCC will want to see a more formal innovation section in the strategic plans of banks. Innovation should be aligned with strategy. This isn’t that different than current strategic planning, but the goal is to more formalize initiatives with efforts to not only quantify the risk but clear benchmarks for success and failure. This concept is very much work in progress, but more formality when it comes to investing in bank-built technology or partnering is in the works. This means not taking wild initiative flyers outside of core focus (“chasing the next new idea”), while at the same time acknowledging non-bank competitors and technology that could disrupt any new initiative. Further, larger community banks may want to consider a more formalized innovation process with a dedicated team, stated mission, ideation process and budget. If you are looking to roll out three ideas per year, then you are likely looking at ten ideas. To process ten ideas efficiently and accurately, banks need a framework and infrastructure in place so they can improve.
- Special Charter: The OCC is seriously debating the pros and cons of a separate, limited purpose, fintech national charter – The OCC seemed almost perfectly split on this. Some didn’t want to expand the current mission and just place the pressure on banks to be responsible, some wanted to expand the current charter to include more fintech issues/risk, and some wanted a set of defined special (payments, marketplace lenders, etc.) charters. Stay tuned as this was one of the more hotly debated issues at the conference.
- Consumer Disclosure: Regarding product development, there was a strong emphasis on making sure banks have consumer disclosures at a level so that all fees, risks and alternatives are clearly known upfront. Consumer protection remains a top focus for regulators in addition to the primary mandate of the CFPB.
- General Risk Management: The OCC also emphasized general risk management – vendor due diligence, understanding of a fintech partner process, security, data protection, etc. All this was fairly common with little new information here. However, ample time was devoted to acknowledging that the vendor management piece likely needs to be expanded so banks can have a better framework to be able to partner with startups and early stage companies.
- CRA/Promote Financial Inclusion: Banks should consider employing technology to better reach unbanked and underbanked consumers. Look for more CRA emphasis to be placed on this and it was acknowledged that responsible innovation in this area can better democratize bank products by increasing accessibility, lowering fees/requirements and making underbanked customers more profitable for financial institutions.
- Areas of OCC Improvement: The OCC understands that current regulation and policy are not very transparent, not timely and that inconsistency between examiners and between other regulators exists (no surprise here). The good news is that the OCC is working on it and this conference was a step in the right direction. The OCC admitted that they were slightly risk adverse and that they are trying to focus more on the upside of bank opportunities.
- Product Focus: From a product standpoint, the products that seem most on the OCC’s radar screen at present are: any product that causes systemic risk (such as consumer facing data firms that connect to banks), consumer facing technology, payments, cryptocurrency (Bitcoin) and marketplace lenders.
- Sandbox: Banks should be thinking of conducting pilots with new products and invite the OCC in to observe. Parameters should be defined, with goals clearly stated. Look for more support and guidance around this area. Regulators should be brought on before the final stage, but only once the idea has had some level of vetting.
- What is next: A dedicated innovation cross-functional working group at the OCC has been established. This team is only a month old, and this effort is just getting underway. It seems like one next step is for this working group to review their current guidance and make sure it is modernized. As stated above, a good example of this is to update third-party relationship analysis (FIL 2013-29) to make it more flexible and more principals-based.
Submitted by Chris Nichols on June 28, 2016