The Office of the Comptroller of Currency, recognizing the sweeping changes in technology and business practices that are affecting financial institutions, is recommending U.S. banks incorporate “responsible innovation” as they adapt quickly to these advances, but what exactly does that mean?
In a recent whitepaper (download), the regulator outlined the general approach it will take as it evaluates innovative products, services and processes that OCC-regulated banks may offer or perform. In the paper, the OCC 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.
In a March 31 speech at Harvard University, Comptroller of the Currency Thomas Curry elaborated, noting that sound risk management practices are key. Specifically, he said this means:
• The bank understands the product and the risks it carries.
• The bank has the capacity to manage those risks.
• The product is compatible with safety and soundness and consistent with the bank’s strategic business plan.
• The product complies with laws and regulations, particularly those aimed at protecting consumers.
“Not every innovation is appropriate for a regulated financial institution, and not every innovation that is appropriate for a regulated institution is appropriate for all regulated institutions,” Curry said. At the same time, he said, avoiding new approaches completely can be equally dangerous.
“Banks have to continuously adapt to prosper, and we, as regulators, have to be knowledgeable enough to understand new technology and nimble enough to render timely decisions on matters requiring regulatory approval, as well as guidance about our supervisory expectations,” Curry said.
The OCC, which is seeking comments on the whitepaper (by May 31, send to email@example.com), said eight principles would guide its general approach for understanding and evaluating innovation in the context of OCC-regulated banks. These principles call for the regulator to:
1. Support responsible innovation.
2. Foster an internal culture receptive to responsible innovation.
3. Leverage agency experience and expertise.
4. Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers.
5. Further safe and sound operations through effective risk management.
6. Encourage banks of all sizes to integrate responsible innovation into their strategic planning.
7. Promote ongoing dialogue through formal outreach.
8. Collaborate with other regulators.
Brian Hamilton, chairman and co-founder of Sageworks, says the issue of how to respond to innovation is important, especially for community banks, which make up 97 percent of all U.S. banks. In a column for American Banker, Hamilton said that striking a balance between risk management and innovation in order to stay competitive is possible if community banks operate with an eye towards compliance, but also do so faster, online, and using technology and data.
Collaborating with innovators, focusing on understanding their own underwriting risks and automating more of the process to speed up underwriting and price in risk will help community banks compete with the fintech wave, he said.
“Community banks find themselves at a crossroads,” he wrote. “They could choose to continue with business as usual and write off fintech or alternative lending as just another threat that could come and go. Or they could explore how to compete with the fintech wave within the parameters of the traditional bank model.”
Curry, speaking in early April to the American Banker Retail Banking Conference, noted that without change, “banks could go the way of other businesses that failed to adapt to changing times.”
“But if they do adapt – and I believe the evidence is encouraging – banks can hold or even increase their share of the growing financial services marketplace,” Curry said. “That’s because they bring some very decided advantages of scale, scope and understanding of customer behavior to the table that other financial providers don’t.”