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Information technology -- especially the Internet -- can have a positive impact on the U.S. financial system. Used improperly, however, such tools have the potential to wreak havoc on the financial sector and consumers.
The Office of the Comptroller of the Currency, a unit of the U.S. Department of the Treasury, has launched an initiative on the future of e-commerce finance in light of technology innovation. While acknowledging the advantages of technology, the agency also is worried about the negative impact on financial markets and how it should direct its regulatory program in the future.
The OCC is seeking input from the IT industry, financial enterprises and the public, and has published a white paper outlining its concerns. The deadline for comments on the white paper is May 31.
The benefits of IT in the financial sector include improved productivity in conducting transactions, consumer convenience and system reliability. Dangers include data entry errors, the vulnerability of consumer records and privacy issues.
What also worries the comptroller's office is the use of technology in creating new kinds of financial intermediaries that would not exist without the Internet. They are broadly referred to as "fintech companies" and include new services such as online payments providers, commercial online lenders and peer-to-peer lending platforms. The OCC is concerned that some of these new entities may not be adequately funded.
The OCC also is concerned about innovative financial products that could mirror the unconventional mortgage entities associated with the financial meltdown of 2008 and 2009.
"But recalling the lessons of the financial crisis, when some innovative products such as subprime mortgages and financially engineered securitizations were used in ways that had disastrous consequences for individuals, communities and our economy, we want to be sure that the banks and thrifts we supervise innovate in a way that is compatible with safety and soundness and consistent with consumer protection laws and regulations," said U.S. Comptroller of the Currency Thomas Curry.
"In short, what we are trying to encourage is responsible innovation," he said at a Harvard University forum in March where he previewed the OCC program.
The OCC charters, regulates and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. Its goal is to ensure that these organizations operate in a safe manner, offer fair access to financial services, treat customers fairly, and observe laws and regulations.
The OCC white paper is titled "Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective." The agency is concerned about its own ability to become more agile and expeditious in its regulatory processes so as to encourage what it considers proper innovation, it revealed in the document. That effort will include utilizing and improving technological expertise within the agency as well as reaching out to the finance and technology sectors for guidance.
Other areas of concern are ensuring that banks, nonbanks and fintech providers adopt appropriate risk management tools to address cybersecurity weaknesses associated with existing services as well as with services or products resulting from innovations in technology.
While mobile technologies and social media could enhance access to financial services in underserved communities, the OCC expressed concerns about the importance of brick-and-mortar banking outlets in such communities.
Importantly, in its traditional role of ensuring stability in the finance sector, the OCC raised the question of how fintechs will address that issue.
"Our job is to help ensure that banks of all sizes are capable of withstanding economic storms so that they can continue to support their communities and their customers," Curry said.
"I would worry about the staying power of some of the new types of lenders. One of the great virtues of community banks is that they know their customers and they stand behind them in good times and bad. I'm not so sure that customers selected by an algorithm would fare as well in a downturn," he said.
The OCC's framework for the innovation initiative consists of several elements, according to a statement provided to the E-Commerce Times by spokesperson Bryan Hubbard. They include the following:
Business groups generally endorsed the OCC initiative. The agency's "focus on responsible innovation lines up with our core belief that banks should be empowered to innovate and that consumers should feel confident they have the same protections when doing business with any financial services provider -- bank or a nonbank," said Rob Nichols, president and CEO of the American Bankers Association.
"Banks are helping consumers by delivering innovative products and pursing new partnerships. The OCC's efforts are an important piece of a broader discussion on how fintech fits into the current regulatory structure," he said.
"The payments industry is heavily regulated at the state and federal levels. We urge all regulators to work together to avoid duplication and unnecessary regulatory burdens. The OCC calls for cooperation and coordination of the regulators and we applaud this approach," said Scott Talbott, senior vice president for government affairs at the Electronic Transactions Association.
"More and more, we see regulators studying the modern electronic payments system. It is wise to take the time to understand how technology is changing payments and benefiting consumers, merchants and the economy. The key is what next step regulators take: measured reaction or overreaction?" he told the E-Commerce Times.
"It's the centuries-old question -- how to balance regulation and innovation. The OCC strikes the right tone by acknowledging this debate and recommending proceeding carefully," Talbott said.
The document lacks specificity and mainly deals with high-level principles, Randy Benjenk and Michael Nonaka of Covington & Burling said in an analysis of the OCC white paper. For example, the OCC did not address "the sometimes significant legal and supervisory barriers that banks face" regarding innovation.
Banking sector investments in fintech companies remain subject to the activity restrictions and additional requirements of the National Bank Act, the Home Owners' Loan Act and other key statutes, they noted. Also, fintech companies that provide services to banking organizations potentially are subject to provisions of the Bank Service Company Act.
"The white paper also does not address the relevance of banks' assessment areas for purposes of the Community Reinvestment Act performance evaluations as online and mobile banking use increases. In addition, the document does not discuss the chartering of fintech companies, although the comptroller's remarks released in conjunction with the white paper touch on this subject," Benjenk and Nonaka said.
The OCC also failed to address the larger question of whether new types of regulation should to apply to innovative methods for delivering financial services, whether or not delivered by banks, according to the analysis.
"Nevertheless, the white paper clearly represents a spark for further discussions on the issues surrounding bank innovation, and signals a new focus by the OCC on addressing the issues in a way that balances the industry's commercial interests, consumer interests, and safety and soundness considerations," Benjenk and Nonaka said.
The OCC on June 23 will host a forum on innovation in Washington, D.C.