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10 takeaways on innovation

A banker’s-eye view out of OCC’s innovation conference

UNconventional Wisdom is a periodic guest blog where the conventional wisdom is held up for fresh inspection. If you have some "UNconventional Wisdom" to share, email UNconventional Wisdom is a periodic guest blog where the conventional wisdom is held up for fresh inspection. If you have some "UNconventional Wisdom" to share, email [email protected] has been presenting coverage of sessions from the Comptroller’s recent “Forum On Supporting Responsible Innovation In The Federal Banking System.” I was one of the 300+ bankers, analysts, lobbyists, and others who attended the full-day, “sold-out” forum, and I came away with some observations and follow-ups that I thought other bankers would like to hear.

The day consisted essentially of a series of panel discussions, with audience participation. The centerpiece of the day was OCC’s March white paper, Supporting Responsible Innovation In The Federal Banking System. 

I give the OCC props for organizing this first-class workshop that brought together lawyers, fintech players, bankers, community activists, consultants, and regulators to exchange ideas. While the conference was chock-full of ideas and lessons, I’ve distilled my “Top 10” below:

1. General Theme: OCC is trying to figure innovation out and attempting 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.

OCC demonstrated that the agency is very open to feedback. OCC 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 inserting themselves into things when banks run afoul of traditional risk management practices.

Going forward, this may change. I would predict, given the feedback from this conference, that all regulators will take more of an active role in coming years concerning the process of innovation and promoting a set of new principles-based guidance.

2. Strategic Plan And Innovation: Based on what I heard, it is highly likely that OCC will want to see a more formal innovation section in the strategic plans of its banks.

Innovation should be aligned with strategy. This isn’t that different from current strategic planning. However, the goal is to more formalize initiatives with efforts to not only quantify the risk but to set 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. This could include a dedicated team, stated mission, idea generation 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.

3. Special Charter: OCC is seriously debating the pros and cons of a separate, limited-purpose, fintech national charter.

Representatives of the agency speaking at the forum seemed almost perfectly split on this:

• Some didn’t want to expand the agency’s current mission and just wanted to concentrate on placing the pressure on banks to be responsible.

• Others wanted to expand the current charter to include more fintech issues and greater risk.

• And some wanted a set of defined special charters. Possibilities include payments, marketplace lending, and more.

Stay tuned as this was one of the more hotly debated issues at the conference.

4. Consumer Disclosure: Clearly, consumer protection remains a top focus for regulators, in addition to the primary mandate of the CFPB. Regarding product development, there was a strong emphasis among forum speakers on making sure banks have consumer disclosures at a level so that all fees, risks, and alternatives are clearly known upfront.

5. General Risk Management: OCC also emphasized general risk management—vendor due diligence, understanding of the need for a fintech partner process, security, data protection, etc.

All that was said was fairly consistent with past statements, 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.

6. Community Reinvestment Act/Financial Inclusion: Banks should consider employing technology to better reach unbanked and underbanked consumers.

Look for more CRA emphasis to be placed on this. Also note that speakers 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.

7. Areas For OCC Improvement: OCC understands that current regulation and policy are not very transparent nor timely. And officials made it clear that they realize that there’s inconsistency between examiners as well as between different regulatory agencies. (No surprise there for us bankers.)

The good news: OCC is working on such issues, and this conference was a step in the right direction.

Officials admitted that they are slightly risk averse and that they are now trying to focus more on the upside of bank opportunities.

8. Product Focus: From a product standpoint, those 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 (like bitcoin); and marketplace lenders.

9. 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 in before the final stage, but only once the idea has had some level of vetting.

10. What comes next: A dedicated innovation cross-functional working group has been established at OCC. This team is only a month old, and this effort is just getting underway.

It seems like one next step 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 to make it more flexible and more principles-based.

Other coverage of sessions at the OCC forum:

Where is innovation heading?: OCC forum speakers praise innovation’s promise, but much is yet to come

Fintech, “regtech,” and coping with tech: OCC forum examines the big picture of disruption

Where is innovation heading?: OCC forum speakers praise innovation’s promise, but much is yet to come

Better serving beleaguered consumers: OCC forum session explores helping consumers via fintech

Chris Nichols

Chris Nichols is chief strategy officer at CenterState Bank Central Florida, N.A., Winter Haven, Fla. He frequently contributes to "UNconventional Wisdom" and other parts of Nichols is a member of the Banking Exchange Editorial Advisory Board.

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