Key Points from the OCC’s Financial Innovation Paper

The Office of the Comptroller of the Currency (OCC) released its highly anticipated white paper on financial technology innovation last week. The agency offered few details regarding its supervisory approach, but it did tip its hand regarding its areas of interest, which include banks’ risk management practices, relationships with third parties, and consumer protection and access. The OCC has historically sought to promote expansion of the banking industry through innovation and improved competitiveness, so it is no surprise that it is the first US banking regulator to formally act. [1]

1. The OCC is focused on banks, not FinTechs. The OCC is looking to establish consistent guidelines and feedback for banks seeking to harness new technologies. Technological innovation can come from within the bank, or from the bank’s relationships with (or investments in) nonbank financial technology firms (i.e., “FinTechs”). [2] The OCC is focused on effective risk management within the banking industry and on the continued competitiveness of national banks, given emerging technologies. Accordingly, we do not believe that the OCC is looking to establish a regulatory framework for FinTechs beyond those in relationship with banks. [3]

2. The OCC is looking to lead the banking regulators. As the first mover among banking regulators, the OCC is looking to lead its fellow agencies (namely, the Federal Reserve, the FDIC, and state banking departments) by fostering—not squelching—bank innovation, as evidenced by its use of the phrase “responsible innovation” many times in its paper. This leading position makes sense, as the Federal Reserve is more focused on bank holding companies while the FDIC and state banking regulators generally give more attention to smaller banks. The timing of the OCC’s action is also understandable given that banks’ competitiveness has recently come under pressure due to FinTechs’ entry into areas that have traditionally been solely within banks’ purview.

3. The OCC is first looking inward. The OCC pledges in its white paper to evaluate its existing processes as a first step. Improvements may include streamlining application procedures or permitting banks to pilot innovative products and services before full rollout. Furthermore, the agency wants to be in better a position to provide consistent direction and guidance to banks. To do so, the white paper suggests options such as establishing a centralized “office of innovation” within the OCC, hosting “innovator fairs” with banks and FinTechs, or developing educational materials for OCC personnel and banks. The OCC hopes to demonstrate that it understands the relevant technology issues and that regulation is not the only option in its toolkit.

4. Supervision of FinTechs is on the table, but via banks. The OCC will likely want a window into the risks of FinTechs that partner with banks, and will utilize its third party vendor management guidance for this purpose. [4] The guidance requires contracts with third parties who provide key services to include a clause allowing the OCC to examine the third party. The OCC will likely apply somewhat bank-centric expectations to FinTechs in the course of any examinations.

5. The OCC is not revealing all of its cards. The OCC’s paper provides no clear examples of the types of innovation or third party partnerships that it would look favorably upon, or how it might differentiate expectations for community banks or thrifts from those for large banks. The agency has no doubt received a great deal of information from banks on various types of potential innovations, and likely has a better sense of how it would like to proceed than the paper articulates. The agency’s cautious approach in the paper, and the announced public forum on the topic scheduled for June 23^rd, indicate the OCC’s interest in considering public feedback before issuing more detail. Banks should take advantage of the opportunity to make comments to the OCC.