OCC: Bank-FinTech Partnerships Are ‘Here to Stay’
The Office of the Comptroller of the Currency (OCC) has stated that bank-FinTech partnerships “are here to stay.” Acting Comptroller of the Currency Michael J. Hsu’s announcement follows his warning that such schemes could pose an increased risk to the banking industry because of their complex structures.
In an interview with Reuters, Hsu expanded on his comments from last month’s Clearing House and Bank Policy Institute annual conference in light of concerns expressed by Republican members of the Task Force on Financial Technology. Essentially, the concerns revolved around wanting to ensure that “examiners will not discourage innovation through FinTech partnerships… [or] impose unreasonable burdens on one of the parties.
Responds to criticism
After Hsu’s speech at the conference, additional clarity was called for by House Republicans to quell concerns about the future of bank-FinTech partnerships. In a letter to Hsu, the authors criticized the lack of “clear driving rules and support [for] innovative banking services.” The letter noted that when executed correctly, the benefits of bank-FinTech partnerships far outweigh the risks they pose, as they provide greater financial inclusion, stimulate technological innovation and promote competition – all to the ultimate benefit of the consumer.
Speaking to these concerns, Hsu assured that his caution about bank-FinTech partnerships is not intended to stifle arrangements, but rather reflects his concern that financial institutions need to adequately measure their risks. “When everything is done in a bank, we know exactly who is responsible when things break. But when you start chopping those things up, and the business models are different, that’s when the risk can be lost.”
A formal response to the House Republicans’ letter is expected by October 31, 2022.
Attention to crypto
In the interview, Hsu also warned regulators and policymakers against overextending their focus on crypto to the detriment of other areas. “Crypto occupies a lot of brain space for a lot of people, both on Capitol Hill and the regulatory community,” Hsu said.
In light of the rapid rise of crypto and related virtual products, government agencies have recently issued a series of reports to lay the groundwork for a regulatory framework for digital assets. From the White House Office of Science and Technology Policy (OSTP) to the Treasury, recent crypto-related guidance includes:
While FinTech and crypto are priorities for the OCC Committee on Banking Supervision, ten additional priorities are listed as areas that require risk-focused banking supervision strategies to be developed and implemented, including:
-
- Protects against complacency: Ensure that the banks maintain stable financial positions with regard to capital, provisions for credit losses, management of net interest margins and earnings
- Credit: Evaluation of measures to manage credit risk given changes in market conditions, termination of pandemic-related forbearance and uncertainty in the economy
- Cyber Security: Assess the bank’s ability to recover from destructive malware attacks
- Third parties and related concentrations: Determine whether banks provide appropriate oversight of their significant third-party relationships, including FinTech partnerships
- Payments: Evaluation of payment systems products and services that banks offer or plan to offer, focusing on new or emerging products, services or channels for wholesale and retail customer relationships
Important takeaways
A bank considering working with a FinTech familiarizes itself with the thorough vendor due diligence regulators expect a bank to undertake before engaging a FinTech. Similarly, a FinTech looking to partner with a bank should ensure it has the necessary risk-based regulatory policies, programs and procedures regulators and banks expect to build and maintain.
To avoid risk management responsibilities being lost or confused between the two parties, both sides of the partnership must accurately measure their risks on an ongoing basis through a robust risk assessment.
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In an interview with Reuters, Hsu expanded on his comments from last month’s Clearing House and Bank Policy Institute annual conference in light of concerns expressed by Republican members of the Task Force on Financial Technology. Essentially is concerns centered around which wants to ensure that “examiners will not discourage innovation through FinTech partnerships… [or] impose unreasonable burdens on one of the parties.
Responds to criticism
Following Hsu’s speech at the conference, further clarification was requested by House Republicans to ease concerns over the future of bank-FinTech partnerships. In a letter to Hsu, the authors criticized the lack of “clear driving rules and support [for] innovative banking services.” The letter noted that when executed correctly, the benefits of bank-FinTech partnerships far outweigh the risks they pose, as they provide greater financial inclusion, stimulate technological innovation and promote competition – all to the ultimate benefit of the consumer.
Addresses these concerns, Hsu assured that his caution about bank-FinTech partnerships is not intended to stifle arrangements, but rather reflects his concern that financial institutions need to adequately measure their risks. “When everything is done in a bank, we know exactly who is responsible when things break. But when you start chopping those things up, and the business models are different, that’s when the risk can be lost.”
A formal response to the House Republicans’ letter is expected by October 31, 2022.
Attention to crypto
In the interview, Hsu also warned regulators and policymakers against overextending their focus on crypto to the detriment of other areas. “Crypto occupies a lot of brain space for a lot of people, both on Capitol Hill and the regulatory community,” Hsu said.
In light of rapid rise of crypto and related virtual productsgovernment agencies have recently released a series of reports to lay the groundwork for a regulatory framework for digital assets. From the White House Office of Science and Technology Policy (OSTP) to the Treasury, recent crypto-related guidance includes:
While FinTech and crypto are priorities for OCC Committee on Banking SupervisionA further ten priorities are listed as areas requiring risk-focused banking supervisory strategies to be developed and implemented, including:
-
- Protects against complacency: Ensure that the banks maintain stable financial positions with regard to capital, provisions for credit losses, management of net interest margins and earnings
- Credit: Evaluation of measures to manage credit risk given changes in market conditions, termination of pandemic-related forbearance and uncertainty in the economy
- Cyber Security: Assess the bank’s ability to recover from destructive malware attacks
- Third parties and related concentrations: Determine whether banks provide appropriate oversight of their significant third-party relationships, including FinTech partnerships
- Payments: Evaluation of payment systems products and services that banks offer or plan to offer, focusing on new or emerging products, services or channels for wholesale and retail customer relationships
Important takeaways
A bank considering collaborating with a FinTech familiarizes itself with in-depth supplier due diligence regulators expect a bank to commit before engaging a FinTech. In the same way, a FinTech that wants to work with a bank should ensure that it has necessary risk-based regulatory guidelines, programs and procedures regulators and banks expect to build and maintain.
To avoid risk management responsibilities being lost or confused between the two parties, both sides of the partnership must accurately measure their risks on an ongoing basis through a robust risk assessment.
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Originally published October 21, 2022, updated October 21, 2022
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