On Wednesday, September 7, 2022, Acting Comptroller of the Currency Michael J. Hsu delivered remarks in New York City at the Clearing House + Bank Policy Institute Annual Conference. Hsu’s remarks, “Safeguarding Trust in Banking: An Update,”1was focused on measures the Office of the Comptroller of Currency (OCC) is taking to build stronger consumer confidence in the banking system. These comments are a follow-up to those he made last year, and reflect that the OCC will increase scrutiny of banking and financial technology (FinTech) partnerships to ensure consumer confidence in banking services provided through these programs.2 In general, the OCC’s view reflects the maturation of the FinTech industry and the focus of banking regulators on ensuring the industry’s continued survival through better regulation, rather than any intention to stop FinTech innovation. The background to this approach is a concern for the stability of the traditional banking system given the increase in partnerships between traditional banks and FinTech companies.
Discussing the growing number of partnerships between banks and FinTech companies, Hsu urged maintaining a “careful and cautious” approach. This is the same approach the OCC has taken under his leadership towards cryptocurrency.3 He attributes this attitude to the fact that the federally regulated banking system is largely unaffected by the Terra stablecoin collapse in May, which resulted in the failure of several other crypto platforms. However, for bank-FinTech partnerships, the “cautious and prudent” approach will consist of more thorough supervision and investigation of banks that work with FinTech companies. Hsu pointed out that the decline in FinTech value has disproved earlier predictions that FinTech disruption in banking would lead to the extinction of traditional banks. Instead, FinTechs and banks collaborate, resulting in a mutually beneficial relationship: FinTechs benefit from banks’ trusted reputations, long-standing customer bases, and access to cheaper capital and funding sources. The banks, for their part, “gain momentum in the market and gain access to technological innovation at a lower cost.” According to Hsu, bank digitization requires “expertise and economies of scale” that most banks do not have. So, FinTechs step in. This transition has resulted in an “increasingly deintegrated stack of banking services.”
Bank-FinTech partnerships also focus on providing customers with a more seamless experience than those traditionally offered by custodian institutions. However, this makes it more difficult for customers, regulators and the industry to distinguish between where the bank stops and where the technology company starts. Hsu fears that the de-integration of banking that is taking place, if left unregulated, “is likely to accelerate and expand until it is a serious problem or even a crisis.” He compared this supposed potential crisis for bank-FinTech partnerships to the financial crisis of 2008, where an increasingly complex system initially provides benefits but eventually collapses as a result of poor regulation and attention to detail. Hsu highlighted that the OCC has adapted to changing times in its banking information technology (BIT) investigations to address developments related to ransomware, artificial intelligence, cloud computing and distributed ledger technology. However, Hsu fears that the emergence of bank-FinTech partnerships creates new, unseen risks that threaten the growth of these partnerships, threaten consumers and the trust that banks have rebuilt since 2008. As Hsu said, “trust is sensitive to surprise.”
To mitigate these risks, the OCC is working on a process to “subdivide banking FinTech arrangements into cohorts with similar security and soundness risk profiles and attributes.” To help better focus efforts, Hsu listed a series of questions that he says must be asked and answered to make real progress. These include questions about the division of responsibilities between banks and FinTechs, the resilience of banks when FinTechs face difficulties, reconciling the differences between FinTechs and banks, and what happens when FinTechs fail. Another important question Hsu asked is “how do banks and their third parties view and treat customers in banking FinTech arrangements – when do customers move from being the client to becoming the product, and how are consumer protections maintained?”
Hsu also referenced the OCC’s recently released five-year strategic plan4, which explicitly recognizes today’s digitization forces and the need to be “agile and credible” in addressing them. He emphasized the continued efforts of the OCC to work with FinTech companies and map potential risks to ensure that banking “remains reliable and safe, sound and fair as the system evolves.”
Footnotes
1. Acting Comptroller Michael J. Hsu, “Safeguarding Trust in Banking: An Update” (The Clearing House + Bank Policy Institute Annual Conference, September 7, 2022).
2. Acting Comptroller Michael J. Hsu, “Safeguarding Trust in Banking” (Exchequer Club, 15 September 2021).
3. OCC Interpretive Letter 1179 (November 18, 2021); Acting Comptroller, Michael J. Hsu, “Modernizing the Financial Regulatory Perimeter” (Federal Reserve Bank of Philadelphia Fifth Annual FinTech Conference, November 16, 2021).
4. OCC, “Strategic Plan for Fiscal Years 2023-2027” (September 6, 2022).
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