The Weekly Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.
This week we discuss the latest actions of U.S. regulators regarding innovation and fintech. We summarize a RegTech primer we think everyone in financial services should read, and finally, we cover the continuing discussions about digital transformation in banking.
Are U.S. Regulators Finally Serious About Innovation?
In the past, financial service industry observers have placed blame on the regulatory regime for the slow pace of innovation. Regulations, like eSig, have not been updated in decades; even with the advent of new technology. Newer areas, like cryptocurrency, aren’t dealt with in regulations, often barring traditional FIs from growing financial activities. Inconsistent interpretations of regulations exist between agencies and local examiners. State and federal regulators often don’t see eye to eye — sometimes resulting in legal action.
Recently, regulators have begun to talk more about innovation, fintech, and specific technologies with some action. The COVID-19 pandemic and the sudden urgency to move towards digital models have brought a sense of urgency to regulators. This week during the LendIt Fintech USA 2020 conference both the OCC’s Acting Comptroller and the FDIC Chairman addressed innovation. Jelena McWilliams, the FDIC Chairman, noted that the FDIC has taken steps to promote fintech partnerships within the financial services industry, both internally, and among the institutions they regulate. McWilliams didn’t cite any specific regulations. For his part, Acting Comptroller Brian Brooks spoke at length about OCC’s continued push for fintech and payments bank charters.
In an article in BankingDive this week, Anna Hrushka summarizes Brooks comments and some of the reactions of the banking industry. Hrushka writes:
“Brooks said a national charter for fintechs and payments companies is the appropriate response to the ongoing unbundling of financial services.” As a rationale Brooks is quoted saying “Customers want what they want. The question is, is our platform flexible enough to accommodate that? And I think it has to be.”
Hrushka notes that on the same day, “several trade groups sent a letter to Congress expressing opposition to the OCC’s plans for a payments charter.” She quotes their statement:
“We oppose the OCC’s effort to grant commercial companies like Amazon or Facebook a national payments charter to access to the Federal Reserve payments system and safety net … without protecting the financial system and consumers from the concomitant increase in systemic risk.”
Brooks dismissed these concerns and called them a misunderstanding, “some of these trade groups are operating under… (the idea) that somehow this is going to trigger a lighter-touch charter with fewer obligations, and it’s going to make the playing field un-level. I think it’s just the opposite.”
Brooks also addressed the ongoing legal battle between the OCC and the states over charters. “We’re going to win these cases,” Brooks is quoted. “The OCC has never lost a case on bank powers in the U.S. Supreme Court. And yet in every generation, every new thing the OCC has done to adapt to markets has always been challenged. So there’s nothing new about the fact that New York is suing us.”
Nikhilesh De addresses another regulatory issue in an article in Coindesk. De writes:
“The OCC and the Securities and Exchange Commission (SEC) published stablecoin guidance…on how cryptocurrencies backed by fiat currencies should be treated under law.” De continues, “The OCC detailed how banks should handle stablecoin reserves, specifically referring to stablecoins backed by currencies like the dollar.”
Since Brooks was named Acting Comptroller the “OCC has taken a number of steps to integrate the crypto space with the existing financial system. In recent months, the OCC has told banks they can provide services to crypto startups,” as well as the charter activity noted earlier.
In the part of the SEC, De writes:
“The SEC said certain stablecoins might not be securities under federal law, but advised issuers to work with the agency and legal counsel to ensure this is the case. According to the statement, the SEC is willing to publish a ‘no-action’ letter, which would assure the recipient that the regulator would not bring an enforcement action against the company.”
Noelle Acheson, Director of Research at CoinDesk, in a separate CoinDesk article writes that stablecoin demand has grown significantly and a regulatory response was urgent.
“The total value of stablecoins has now surpassed $18 billion, up from $10 billion just four months ago. Much of this growth has been driven by international demand for dollars as well as the increasingly sophisticated financial tools being built on top of public blockchain technology. USDC, the leading U.S.-based stablecoin, has seen its market cap almost quadruple so far this year, to over $2 billion”
Acheson speculates that these regulatory positions “could incentivize banks to actively seek stablecoin business, and in so doing, broaden both their client base and their stake in crypto markets.” She adds that “a recent statement from the OCC said that U.S. national banks could now custody crypto assets. Presumably that includes stablecoins, too. So, a bank could attract not just stablecoin issuers, but also their clients. It would then make sense to facilitate the transfers of stablecoins between clients, and (why not) even between banks. New payments networks could emerge, which in turn could give rise to a host of new banking services. For an industry squeezed by low interest rates and looming defaults, this potential growth vector will eventually start to look attractive.”
While many of these moves do bode well for innovation in financial services, the fact that regulators aren’t working in concert throughout the U.S. regulatory regime is proving to be an ongoing hurdle.
What Every FI Needs to Know About RegTech
In keeping with the subject of regulation, we came across an excellent primer on RegTech by Alex Sokolov in ReadWrite. Sokolov begins by defining RegTech:
“RegTech implies the use of technology for supervising, reporting, and ensuring compliance mostly for the financial industry (essentially the most regulated one) while also covering the needs of pharmaceutical and medicine manufacturing, the oil and gas sector, transportation, etc.”
He adds that it also addresses the application of technology to risk management. Sokolov gives a short history on RegTech, “The history of RegTech goes back to the 2008 financial crisis that led to an increase in government regulations. Additionally, technological advancements in the financial domain spurred the appearance of numerous fintech solutions that aimed to serve customers differently.”
Sokolov then examines the current situation and the benefits of RegTech. “Still, many financial organizations refrain from adopting RegTech solutions regardless of their growing popularity and tangible benefits.” Sokolov does an excellent job examining succinctly each of the barriers to adoption of RegTech.
Finally, he supplies an examination of the “mature technologies used in RegTech solutions,” including:
- Cloud Computing for Data Security and Cost-efficiency
- Natural Language Processing (NLP) for Supervising and Managing Regulatory Change
- Machine Learning (ML) to Improve Transaction Monitoring
- Robotic Process Automation (RPA) to Facilitate KYC and AML Processes
- Big Data Analytics to Improve Decision-making
- Blockchain for Better Deals’ Transparency
- Biometrics for Better Identity Management
We come across a lot of confusion regarding application of technology in the area of compliance and risk management in our work with various financial institutions. I urge our readers to give this short primer a read.
Digital Transformation: It’s Not About Tech
In an article in Forbes this week, Dmitry Dolgorukov writes that:
“digital transformation shouldn’t be seen as a strategy based on technology. In other words, you don’t go digital just because you can. Instead, it’s all about creating a business strategy that allows financial institutions to promptly respond to market needs.”
He further notes that, “the key components of the digital banking concept are the customer-centric approach, personalization of the offer and mobility.” These are concepts that are near and dear to our approach in helping our clients define their digital strategy.
While smaller FIs feel that they cannot innovate, Dolgorukov makes the point that “The larger banks get, the more difficult it is for them to innovate.” A way to accelerate digital transformation is “through strategic partnerships and alliances with fintechs.” He adds, “While banks have a deeper understanding of the industry, fintechs are more experienced in the implementation of technologies.”
However, as noted by Edmund Lawler in an article in BAI’s Banking Strategies, smaller organizations don’t need to rely of partnerships alone. Lawler gives a few examples of smaller FIs that were able to easily pivot during the pandemic due to digital strategies that were in place prior.
Lawler writes:
“Vast Bank’s digital transformation was well under way when the pandemic struck. The family-owned bank based in Tulsa, Oklahoma, has $670 million in assets and 11 locations. President and CEO Brad Scrivner says it recently installed a new open-source banking platform, and it provides banking services for fintech Meed Banking Club. The Vast mobile app gives the bank an online footprint covering 48 states.”
Another example is NBT, a $10-billion-asset community bank based in Norwich, New York. NBT “rapidly and efficiently transitioned to a nearly all-digital operation, says Joseph Stagliano, executive vice president and president of retail community banking.” Lawler quotes Stagliano:
“We established a very robust technology roadmap seven or eight years ago, with a focus on the customer experience, the employee experience and the digital branch experience.”
In another article from Forbes, Kasia Borowska, Managing Director at Brainpool AI, writes that:
“Traditional banks will either need to partner with FinTech’s [sic] or take on the transformation process themselves.”
She notes that digital transformations require “digital capabilities as well as welcoming a fundamental mindset shift.”
Borowska correctly identifies the mindset shift from the bank’s products to the customer needs. Technology can be applied to aide in this shift. She notes “Leveraging AI and Big Data is crucial to personalising…services (that address customer needs) at scale.”
The other shift she identifies is understanding:
“The importance of both physical and digital touchpoints. Digital transformation doesn’t mean technology that will always replace the human touch. The solution isn’t binary. Physical touchpoints can and should be improved by applying digital technology, such as AI to augment a human.”
Borowska adds “Digital inclusion must not result in the exclusion of those most in need of human contact.” Finally, Borowska warns, “Banks that fail to realise the potential of emerging technologies today will be left behind and lose customers tomorrow.”
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