How the OCC is focusing on fintech

In late March of 2016, the Office of the Comptroller of the Currency (OCC), one of a handful of federal financial regulators, published a set of principles to guide a broad regulatory approach to innovation in the financial technology sector. Although barely 11 pages, the paper, “Supporting Responsible Innovation in the FinTech Sector: An OCC Perspective,” nonetheless represents the most significant and comprehensive statement from any federal regulatory agency on fintech to date. The paper is part of a broader framework that the OCC is currently developing to guide its evaluation of, and response to, innovation in the fintech sector.

It raises questions about what those those in the fintech community should make of Washington’s growing interest in what’s happening on the frontier of financial services. So far, two regulators have shown interest in the fintech sector: the Consumer Financial Protection Bureau (more on the CFPB here) and the OCC. Here, we’ll focus on the second agency—the OCC, which seems to be positioning itself to make fintech a core part of its regulatory focus.

First things first. What is the OCC, and what sort of authority does it have? Founded during the Civil War by Abraham Lincoln to oversee the development of a national currency, the OCC today has the authority to regulate nationally-chartered banks. (Supervision of different categories of banks is rather messily divided between the OCC, the Federal Reserve Board, and the Federal Deposit Insurance Corporation.)

The OCC’s mission is to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations. For banks that are nationally chartered, they have the authority to issue rules and regulations that govern investments, lending, and other practices.
Although it’s too early to tell what actions the OCC may take, the agency’s interest in leading the regulatory pack in fintech means that any ground they break will likely shape the approaches that other regulators ultimately take—one reason this obscure agency is worth keeping a close eye on.

And some hints about the future of the feds’ relationship with fintech can be gleaned from the OCC’s new paper. Here are 5 key takeaways:

1. The OCC is focused on banks and, to an extent, fintech companies associated with banks. In its paper, the OCC states that banks and nonbank innovators can benefit from collaboration. It also asserts that representatives from both banks and nonbanks suggested a need for more regulatory guidance, particularly with respect to partnerships and third-party relationships. While the OCC doesn’t have direct regulatory or enforcement authority over nonbank companies in the fintech sector, the close relationships between banks and many nonbank fintech companies means that rules affecting the former will affect the latter—either directly, or through altering the competitive environment (by making regulatory changes such as, for example, issuing special bank charters to certain fintech companies). In some cases, the OCC does, in fact, have the authority to extend their examinations to third parties that contract with banks, if a vendor is deemed to provide key services.
2. The OCC wants to make sure new financial technologies don’t allow banks to innovate themselves into another financial crisis. In light of the 2008 crash, the term “financial innovation” is somewhat tarnished: It still causes many people—especially those in the regulatory community—to imagine adjustable rate mortgages, credit default swaps, and other excessively complex or irresponsible financial instruments that contributed to the near-collapse of the U.S. economy. While acknowledging many exciting developments in the fintech sector in recent years, the paper nonetheless makes clear that the agency will only support innovations that are consistent with the principles of safety and soundness, compliant with applicable laws and regulations, and protective of consumers’ rights.
3. The OCC wants to nudge banks into leveraging fintech to improve financial inclusion. The OCC is bullish on the power of fintech to help banks improve financial inclusion and support community development. The paper lists a range of services, from mobile banking services, to improved payments systems, to behavioral models that improve automated underwriting, that could support people that are un- or underbanked. The OCC indicated it may issue guidance that lays out its expectations related to products and services that are designed to address the needs of low- to moderate-income individuals and communities.
4. The OCC doesn’t want fintech to result in increased cybersecurity threats for banks or consumers. The paper states that banks, nonbanks, and bank customers all believe that cybercrime is one of the most significant risks facing the financial industry as it implements new technologies—and asserts that risks to customer data through data aggregation and third-party use is increasing. While the paper doesn’t provide much in the way of specifics, the OCC pledges to improve its ability to understand and monitor emerging risks of all types, cybercrime included.
5. The OCC wants to know what you think. The OCC stresses it sought and received input from a broad range of stakeholders when drafting the paper—bankers from community, midsize, and large banks, innovators in various fields, consumer groups, academics, and other regulators—and will continue to listen to a diverse set of voices as it develops its framework. It asks for interested parties to submit comments on the paper—and the several key questions it raises—to innovation@occ.treas.gov.