Regulatory Push for Industry Collaboration, Technology Continues

Financial Services Law

Federal Deposit Insurance Corporation (FDIC) Chair Jelena McWilliams emphasized the need for partnership and collaboration with the financial services industry, in recent remarks at a fintech conference.

The comments—and the announcement of an Office of Innovation at the FDIC—are part of the agency’s recent embrace of technology, a welcome sign from the regulatory agency that issues deposit insurance.

What happened

Speaking at the Federal Reserve Bank of Philadelphia’s “Fintech and the New Financial Landscape” conference, McWilliams noted that technology in financial services is nothing new. “Banking has been the product of continuous innovation” since at least the 15th century, she reminded attendees.

“What is different today is the speed and tremendous impact of technological innovation in and on banking, and the potential for technology to disrupt not just an institution or two, but banking as we know it,” McWilliams said. “This is why it is crucial that policymakers and regulators understand the impact, scope and consequences that are innate to what we have come to refer to as ‘fintechs.’”

Innovation has played a huge role in expanding bank access to consumers, with mobile and online banking in particular offering “a level of control, access and convenience” embraced by consumers, she said. A recent FDIC study documented an increase in the percentage of banked households using mobile banking, from 23.2 to 40.4 percent in 2017.

New technology offers not only convenience but “a tremendous opportunity to expand access to the banking system,” McWilliams added. While the number of U.S. households that are unbanked or underbanked is trending downward, 8 million households still do not have any relationship with the banking system, and another 24.2 million households are underbanked.

“Innovation plays a role here—not just in how products and services are delivered to consumers, but also in the development of products and services that meet their needs—particularly those of unbanked and underbanked households,” the FDIC chair explained. For example, more than eight in ten underbanked households had access to a smartphone in 2017, she noted, and 76 percent had Internet access.

“These channels enable unbanked and underbanked households to access banking services,” McWilliams said. “It will be up to institutions to leverage technology and develop products to reach these consumers.”

As banks develop strategies to bring more consumers into the banking system, non-banks are also introducing new products and services to meet consumer demand, with McWilliams citing examples such as marketplace lending and crowdfunding, digital-only banks, peer-to-peer payment technology, and robo-advisors.

“To ensure that we are prepared to address the changing landscape in financial services, the FDIC has dedicated significant resources to identify and understand emerging technology,” McWilliams said. “We are examining trends in retail financial markets, including marketplace and digital lending, machine learning and artificial intelligence, and big data. We are also considering developments in the wholesale financial markets as well as blockchain and distributed ledger technology.”

Technology is also working its magic on the business of banking, McWilliams added, with data analytics improving lending and transforming how banks distinguish routine transactions from suspicious activity. Even the FDIC and other regulators have felt the impact, “particularly in the areas of [Bank Secrecy Act/anti-money laundering] compliance and protecting consumers’ personal information,” she said.

McWilliams offered more detail on the recently announced Office of Innovation at the FDIC, explaining that she tasked her team with four fundamental questions:

  • “How can the FDIC provide a safe regulatory environment to promote the technological innovation that is already occurring?
  • How can the FDIC promote technological development at our community banks with limited research and development funding to support independent efforts?
  • What changes in policy—particularly in the areas of identity management, data quality and integrity, and data usage or analysis—must occur to support innovation while promoting safe and secure financial services and institutions?
  • How can the FDIC transform—in terms of our technology, examination process and culture—to enhance the stability of the financial system, protect consumers and reduce the compliance burden on our regulated institutions?”

“We will not answer these questions overnight,” McWilliams concluded. “It is my goal that the FDIC lay the foundation for this next chapter of banking, encouraging innovation that meets consumer demand, promotes healthy and successful banks, and reduces compliance burdens. To all you innovators out there, get to work!”

To read McWilliams’s prepared remarks, click here.

Why it matters

The FDIC’s recognition of the importance of technology and innovation is a positive development for the financial services industry, though it follows on prior movement in the same direction by other regulatory agencies, including the Office of the Comptroller of the Currency. Although some critics are less than enthusiastic about the regulator’s efforts given the tendency of regulatory agencies to play “catch up” with technological advances, McWilliams pledged her support for the movement. “I assure you, the FDIC will keep an open mind to the potential challenges and opportunities going forward,” she said. “[T]he FDIC is obligated to fully understand emerging technology and its implications. We have already begun partnering with banks to understand how they are innovating. We are working to identify and hire subject matter experts to deepen our understanding of technological advancements.”