OCC Advises “Careful and Cautious” Approach to FinTech-Bank Partnerships

On Wednesday, September 7, 2022, acting Comptroller of the Currency Michael J. Hsu gave remarks in New York City at the Clearing House + Bank Policy Institute Annual Conference. Hsu’s remarks, “Safeguarding Trust in Banking: An Update,” were focused on measures the Office of the Comptroller of Currency (OCC) is taking to build stronger trust among consumers in the banking system. These remarks are a follow-up to those he gave last year, reflecting that the OCC will increase scrutiny on bank and financial technology (FinTech) partnerships to ensure consumer confidence in banking services delivered through those programs. 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 halt FinTech innovation. Underlying this approach is a concern for the stability of the traditional banking system given the increase in partnerships between traditional banks and FinTech companies.

When discussing the growing number of partnerships between banks and FinTech companies, Hsu encouraged maintaining a “careful and cautious” approach. This is the same approach the OCC has adopted under his direction towards cryptocurrency. He attributes this stance to the federally regulated banking system being largely unaffected by the Terra stablecoin collapse in May, which resulted in several other crypto platforms failing. For bank-FinTech partnerships, however, the “careful and cautious” approach will consist of more thorough supervision and examination of banks partnering with FinTech companies. Hsu pointed out that the drop in FinTech valuation has disproven previous predictions that FinTech disruption to banking would cause traditional banks to go extinct. Instead, FinTechs and banks are partnering, resulting in a mutually beneficial relationship: FinTechs benefit from banks’ trustworthy reputations, longstanding customer bases, and access to cheaper capital and funding sources. Banks, in turn, “gain speed to market and access technological innovation at lower cost.” According to Hsu, bank digitalization requires “expertise and economies of scale” that most banks do not have. So, FinTechs step in. This transition has resulted in an “increasingly de-integrated stack of banking services.”

Bank-FinTech partnerships also focus on providing customers a more seamless experience than those traditionally offered by depository institutions. However, this makes it more difficult for customers, regulators, and the industry to distinguish between where the bank stops and where the tech firm starts. Hsu fears that the de-integration of banking that is taking place, if left unregulated, “is likely to accelerate and expand until there is a severe problem or even a crisis.” He compared this perceived potential crisis of bank-FinTech partnerships to the 2008 financial crisis, where an increasingly complex system initially provides benefits but eventually collapses as a result of improper regulation and attention to detail. Hsu highlighted that the OCC has adapted to changing times in its bank information technology (BIT) examinations to address developments relating to ransomware, artificial intelligence, cloud computing, and distributed ledger technology. However, Hsu fears that the advent of bank-FinTech partnerships is creating new, unseen risks that threaten the growth of these partnerships, threatening consumers and the trust that banks have been rebuilding since 2008. As Hsu stated, “trust is sensitive to surprise.”

To mitigate these risks, the OCC is working on a process to “subdivide bank-FinTech arrangements into cohorts with similar safety and soundness risk profiles and attributes.” To help better focus the efforts, Hsu listed several questions that he says need to be posed and answered to make real progress. These include questions of dividing responsibility between banks and FinTechs, the resiliency of banks when FinTechs face difficulty, reconciling the differences between FinTechs and banks, and what happens when FinTechs fail. Another important question Hsu posed is, “How do banks and their third parties view and treat customers in bank-FinTech arrangements—when do customers go 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 Plan, which explicitly acknowledges current digitalization 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 out potential risks to ensure that banking “remains trusted and safe, sound, and fair as the system evolves.”