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OCC Advises “Careful And Cautious” Approach To FinTech-Bank Partnerships – Fin Tech

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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,”1
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.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 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.3 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 that 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 a number of 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 Plan4, 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.”

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, September 15, 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).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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