As you are well aware on December 2, 2016, the Office of the Comptroller of the Currency (OCC) announced that it would consider issuing special purpose charters to fintech companies. There have been plenty of articles written on the potential impact of extending charters to fintech companies. Many of these articles have been dire. But will it be?
Keep in mind that fintech isn’t always competitive; it can be collaborative as well. Consider a special charter for a fintech firm developing a blockchain solution to move funds more efficiently between banks. In fact, any firm that clears transactions, including your core processor, might find a special purpose charter compelling. The competitive aspects of fintech are what concerns bankers. And community bankers seem to be especially worried.
There are many examples of present day fintech-based offerings that have disrupted the market: Venmo, Rocket Mortgate, and Lending Club to name a few. These services exist without a national charter. So, why would they willingly submit to the rigorous compliance that comes with a charter, even a limited special purpose charter? I am not sure that they would. They know that these barriers exist.
In fact, Financial Innovation Now recently published a study about these issues in July 2016, entitled “Examining the Extensive Regulation of Financial Technologies.” This same group recently sent a letter to the President-elect congratulating him on his election and asking him to consider several initiatives outlined in that letter.
If you are not familiar with Financial Innovation Now, you should become familiar with it. They have established a very strong voice. It is a collaborative effort of technology firms including Amazon, Apple, Google, Intuit, and PayPal. Barbarians at the gate? Maybe. But, these leading companies are hardly barbaric.
The OCC brings up a very good reason for taking this action, to promote responsible innovation. Let’s be honest. Innovation has been lacking in bank technology. Disregard the latest news from the large tech firms. What real innovation in banking technology for community banks has there been recently?
A new app feature or an updated system doesn’t define innovation. Technology has been refined, no doubt however what is in place today is not much different than what was employed a decade ago, or even two decades ago. It is nearly identical just more refined.
The iPad was announced in April 2010. Now, touch screens are ubiquitous. They can be found everywhere, but in the financial services industry they are only now being integrated into banking systems. However, even that is just a new delivery of an existing process. Much of banking is too dependent upon its legacy which includes its physical structure design (branches) as well as its infrastructure to move into the future.
If you were to reinvent your bank today, how different would it look? I am sure that it would be quite modern in design and service delivery. Moving from a decades-old legacy that includes branch delivery, systems design, and process design to embrace current technology is not going to happen easily especially if it isn’t readily available. Maybe the OCC’s action will pave the way for that to occur.
When comparing the state of financial technology in the United States to what is occurring in foreign countries, it appears that the U.S. is lagging behind. Fully- digital banks are springing up around the world. They can be found in Great Britain and Europe. Singapore is a hotbed for fintech development. India is going cashless. Australia is mandating open application programming interface systems (APIs). Parts of Africa have adopted mobile banking well beyond what has occurred in the U.S. Not to mention the European Commission’s PSD2 where retailers can connect to account processors for payments.
There are plenty of reasons for these innovations. The top two reasons: developing economies can jump into the most current technology without the burden of legacy and state-sponsored development regulations. Developing countries have no legacy, which is a factor that becomes more cumbersome or an anchor here in the U.S. One of the best examples may be EMV technology.
The OCC is accepting comment on their proposed licensing of fintechs until January 15, 2017. This is your opportunity to express your thoughts. The OCC’s publication, “Exploring Special Purpose National Bank Charters for Fintech Companies” provides a section on commentary. I urge you to give this careful thought.
This will be the last Trends in Technology blog for 2016. I extend to you all wishes for a joyous holiday season and for a prosperous 2017. I intend to launch the new year with blogs that will address how your bank can prepare for fintech. Until then, stay warm!