Federal Reserve Board Governor Michelle Bowman described the opportunities and challenges for community banks to innovate through collaboration with FinTech firms.
In remarks at a "Fed Family" Luncheon, Ms. Bowman stated that "community banks offer potential fintech partners a consumer-first approach to business and a number of advantages: deposit insurance and liquidity; a stable customer base; credibility in a local community; and settlement and compliance services." She observed that a significant number of community banks are currently working in collaboration with FinTech firms to deliver products more efficiently. However, Ms. Bowman expressed concern that many small banks are not adjusting to the changing environment, in some cases because they have "not gone through the process of thinking about the way innovation impacts their business" or because "they feel they lack the ability to navigate the complex regulatory and compliance issues that may arise." More specifically, Ms. Bowman noted that "40 percent of community banks say that they do not currently offer online loan applications and have no immediate plans to do so." Even where community banks have adopted technology, there is a concern that they may be overly dependent on their technology partners.
Ms. Bowman also said that bank regulators should accept some responsibility for the failure of banks to adopt technology. A major supervisory focus in recent years has been on third-party risk management, and she quoted a Treasury Department report to the effect that bank examination procedures may impose "more stringent de facto [risk-based] regulation" than the law requires. She also recognized a need for the bank regulators to "ensure that our outsourcing risk management guidance appropriately reflects the present-day business realities of the banks that we supervise."
Commentary / Mark Chorazak
Governor Michelle Bowman attempts to strike a somewhat upbeat tone on the potential benefits of collaboration between community banks and FinTech firms, but one could interpret her remarks as a warning for small banks to "innovate or die." To the extent that her remarks have a cautionary undertone, it is to the good that they are directed not only to the banks but also to the regulators. She acknowledges that if the regulators are too fearful of innovation, they will contribute to a technological stagnation that will ultimately damage the firms they are charged with overseeing.
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