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The Year in Review: Focus on Responsible Innovation

The banking system is experiencing significant changes driven by technology and demographics. Banks in the United States have always been early developers and adopters of technology, dating back to the creation of checking accounts, credit cards, and automated teller machines. These innovative products and services helped transform banking relationships in their day. Today, innovations being developed by banks, by nonbank financial technology companies (fintechs), or by banks and fintech companies working together are transforming the delivery of financial products and services to consumers, businesses, and communities across the country.

Innovative products and services hold the potential to improve access to the financial system, particularly for the unbanked or underbanked. They provide opportunities to expand access, lower the cost of financial products and services, expand product offerings to better serve consumers, make branch networks more efficient, and help banks fulfill their regulatory obligations to meet the credit needs of the communities they serve. The OCC recognizes that innovation brings risk as well as opportunity. Financial products once considered innovative, such as option adjustable rate mortgages, structured investment vehicles, and subprime mortgage-backed securities, contributed to the 2008 financial crisis. Greater reliance on technology means greater risk of system breakdown and corruption by hackers and cyber criminals. Smaller banks in particular may choose to introduce innovations that outsource all or part of their responsibilities to third-party technology providers, which poses additional risk management challenges. New sources and types of data and models to assess product performance and creditworthiness remain untested by adverse credit conditions. At the same time, bankers face strategic risk if they are too slow in adapting to markets and customer trends or if innovation fails to align with their long-term strategies. Marketplace lending, which links borrowers and lenders through technology-based platforms, exemplifies the benefits and risks inherent in financial innovation. By reducing paperwork and expediting the underwriting process, marketplace lenders make credit available more quickly and conveniently. Borrowers who may have trouble accessing credit through traditional lenders may gain access to credit and the opportunities that come with it. These advantages help explain the nearly six-fold increase in 2015 in the volume of consumer loans originated by marketplace lenders since 2013.

Comptroller Curry at the OCC’s Responsible Innovation Forum.

Yet it is crucial that marketplace lenders are also responsible lenders that promote the safety and soundness of the financial system and the interests of borrowers and consumers. Regulators must provide a framework that encourages banks to innovate, compete, and meet the needs of customers and communities. That framework must protect the safety and soundness of the financial system against unnecessary risk and ensure that consumers are protected from abuse. The process of designing such a framework was one of the OCC’s key initiatives in 2016.

That initiative included forming a team of policy experts, examiners, lawyers, and others to study emerging technologies and new approaches in financial services, with the goal of developing recommendations to improve the agency’s ability to evaluate these products and services and assess the associated risks. To obtain a broad perspective, the team met with a variety of groups to discuss the changes in the financial services industry and the implications of those changes for banks. The discussions included bankers from community, midsize, and large banks, as well as innovators in various fields, consumer groups, academics, other regulators, and OCC employees.

The team’s research formed the basis of a March paper titled “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective.” The paper established a set of principles to guide the agency’s approach to innovative financial products and services. The principles commit the OCC to supporting responsible innovation that provides fair access to financial services and fair treatment of consumers; to fostering both an internal culture receptive to financial innovation and a workforce that brings a deep understanding and expertise to the subject; and to promoting dialogue and collaboration through outreach to industry stakeholders and other regulators to ensure that innovative products and services are provided in a safe, sound, fair, and inclusive manner.

"When it comes to fintech, it’s very difficult to move things forward [from a regulatory standpoint]. So I will talk around the world about what I’ve heard today.”

- Jeremy Wilson, Co-Chairman, Whitechapel Think Tank, at the OCC’s Responsible Innovation forum.

The paper raised a number of ways to accomplish these goals. It addressed possibilities for streamlining the evaluation and approval processes for certain innovative products and services, strengthening the OCC’s supervisory capabilities in this area, and advancing the agency’s reputation as a thought leader in the field of financial services innovation. Recommendations and decisions for implementing a responsible innovation framework were finalized in October 2016.

To underscore the agency’s commitment, the OCC sponsored a “Forum on Responsible Innovation,” held in Washington, D.C., in June. More detail about this conference, which attracted financial technology experts from around the world, is provided in sidebars in this Annual Report.

OCC Forum on Responsible Innovation

The OCC understands the importance of encouraging innovation in banking while assuring that safety and soundness and consumer protection are not compromised. The agency calls that “responsible innovation,” and it was at the forefront of the OCC’s agenda throughout FY 2016.

In June, the agency sponsored a “Forum on Responsible Innovation in the Federal Banking System” at its Washington, D.C., headquarters. The forum attracted representatives from banks and fintech companies, along with consumer advocates, academics, regulators, and private-sector representatives. The broad cross-section in attendance was critical to the success of the event, which was intended to spark a discussion among myriad and sometimes competing stakeholders in the industry. The forum was organized into four panel discussions, each focusing on a separate area of innovation within the financial services industry. Videos of the forum are available on

The Big Picture
Moderating the overview panel, OCC Senior Deputy Comptroller and Chief Counsel Amy Friend (pictured) discussed the speed at which technology is reshaping the financial services industry, noting the recent proliferation of fintech companies and products such as virtual currencies and distributed ledgers that were nearly unheard of just a few years ago.

To introduce some of those core concepts and key questions, the panel featured veteran bankers, investors, and former regulators with decades of experience who now work in the fintech sector, a group Ms. Friend called “big thinkers at the intersection of fintech and banking.”

The panel discussed a number of questions about the evolution of fintech: What gave rise to fintech? Was it primarily the availability of technology, or was it the need to fill gaps in financial services? Do fintech companies and banks need each other? Several panelists noted that generational differences were one of the key reasons for the rise of fintech. Younger consumers have demanded services and platforms that fintech companies can offer more easily, panelists said, and, in contrast to many older consumers, millennials tend to have more faith in technology than in institutions.

The Business of Innovation: Opportunities and Challenges
Kathleen Oldenborg, the OCC’s Director for Payment Systems Policy, moderated this panel. While the first panel discussed the “big ideas” in financial innovation, the “Business of Innovation” panel brought together bankers from institutions of various sizes and fintech representatives to discuss the nuts and bolts of innovation.

Panelists pointed out that partnerships between banks and fintech companies offer opportunities to leverage the strengths of both parties. The panelists discussed the ways fintech companies and banks are already working together and where such relationships are likely to go in the future.

Much of the discussion revolved around payments—for example, the way banking deposits, withdrawals, and transfers are reconciled and credit card transactions are processed. Fintech companies carry out many of these transactions for the benefit of banks, illustrating that banks and fintech companies already are partnering in some areas.

Responsible Innovation and the Consumer
One reason the OCC is encouraging responsible innovation is the potential of technology to improve the financial well-being of millions of Americans, particularly the unbanked and underbanked populations. As Comptroller Curry said in his opening remarks, “To be responsible, innovation should improve the products and services that customers rely upon. It should help expand financial inclusion.”

In moderating this panel, Senior Deputy Comptroller for Compliance and Community Affairs Grovetta N. Gardineer asked panelists a series of questions to gain their perspective on consumers and fintech. There was general agreement that partnerships between banks and fintech companies can provide improved access to financial services for consumers.

While much of the day’s discussion revolved around the extension of credit, the panel also discussed ways fintech is helping people save money—an important issue in retail banking. Several companies offer banking applications that make regular, automated withdrawals from customers’ checking accounts to special savings accounts, helping people save money for unexpected situations and retirement.

Building a Framework for Responsible Innovation
The final panel of the day brought together OCC officials who discussed the agency’s efforts to build a framework to support responsible innovation. This panel, led by Deputy Comptroller for Public Affairs Bryan Hubbard, discussed comments the agency received about its paper on responsible innovation.

Western District Deputy Comptroller Kay Kowitt, who led the team developing the OCC’s framework for evaluating proposed innovations, said that one of the challenges facing the OCC is to make itself more open to innovation despite the risk it entails. Part of the effort in developing a framework for identifying and evaluating innovation is to foster a culture that is more receptive to responsible innovation.

Ms. Kowitt assured the attendees that the OCC does not intend to issue onerous rules, regulations, or guidance related to fintech companies working with banks and FSAs. Rather, she said, there may be places to fill gaps, modernize, or update existing guidance.

“Maybe it is just a question of clarification or interpretation, or frequently asked questions. Again, the mandate is not to be pushing out a bunch of new regulations or guidance,” Ms. Kowitt said.