On June 23, the Office of the Comptroller of the Currency hosted an all-day forum on supporting responsible innovation in the federal banking system. The forum builds on the OCC’s white paper on responsible innovation, which the agency released in the spring. Our analysis of the white paper is available here. The OCC’s forum included speakers from across the financial and technology industries and both the private and public sector.

Comptroller Thomas J. Curry opened the event by discussing the OCC’s ongoing efforts to encourage responsible innovation in the fintech sector. The OCC defines “responsible innovation” as innovation “that meets the changing needs of consumers, businesses, and communities; is consistent with sound risk management; and aligns with the company’s business strategy.” Comptroller Curry explained that the OCC’s goal is “to encourage and promote advances in products, services, and processes that serve consumers, communities, and businesses better and more fairly.”

Regulatory Sandbox and Limited-Purpose Charters

In a question and answer session held after his remarks, Comptroller Curry agreed with a participant that regulators and fintech firms could benefit from a “regulatory sandbox” that functions as “a place for the regulated institutions and fintech firms to have a conversation about what the rules of the road are.” Participants in the forum supported this idea noting the development of the Financial Conduct Authority’s sandbox, which launched in the United Kingdom on May 9, 2016, and the potential benefits of the new framework.

Relatedly, participants and Comptroller Curry discussed the potential benefits of a limited-purpose charter for fintech firms looking to provide financial products and services. As currently conceived, a limited-purpose charter could allow a fintech firm to be licensed at the federal level, thus bypassing the complicated network of state licensing regimes. The OCC has established a working group to consider how a limited-purpose charter could be issued and how fintech firms performing various functions could be regulated.

Comptroller Curry noted that a limited-purpose charter presents a number of issues throughout the life cycle of the fintech firm, including possible receivership. The OCC is considering how the agency would go about winding up a fintech firm if the firm went into receivership. The OCC is looking to apply lessons learned during the resolution of failed banks resulting from the 2008 financial crisis.

Finally, Comptroller Curry noted that even under the current regime a fintech firm may be subject to the same regulatory requirements as a supervised financial institution, such as anti-money laundering regulations, but there may not always be a regulatory agency devoted to supervising such entities and enforcing such requirements on the fintech firm.

From Disruptors to Collaborators

Throughout the day, panelists point to the evolution of fintech from a force “disrupting” the banking system to an industry poised to collaborate with financial institutions. Panelists agreed that banks and fintech firms have complementary strengths, which both types of entities can leverage to develop the best customer experience. For example, banks have larger, more established customer bases while fintech firms are able to attract individuals who are not fully served by the banking system. Additionally, banks are accustomed to operating within a highly regulated space. Fintechs can struggle to comply with complicated regulatory regimes, and the emergence of “regtech”—technology designed to facilitate regulatory compliance—does not always fill the gap or provide safe or reliable regulatory guidance.

Comptroller Curry and other speakers also noted that banks were instrumental in developing or introducing key financial technologies, such as the ATM and check image processing, but banks’ innovation “cycles” have failed to keep pace with today’s quickly evolving technology sector. Speaking to the nature of the technology landscape, industry consultant (and former OCC official) Joana Barefoot commented that “fintech is more tech than fin.” That is to say, fintech is driven by the constant evolution of technology while relying on the established structures of the existing financial system. Now, fintech firms and financial institutions are able to collaborate to develop the next iteration of financial technology. To that end, some banks have established internal technology labs to attract talent and develop new fintech products.

Barriers to Entry

During the “Business of Innovation” session, panelists discussed the barriers to entry into the financial sector for fintech startups that are different for technology startups in other sectors. Panelists noted that regulatory uncertainty presents challenges given the constantly evolving technology industry and the more staid financial industry, but regulatory fragmentation can present an even bigger challenge. Fintechs may be subject to federal regulatory requirements as well as licensing regimes in the states, each with its own nuances. Panelists contrasted this federal structure with that in the EU in which fintechs do not face the same fragmentation and related inefficiencies. One participant noted that this fragmentation existed not only as to state versus federal but also between the federal banking agencies.

At the outset, Comptroller Curry advised that OCC staff continue to review comments the agency has received in response to its spring white paper. The OCC intends to take action in the coming months based on those comments as well as the discussion at the forum.

We will continue to monitor developments by the OCC and others in these areas.