To address the risk these connections provide to the banking system, the Office of the Comptroller of the Currency (OCC) is examining the wide variety of intricate agreements between banks and financial technology businesses (fintechs).
Acting Comptroller of the Currency Michael Hsu said in a speech at an industry event on Wednesday that banks benefit from partnerships with fintechs by gaining access to tech innovation at a lower cost, while the latter benefit from affiliation with organizations with "trustworthy (reputations), long-standing customer bases, and access to cheaper capital and funding sources."
According to Hsu, fintechs deliver services at such economies of scale and have competence in online and mobile engagement that most banks are unable to match.
The banking system is vulnerable because bank-fintech partnerships have expanded "at exponential rates" and become so complex that it is frequently difficult to tell "where the bank stops and where the tech firm starts," according to Hsu.
While fintechs and Big Tech represent a larger risk to the banking sector and should receive more attention, cryptocurrency has "grabbed the headlines for most of the past year," according to Hsu.
According to Hsu, a recent OCC analysis of the bank-fintech landscape revealed that at least 10 OCC-regulated banks have partnerships with nearly 50 different fintechs that provide banking as a service. A fifth of the banks had assets under $1 billion, and the majority had total assets under $10 billion.
A survey of institutions regulated by the Federal Reserve and Federal Deposit Insurance Corporation indicated comparable results.
"Do these alliances encourage healthy competition and lower pricing for consumers, or do they encourage a race to the bottom and pressure to compromise on compliance?"Hsu said.
If left unchecked, Hsu continued, bank-fintech collaboration is "likely to accelerate and expand until there is a severe problem or even a crisis."
He is concerned that the dangers associated with cooperation between banks and fintech companies are less understood, labelled, and so invisible.
"As we learned from the 2008 financial crisis, risks that are unseen have a tendency to grow and later be the source of nasty surprises," Hsu added.
The OCC is actively working to investigate the bank-fintech industry and remove "blind spots," such as the oversights that caused the 2008 financial crisis. To reduce the risks associated with such agreements, the government is identifying bank-fintech linkages and hazards and working with nonbank technology companies, according to Hsu.
The OCC is in the process of dividing bank-fintech agreements into cohorts with comparable safety-risk characteristics.
"This will enable a clearer focus on risks and risk management expectations," according to Hsu.
According to Hsu, a bank loses the advantages of technology if it does not pair it with sufficient risk management practices like board oversight, governance, and internal controls.
According to Hsu, the OCC has broadened the scope of its investigations of bank information technology to include evaluations of distributed ledger, cloud computing, and ransomware technologies. According to him, common difficulties that are discovered during the inspections include inadequate information security measures, poor IT operational resilience, and management challenges.
To make the Bank Merger Act regulations consistent with President Joe Biden's executive order on fostering competition, Hsu said they "are ripe for updating."
By fLEXI tEAM