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 susceptible because bank-fintech relationships have expanded "at exponential rates" and become so complex that it is sometimes difficult to tell "where the bank stops and where the tech firm starts," according to Hsu.
Although fintechs and Big Tech are riskier to the banking industry and need to be in the centre of attention, cryptocurrency has "grabbed the headlines for most of that time," according to Hsu.
According to Hsu, a recent OCC analysis of the bank-fintech ecosystem revealed that at least 10 OCC-regulated banks had partnerships with approximately 50 distinct fintechs that provide banking as a service. A quarter of the banks had assets under $1 billion, while the majority had total assets under $10 billion.
Similar findings emerged from an examination of banks under Federal Reserve and Federal Deposit Insurance Corporation regulation.
Whether these alliances "lead to a race to the bottom with pressure to cut compliance corners" or "lead to healthy competition and better prices for customers," Hu enquired.
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 attempting 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 couple it with sufficient risk management practices including board monitoring, 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