The convergence of the rapidly emerging financial technology (fintech) industry with the traditional and well-established banking industry in the United States was recently accelerated by two key releases from the U.S. Treasury (Treasury). In July, the Treasury released its comprehensive report – A Financial System that Creates Economic Opportunities – Nonbank Financials, Fintech and Innovation. Immediately following the issuance of this report, the Office of the Comptroller of the Currency (OCC), the Treasury’s banking regulator, issued its Policy Statement on Financial Technology Companies’ Eligibility to Apply for National Bank Charters.
These anticipated releases set the stage for a more formal process designed to facilitate the inclusion of a wide range of technology-based solutions into the fabric of the products and services offered by the banking industry. Prior to the issuance of these reports, the landscape for the continued development and acceptance of these emerging solutions was, at best, unclear. Historically, founders and investors in fintech solutions have been faced with the challenges of attempting to “disrupt” the traditional banking industry, while not having a reasonably clear understanding as to how these solutions aligned with the increased level of regulatory oversight brought on subsequent to the financial crisis. In addition, many fintech organizations, especially those with a credit orientation such as marketplace lenders, were finding increased challenges in achieving the funding stability and liquidity required to sustain growth expectations.
Although neither of the recent releases provides definitive clarity for fintech companies or banks interested in exploring the development or acquisition of fintech businesses, they do signal an awareness by the current administration that the success of the financial services industry in the U.S., especially those products and services focused on the American consumer, is critically dependent on the development of a regulatory framework actively promoting innovation.
The Treasury report is designed to call on both the industry and the primary financial services regulators to direct their collective efforts to developing an environment that specifically addresses:
OCC’s special purpose bank charter
The OCC’s Policy Statement specifically announces the agreement to accept applications for special purpose national bank charters from fintech companies. The Policy Statement does not specify unique instructions as to the applications process, however, it acknowledges that such applications will be assessed in a manner similar to other special purpose charters granted to nonfintech companies. Although there has been limited guidance provided since the issuance of the Policy Statement it has been noted that companies making such applications for special purpose charters should expect rigorous requirements related to regulatory compliance, capital and liquidity adequacy, data security and privacy, and management expertise. For example, the OCC expects to apply the existing banking capital adequacy standards in currently in place, including capital buffers where applicable.
The OCC Policy Statement is not necessarily limited in its scope however, it does identify certain segments of the fintech industry that are most likely to seek special purpose charters. Because of their current prominence in the industry today, the potential for continued growth, and the concentration on consumer-based products and services these include:
The U.S. Treasury report and the OCC Policy Statement provide more commentary, direction and recommendation on four key areas:
The sections below provide more insights into each of these areas of focus.
The OCC recommendation would make available a national charter to fintechs, instead of requiring state by state regulatory filings. At least one of these three components is necessary for the charter application to be considered:
The OCC’s special purpose national bank charter for fintech companies would enable them to engage in the core banking activities of lending money and paying checks, but would not provide the ability to accept deposits. Therefore, fintechs chartered under a special purpose charter would not qualify for insurance coverage by the Federal Deposit Insurance Corporation (FDIC). A fintech company must still obtain a full-service national bank charter in order to expand its business into taking deposits and accessing FDIC insurance.
NOTE: Fintech companies must still comply with applicable state laws on a state-by-state basis until the OCC charter process is approved, and a national charter is secured.
Requirements for application
The OCC’s announcement outlines the requirements for companies seeking to apply for the special purpose fintech bank charter, along with a general framework for their proposed supervision by the OCC. An applicant for the special purpose charter must provide:
Many fintech companies have not yet engaged in the business planning process in the detail required to complete the OCC’s special purpose fintech bank application. Many lack internal resources and expertise to do so. Legal counsel and consultants will likely be needed to prepare filings, and potentially the internal governance, frameworks, policies, procedures and controls required.
Additional regulations and regulators
In addition to the OCC, other financial regulators (including the Consumer Financial Protection Bureau (CFPB), the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC) and the FDIC) have launched initiatives intended to regulate the fintech sector.
TECHNOLOGY AND INNOVATION IN FINANCIAL SERVICES
Between the need for process efficiencies and staffing shortages in the near future, the banking industry is increasingly turning to automation technologies. Robotics Process Automation (RPA) and Intelligent Process Automation (IPA) have gained significant attention from financial services firms, and now have caught the positive attention of regulators.
What is RPA?
RPA software is an advanced technology with the capability to automate routine processes. It’s like a virtual employee who performs repetitive, manual tasks across the organization’s legacy information systems and applications. The RPA software (more simply called ‘bots’) can execute a massive volume of tasks, on a 24/7 basis, with a significantly reduced risk of error (due to automation and standardized processes).
What is IPA?
IPA software incorporates an additional element of artificial intelligence or machine learning to allow the RPA to learn as it processes. An example would be where RPA identifies data exceptions and would report out the errors, an IPA would learn the formats that are acceptable and move those forward, only reporting back out true exceptions. IPA leverages RPA and other advanced technologies such as Optical Character Recognition (OCR), Artificial Intelligence (AI), Machine Learning (ML), Natural Language Processing (NLP) and Natural Language Generation (NLG), advanced analytics. This collaboration of tools makes IPA bots both cognitive and efficient in handling business processes and human workforce.
Why are banks excited about RPA and IPA?
Financial service organizations’ excitement is based on the industry’s pursuit of performance advantages:
Through automation, either RPA or IPA, financial service organizations can address organizational problems:
The benefits of this technology are compelling:
Why are regulators excited about RPA and IPA?
The OCC and the Treasury Department are excited by the potential for automation and artificial intelligence to increase the accuracy of record-keeping and financial calculations, while concurrently enhancing the user experience and access. In a recent notice, the regulators praised these technologies and encouraged financial institutions to look at leveraging the potential for efficiencies, accuracy and access that they can provide.
The U.S. Treasury and OCC are focused on facilitating the managed growth of innovative solutions within the banking industry. These include, but may not be limited to, more efficient deposit gathering methodologies, efficient and reliable platforms for extending credit to a broader range of consumers and businesses, especially consumers with less-developed financial foundations, smaller and emerging businesses. In addition, regulators are highly interested in meeting these needs in significantly more secure environment, principally through reducing the reliance upon human intervention and the exposure to threats from outside of the technology framework.
Overcoming challenges in implementing automation
Financial service organizations are implementing RPA and IPA solutions at an accelerating pace. However, to maximize the return on investment (ROI) from this technology, there are four challenges we commonly see organizations needing help with.
1) Overcoming ‘automation anxiety’
Any organizational culture is vulnerable to fear and rejection of emerging technology. Employees may be skeptical and may fear that management will leverage RPA or IPA to eliminate staff.
2) Fragmented impact
Organizations may implement automation ‘unevenly’ and inadvertently create performance variability (skill gap) between departments or business units.
3) Managing hyper-fast pace of technological change
Advanced technologies, such as RPA and IPA, will continue to evolve quickly. Firms that avoid adoption will be competitively disadvantaged, while firms that “implement and pause” will experience diminishing returns with outdated software.
4) Managing evolving responsibilities and accountabilities
Automation technologies will disrupt roles in the organization. Next generation responsibilities and accountabilities must be anticipated and adjusted when a robotic workforce (the RPA or IPA) and the human workforce work side-by-side. The organizational cultural result can be net-positive if not left to random evolution.
Automation technology can enable institutions gain competitive edge and enhance opportunities for growth by removing many traditional banking business challenges, such as:
As RPA and IPA become more and more attractive technology investments for transforming processes within the financial services sector, early and continuous adoption will provide organizations with the boost they need to maintain and grow their market share. Organizations who lag in adopting these technologies will soon find it a mountainous task just to maintain their profitability. Financial institutes are using robotics to invest in and develop new platforms, engage with customers and win over advisors, all at a dramatically lower cost. But these organizations are only scratching the surface of what is possible. Tomorrow’s winners are those that embrace these capabilities as part of a next-generation operating model and move quickly to capture the value from them, pulling away from the laggards who choose to dip in only one toe at a time.
CONTINUED STATE OF CHANGE
The Treasury report and related OCC national fintech charter application procedures indicate the significant changes continuing to occur in the financial sector. Traditional financial institutions should continue to monitor these changing regulations to understand how they intersect with the institutions own fintech plans, whether that’s partnering, developing or acquiring. Fintechs should stay abreast of the changes and discuss how changes, and related regulatory requirements, impact their specific business objectives before pursuing a specific path. Baker Tilly will continue to monitor and address these changes to the regulatory environment with our clients.
For more information on this topic, or to learn how Baker Tilly’s banking industry specialists can help your institution, contact our team.
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