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From Banking and Finance Law Daily, November 14, 2018

FDIC Chair emphasizes ‘partnership with industry’ at financial technology conference

By Thomas G. Wolfe, J.D.

As a keynote speaker at the Federal Reserve Bank of Philadelphia’s "Fintech and the New Financial Landscape" conference, Federal Deposit Insurance Corporation Chair Jelena McWilliams noted that too often regulatory agencies "play ‘catch up’ with technological advances and their impact on regulated entities and consumers." With this dynamic in mind, Williams underscored the FDIC’s goal to "reverse that trend through increased collaboration and partnership with the industry" to "increase the velocity of transformation, while ensuring that banks are safe and sound" and that consumers are "sufficiently protected." In her speech at the mid-November 2018 conference, the FDIC Chair also relayed a set of questions she has posed for her own staff’s consideration as the agency plans for a future FDIC Office of Innovation that will specifically address financial technology (fintech) developments and issues.

In her prepared remarks, McWilliams briefly traced how innovation in the banking and finance field "has been around since at least the 15th century." "What is different today is the speed and tremendous impact of technological innovation in and on banking," McWilliams stated. "This is why it is crucial that policymakers and regulators understand the impact, scope, and consequences that are innate to what we have come to refer to as ‘fintechs’," she said.

Expanding access to banking. McWilliams took the opportunity to stress the role of innovation in expanding consumers’ access to banking. Referencing a recent "FDIC National Survey of Unbanked and Underbanked Households" (see Banking and Finance Law Daily, Oct. 24, 2018), McWilliams pointed out that although the survey indicates that unbanked and underbanked rates generally are higher among "lower-income households, less-educated households, younger households, black and Hispanic households, working-age disabled households, and households with volatile income," new technologies offer a "tremendous opportunity to expand access to the banking system." In particular, mobile banking and Internet banking "offer important inroads to the banking system," McWilliams said, because a significant percentage of these unbanked or underbanked households have access to a smartphone or the Internet.

In addition, the FDIC Chair noted that the agency has "dedicated significant resources" to identify and understand emerging technologies—including digital lending, peer-to-peer lending, machine-learning, artificial intelligence, big data, and blockchain. While the new technology "can certainly introduce risk, it can also help regulators and institutions identify and mitigate risk sooner," and "will undoubtedly present opportunities to ease the burden of regulatory compliance," McWilliams said.

Future innovation office. While aiming, with humor, to correct any existing misconceptions about the FDIC immediately "rolling out" an Office of Innovation, McWilliams indicated that she is preparing and planning for that eventuality down the road by, among other things, having FDIC staff focus on "four fundamental questions":

  1. How can the FDIC provide a safe regulatory environment to promote the technological innovation that is already occurring?
  2. How can the FDIC promote technological development at community banks with limited research and development funding to support independent efforts?
  3. What changes in policy—particularly in the areas of identity management, data quality and integrity, and data usage or analysis—must occur to support innovation while promoting safe and secure financial services and institutions?
  4. How can the FDIC transform—in terms of technology, examination processes, and culture—to enhance the stability of the financial system, protect consumers, and reduce the compliance burden on regulated institutions?

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