The Tricky Task of Regulating Fintech
Financial-technology—or fintech—firms hold the promise of disrupting the world of traditional lending by, among other things, slashing costs and using big data to assess risks. Now regulators are wrangling with a difficult question: How to create rules for this new sector to keep the public safe—without squashing innovation?
For insights, The Wall Street Journal’s Jacob Schlesinger spoke with Thomas J. Curry, comptroller of the currency. Here are edited excerpts of the discussion.
MR. SCHLESINGER: You’ve adopted the phrase “responsible innovation.” Tell us what you mean.
MR. CURRY: How do you engage in innovation but do it in a way that doesn’t result in endorsing a fad, or an inherently bad idea, or one that is against existing law and regulation.
The clearest example of where you could have responsible innovation is to reduce cost structures for banks, and allow them to be more profitable and to reach greater numbers of people and meet their expectations as customers.
MR. SCHLESINGER: What would you say are the benefits and the things you fear most when you look at fintech?
MR. CURRY: I think fintech has a lot of potential. I think competition’s good. For regulated financial institutions to be challenged, I think that’s important. The challenges posed by fintech firms and their freedom from the constraints that banks operate under can be healthy.
That’s really the major advantage.
MR. SCHLESINGER: What scares you most when you look at how fintech changes the landscape?
MR. CURRY: I don’t think we have a negative view toward financial technology. It’s a valuable challenge to the traditional banking industry. I think that the concerns are, from a regulatory standpoint: Is the [lenders’] information going to be accurate? Is it capable of being corrupted? And there is a strong public-policy goal for combating money laundering.
Whether you’re a bank or nonbank, ultimately if you’re offering a transactional product you need to maintain the trust of your customer. You need to provide basic assurances that the transaction is safe, that there is not a real potential to have it be hacked or the underlying data to be corrupted.
The possible advantage of regulation is that this is something that we pay close attention to from a regulatory standpoint—banks’ ability to make sure that reasonable steps have been taken to protect their data and their systems. And in the event that they are breached, that there’s an appropriate process in place that can be deployed rapidly.
MR. SCHLESINGER: You mentioned anti-money-laundering. I would assume that some of the appeal of taking these transactions outside of the traditional banking sector is to take them outside the scrutiny of traditional bank regulators.
How do you deal with that issue?
MR. CURRY: The technology could actually help a more effective regulatory regime and the ability of our financial institutions to detect patterns that may indicate illegal money-laundering activity.
Our banks spend an enormous amount of money on maintaining expensive Bank Secrecy Act and [anti-money-laundering] programs. If there was an ability to share that while protecting legitimate privacy concerns, that would be a plus.
It would be a plus in terms of having better reach into what’s going on from an illicit standpoint and also reduce the overall cost for the banks so that those savings can be redeployed into the economy through lending and other activities by banks.
MR. SCHLESINGER: Since they’re not regulated, they’re not insured, why should a banking regulator care what happens in [the fintech lending market]?
MR. CURRY: Longer term, there might be concerns about financial stability. The larger the presence [of fintech businesses] down the road, they may have an impact on the economy.
From a banking standpoint, we think that there’s some value in [traditional banks forming] strategic partnerships [with fintech firms or acquiring technology to add to their] suite of services or products.
That’s something that we would like to encourage, or at least provide a road map from a regulatory standpoint of what considerations that a bank and a fintech firm should be aware of.
MR. SCHLESINGER: Let’s talk about the Office of the Comptroller of the Currency itself. You’ve talked a bit about how this isn’t just an evolution of the banking industry, it’s an evolution of the regulators, too. Give us an honest assessment of where you see barriers internally, and what is it that you’re trying to do to change those?
MR. CURRY: That’s really been part of the focus in how we’ve been approaching technology and the strategic changes it poses to the banks that we regulate. I think that there’s a reflexive action among the regulatory community, “When in doubt, say no.”
I’ve charged our people to become educated; to understand what’s going on from a technological standpoint; to be open to what its potential benefits are, not jumping immediately to some negative conclusions.
The other area is really a recognition that banks really are engaged in technology and have been. So this is central to what we do as a bank regulatory agency.
There’s an opportunity for us. That’s what I’ve been asking internally—to rethink how we do things and to think about how we can act as a bridge [between traditional banks and fintech firms] or a clearinghouse for information to both banks that are interested in expanding their reach through technology or potentially entering into partnerships with technology firms. It would help both sectors understand each other and what the requirements are.
I’ve charged people to look at how we should set up this function. How should it be staffed, what type of resources should be provided to it, and how it can break internal logjams within the OCC.
First appeared at WSj