Written by André B. Cotten, Regulatory Compliance Counsel
Consumer Compliance Outlook. The Third 2016 Issue of the Philadelphia Federal Reserve’s Consumer Compliance Outlook is now available. This issue’s articles focus on the rise of financial innovation in the financial services industry. This issue’s articles include the following:
- Perspectives on Fintech: A Conversation with Governor Lael Brainard
- Fintech: Balancing the Promise and Risks of Innovation
- Fintech for the Consumer Market: An Overview
- Fintech Resources: Laws, Regulations, and Supervisory Guidance
The article on fintech discussed how consumers, especially Millennials, are accustomed to having a wide range of applications and information immediately accessible to them. The emergence of financial innovation applications has transformed consumer expectations around financial products, services and delivery. As a result, brick and mortar financial institutions, including credit unions, are feeling the increased pressure to update and diversify the way they deliver services and products to remain competitive.
Fintech is composed of a variety of different sectors. The article by Tim Marder on page 4 of this issue provides an overview of four fintech market segments: credit; digital payments; savings, investments and personal financial management; and distributed ledger technology. Note, the aforementioned segments do not encompass the entire fintech ecosystem, but they are more likely to impact current credit union products, services and delivery methods.
However, fintech products and services are not seen solely as market disrupters. Some financial institutions have focused on partnerships, collaboration, and other relationships with financial technology firms. Financial innovation has introduced advanced technology, new uses of data and created changes in customer preferences and expectations.
Although, many segments of fintech are still in the early phases, the article explains that fintech credit providers or alternative lenders have enjoyed a range of collaboration with bank partners. While credit unions have lending limitations banks do not, some examples of this innovative partnership include banks providing funding through loan purchases, credit extensions, and equity investments. Financial institutions also originate loans on behalf of alternative lenders, use technology developed by alternative lenders to originate loans themselves, and direct customers to alternative lenders in exchange for marketing and referral fees. Other banks have provided workspace, seed funding, mentoring, training, and other related support to fintech startups. Some financial institutions have even shown some interest in acquiring alternative lenders.
Another notable change sparked by financial technology innovation is the way people pay merchants and transfer money, digital payments. Smart phones are also equipped with digital wallets that store credit card, debit card, and other financial information, thus further eliminating the need for cash and checks. The growing use of fintech applications has enabled an increasing number of small businesses to accept credit cards as a payment option. Beyond payments, some fintech applications have allowed people to more easily to transfer money to other people by simply using the recipient’s email address or phone number.
The financial regulators are taking a measured approach to assess the impact of supervision on financial innovation. The Federal Reserve notes the two questions the Board is most often asked about fintech. First, “what is meant by the term fintech?” Secondly, “what is the Federal Reserve doing to understand the impact of these new technologies?”
The Consumer Financial Protection Bureau also created Project Catalyst to facilitate consumer-friendly innovation; it includes a “No-Action Letters” policy, finalized on February 18, 2016, to reduce regulatory uncertainty for a new product or service that offers the potential for significant consumer-friendly innovation.
Last October, the Office of the Comptroller of the Currency released a white paper titled Recommendations and Decisions for Implementing a Responsible Innovation Framework. Last month, Comptroller of the Currency Thomas J. Curry announced during a speech that the OCC is developing special purpose national bank charters for fintech firms.
According to Governor Lael Brainard, generally, regulators should seek to tailor regulatory and supervisory expectations to facilitate financial technology growth that produces benefits to the financial marketplace. At the same time, any contemplated adjustments must also manage corresponding risks. The goal is to ensure financial products are fair and transparent so that consumers can make informed choices.
The Consumer Compliance Outlook also lists certain federal laws and implementing regulations for financial services and products that may be relevant to fintech firms and their depository institution partners. The authors note that this is not an exhaustive list, and the applicability of each law depends on the specific circumstances. State laws and regulations, including usury limits may also apply to fintech services and products.
Given some of the lessons from the financial crisis, the article stressed the importance that financial institutions and fintech firms consider the long-term sustainability of the products and services they offer. Fintech firms can establish sound practices by articulating a clear risk tolerance and managing risk. The Federal Reserve intends to maintain an active dialogue with market participants to continue ensuring the safety and soundness of the nation’s financial system.
In a related note, the Office of the Comptroller of the Currency (OCC) announced that it was considering a possible charter for fintech firms, seeking public comment on the concept. Today, NAFCU will file comments, noting in part that if the OCC does move forward with such charters, regulators should require fintech firms to meet basic consumer protection requirements, such as the Truth in Lending Act and applicable usury laws, just as credit unions must do now
Programming Note: The NAFCU office will close early today, Friday, January 13th at 2:00pm, and the office will be closed on Monday, January 16, 2017 in observance of Martin Luther King, Jr. Day.
NCUA Issues Supervisory Priorities Letter. Yesterday afternoon, NCUA issued its annual Supervisory Priorities in Letter to Credit Unions 17-CU-01. As no surprise to anyone, cybersecurity and BSA compliance remain on NCUA’s radar. Other priorities include internal controls for fraud, commercial lending, interest rate and liquidity risk, and compliance with the Military Lending Act and Servicemembers Civil Relief Act.