OCC: Bank-FinTech Partnerships are “Here to Stay”

The Office of the Comptroller of the Currency (OCC) has stated that bank-FinTech partnerships “are here to stay.” Acting Comptroller of the Currency Michael J. Hsu’s announcement follows his warning that such arrangements can present an increased risk for the banking industry due to their complex structures. 

In an interview with Reuters, Hsu expanded on his comments from last month’s Clearing House and Bank Policy Institute’s Annual Conference in light of concerns expressed by Republican members of the Task Force on Financial Technology. In essence, the concerns centered around wanting to ensure that “examiners will not discourage innovation through FinTech partnerships… [or] impose unreasonable burdens” on either party. 

Responding to criticism 

Following Hsu’s speech at the conference, further clarity was requested by House Republicans to assuage concerns over the future of bank-FinTech partnerships. In a letter to Hsu, the authors criticized the lack of “clear rules of the road and support [for] innovative banking services.” The letter noted that, when conducted properly, the benefits of bank-FinTech partnerships far outweigh the risks they pose, as they provide greater financial inclusion, spur technological innovation, and foster competition – all for the ultimate benefit of the consumer. 

Speaking to these concerns, Hsu reassured that his caution over bank-FinTech partnerships is not meant to stifle arrangements but rather reflect his concern that financial institutions must adequately gauge their risks. “When everything is done within a bank, we know exactly who is accountable when things break. But when you start chopping these things up, and the business models are different, that’s when risk can get lost.”

A formal response to the House Republican’s letter is expected by October 31, 2022. 

Attention on crypto

In the interview, Hsu also cautioned regulators and policymakers against overextending their focus on crypto to the detriment of other areas. “Crypto is occupying a lot of brain space for an awful lot of people, both on Capitol Hill and the regulatory community,” said Hsu. 

In light of the rapid rise of crypto and related virtual products, government agencies have recently issued numerous reports to lay the foundations for a digital asset regulatory framework. From the White House Office of Science and Technology Policy (OSTP) to the Treasury, recent crypto-related guidance includes:

• Fact Sheet: Framework for Responsible Development of Digital Assets
• Sanctions Compliance Guidance for the Virtual Currency Industry
• Crypto-Assets: Implications for Consumers, Investors, and Businesses
• Action Plan to Address Illicit Financing Risks of Digital Assets
• Climate and Energy Implications of Crypto-Assets in the United States
• Responsible Advancement of US Competitiveness in Digital Assets

While FinTech and crypto are priorities for the OCC Committee on Bank Supervision, a further ten priorities are listed as areas that require risk-focused bank supervisory strategies to be developed and implemented, including:

• • Guarding against complacency: Ensuring banks maintain stable financial positions regarding capital, allowances for credit losses, management of net interest margins, and earnings

• Credit: Evaluating actions to manage credit risk given changes in market condition, termination of pandemic-related forbearance, and uncertainties in the economy

• Cybersecurity: Assessing the bank’s capabilities to recover from destructive malware attacks

• Third parties and related concentrations: Determining whether banks are providing proper oversight of their significant third-party relationships, including FinTech partnerships

• Payments: Evaluating payment systems products and services that banks offer or plan to offer, with a focus on new or novel products, services, or channels for wholesale and retail customer relationships

Key takeaways

A bank considering partnering with a FinTech familiarize itself with the in-depth vendor due diligence regulators expect a bank to undertake before engaging a FinTech. Similarly, a FinTech looking to partner with a bank should ensure it has the necessary risk-based regulatory policies, programs, and procedures regulators and banks expect to build and maintain. 

To avoid risk management responsibilities being lost or muddied between the two parties, both sides of the partnership must accurately gauge their risks on an ongoing basis through a robust risk assessment.