Fintech in Brief: OCC Singles Out Financial Innovation as Special Risk TopicPrint PDF
On May 20, the OCC published its Semiannual Risk Perspective, Spring 2019 and singled out financial innovation and rapid developments in Fintech as a special topic in emerging risks to the banking industry. This is the first time the strategic risks associated with financial innovation or Fintech have been highlighted since Comptroller of the Currency Joseph Otting took office in November 2017.
The OCC noted that federal banks have adopted a wide variety of approaches to innovation by technology type and bank size. These approaches include pooling resources through industry consortia to collaborate and share costs associated with developing and acquiring new technologies; increasing reliance on third-party service providers or Fintechs; and a wait-and-see/slow-adopter strategy. The OCC cautioned against the latter approach because it can result in loss of customers or market share before banks can respond to the speed of innovation. It also noted that size alone might not be an advantage—although larger banks may have the financial resources to support technology investments, some smaller banks may find their businesses more agile and able to effectively adopt technology through Fintech collaborations.
The OCC noted that new entrants and more powerful technology increases strategic risk where banks pursue innovation without strong corporate governance and effective risk management. It also cited, among others, the burden of legacy technology systems, reliance on core processing firms, and resource limitations as drivers of higher strategic risk to the banking industry. It re-emphasized longstanding guidance related to strategic planning, evaluating new products and services, and managing third-party relationships.
Overall, the OCC recommended that banks should focus on their core competencies and identify Fintech opportunities and adopt technologies that increase their efficiency and ability to retain and attract customers. The OCC urged banks to conduct proper due diligence and confirm that appropriate controls are in place for third-party relationships and warned that the lack of proper planning and due diligence, oversight, and controls over third-party relationships can result in elevated reputational, strategic, operational, and compliance risks.
The Semiannual Risk Perspective’s focus on financial innovation and rapid developments in Fintech as a special topic in emerging risks to the banking industry is a continuation of the OCC’s longstanding recognition of financial innovation as a strategic risk. The OCC’s supervisory approach to these risks remains constant. However, the OCC’s clear message is that banks have an urgent need to address this risk given the rapid pace of technological change.