In remarks at the 41st Annual Central Banking Seminar in New York, Board of Governors of the Federal Reserve System (“FRB”) Governor Jerome H. Powell described the effect of FinTech on retail banking and payment services, and the role of the Federal Reserve in facilitating responsible innovation in those areas.
Governor Powell asserted that technological innovations, and the increased availability of data and analytics tools, have challenged traditional banking models. Governor Powell described the ability of FinTech to facilitate access to credit through alternative lending platforms that analyze non-traditional metrics to evaluate the financial health of a loan applicant. At the same time, he said, techniques such as “screen scraping” accentuate the necessity of heightened vigilance and raise questions about data security and consumer protection.
In the area of retail payments, FinTech developments now allow for instant payments via smartphone applications. Governor Powell said that enhancements such as integration with mobile messaging and increased security through two-factor authentication, biometrics, IP address verification, and geolocation data offer “tangible” benefits to consumers. He also examined the role of banks in payment innovations, noting that the ability to hold and transfer funds means that cooperation between banks and FinTech companies remains important. He encouraged a collaborative effort to ensure wide-scale improvement to retail payment systems.
Governor Powell suggested that the U.S. lags behind other countries in creating an advanced payment system, and emphasized the FRB’s role as a “leader and catalyst for change.” He explained that the Faster Payments Task Force recently made several recommendations for implementing “safe, ubiquitous, faster payments capabilities,” and that the FRB followed up on the recommendations by identifying several key strategies to achieve the stated goal. Governor Powell also said that the FRB formed a team to develop a proposal for a governance framework, and is considering providing settlement services for real-time retail payments. Finally, Governor Powell committed to the continued support of the Secure Payments Task Force. He shared that the FRB will (i) commission a study to analyze payment security vulnerabilities, and (ii) form work groups to explore approaches to reduce the cost of specific payment security vulnerabilities.
Lofchie Comment: On the one hand, Governor Powell insists that banks continue to be important to the financial system. On the other hand, he says that FinTech firms are racing ahead using technology to perform traditional banking tasks better and faster than banks (or most banks, at least).
These messages are not entirely contradictory. Banks, of course, are essential to the financial system. Individual banks, however, are not. Challenges from new technology providers, combined with materially increased regulatory costs, put individual banks in the midpoint of a rock and a hard place. Technology businesses tend to favor firms that can scale up. How will the banking regulators deal with the challenges to small banks? Proclaiming the significance of small banks in the payment system is well and good, but it won’t keep the doors open, as competition from nonbanks increases and the costs of being a regulated bank rise. How do the regulators think that banks, particularly small banks, will make money and survive? Should the regulators do more to relieve the cost pressure on small banks? Should regulators prepare for the possibility of bank closures?