OCC's New Lexicon: Neobanks, Bitcoin, Peer-to-Peer

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WASHINGTON — The Office of the Comptroller of the Currency is trying to "supercharge" its process for reviewing financial innovations in an effort to keep pace with a glut of new products inside and outside the banking system.

Comptroller Thomas Curry said late last week that his agency has formed a working group to more closely examine technological advances like digital currencies, neobanks and marketplace lending. He said the agency may eventually create a separate office, similar to banks' "innovation centers," to be better equipped to understand new products that may need regulatory approval and to assess their risks.

In a follow-up interview Monday, Curry said he wanted to create a faster way to analyze new technology. He's asked a team of around 10 people to give him recommendations within the next couple months about how to best accomplish that.

"We're comprised of hard-nosed examiners, economists and lawyers here at the OCC. Culturally, the tendency is to say no rather than maybe and yes," Curry said. "The idea would be to get knowledgeable people together to get a greater understanding of the changes that are occurring… and with that understanding be able to evaluate it on a quicker turnaround. Left to our normal processes, we would not be that nimble."

"We are very deliberate when we review things in a formal sense," he added. "So this would really be to supercharge that process both in terms of timing and understanding."

In his speech Friday to the Federal Home Loan Bank of Chicago, Curry made it clear he was not seeking to oppose innovation.

"New approaches that meet the needs of an evolving marketplace are the lifeblood of our nation's economy, and it's our job as a regulator to support and even encourage innovation that helps bank customers," Curry said in the speech.

Analysts said Curry's remarks further reflect regulators' acknowledgement of and growing interest in how technology is reshaping the financial services industry.

"Clearly Tom Curry wants to position the OCC as the go-to regulator for innovative concepts," said Karen Shaw Petrou, managing partner with Federal Financial Analytics. "He is signaling a lot of openness to them as long as certain controls are in place."

But his remarks also sparked some concerns. During Curry's speech, he noted that "the financial crisis was fueled in large part by such 'innovations' as option adjustable rate mortgages, structured investment vehicles, and a variety of increasingly complex securities that represented interests in subprime mortgages."

"Those very risky activities created huge losses for financial institutions and their customers, and ultimately threatened the entire financial system," Curry said. "So new products and services have to be evaluated with an eye toward risk management."

Jason Oxman, the chief executive officer of the Electronic Transactions Association, said the comparison between new payment technologies like digital currency or Apple Pay and subprime mortgage market products is unwarranted.

"My hope is that he doesn't think payment innovation and digital currencies are akin to subprime mortgages, although he did make that comparison," Oxman said. "My hope is he's not saying we need to regulate those aggressively but simply suggesting it was important for regulators to understand the marketplace."

In the interview, Curry said he wasn't trying to compare the two developments, but instead note that sometimes "innovations" can turn out poorly.

"We're regulators — so throwing in words of caution is always wise," Curry said. "One should avoid the exuberance of a new product and to also be cognizant that some things are fads and may have negative implications. To think it through is the point of the speech."

He said he just wants banks to "understand the complete picture when [they] are being innovative."

During the speech, Curry specifically cited blockchain technology — essentially a computerized bookkeeping system that records individual transactions — used by many digital currencies as places regulators should keep an eye on, particularly given that banks are looking at it as a way to speed payments.

"There is considerable interest in the technology that Bitcoin and other virtual currencies use to keep track of ownership and prevent double spending, and that technology could lead to less expensive ways for banks to settle transactions," Curry said. "There is also at least some interest among traditional banks, as well as the new online-only financial institutions, in facilitating Bitcoin transactions of one type or another. That's not objectionable in and of itself, but one of the attractions of virtual currency is anonymity, and so we need to be sure that federal banks and thrifts that participate are adhering to requirements of laws aimed at deterring money laundering and terrorist financing."

Curry also pointed to neobanks — mobile startups that provide banking-like services, either with or without a bank charter.

"We are already seeing some interest among federal banks and thrifts in these new products and services, and some of the banks we supervise are already exploring partnerships with existing neobanks," he said.

Some neobanks welcomed Curry's remarks.

Curry "recognized that the innovation that's coming from fintech is required for the market to move forward," said Brett King, the CEO and founder of Moven, which is a mobile-based application that provides bank account and debit card services but is not actually a chartered bank. "Regulators don't want to stop fintech innovation. There is recognition that this is very powerful."

King said that as neobanks gain market share, more attention is unavoidable.

"As we get more customers and as we start to provide more day-to-day banking services, then it's inevitable that you're going to have some sort of scrutiny and probably some rudimentary regulation of customer-facing organizations that are in day-to-day banking relationships but aren't banks," said King, whose firm partners with CBW Bank in Weir, Kan., which technically holds customers' deposits.

Jennifer Tescher, the president and CEO of the Center for Financial Services Innovation, said it is natural for new firms and banks to be worried about regulators' quashing innovation.

"The natural reaction will be for the new players to be concerned that they're all of a sudden going to come under the thumb [of regulators] or that the models they have used to date are not going to pass muster," she said. "The banks may also think, 'Once they take a look, they're never going to let us do this.' … Maybe history suggests that there is reason to feel pessimistic, but leaving blinders on certainly isn't going to move anything forward. I'm heartened by [the OCC] wanting to take a broader look."

King warned that regulators should be careful not to show preference for the advancement of institutions they regulate to the detriment of disruptors that embraced certain technological innovations sooner.

"The real question is whether" regulators' interest in financial innovation "will limit the improvements to customer experience in favor of established incumbents, which would not be a good thing," King said.

Tescher said a regulator such as the OCC becoming more interested in financial technology will become more important as innovations bring banks closer to less traditional players.

"It's not just about whether the OCC gives thumbs up for banks to adopt new innovations," she said. "I don't think the future of financial services is winner-take-all, where either fintech is going to win or banks are going to win. The future is the mashup between those two."

In the interview, Curry said that potential mashup needs to be examined thoroughly.

"If we start separating out the deposit taking function or the payments function from lending, we should be thinking about what we end up with," he said. "What is the competitiveness of the traditional banking industry and how well can they adapt?… The banking industry and bank regulatory structure really are at a watershed. Things are changing, whether it's technology driven and distribution systems."

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