What the OCC’s Acting Comptroller’s Speech Tells Banks

Michael J. Hsu, the Acting Comptroller of the OCC gave a great speech (pdf link) to the American Fintech Council on November 21 that has many insights for bankers across the country. The speech is important because it shows what the OCC wants from banks and thus highlights the regulatory approach of the current administration.

What is remarkable about his speech is that he did not simply give a speech full of cliches to highlight the need for fintech – which he could have easily done since he was talking to the American Fintech Council. His approach was much more holistic and looked at what banks need to do if they want to continue success in a world where alternates to banking exist.

Focusing on Synthetic Banks

Michael J. Hsu compared traditional banks to ‘’synthetic banks’’. Synthetic banks are defined as businesses that are offering alternatives to banking services or bank-like services without being a bank. Many modern payment platforms and fintech apps are now branching out of simply providing a way to complete transactions. Users can now get instant credit, invest in stocks from borrowed funds, and much more.

The rise of synthetic banking is problematic because these businesses are not being regulated or supervised like banking. The banking system that we currently have works so flawlessly partly because it is backed by the government – the people know that even if the bank runs out of money, the government will ensure that the people’s money in the bank is safe. There are no similar safeguards in any of these synthetic banks. A major synthetic bank going bankrupt can result in millions of users losing their hard-earned money and cause a major ripple effect on the emerging fintech sector.

Making Banks Better

According to Michael J. Hsu, the rise of banking alternatives may be inevitable, but banks can still do a lot to secure their place in the future. To solve the issues of synthetic banking in payments and fragmented oversight of cryptocurrency, as well as to foster an atmosphere conducive to responsible innovation, bankers must “level up” banking and finance. Hsu uses the term “level up” in both senses—that is, to raise something to close a gap and to advance to the next level. By requiring SBPs to adhere to banking rules, regulators may eliminate the discrepancy between the rights and obligations of banks and those of synthetic banking providers.

Simultaneously, people need banks, fintech, and cryptocurrency enterprises to step up and transform the business of managing other people’s money into an ultra-high-trust activity, where all customers’ demands are addressed reliably and consistently in a safe, sound, and fair manner. By leveling the playing field, the banking industry can preserve public trust in money, loans, and payments, and reassure the public that financial innovation and change will benefit consumers and not jeopardize the financial system.

Michael J. Hsu also talked about the issues people have with banks that need to be solved. Banks have a long history of being slow to adapt to change. Certain groups, including the unbanked, communities of color, rural towns, and small companies, have complained about the banking industry’s poor service. And the 2008 financial crisis’s lingering skepticism persists. These developments have generated opportunities for fintech and cryptocurrency companies. While banks have made significant improvements to their financial situations, risk management skills, and consumer procedures, significant gaps, errors, and negative behaviors persist. To be clear, everyone, including banks, must improve.

The primary difficulty with leveling up is that it cannot be accomplished only by the OCC or any other regulatory body. It necessitates a shift in the way regulatory agencies, including state regulators, interact, as well as in our definition of success. It necessitates less regulatory rivalry and more collaboration, less parochialism, more teamwork, less independence from others, and more dependency. It challenges us to let go of our attachment to or reliance on the past and to embrace and adapt to the future.

The speech highlights that the regulators are also looking at using technology to improve banking. This new subdomain of Regtech (which is itself a subdomain of Fintech) is currently being referred to as ‘’Suptech’’ (SUPervisory TECHnology). There are innovative solutions and platforms available that claim to be able to help regulatory bodies across the world easily audit and monitor businesses using A.I.-powered automation.

Banks need to look at their current service offerings and understand the shortcomings that are driving customers towards fintech-based synthetic banking. Intelligent use of technology can help banks improve their services to the point where customers will have no reason to switch to alternate channels. Banks have traditionally been slow, and it has been accepted because there was no alternative. Banks can no longer ask customers to wait while the bank manages risk and compliance requirements; the customer can opt to use an app for an instant transaction instead. The right move is to redesign the risk and compliance framework within banking to be more proactive and less delayed.

Interested in seeing how your bank can improve the way it manages risk and compliance to become more competitive with born-digital synthetic banks? Get in touch with us for a demonstration of Predict360, our American Bankers Association (ABA) endorsed risk and compliance management platform.