Posted July, 5 2016NACHA Participates in the OCC Forum on Supporting Responsible Innovation in the Federal Banking System
Last week, the Office of the Comptroller of the Currency (OCC) held its long awaited Forum on Supporting Responsible Innovation in the Federal Banking System. The goal of the event was to begin industry dialogue after the release of its March whitepaper on Innovation – to which NACHA has submitted formal comment.
The day was divided into four panels: an overview of financial innovation; opportunities and challenges to innovation; how innovation can help consumers and evolve to changing consumer needs; and an OCC panel discussing the OCC’s vision for responsible innovation and summarizing some broad themes from comments to the OCC white paper. The day also featured remarks by Comptroller Curry and OCC Chief Counsel Amy Friend.
A summary of the event is below. Click here to view the agenda.
Office of the Comptroller of the Currency
Financial Innovation Forum
June 23, 2016
Yesterday the Office of the Comptroller of the Currency (OCC) held its long awaited Forum on Supporting Responsible Innovation in the Federal Banking System. The forum’s goal was to begin a dialogue after the release of its March white paper and hear perspectives on how the agency can promote innovation in financial services. The day was divided into four panels: an overview of financial innovation; opportunities and challenges to innovation; how innovation can help consumers and evolve to changing consumer needs; and an OCC panel discussing the OCC’s vision for responsible innovation and summarizing some broad themes from comments to the OCC white paper. The day also featured remarks by Comptroller Curry and OCC Chief Counsel Amy Friend.
Comptroller Curry’s Remarks. Curry reiterated the goal of the OCC white paper and the forum was to engage stakeholders and see where the OCC might be able to support responsible innovation. Curry defined responsible innovation by saying “at its simplest, a responsible innovation is one that meets the changing needs of consumers, business, and communities; is consistent with sound risk management; and aligns with the company’s business strategy. Said another way, responsible innovation within the federal banking system helps institutions achieve their public purpose without compromising their safety and soundness, and supports their long-term business goals.” Curry announced that Kay Kowitt, Deputy Comptroller for the Western District, as the new head of the team that will turn the principles laid out in the white paper into practice; and that Kay and her Deputy, Beth Knickerbocker, will take feedback to develop actionable recommendations for implementing their framework for innovation. Curry then gave a short overview of the day and took a few questions from the audience. Curry’s responses are as follows:
- Sandbox. Curry said he would like to see some form of a clear process for fintech companies and regulated institutions to more easily understand the rules of the road. He said it could be a sandbox, but that regulators need to be wary about giving companies a free pass to operate outside of regulations. He also said there are limits in some areas to how much discretion the agency can exercise.
- KYC/AML. Curry said whenever you are engaged in the transmission of money there is a need to address money laundering and to ensure illicit funds are not flowing through the financial system. He said there is an opportunity through technology to reduce AML/KYC compliance costs but some privacy issues need to be addressed for the sharing of information between institutions.
- Community Reinvestment Act. The National Community Reinvestment Coalition raised concerns that CRA issues would be lost in a limited purpose charter for fintech companies. They said they would oppose any charter where a CRA exam doesn’t look at retail lending. In response, Curry said with respect to chartering they will look at “is the activity permissible,” but said how consumers and communities are treated is certainly something they will have to look into.
- Fintech Charter. The Clearinghouse asked about Curry’s views on a fintech charter from an FDIC board perspective, and how would the OCC resolve a failed fintech institution if it were granted a charter. Curry said he could not speak for the FDIC, but said that the FDIC would fit in only if they were trying to take deposits, if not, it may be the sole authority of the OCC. Curry said there is a statutory framework in place for the OCC doing a receivership, noting the OCC resolved failing institutions prior to deposit insurance. He said if the OCC were to grant a fintech charter, one consideration prior to granting the fintech charter would be how they would be able to unwind the institution.
- Digital Ledger Technologies. A journalist from the American Banker cited the FSOC annual report and its identification of distributed ledger technologies (DLT) as a potential risk, and asked if Curry envisioned a more formal regulatory oversight function or license for these types of technology. Curry said the OCC does not license technology to institutions, but DLT or other processes that could impact the integrity of bank records would be something the OCC would want answers to as part of supervision.
Comment Themes from OCC White Paper. OCC officials said several themes emerged from the comment letters to the white paper. These include: establish of a centralized office for innovation; create a means to test new technology products and services; consider a federal charter tailored to fintech; maintain an open dialogue with all stakeholders; collaborate with other regulatory bodies; and recognize the uniqueness of community banks. OCC officials also said several comments presupposed a narrow charter for fintech companies would mean lighter supervision, but the officials said that is not true.
Federal Charter. A potential fintech charter was discussed in every panel throughout the day. Panelists had mixed views on the necessity of a fintech charter, but many offered interesting points on the topic to consider. In the preamble to the question on chartering asked by OCC Chief Counsel Amy Friend, she said the OCC chartering regulation says the agency’s policy is to approve charters for institutions that have a reasonable chance of success and operate in a safe and sound manner. Adam Shapiro of BBVA Open Platform said there may be scope within the definition of “reasonable” for fintech companies to fit within existing charters, and said two questions need to be asked 1) is there enough of a path for fintech firms to get an existing charter; and 2) should there be a separate charter? He said in terms of a new charter, thought needs to be given to the public policy issue you are trying to solve with such a charter: relief from 50 state regulations; access to the payment system; etc. Jo Ann Barefoot said a denovo charter to be granted to a fintech company seems far away, but there are some efforts underway to make the state-by-state process easier. She said the Conference of State Banking Supervisors (CSBS) is working on a process, and it may be states can create reciprocal arrangements to make licensure simpler. She also said that as it stands, fintech companies must comply with the same regulations as financial institutions, however, the disparity between the two groups is they don’t have the same level of supervision.
Major Trends in Fintech. Panelists said that major changes in technology are reducing barriers to the financial industry that could typically only be overcome by well-resourced institutions. For instance, they highlighted cloud computing, machine learning, blockchain, mobile phones, and others as technologies that help new entrants reach customers and scale while growing. They said an advantage for fintech companies are banks’ reliance on legacy systems that don’t allow them to integrate new technologies as easily as their fintech counterparts. Panelists also said if fintech companies want to partner with banks, however, it is important for them to realize they are building critical systems for financial institutions that must meet certain requirements (such as code documentation, security, etc.) because they are regulated entities. Adam Shapiro of BBVA Open Platform also noted that fintech companies would benefit from developing more expertise in the regulatory expectations of the customers they are trying to serve. He elaborated on this by giving an example where is said a fintech provider “didn’t realize OFAC screening wasn’t just checking the SDN list.” John Beccia of Circle reiterated this point on the second panel by saying fintech companies need to have strong risk management and compliance programs, and that they need to ensure bank partners and regulators understand the technology. Beccia said, for instance, that nearly one-third of Circle’s employees are devoted to risk and compliance.
Regulatory Cooperation. Several panels discussed the need for regulatory cooperation both at a domestic level and an international level. Hans Morris of Nyca Partners said you could divide into several areas so no one agency has to lead on everything and that it would be beneficial for regulatory agencies to take a lead in areas where they have expertise and primary jurisdiction. He said an example would be if the SEC led on capital market structure even if it bleeds into other areas. Another alternative that was offered for better coordination would be using a construct like the FFIEC for coordination.
Regulatory Competitiveness. Several panelists said they believe our regulatory system will have to evolve to be competitive with other jurisdictions, citing the UK model where there is a single authority to turn to for answers. Ryan Zagone of Ripple noted that they just opened offices in the UK and Australia and said a more efficient regulatory system in the U.S. would be beneficial. Adam Shapiro of BBVA Open Platform said that although they have not found themselves innovating in other jurisdictions because of any one nation’s regulatory policy, he did note the EU’s Payment Services Directive will make it difficult to make money off of payment banking. John Beccia of Circle said one of the biggest barriers that innovation firms face is a lack of clarity in the regulatory space. He said one example of the UK system being more efficient is that the Innovation Hub in the UK is very aggressive about reaching out to companies even before they submit an application. Beccia also said that he recognizes the U.S. has a much more complicated model than the UK but that coordination would be extremely beneficial. He also said efficiencies could be gained at the state level too and gave an example of a home state model as an alternative to all 50 states.
Financial Inclusion. Community Reinvestment Coalitions from several states asked questions about various aspects of fintech’s ability to help underserved communities. Jo Ann Barefoot said fintech is the most hopeful thing for financial inclusion and that policy strategy should be less about maintaining branches and more about using alternative forms of data to drive financial inclusion. Jennifer Tescher of the Center for Financial Services Innovation said that in addition to unbanked and underbanked communities there is a large portion of the U.S. that is not financially healthy. She said fintech has a huge potential to help these consumers as well – citing Digit as a way for people to save automatically. Conor French of Funding Circle said the data revolution will help improve access to credit. He said Funding Circle’s proprietary algorithm uses alternative data sources to provide credit to small- and medium-sized businesses that are underserved by traditional financial institutions.
Advantages and Disadvantages: Bank v. Fintech. Banks were given an advantage at the forum for having a stable source of funding, historical ability to survive a credit cycle, and being regulated prudently. Fintech companies were given an advantage in their ability to use the latest technology and to adapt quickly. Several fintech companies throughout the day, however, cited a fintech disadvantage as needing to be licensed in every state in which they do business.
Faster Payments. Kathleen Oldenborg, Director For Payment Systems Policy at the OCC, noted the Federal Reserve efforts to modernize the payment system and NACHA’s Same Day ACH effort, and asked panelists to comment on how much more speed do we really need. Panelists said speed will really come down to what does the consumer want. They also said it will have to take into account security rather than just speed. Jonathan Morris of Titan Bank said there is still a need for more speed saying that customers can’t use the ACH system because businesses need instantaneous answers so they would rather pay the 2+ percent for knowing the payment won’t fail. Aaron Klein of Brookings asked if the Fed’s inability to move faster in the payment system has provided the impetus for fintech, noting the Fed hasn’t acted to reduce time for checks. Panelists said there is a lot of opportunity in the payment system, and that the Fed has taken on a large task with its payments initiative.
More information on today's forum can be found on the OCC website.
NACHA Meets with United States Treasury, Bureau of Fiscal Services
On June 29, 2016, NACHA had their bi-yearly meeting with the executive team at the Bureau of Fiscal Services. This strategic meeting covered U.S. government initiatives in both collections and payments and how the ACH Network can help Treasury to achieve their objectives. NACHA will continue to meet with Fiscal Services staff to ensure the ACH is positioned to help Treasury continue to innovate on federal collections and payments.
NACHA, FS-ISAC, BITS and ABA Release: “Security of Payment Network Access Points: Recent Payment Account Takeover Attacks Against Banks Leveraging the SWIFT Network and Risk Mitigation Recommendations”
On July 1, 2016 NACHA, FS-ISAC, BITS and ABA released a report titled, “Security of Payment Network Access Points: Recent Payment Account Takeover Attacks Against Banks Leveraging the SWIFT Network and Risk Mitigation Recommendations”. Ensuring the safety and soundness of the global payment infrastructure is a key priority for all participants in the global financial system. The ability to efficiently move funds safely and securely enables the global economy to function at the most basic level. Any disruption or threat to this capability represents a “top-line” threat that requires a broad industry response.
NACHA GR Releases Summer Political Outlook
NACHA’s GR team has compiled a summary highlighting anticipated upcoming political activity, updated as of July 2016.
New York Department of Labor Proposes Rule to Force New York Workers to Reauthorize Direct Deposit
A new proposed wage payment rule could force millions of employees in New York State to reauthorize their employers to pay them by direct deposit via ACH or a payroll card. If employers do not obtain new consents within six months, they will have to pay their employees in cash or by check. This regulation covers any company that has a nonexempt employee in the state of New York.
The proposed rule requires employers to provide nonexempt employees with detailed information about their payment options prior to obtaining consent to direct deposit or payroll cards. Authorizations that do not comply with these requirements will no longer be valid. Because of the complex requirements of the proposed rule, it is unlikely that any existing direct deposit via ACH authorizations – some dating back 20 or 30 years – will survive.
The fact that direct deposit via ACH is included in this proposed regulation is inconsistent with the benefits of direct deposit. Direct Deposit authorizations must already conform to Regulation E, NACHA Operating Rules, and state laws. The authorization can be revoked at any time. Unintended consequences could cause employees to be paid by check, which is costly to the employer and removes the all-time proven benefits of direct deposit via ACH like: availability of funds, avoiding monthly bank fees, the ability to split deposits to go to multiple accounts (which encourages savings), and avoiding late payments by deposits coinciding with paydays/auto-debit dates. As well, having direct deposit removes the time spent away from work/family to deposit a check and the security concerns that go along with providing a check to an employee.
The NYSDOL is accepting comments on the proposed rule until July 15. New York residents, employers that employ workers in the state, and business leaders are strongly encouraged to submit comments to Michael Paglialonga at firstname.lastname@example.org. Click here for a full copy of the proposed regulations.
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