Fintech Raises Expectations for Financial Institutions
If you went to a farmer’s market or local business today, you’d likely buy something using a credit or debit card — not cash. Later, you might view your checking account on your phone to see if the transaction went through. But it wasn’t too long ago that these types of financial features weren’t available. So what changed?
Fintech is a blending of two words: financial and technology. This emerging financial services sector is becoming more common as accessing and using technology gets easier.
Gen Xers and Millennials are beginning to choose institutions based on technology options that allow them to interact with their finances outside of a nine-to-five schedule. With fintech’s popularity rising, it’s important to know how well your institution is providing the tech services and features consumers are coming to expect.
Fintech already offered by many institutions
Unsurprisingly, many institutions are already exploring and offering features in the four main fintech categories: credit, digital payments, saving and investments, and digital currency.
Collaborating with fintech credit providers
Fintech credit providers are non-bank lenders that offer lending services to consumers through mobile technologies and the internet. This lending approach relies heavily on data analysis, automating much of the loan funding process. Similar to other fintech sectors, these credit providers originally developed to compete with traditional financial institutions. However, many now collaborate with institutions on a range of services, including funding and partnerships.
Facilitating digital payments
Digital payments are changing the way consumers transfer money and make payments for goods and services. In today’s world, fintech looks like digital wallets, peer-to-peer payment transfer (e.g., Venmo), and alternative payment processing. The convenience of these services has changed the way that many companies do business and has expanded a business’s ability to accept different forms of payment.
Viewing accounts on mobile devices
Many people can attest to the convenience of viewing their bank account information right from their smart phone, tablet, or computer. Many financial institutions have begun working with fintech companies to provide easy access to financial information. But it doesn’t stop there. Fintech firms are aiming to interact with consumers and businesses for savings, investments, and personal financial management. This includes services such as automated investment advisory and financial management tools that help consumers track, manage, and analyze their spending and savings habits.
Developing digital currency capabilities
Distributed ledger technology, more commonly known as digital currency, first popularized with the e-currency Bitcoin. Other digital currencies have since developed, and more are expected to surface as this part of the fintech industry constantly changes.
Fintech brings new opportunities and challenges
The introduction of fintech to the financial industry brings a wide range of complexities that institutions must navigate, including:
Resources don’t go as far in a constantly-changing industry
Every financial institution, regardless of size, has limited resources. Your institution should determine which fintech options are considered essential by the people you serve, and how to best allocate your resources to put those options in their hands. This is particularly challenging as the fintech industry rapidly changes; an app or product that is dominating the market today might be considered obsolete in months.
Consumers are beginning to expect fintech features
The people you serve will come to expect fintech — and you’ll need to provide it. Many consumers use apps on their phone more often than their computer, and far more often then they set foot in a financial institution branch. These consumers increasingly look for apps and digital services with a focus on intuitive ease of use and convenience. This is particularly true for individual consumers and small businesses who seek payment and lending services, but operate in a flexible environment outside of the traditional work day.
Regulations can’t keep up with fintech growth
Technology often evolves significantly faster than financial institutions’ regulatory framework. This results in institutions, independent auditors, and examiners applying regulations to technology that didn’t exist at the time the regulation was passed. Additionally, the strong compliance culture that already exists for financial institutions must be applied to fintech products and services, which can run counter to the flexible and forward approach of many fintech firms.
Financial institutions also face challenges in complying with government regulations and restrictions when providing fintech options to consumers. Fintech firms, financial institutions partnering with fintech firms, and financial institutions developing their own fintech face a maze of regulations that may apply to certain products or services. These regulations include Reg. B, Reg. Z, Reg. V, the Military Lending Act, the Service Member Civil Relief Act, Gramm-Leach-Bliley Act, and Bank Secrecy Act, to name just a few. Additionally, state laws and regulations may apply to fintech products and services.
Fintech companies look to gain ground in the industry
The introduction of technology in the industry also brings increased competition as fintech companies start working with and competing against traditional institutions.
In December 2016, Thomas J. Curry, comptroller of the currency at the time, announced that the Office of the Comptroller of the Currency (OCC) would begin to take applications from fintech companies that wish to become chartered as special purpose national banks. Per the OCC, the process for chartering would include pre-filing, filing, review and evaluation, and decision stages.
On March 15, 2017, the OCC issued the Comptroller’s Licensing Manual Draft Supplement: Evaluating Charter Applications from Financial Technology Companies, outlining the process by which fintech companies may seek the agency’s limited-purpose national bank charters. However, in September 2017, Keith Noreika, acting head of the OCC, stated that the OCC was still in the exploratory phase of the fintech charter and not yet accepting applications from fintech firms. With these charters in limbo, it’s difficult to predict how these companies will impact institutions moving forward.
How we can help
CliftonLarsonAllen’s (CLA) compliance professionals have watched fintech claim stake in the industry, and we’re continuing to monitor the constant changes being introduced to financial institutions. We can help you address and evaluate the fintech features your institution is looking to incorporate — and (along with your attorneys) any corresponding regulations and restrictions that you may need to navigate as a result.