In a speech today, Federal Reserve Governor Lael Brainard acknowledged the challenges facing the financial industry as banks work to partner with fintech companies and innovate to better serve their customers. Brainard noted that unlike other industries that have been quick to embrace technology through open application programing interfaces, or APIs, the highly regulated banking industry faces unique hurdles, particularly with respect to consumer data protections.
“While ‘run fast and break things’ may be a popular mantra in the technology field, it is ill suited to an arena where a serious breach could undermine confidence in the payments system,” she said. “Indeed, some of the key underpinnings of consumer protection and safety and soundness in the banking world… sit uneasily alongside the requisites of openness, connectivity, and data access that enable today’s app ecosystem.”
Brainard noted that banks are working their way into the fintech “stack” through a number of different avenues, with some choosing to provide their own APIs to outside developers, while others choose to partner with third-party data aggregators. In other cases, she noted, data aggregators are going directly through consumers to “screen-scrape” — a process through which consumers provide their online banking credentials directly to a third-party app or tool. The American Bankers Association has previously raised concerns about screen-scraping, as it undercuts banks’ ability to secure their customer’s financial data.
Brainard acknowledged that the Fed is still in the process of determining how best to encourage responsible innovation in the banking system. “[W]e have a strong interest in permitting socially beneficial innovations to flourish, while ensuring the risks that they may present are appropriately managed,” she said. “We do not want to unnecessarily restrict innovations that can benefit consumers and small businesses through expanded access to financial services or greater efficiency, convenience, and reduced transaction costs. Nor do we want to drive these activities away from regulated banks and toward less governed spaces in the financial system.”
She also discussed the implications of the OCC’s proposal to grant limited-purpose national bank charters to fintech companies, adding that if finalized, the OCC’s proposal to grant a limited-purpose charter would raise “interpretive and policy issues” for the Fed, as the agency would need to determine to what extent fintech companies granted a charter would have access to Federal Reserve accounts and services, including the payments system.