Fed Issues Paper on Bank/Fintech Partnerships; Bowman Discusses Innovation

The Federal Reserve today published a paper highlighting how community banks can partner effectively with fintech companies. The paper is intended to be a resource for community banks as they plan their innovation journeys. Among other things, it provides an overview of the banking and fintech landscape, discusses benefits and risks of bank/fintech partnerships and key considerations for engaging in these partnerships.

Discussing the paper at the American Bankers Association’s Government Relations Council fall meeting today, Fed Governor Michelle Bowman—who holds the designated community bank seat on the Fed board—noted that in her agency’s outreach, “two important themes stood out. The first is establishing trust and aligning with fintech partners, and second, building a long-term culture committed to innovation.”

The paper is the latest of several initiatives the Fed has undertaken to help promote responsible innovation for community banks, Bowman added. Other initiatives included the joint publication of a vendor due diligence guide with the FDIC and OCC, a request for comment on interagency third-party risk management guidance and a request for information on banks’ use of artificial intelligence.

Bowman encouraged bankers to continue to engage with the Fed on issues related to innovation, including through an upcoming “Ask the Fed” program that will focus on community banks and services providers and an upcoming “innovation office hours” event later this month that will be hosted jointly by the Fed and the Kansas City Reserve Bank.

Turning to digital payments, Bowman said that the Fed in the coming weeks will issue a discussion paper outlining its thinking on including central bank digital currencies. As the agency continues to deliberate the merits of a CBDC, Bowman emphasized that “our focus has been on whether and how a CBDC could improve on an already safe, effective, dynamic and efficient U.S. domestic payments system.”

“When I’m looking at CBDC issues, what I’m looking to understand is: what’s the business case?” Bowman said. “We have several payments processes that exist now—what would be the purpose of creating a CBDC that go beyond some of those functions we already have?” She added that “the board has not come to any conclusion or decision” regarding how it will move ahead with regard to the creation of a CBDC, and that “it’s entirely possible that legislative action could be necessary in order to grant authority to create one.”

ABA has previously cautioned that the introduction of a CBDC could fundamentally change the role of the central bank in the U.S. and reshape the banking system, and that careful consideration should be given to understanding the significant real-world trade-offs that would come with the introduction of a U.S. CBDC.