The OCC's senior deputy comptroller for midsize and community bank supervision, Sydney Menefee, recently spoke to American Banker about some of the changes she's observed in the decade since the Office of the Comptroller of the Currency last overhauled its supervision of small and midsize banks.
“The industry has evolved, and we have to evolve, too,” she noted.
Fintechs exploded onto the scene, stealing market share from traditional banks, partnering with community institutions or — in the case of companies such as SoFi and Varo — obtaining bank charters.
That’s why one of the centerpieces of the agency’s recent restructuring of oversight of national banks below $60 billion was to put innovative banks and technology service providers under the purview of a single deputy comptroller, Menefee said. (That person hasn't yet been named.)
The move will allow specialists “more of a bird’s-eye view” of new developments in financial services and promote consistent treatment across the agency’s regions of national banks that partner with fintechs or have cutting-edge business models, said Menefee.
Centralization, Not Location
However, the focus on fintech partnerships and novel banking models should reduce any differences among fintechs and banks in supervisory practices among various regions, said Scott Pearson, a partner at Manatt, Phelps & Phillips, LLP and leader of the firm’s consumer financial services practice. The concern is that Fintechs that partner with banks will pursue a novel banking business model, and that business model might be more important than the location of the business.
“There’s some benefit one would think to having some people at the OCC dedicated to focusing on those technologies and making sure that they’re treated the same regardless of where the bank happens to be located,” he said. “Historically the OCC and other banking agencies have had sort of a regional approach where there could be some differences in supervision practices based on where a bank is located.”
Sometimes local examiners could lack expertise in these businesses, and realigning those portfolios could help enforce some consistency, Pearson added.
“Frankly, individual regulators who are conducting an examination have discretion on a number of different things,” he said.
Karen Solomon, senior of counsel at the law firm Covington and former acting senior deputy comptroller and chief counsel at the OCC, points out a move toward specialization -- a specialized deputy comptroller could bridge the gap between senior leadership at the agency and the examiners who have direct contact with banks.
“Centralization of a particular type of supervision improves efficiency by making it easier to deploy resources where they are most needed and, at the same time, avoid duplication of effort,” she said. “Centralization also fosters consistency in the supervision of institutions or companies with similar business models.”
Focusing on Technology Partnerships
The OCC change might signal an increased focus on technology service providers to banks, which could potentially range from cloud service providers to lending partnerships, said Chris Odinet, a professor at the University of Iowa College of Law, where he teaches consumer finance law. He notes that bank regulators have a wider ability to oversee these institutions than possible in the past.
“OCC is taking the approach that the nature of these links between regulated banks and the technology companies that they partner with is just becoming much more of a partnership and less of a firm and contractor,” he said. “Regulators like the OCC have always had the power to supervise these sorts of firms, but the increasingly robust role they’re playing in the business models and activities of banks is being reflected in this reorganization.”
Relationship between fintechs/technology vendors and banks have have indeed drastically evolved over the past decade. Banks have moved away from signing agreements and deploying technology into their workflows, to now creating new workflows and even new revenue streams with the help of fintechs and technology partners -- effectively changing the way banks are doing business. In fact, OrboGraph has evolved to a hands-on approach with its banking partners, enabling them to have feedback and input on development and improvement of evolving solutions through our OrbNet AI Innovation Lab -- a crucial component in the development of our OrbNet AI for check recognition and OrbNet Forensic AI for check fraud detection.
With additional oversight on the horizon, it's important for banks to thoroughly vet their potential partners — going further than the capabilities of their technology — ensuring that they are fully compliant with all banking regulations and have reputations as strong collaborators.