Speaking to a group of community bankers at the Chicago Fed on Friday, U.S. Comptroller of the Currency Thomas J. Curry said that mitigating strategic risk should be at front of mind for all banking executives and boards heading into the new year—and one issue that is testing banks’ strategic risk today is the shift taking place with innovation and financial technology in the industry.
Curry noted that community banks are the “heart and soul of banking across our nation” and that “our nation and economy are stronger when community banks are a healthy, vibrant part of our financial services industry.”
The OCC has defined strategic risk as “the risk to current or anticipated earnings, capital, or franchise value arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes”—which for community bankers, Curry said, means they need to have the right plan to meet their business goals in their own respective markets.
“Strategic planning helps a community bank position its business, identify its best opportunities, and make hard choices about the unknown and uncontrollable,” Curry said. “The future is always uncertain, but strategic planning provides a context for making decisions.”
The phenomenal growth of financial technology companies, or FinTechs, in the last few years is testing banks' strategic risk, Curry said. FinTechs numbered approximately 4,000 between the United States and U.K. at the end of 2015. These companies provide financial products and services through a variety of alternative platforms and delivery channels, and a major factor driving the growth of FinTechs is the 85 million millennials entering the market who are willing to seek alternative platforms to meet their financial needs, Curry said.
“While FinTech companies are still a small portion of the industry, their rapid growth requires banks and regulators to ask big-picture questions about the future of banking, how consumer needs are being met, and whether we have the necessary regulatory tools and structure to ensure that the changes occur in a safe and sound manner, promote financial inclusion, and avoid consumer abuse,” Curry said.
Curry noted that he understands why banks may be hesitant to work with FinTechs or use their products.
“By definition, they are new,” he said. “Their technology may not be as familiar or easily understood, and most don’t have long-term track records that could provide a measure of reassurance. Vetting new companies can be costly and daunting, and small banks without specific expertise may have to rely on yet another third party to support their due diligence. Even after entering a partnership, overseeing the vendor can present similar challenges.”
The bank’s responsibilities as far as third-party risk management include assuring an outsourcing arrangement that aligns with the bank’s strategic direction, assessing the appropriateness of the fee structure for the services received, implementing the necessary user controls, and monitoring the performance of service providers, Curry said.
“Working together to evaluate and monitor third-party service providers can help manage the risk, and some community banks already are finding success with this type of collaboration,” Curry said. “Many community banks that use large technology service providers already belong to user groups that work together to manage the third-party relationship.”
Click here to read Curry’s complete speech.