FDIC warns banks of consequences of not adopting technology

FDIC Chairwoman Jelena McWilliams warns relying on legacy systems will result in lost customers

Even well-capitalized, well-managed community banks will not survive if they fail to adopt technology that fintech companies and large banks already offer, the chairwoman of the FDIC warned Wednesday.

During a session at the virtual LendIt Fintech USA 2020 conference, FDIC Chairwoman Jelena McWilliams said that “relying on legacy systems and relying on technology that they have been implementing for such a long time — when their customer is three generations ahead in terms of the use of technology — is going to result in those banks losing customers.”

McWilliams reiterated her belief, outlined in an October 2019 speech at the Federal Reserve Bank of St. Louis, that community banks risk going “the way of Blockbuster” if they don’t embrace tech innovations. The brick-and-mortar business model of movie rental chain Blockbuster ultimately fell victim to video-streaming services like Netflix. Blockbuster went bankrupt in 2010.

To underscore her cautionary Blockbuster tale, McWilliams recalled her recent chat with a rural banker. Explaining that the average age of a consumer at his bank is 70, the banker expressed a desire to attract younger customers who increasingly are doing business with online banks.

“We need to figure out how to get there as well,” the banker told McWilliams.

To help community banks figure out how to “get there,” McWilliams’ agency set up the FDIC Tech Lab (FDiTech). The lab is collaborating with community banks on technology that will help the banks better serve customers.

“Many of the institutions we supervise are already innovating,” McWilliams said last year, “but a broader adoption of new technologies across this sector will allow community banks to stay relevant in the increasingly competitive marketplace.”

More coverage from LendIt Fintech USA 2020:
OCC’s Brian Brooks talks enabling innovation to expand financial access
Goldman Sachs’ fintech partnership and acquisition playbook

During her LendIt Fintech session, McWilliams provided another example of how some community banks remain behind the fintech curve. As the coronavirus pandemic hobbled banking operations across the country, the FDIC reached out to banks and asked whether they were still able to go through with compliance examinations. For some banks, technology stood in the way of moving forward with remote exams.

“We came to a point where some of the smaller banks with, I would say, some of the outdated technology, said, ‘Well, we would like to continue, but we don’t know exactly how to upload all our documents to your system for this remote type of examination,’” McWilliams said. “And in those cases, we actually … sent to those banks high-speed scanners that were compliant with our system so they could proceed with the examination activity remotely and seamlessly.”

McWilliams fears that an absence of tech savviness on the part of community banks could cause further consolidation and help produce “banking deserts.”

“It is in the interest of the FDIC that we promote technological solutions and create a pathway for banks to team up with fintechs,” she said, “when in the past, frankly, fintech was almost a dirty word in the regulatory sphere.”

McWilliams said she’d even like to see the FDIC devise “some kind of a Good Housekeeping Seal of Approval” that would establish a blanket standard for all fintech companies seeking to supply products and services to FDIC-insured banks, particularly community banks. The agency also has proposed prize competitions and rapid prototyping to help promote private-sector tech solutions to challenges in the regulation of banks.

“The cost to innovate is in many cases prohibitively high for community banks. They often lack the expertise, the information technology, and research-and-development budgets to independently develop and deploy their own technology,” she said last year. “That is why partnering with a fintech that has already developed, tested and rolled out new technology is often a critical mechanism for a community [bank].”

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