Winning the Tug-of-War Between Innovation and Regulation

By Kevin Tweddle

There’s something about these dog days of summer that opens us up to nostalgia. Picnics and pools. Fireworks and fireflies. And, at least once a year, a good old-fashioned tug-of-war at someone’s barbeque.

Community bankers often struggle with competing objectives: push for innovation for improved efficiency and effectiveness or pull back in light of the harsh realities of regulatory compliance.

This “push-and-pull" between innovation and regulation is more pronounced than ever as our industry becomes more dynamic and technology-centric.

This tension is exacerbated by a regulatory environment that imposes one set of standards for financial institutions and another for nonbank providers, positioning the latter at an advantage in an unlevel playing field.

But those winds may finally be shifting. Last month during ICBA Capital Summit, Rep. French Hill (R-Ark.) acknowledged the challenges community banks face in innovating amid regulation and noted the formation of a new task force to dive deeper to address these imbalances. 

“I’d say that anything that lowers the cost for regulatory compliance would be a priority of what we do,” Hill said. “And then level that playing field between a nonbank player and a bank player on acquiring a deposit customer, serving an investment services customer, or making a consumer or business loan.”

Policymakers, regulators and federal agencies all appear to have increased their awareness on this issue. Various agencies are establishing offices of innovation, and last year the Treasury Department issued a report with more than 80 recommendations designed to “streamline the regulatory environment to foster innovation and avoid fragmentation; and modernize regulations for an array of financial products and activities,” among other things.

Then, in late November 2018, the Senate Banking Committee held a hearing on combating money laundering that was immediately followed by the release of a joint statement from federal banking regulators encouraging the use of technology for anti-money-laundering compliance.

“I do think the mindset of the regulators has shifted,” said Heather Archer Eastep, a partner at Hunton Andrews Kurth and panelist at the ICBA Capital Summit. “Six or seven years ago, the only fintech regulators knew about was marketplace lending. That’s expanded significantly through the Treasury’s white paper and the various offices of innovation at the federal bank regulatory agencies. They are really pushing for this idea of innovation and how it can improve banking services and banking in general.”

Hill believes it’s Congress’ job to help ensure uniformity in exactly how that innovation is regulated.

“Trying to create some consistency is really important, particularly for community banks who don’t have a lot of extra people and time to do vendor due diligence,” he said. “We’d like to have a hearing on these innovation offices in the agencies. What are their goals? How are they operating to create some consistency of approach? I think that will really help our banks.”

Transparent guidance is the best thing regulators can do. We want to ensure that as community banks adopt new technologies, the lens through which they will be evaluated will be consistent with that of larger banks and nonbank providers. And we will work to continue to advocate for just that.

Because until we’re sure regulation has established a more suitable dynamic tension with new innovative offerings, it’s our job to hold our ground and keep our hands firmly on the rope.

Kevin Tweddle is chief operating officer for ICBA Services Network.