Open Letter to the OCC: Make Real Innovation Possible

Dear Thomas J. Curry, Comptroller of the Currency,

You might be wondering why I am writing you. After all, I am just a trifling blogger on banking innovation, and the Office of the Comptroller of the Currency has historically taken an apathetic view on such piddling matters. Yes, I know, you’ll suggest that this has changed somewhat — at least you initiated a request for comment last March on “supporting responsible innovation,” as if innovation at banks can only be “responsible,” and not “daring” or “revolutionary” or — gasp — “smart.”

The truth is I am writing in support of Donald T. Parker. Oh, you don’t know him? Well, you should, Mr. Curry.

Donald T. Parker is the executive vice president and chief information officer at BOK Financial. BOK operates the Bank of Oklahoma, not known as one of the preeminent innovation banks in the nation. It’s not all the big of a bank either — $4 billion market capitalization and $31 billion of assets.

But Donald T. Parker has boiled down the template for practical banking innovation in a remarkably succinct and enlightened manner. Mr. Curry, I would encourage you to listen to what Mr. Parker wrote you on June 3 in response to your request for comment.

First, Mr. Parker explained why “responsible innovation” was a silly term. He explained that midsized banks like BOK are challenged to innovate at the scale of megabanks — but that doesn’t mean the bank ignores emerging technology.

Given our scale, we must be efficient with our technology investment. Much of our investment is consumed with basic product capability and meeting risk management expectations. As a result, we have limited resources available for the experimentation required by emerging technology and financial innovation.

So, Mr. Parker is smart.

But he is also blunt. He explained clearly that you, Mr. Curry, are preventing BOK (and other banks, I would add) from pursuing meaningful innovation, let alone “responsible innovation.” Mr. Parker explained that the OCC requirements that BOK assess third-party risk fly in the face of innovation, because “[e]merging technologies and financial innovation frequently involve partnering with technology companies with which we have limited negotiating leverage,” he wrote. “This makes meeting reasonable third-party risk expectations challenging and sometimes impossible.”

And then BOK is stymied by yet two more factors: 1) “concern that our investment will be challenged by regulators post-implementation causing an exit of the product and write off of the investment”; and 2) “the regulatory expectation that the control infrastructure for a new product or service be fully built out prior to even a small scale implementation.” As Mr. Parker put it, “We sometimes want to scale the control infrastructure as a business grows to see if the business develops.”

That the OCC prevents even “small-scale implementation” is absurd. Mr. Curry, you should change that. Oh, wait, Mr. Parker was even kind enough to give you a three-point roadmap for doing so:

1. Engage with institutions regarding product concerns as opposed to insisting they exit the product. Once the specter of a forced exit exists, institutions are less likely to be willing to make necessary investments in new products. Forcing a regulated institution to exit a product does not eliminate the marketplace need; it forces the customer to the shadow banking industry.
2. Create an avenue for discussion of specific rules that have an inadvertent impact of suppressing innovation. We understand that the OCC does not always have the flexibility to change a rule but in certain cases our advocacy work could be aligned.
3. Require a section in the annual report of examination that describes areas of responsible innovation that the OCC is supporting within the institution. This would force the conversation between examination staff and bank executives and place some accountability on OCC staff to explicitly support responsible innovation.

I would add that Citigroup’s suggestion that the OCC creates a “U.S. FinTech Regulatory Greenhouse” to “facilitate safe pilot-type, small-scale innovation by banks and nonbanks” also deserves consideration.

Look, you can ignore Mr. Parker’s sensible suggestions, but I would strongly advise against that. Mr. Parker’s greatest insight is his clear-minded realization of the risk in not innovating. Please, allow me to quote from Mr. Parker’s note:

Keep in mind that a lack of capacity for innovation is in itself a risk. Banks have limited resources for investment and every regulatory required investment should be considered relative to its value versus investing in new or improved product, services, and processes.

This is gospel worth memorizing, Mr. Curry.

Very truly yours,

JJ Hornblass