Michelle W Bowman: Technology, innovation and financial services
Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve
System, at the VenCent Fintech Conference, Little Rock, Arkansas, 17 August 2022.
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Thank you, Commissioner Marshall, for the invitation to speak to you today. It's really a pleasure
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to be here, finally in person at the Venture Center. Much has happened over the past few years,
and I have been following your work closely.
Technology Is Changing Financial Services
Technology and innovation are a priority interest for my work at the Board of Governors.
Technology can offer increased speed, lower costs, and greater efficiency in providing services
and products in the financial industry. This week's conference agenda includes many of the
topics I follow closely through our work on innovation.
Much of the innovation in financial services is occurring in the nonbank sector, but technology is
also changing the business of banking in profound ways. More and more customers interact with
their banks exclusively through digital channels. They check their balances, apply for credit
cards, and make deposits and payments via their phones, rather than visiting bank branches.
But the changes run deeper than that. Technology is also changing fundamental aspects of bank
operations. For example, banks are beginning to use artificial intelligence (AI) in credit
underwriting, back-office operations, various aspects of risk management, and customer
service.
Technology is also leading to new bank business models. Many banks are using application
programming interfaces and other technology to allow nonbank technology firms to provide
financial services. Under many of these arrangements, the technology firm maintains the
customer relationship, while the bank provides the underlying financial infrastructure, including
deposit services and access to the payment rails.
Federal Reserve Support for Innovation
The Federal Reserve is monitoring these transformations closely, and we are encouraged by the
potential for improvements that can be brought by responsible innovation.
I think it is critically important for banking regulators to support innovation in banking. Traditionally,
banking regulators may have viewed banking innovation solely as a risk on a long list of risks that
need to be appropriately managed. While that perspective won't change, I recognize that evolving
consumer preferences are requiring banks to meet these technology-enabled expectations. It is
true that new services and products present new risks, but these are not unmanageable risks.
And, frankly, there is greater risk in standing still-in not recognizing the need to move forward.
Failure to innovate can undermine a bank's competitiveness, posing a threat to safety and
soundness just as innovating recklessly can. The Fed supports responsible innovation in a
variety of ways, and I will mention a few of them in this discussion.
For the past few years, I have been working to assist banks to address the challenges brought by
the process of partnering with a third-party service provider. Last year, the Fed, along with the
Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation,
proposed interagency guidance to assist in the management of risks involved in third-party
engagement. The agencies received over 80 comment letters and are reviewing those
comments as we move toward finalizing the guidance. In my view, it is especially helpful to
provide clarity for banks in these kinds of relationships and to help them establish a solid
foundation as banks and fintechs continue to engage in partnerships.
Last year at this time, the federal banking agencies released a guide designed to assist
community banks to assess risks in constructing and considering relationships with fintech
companies.
And lastly, this past September, the Federal Reserve published a paper detailing industry
perspectives and experiences on the different types of partnerships between community banks
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and fintech companies. We conducted extensive outreach with community banks, fintechs, and
other stakeholders and incorporated real world experiences of the strategic and tactical
decisions that led to effective partnerships.
For the remainder of my remarks, I will focus on several issues that are likely top of mind for
those who are engaged in financial services innovation.
Crypto-Assets
Let's start with digital and crypto-assets. I am hearing more discussions involving banks' interest
in offering services involving crypto-assets. The chatter seems to originate more from those
outside the banking industry, but I'll put that aside for now.
There seem to be a number of reasons for this interest and why customers might seek to
engage in this type of activity. First, although the interest seemed to have cooled lately, given
recent developments in the crypto industry, we have seen significant consumer demand for
engagement in these types of services. It seems reasonable that because bank customers are
aware of crypto and have discussed these assets with their banks, banks want to better
understand this type of engagement and potentially provide those services to their customers.
Second, we have also been told that banks have observed their deposits flowing to nonbank
crypto-asset firms and, understandably, would like to stem that outflow by offering the services
themselves. I certainly recognize and appreciate these challenges. But before a bank begins to
engage in or offer crypto-asset-related services, it must seriously and carefully consider the risks
involved-both to the bank and its customers. The recent turmoil in the digital-asset industry only
underscores that point.
Federal Reserve staff is working to articulate supervisory expectations for banks on a variety of
digital asset-related activities, including
custody of crypto-assets
facilitation of customer purchases and sales of crypto-assets
loans collateralized by crypto-assets, and
issuance and distribution of stablecoins by banking organizations.
We understand that everyone involved in this space is seeking clarity. One of the most important
tools that we have as a regulator is the ability to clearly articulate our supervisory expectations. It
is also our most direct path to encouraging and supporting responsible innovation.
Earlier this week, we released supervisory guidance addressing banks that are engaging in or
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seeking to engage in crypto-asset related activities. This guidance will provide banks with
additional information about the risks of crypto activities and remind them to ensure that the
activities are legal, and they should have adequate systems, risk management, and controls in
place to conduct the activities in a safe and sound manner consistent with applicable law.
Critically, one important element of this release is that firms should contact their supervisors
about these types of activities and expect that supervisory staff will provide timely feedback, as
appropriate.
Based on my conversations with bankers across the country, I believe that providing the rules of
the road-highlighting the risks we are most concerned about and laying out our expectations for
how those risks should be managed-is invaluable for banks considering whether and how to
innovate.
Artificial Intelligence
The Federal Reserve is taking a similar approach with respect to banks' use of AI. Last year, the
Fed joined with four other financial agencies to issue a Request for Information and Comment on
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Financial Institutions' Use of Artificial Intelligence, Including Machine Learning. As noted in that
document, banks are using AI in a variety of ways, including fraud monitoring, personalization of
customer services, credit decisions, risk management, and textual analysis. These applications
of AI can, to varying degrees, involve risk-management challenges around issues such as
explainability, data governance, cybersecurity, third-party risk management, and consumer
compliance.
The banking agencies received over 100 responses to the Request for Information. Those
responses give us a window into what questions banks need regulators to answer about using
AI. Federal Reserve staff is working with the other regulators to provide further clarity in this area.
Payments: FedNow and Central Bank Digital Currencies
Payments is another area where innovation continues to flourish, and the Federal Reserve is
actively engaged in shaping the future payments landscape.
The FedNowSM Service will enable financial institutions of every size, and in every community
across America, to provide safe and efficient instant payment services. It is intended to be a
flexible, neutral platform that will support a broad variety of instant payments. It will allow
depository institutions and their service providers to offer value-added services to their
customers, ultimately enhancing competition in the market for payment services. Completing
and implementing FedNow is a high priority, and we expect it to be available by mid-2023.
FedNow will help transform the way payments are made through new services that allow
consumers and businesses to make payments conveniently, in real time, on any day, and with
immediate availability of funds for receivers. Our assessment of these benefits has not changed
even as we consider whether a central bank digital currency (CBDC) might fit into the future U.S.
money and payments landscape.
My expectation is that FedNow addresses the issues that some have raised about the need for a
CBDC. As I'm sure you are already aware, earlier this year we published a discussion paper that
outlined some design principles, costs, and benefits of a CBDC and solicited public
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comments. We received over 2,000 comments, and we are currently reviewing these
comments and plan to publish a summary of them.
Novel Charters and Access to Federal Reserve Account Services
Before I wrap up, let me touch on one more topic that relates to innovation in bank charter types.
In recent years, there has been an increase in novel charter types being authorized or
considered across the country at the state and national levels. As a result, Federal Reserve
Banks are receiving an increased number of inquiries and requests for access to Reserve Bank
master accounts and financial services, which could provide those institutions with access to the
nation's payment system.
On August 15, the Board of Governors published final guidelines that govern how Reserve Banks
will evaluate requests for account access. The guidelines take into account the Board's goals to
(1) ensure the safety and soundness of the banking system; (2) effectively implement monetary
policy; (3) promote financial stability; (4) protect consumers; and (5) promote a safe, efficient,
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inclusive, and innovative payment system.
The approach articulated in the guidelines is based on a foundation of risk management and
mitigation, recognizing that access to Fed accounts and services can create significant risks.
The systematic evaluation of these different risks is intended to establish a framework ensuring
similar treatment for legally eligible institutions with similar risk profiles across the Reserve
Banks. For example, requests for accounts and services from non-federally insured institutions
would generally be subject to a higher standard of review. The Board expects Reserve Banks to
collaborate on reviews of account and service requests, and conduct ongoing monitoring of
approved accountholders, to ensure that the guidelines are implemented in a consistent manner.
Publishing the guidelines is an important step to providing transparency and consistency across
the Federal Reserve System. However, more work remains to be completed before a process is
established to fully implement the guidelines. In the meantime, there is a risk that the guidelines
could establish false expectations regarding the timeline for evaluating and acting on these
requests.
In closing, I'd like to once again thank the Venture Center for hosting this event and for providing
the opportunity to get together to discuss innovation in financial services. It's great to finally be
back in Little Rock and to have the chance to meet so many of you in person after such a long
time. Commissioner Marshall, I look forward to our discussion.
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These remarks reflect my views and not necessarily those of my colleagues on the Board of Governors or the
Federal Open Market Committee. I am grateful for the assistance of Federal Reserve Board staff Jeff Ernst,
Kavita Jain, Molly Mahar, Jason Hinkle, and Kirstin Wells in preparing these remarks.
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Board of Governors of the Federal Reserve System, Federal Reserve Publishes Paper Describing Landscape of
Partnerships Between Community Banks and Fintech Companies, news release, September 9, 2021.
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Board of Governors of the Federal Reserve System, Federal Reserve Board Provides Additional Information for
Banking Organizations Engaging or Seeking to Engage in Crypto-Asset-Related Activities, news release, August
16, 2022.
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86 Fed. Reg. 16,837.
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Board of Governors of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital
Transformation (PDF), January 2022. t
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Board of Governors of the Federal Reserve System, Federal Reserve Board Announces Final Guidelines That
Establish a Transparent, Risk-Based, and Consistent Set of Factors for Reserve Banks to Use in Reviewing
Requests to Access Federal Reserve Accounts and Payment Services, news release, August 15, 2022.