Bowman: Regulators should be more open to innovation

Michelle Bowman

Bank regulators must be more receptive to innovation while maintaining their commitment to the safety and soundness of the financial system, said Federal Reserve Gov. Michelle Bowman on June 17. 

Speaking at an international banking conference in Austria, Bowman said regulators should understand emerging technologies and prioritize innovation when developing regulations. “It is incumbent on regulators to fight the temptation to say no and resist new technology and instead focus on solutions,” she noted. “How can we mitigate the risk of new technology? What benefits will technology bring to the financial system? How can we provide clear regulatory expectations? 

Bowman’s comments came as enforcement actions concerning bank-fintech partnerships increased. More than one-third of publicly disclosed enforcement actions from the Fed, FDIC and OCC involved fintech-partnering banks during the first quarter of the year, up from 10 percent the previous year, according to consulting firm Klaros Group.   

Bowman said previous policy reforms have suffered from a lack of proper prioritization and focus while encouraging activity to move from the banking system. She cited the explosion of mortgage services provided by less-regulated nonbanks following regulatory reforms in the wake of the 2007-08 financial crisis. Nonbank mortgage companies had servicing rights on more than half of U.S. mortgage balances as of 2022, up from 4 percent in 2008. 

Innovators must also delve into greater detail when describing their products, she said, including describing the technology their products utilize along with any use constraints. They can also describe how their innovation meets the demand of consumers, reduces fraud, lowers the cost of banking services or promotes financial inclusion. 

 “Innovators must not adopt the sales mentality that they may use when pitching investors or partners, and instead, acknowledge the unknowns — the risks that new technology presents, the various ways that the technology could be used or evolve over time, and how the technology could either complement or disrupt the current financial system,” Bowman noted.