Acting Comptroller Urges Community Banks to "Convert Digitalization Challenges into Strategic Opportunities"

Steven Lofchie Commentary by Steven Lofchie

Acting Comptroller Michael J. Hsu warned that the digitalization of the banking industry poses significant challenges for community banks.

In a speech before the Texas Bankers Association, Mr. Hsu highlighted three key challenges for community banks: the need to (i) level the playing field, (ii) overcome inertia, and (iii) address the need for scale. He described technology developments as going beyond just digitalizing data toward encompassing a "comprehensive use of digital technologies to compete and support evolving customer needs and expectations, especially with regards to online and mobile banking." He said that community banks were behind in addressing these issues.

Mr. Hsu raised concern that digitalization challenges "relationship banking," a significant attribute of community banking, but he suggested that this was an opportunity for community banks. He said that community banks provide more focused and individual care to customers, a task that he said larger banks have overlooked. Mr. Hsu suggested that the contradiction between the need for scale and relationship banking could be overcome if community banks collaborated with FinTechs or were able to provide cloud-based services.

Mr. Hsu said that the OCC is making efforts to support community bank development on efforts to (i) decrease operational costs, (ii) encourage community investment in local economies, (iii) develop risk-based approaches to supervision and (iv) address challenges arising from the digitalization of the industry. Mr. Hsu said that the OCC's goal is to maximize efficiency while simultaneously improving oversight and protections. He said that the OCC is aiming to "level the playing field" for banks and nonbanks by fully regulating FinTech firms that seek a bank license and by reducing the regulations imposed on small banks.

Mr. Hsu encouraged banking institutions to continue to "collaborate, innovate, and think and act strategically." He warned that the OCC and other regulators increase risk with a lack of regulatory action, and he urged regulators to increase engagement with new technologies to best understand the risks, benefits and strategies.

Commentary

The gist of Mr. Hsu's remarks seems to be that community banks are in a struggle to maintain profitability in a digital world. If that is the case, then it follows that the burden is on the regulators to formulate a more specific regulatory strategy for community banks than what is set out in his remarks.

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