The Federal Reserve’s vice chairman for oversight, Michael Barr, said banks have made great strides in expanding financial inclusion but that they need to be careful about the partnerships with fintechs they have relied on to do so.
Al Drago/Bloomberg
The Federal Reserve’s top regulator praised industry efforts to expand access to financial services but warned that such efforts could pose financial stability risks.
While banks have “played a vital role” in improving financial inclusion, Michael Barr, the Fed’s vice chairman for supervision, said their reliance on financial technology (fintech) partners creates risks that must be carefully managed.
“Innovation in banking services is important to improving financial inclusion,” said Barr, “but to have a lasting impact on society, innovation must be implemented responsibly.”
Barr’s comments were made Tuesday at the Federal Reserve’s Financial Inclusion Practices and Innovation conference in Washington, D.C. He highlighted the expansion of small loan availability, the incorporation of alternative data into credit assessments and the creation of new tools for consumers as key developments in recent years.
But Barr also called for banks to ensure their risk management and compliance functions were keeping up with innovation in products and services, especially when third parties were involved. When banks failed to manage those risks, he said, customers suffered.
“In areas where people live on tight budgets or have limited access to financial services, such disruptions could have devastating consequences,” he said.
Third-party risk has been a focus for the Fed and other regulators in Washington. The Fed, working with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, issued guidance on the subject last year and again in May that focused on the risks posed to community banks.
Additionally, all three agencies have issued a series of enforcement actions against fintech bank partners in recent months.
In his speech, Barr highlighted the potential inclusionary benefits of instantaneous payments processing, both through the central bank’s FedNow service and privately run real-time payments networks.
“These services allow banks to offer their customers an instant way to send and receive payments, helping them weather disruptions to income or unexpected expenses,” he said. “By reducing payment delays and the associated high costs for consumers, FedNow can improve access to the financial system and reduce costs in the long term.”
Barr also touched on the emergence of so-called open banking and its impact on financial inclusion. Greater access to and control over personal data will give consumers “a more complete view of their financial lives and a better understanding of how to improve their financial health.” However, he noted that the transformative potential of this change will be shaped by both banks and regulators.
“As with most innovations, regulators need to ensure that appropriate measures are in place to protect consumers and promote financial stability,” he said. “For example, regulators need to take great care to ensure that organizations to which consumers give access to their data protect privacy and data security.”
Federal Reserve Governor Michelle Bowman, who spoke at the event, also emphasized the benefits of small loans, noting that they help low- and moderate-income consumers avoid turning to costly alternatives like payday loans and pawn shops.
Bowman also called on banks to improve their systems for processing remittances to and from family members in other countries, noting that improved practices could motivate some unbanked and underbanked consumers to get bank accounts.
“Making the financial system more inclusive is a continuing priority for the Federal Reserve,” he said. “While great progress has been made, there is more work to be done in both the public and private sectors.”
