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For release on delivery
10:00 a.m. EST
December 4, 2020

Technology and the Regulatory Agenda for Community Banking

Remarks by
Michelle W. Bowman
Board of Governors of the Federal Reserve System
Independent Community Bankers of America ThinkTECH Policy Summit
Virtual event

December 4, 2020

Thank you to the Independent Community Bankers of America (ICBA) for
inviting me to address this year’s policy summit. I am delighted to be speaking with you
and especially pleased to see the summit’s focus on innovation. The ThinkTech
accelerator represents the type of resourcefulness necessary to help community banks
tackle their greatest challenges, among them ensuring that banking services and credit
support are available to customers in all communities, regardless of where they are
located. Today, I will share my perspective that technological innovation is essential to
the future of community banking in America, and reiterate my intent to elevate those
issues related to innovation to the top of the regulatory agenda.
There are certain points in history when an event can fundamentally change how
society and entire industries function. In addition to the other ways that COVID-19 has
affected us, this could be one of those moments. The pandemic has demonstrated the
importance and unique role of technology in responding effectively to new challenges. In
this case, the challenge has been an unprecedented disruption in our lives. One year ago,
it would have been difficult to imagine the extent to which we are now working and
conducting routine aspects of our lives from home and online.
Take health care as an example. One recent report on telemedicine trends notes
that the number of patients treated through video-enabled physician visits has increased
between 50 percent and 175 percent compared to before the pandemic. 1 While virtual
consultations with a health care professional haven’t replaced physical examinations and
medical procedures, they are serving a vital role in the industry’s response to the

McKinsey & Company, “Telehealth: A Quarter-Trillion-Dollar Post-COVID-19 Reality?” May 29, 2020,

-2pandemic and they will likely play a significant role in how the health-care industry
serves its customers in the future. When this health emergency has come to an end, I
expect that telehealth, home grocery delivery, and a variety of online services and
communications will continue at a higher frequency than before our recent experience.
In the financial sector, I believe we may be seeing a quantum leap in the use of
digital deposit, digital payments and online lending. One large financial service provider
reported a 200 percent increase in new mobile banking registrations during the early
phases of the pandemic. 2 Customers who reacted to the physical limitation on visiting a
bank branch or ATM are learning to bank using online banking or through an app on their
smartphone may not be as willing to stand in line or wait for in-person service at their
bank branch in the future. Recent surveys show that consumers with access to digital and
mobile banking are more likely to continue using those convenience products and
services in a post-pandemic world. 3
The adoption of digital banking services can also be essential for historically
underserved and disadvantaged communities, assuming they have bank accounts and
access to internet-based tools like smartphones. In some cases, fintech can lower costs
and improve services, particularly for small businesses or lower-income consumers who
are less likely to have access to credit. While electronic banking certainly didn’t start
with the pandemic, acceleration of its adoption has undoubtedly led banks of all sizes to
rethink how they will meet their customers’ needs in the long term.

CNBC, “Coronavirus Crisis Mobile Banking Surge Is a Shift That’s Likely to Stick,” May 27, 2020,
American Banker, “Consumers Are Relying More on Finance Apps, Survey Finds,” September 15, 2020,

-3I have noted on many occasions how vital community banks are to those they
serve and to a strong and stable financial system. Successful innovation is not just about
adopting the latest technologies. It involves aligning a bank’s strategy with its innovation
plans to clearly map a purpose and desired outcome for the adoption of new technology.
The continued success of many community banks depends on their willingness to engage
in strategy-based innovation-led growth. We have seen and are encouraged by many
examples of entrepreneurial community banks embracing technological innovation.
Developments such as digital deposit and lending products, regulatory technology
solutions, and application program interfaces (APIs) have increasingly become more
popular in the banking industry. When implemented effectively, they can result in
greater efficiencies and effectiveness.
A number of community banks have already taken advantage of these
opportunities. Still, perspectives on the need for change vary across the industry. I
recognize that while it seems clear that the industry is changing, there remains a wide
distance between fintech’s promise of a future driven by technology and what many
community bankers experience today. From my perspective, it is unlikely that fintech
will ever completely eliminate what is the hallmark of community banking—personal
interaction and building relationships with customers and communities.
One trend is clear, however: more and more community banks are expressing
interest in fintech partners to help them open new lines of business, help with customer
acquisition, enhance customer service, and improve operational functions. Through the
Fed’s engagement with fintech companies and small banks during our Innovation Office
Hours, we learned that a wide range of partnership models are emerging, with varying

-4benefits and challenges. Some banks are engaged in customer-oriented partnerships,
where a bank selects a fintech partner to improve the customer experience, develop new
products or services, or acquire new customers. In one case, a bank partnered with a
fintech company to centralize each customer’s financial data and provide personal
financial management tools. Other banks are engaging fintech partners to automate or
improve the efficiency and effectiveness of compliance and regulatory processes, which
is often referred to as “regtech.” For example, a fintech partner automating the Bank
Secrecy Act/anti-money-laundering process may be able to provide notable cost savings
and enhance compliance, while freeing up resources for other areas. We have also seen
instances where a bank offers its financial services to a fintech partner that, in turn, offers
financial products or services to its customers. In this type of relationship, a bank plays
an important part in the delivery of products and services. The list goes on. My point is
there is great possibility and a wide variety of options for engagement. And everyone,
from the banks to customers to the regulators, needs to be thinking about these changes
and their implications.
With the emergence of additional core-service providers, we are also seeing more
opportunities for community banks to access the technology infrastructure they need to
improve basic banking activities. These basic banking activities include tasks like
reconciling transactions to the general ledger or simply offering expanded digital
services. Furthermore, there are new opportunities for integration of cloud-based
platforms and APIs. Community banks should take advantage of the new technologies
that make sense for their business and the communities they serve.

-5Still, even as community banks prepare for the future, there is the very real
challenge of finding partners and knowing how to navigate the regulatory environment
once an institution has identified a potential partnership arrangement. We certainly
understand this concern. From the fintech perspective, one provider noted the challenges
they face during the onboarding process with financial institutions, including struggles to
navigate siloed compliance and risk-management functions. Participants in the Fed’s
Innovation Office Hours told us that they would benefit from the Fed broadly sharing
information on the current landscape of such partnerships, on a range of practices, and on
relevant guidance for banks to consider.
In response, early next year we plan to publish a white paper that documents
examples of community bank partnerships with fintech companies and outlines effective
practices for managing those arrangements. This white paper would describe a range of
distinct options for such partnerships and seek to identify benefits and challenges of the
different approaches. We are also continuing to pursue a range of community bank
projects to provide pathways to innovation that I mentioned earlier this year.
While it is essential to safety and soundness that banks understand, monitor, and
mitigate risks associated with their third parties, I am sensitive to the burden that due
diligence can pose. Being unsure of the questions to ask a third-party vendor, or whether
a response is sufficient, should not keep community banks from accessing innovation, yet
we continue to hear that these are real challenges. To address this problem, I have
directed Federal Reserve staff to work with their interagency colleagues to develop a
vendor due diligence guide, aligned with existing supervisory expectations, which would
include sample questions for vendors and guidance on appropriate responses. This guide

-6would also be specific about the documents and information that community banks need
in order to successfully complete their due diligence.
In addition to the due diligence guide, I expect that Federal Reserve staff will
work with our colleagues at the Office of the Comptroller of the Currency and Federal
Deposit Insurance Corporation to enhance and align interagency guidance for third-party
risk management. The guidance would eliminate the need for community banks to
navigate multiple supervisory guidance documents on the same issue. It is my
expectation that the combination of refreshed and aligned interagency guidance and the
community bank due diligence guide will meaningfully enhance clarity on supervisory
expectations for community bank partnerships with fintech companies.
There are also opportunities within our existing supervisory program to improve
our regulatory response to innovation, without creating additional burden for community
banks. The federal banking agencies’ service provider supervision program plays an
important role in assessing the rigor of risk management and controls at key service
providers. It is important that reports of supervisory assessments be readily available to
banks that rely on service providers so that banks can use the reports to support their
third-party risk management. Since I last spoke about the program in February, the
federal regulatory agencies have made notable progress in creating a process to
automatically distribute those reports to all client banks. Proactively sending reports to
community banks removes the inefficient step of each bank hunting for reports on their
own. For banks supervised by the Fed, the aim is to begin automatic distribution in the
first quarter of 2021.

-7Finally, I would note that as we consider the types of financial services
technology that may be useful to the banks we supervise, our rules and guidance need to
keep pace. The Federal Reserve is also considering whether the rise of artificial
intelligence and machine learning in banking might require an adjustment in regulation
and supervision. AI is becoming more prevalent in customer service and machine
learning can offer real opportunities to assess risk and find new customers.
Community banks face limits on the resources they can dedicate to researching
and evaluating third party providers of these new services. Regulators and supervisors
should consider ways to encourage innovation by simplifying the process of third party
selection, due diligence and monitoring. 4 To that end, staff from the Federal Reserve and
other agencies have been jointly conducting significant outreach to industry and other
stakeholders over the past several months. We want to hear from you. In addition to this
outreach, a conference planned for January, 2021 will include views from academic
researchers on the potential benefits and risks posed by artificial intelligence for banks of
all sizes.
Technological innovation holds great promise to help community banks compete
and succeed in the evolving financial services landscape. I look forward to continuing to
engage on these issues in 2021 and to work with the ICBA and other stakeholders to
foster an environment where communities and the banks that serve them continue to

Michelle W. Bowman, “Empowering Community Banks,” speech at the Conference for Community
Bankers sponsored by The American Bankers Association, Orlando, Florida, February 10, 2020,