From the Federal Reserve Board:
Financial Innovation: A World in Transition
Governor Jerome H. Powell
We live in a world defined by the rapid pace of technological change. Four of the five largest U.S. companies by market capitalization are classified as "technology companies," where the term describes the products that these companies sell and how they operate. Thanks to decades of investment in information technology, especially in electronic communication networks, consumers now expect services to be available instantly at their fingertips. This statement is true for almost every industry and every aspect of daily life, including financial transactions.
This evening, I will consider how technology is changing the delivery of retail banking and payments services. I will discuss the roles of banks, fintech companies, and other stakeholders in moving the United States forward to a better payment system. I will also review the Federal Reserve's collaboration with these payment system stakeholders in pursuing that goal. I will argue that, for policymakers as well as the private sector, the challenge is to embrace technology as a means of improving convenience and speed in the delivery of financial services, while also assuring the security and privacy necessary to sustain the public's trust. As always, the views I express here are my own.
Retail Banking Innovation
As with so many sectors of the economy, technology is transforming the retail banking sector. The banking industry has traditionally been characterized by physical branches, privileged access to financial data, and distinct expertise in analyzing such data.1 But in today's world companies need not be bound by physical infrastructure and related overhead expenses. For example, companies can take advantage of an explosion in available data, and leverage advances in computing power, via cloud computing, analytical tools, and off-the-shelf machine learning tools, to make sense of those data. The banking industry is adjusting to this world, and facing significant challenges to traditional banking business models.
For example, today financial technology can support access to credit through innovative approaches to gathering and analyzing data. Historically, a customer seeking a loan has provided financial statements to a bank or other traditional lending institution. More recently, the use of a fintech platform may allow a lender to quickly monitor and analyze more up-to-date data from a broader range of sources, including those outside of the traditional lending process, to verify an applicant's identity and make inferences about the applicant's overall financial health. For example, a business loan applicant could submit information such as shipping data or customer reviews as additional input to more traditional data sources. With this additional information, the bank would have a more complete picture of an applicant's day-to-day activity and overall financial capacity, and potentially a greater ability to provide credit to customers, including some who might have been otherwise denied a loan based on traditional data.
Fintech firms are also finding ways to use banks' data, in some cases without entering into an explicit partnership with the bank. With customers' permission, fintech firms have increasingly turned to data aggregators to "screen scrape" information from financial accounts. In such cases, data aggregators collect and store online banking logins and passwords provided by the bank's customers and use them to log directly into the customer's banking account. This information can be used to provide consumers with convenient real-time snapshots of their financial information across multiple banks and accounts.
These examples highlight that there is a balance that needs to be achieved in this innovative environment.2 On the one hand, new technologies have enabled banks and other firms to find different ways of meeting consumers' demand for speed and convenience. On the other hand, these same technologies raise new considerations about data security and safety, as well as consumer privacy and protection. Policymakers and the financial industry must assure that enhanced convenience and speed in financial services do not undermine the safety, security, and reliability of those services.
Retail Payments Innovation
Technology is also shaping changes in retail payments. As with retail banking, retail payments will need to evolve to meet consumer expectations of constant connectivity and instant access while assuring security and privacy....MORE