Michelle W Bowman: Community banking in the age of innovation

Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the "Fed Family" Luncheon at the Federal Reserve Bank of San Francisco, San Francisco, California, 11 April 2019.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Today I would like to share a few observations on innovation as it relates to the business of community banking. In particular, I will focus on opportunities for community banks to innovate through collaboration with fintech firms. I'll also discuss the role our regulatory structure plays in those relationships.

Community banks, like just about every other industry, are learning to adapt to a new world of rapid innovation and shifting consumer expectations. Consider the personal loan market. TransUnion estimates that, about a decade ago, fintech lenders generated less than 1 percent of personal loans. Today, fintech firms originate a larger share of personal loans than banks. This is not all bad news for banks, though. And we should not simply assume that gains by fintech lenders are necessarily at the expense of banks. A large share of fintech lending is actually originated by bank partners working with fintech firms. Similarly, the funds that flow between a fintech lender and borrowers almost always travel across the payment services of a bank. So, while the changes in the market pose potential competitive threats to banks, the changes also raise potential new opportunities for banks. This is especially true for community banks, which are frequently the banks working most closely with fintech lenders.

Competition or collaboration?

Not too long ago commentators were looking at the impact of fintech on community banking as a zero-sum game. In fact, many wondered whether fintech firms would put community banks out of business.