Innovation through a fresh regulatory approach
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Carey Ransom is a SaaS entrepreneur, executive, investor and advisor. He is president of Operate and managing director of BankTech Ventures, a strategic investment fund focused on compelling technologies for community banks—founded and funded by leaders in the community bank ecosystem.
As a new administration takes the reins in January, the U.S. has a unique opportunity to reimagine its banking regulation to foster innovation while maintaining system stability. With more than 4,000 banks creating the world's most diverse banking ecosystem, we have the foundation to build what we should have: the most dynamic and resilient financial system that embraces controlled experimentation and progress.
Small banks, which make up the majority of U.S. financial institutions, are ideally positioned to serve as innovation laboratories within the regulated banking system. Their local presence and focus, along with their deep community relationships, make them perfect testing grounds for new financial products, services and operational models. These innovations, once proven successful, can then be adopted by larger institutions, creating a natural pathway for system-wide improvements.
Current regulatory requirements, however, place disproportionate burdens on smaller banks. While large banks can distribute compliance costs across trillion-dollar balance sheets, community banks must dedicate outsized portions of their resources to meet virtually identical standards. This has inadvertently pushed innovation outside the banking system, leading to the rise of fintech startups, non-bank credit funds and shadow banking operations that operate with limited oversight. Since the financial crisis, regulators have been far too restrictive in allowing banks to explore new and novel approaches to the increasingly digital financial future, and in the process, have created more risks than most realize.
What should a new regulatory approach look like?
A reimagined regulatory framework could harness the innovative potential within our existing banking system. By implementing more clearly scaled oversight based on institutional size and actual systemic risk profile, regulators could create safe spaces for controlled experimentation while maintaining core safety standards. We’ve endured an era with more and more regulation, with each new one adding to the pile, and are due for something closer to a wholesale revision and philosophy change. Better technology use, such as collaborative data sharing and monitoring could also enable oversight and regulatory compliance to be much more efficient and less labor-intensive. This could bring financial innovation back into the regulated banking sector where it can be properly monitored and managed by both the banks and their relevant regulatory agencies.
The rapid growth of fintech partnerships and non-bank credit funds demonstrates the strong market demand for financial innovation. Rather than forcing this innovation into less regulated spaces, we could channel it through the existing network of community banks. This approach would combine the stability of regulated banking with the dynamism of financial innovation. The balance between those two groups actually serves the market better. With several dozen banks effectively learning partner banking in the last decade, the market benefits from a rich body of knowledge and expertise on how to manage innovation within regulatory boundaries.
Banks have learned to evaluate fintech partners for both opportunity and risk. They have learned how to implement appropriate controls, including technology and compliance standards, and can scale new services responsibly. This practical experience should inform the development of new regulatory frameworks that encourage rather than inhibit innovation.
The path forward is clear. By adopting a more nuanced regulatory approach, we can unleash the innovative potential of smaller banks while enhancing overall system safety. This would create new opportunities for community banks to develop and test solutions that better serve their markets and customers, while ensuring new products and services develop within appropriate regulatory boundaries.
With a fresh approach to regulation, we can create a banking system that embraces progress while maintaining stability. This balanced approach would preserve banking diversity, include more people in the banking system, encourage responsible innovation, and strengthen our financial system for the future. The time is right to reimagine how regulation can enable rather than inhibit the evolution of American banking.
