The Federal Reserve faces a dramatically changing financial system dominated by new technologies, three of its regional presidents acknowledged Tuesday.
Esther George, president of the Kansas City Fed, Charles Evans of the Chicago Fed, and Raphael Bostic of the Atlanta Fed discussed the new questions for the central bank in its role as regulator and steward of the economy at a conference in New York held by The Clearing House, a payments company owned by the banks.
The three participants spoke frequently about consumer demands for faster, easier, more accessible financial tools like Apple AAPL, -0.22% Pay and Zelle, as well as upstarts that are starting to take deposits.
As Bostic put it, “Much of banking is not happening in banks,” but that’s how the financial system was designed. Consumers may not understand that they’re taking a risk leaving money in an account that’s not guaranteed by the FDIC, nor that newer modes of payment may not have the protections they’re accustomed to getting from credit cards.
“We have a challenge at the consumer level as these things become more widespread,” Bostic said. If there are bumps while fintech companies figure things out, “we’re going to have angry consumers.”
But there may be even bigger questions than bruised early adopters. Bostic noted that there are 1.7 billion people in the world who either have no bank relationship or are “under-banked.” Of that total, two-thirds are estimated to have a cell phone. While that may seem like a sector that’s ripe for innovation, Bostic cautioned that there are probably very good reasons such people have no bank.
And as start-up fintechs rise, the question of whether they’ll have access to the same privileges as traditional banks – deposit insurance, the Fed’s discount window – and the same regulatory responsibilities becomes even more critical. George noted that the Fed has solicited feedback on how it should think about this issue.
If a “real-time” payments system emerges, Evans said it would be critical to get it right by fostering competition. He likened the opportunity to the internet revolution of the late 1990s. Initially, Microsoft “won” and its Internet Explorer became the default web browser for most users, even though it was inferior. But that outcome encouraged others to invent their own version.
Another immediate question facing the Fed and other regulators is the modernization of the Community Reinvestment Act, a 1970s law that laid out regulations and best practices for banks. But the way CRA envisions and monitors banking is vastly different now than when it was developed, and all the panelists agreed it was long past time for a refresh.
One obvious way of thinking about that is that CRA is conceived of in terms of a physical footprint, but very few Americans visit bank branches now. But an even bigger shift may be that “reinvestment” at one time largely meant “lending,” Bostic said. Now some communities and organizations may not have the resources to manage incoming investment, he noted.