August 07, 2017

My favorite episodes of Barefoot Innovation are the ones that take a philosophical turn. That happened with John Ryan, the thoughtful president of the Conference of State Bank Supervisors, which is the organization that coordinates America’s state-level financial regulators.

As you would expect, John and I began by discussing the events that have CSBS in the news these days. One is the launch of its Vision 2020 project to streamline state licensing and examinations for nonbank fintechs, to address the costly and monumental task these companies face in trying to grow to national scale by getting licensed state by state. The other news, and bigger controversy, is CSBS’ litigation against the Comptroller of the Currency, seeking to block the OCC’s proposal to create a national bank charter for fintechs. From these themes, though, we went on to far-ranging pondering about the future of banking, community banks and America’s communities.

On the OCC charter proposal, as John knows well, I’m for it. After talking with him, I still am, but this conversation is the best case I’ve heard anywhere about what could be at stake if such a charter were to bring more consolidation of the banking system. I don’t think it would, but his insights are hearty food for thought.

On Vision 2020, let me say that CSBS’s innovativeness amazes me.  At one point in the podcast John said, “we’re not very imaginative, but we get the job done.” Actually, I think they’re very imaginative, and I think the 2020 effort deserves its “visionary” labeling. CSBS is a century-old body and it is, after all, a body of regulators. Neither of those factors makes it a likely leader in innovation, nor does its daunting mandate of coordinating fifty wildly diverse state regulatory systems. And yet it plans to design and execute a high-tech transformation of how states license and supervise nonbanks (a process that, as John notes, is often still paper-based). I think other regulators can learn a lot from watching this model, both in how to design new systems and how to build buy-in from a complex set of stakeholders.

This innovativeness shouldn’t be surprising because, since these states are the regulators of financial innovation. With some exceptions, the cutting edge of innovation is not in the banking system (partly because banks are so highly regulated), but rather in the nonbanks -- the startups and some of the large tech firms. And those are all almost entirely regulated by the states -- the federal government plays almost no direct role and in fact has very little contact with them. (This is one reason I support the OCC fintech charter -- because it would be the single best way for the federal regulators, who dominate national financial regulatory policy, to become expert about the technologies that are rapidly transforming all of finance. Today, they have little first-hand interaction with it. All that expertise resides in the states that license and oversee the firms that are pushing out the frontiers of the financial industry. For me, this puts a huge priority on the need for the U.S. to evolve new regulatory models, because our uniquely complex and fractured regulatory structure cannot effectively cross-fertilize the rapid learning regulators need to keep up with today’s technology.

John offered plenty of philosophical thinking about all these topics, but late in the discussion we moved on to even bigger challenges, including the stresses facing America’s rural communities -- the kinds of places where people voted for disruptive change in last year’s election. John grounds his thinking about CSBS in his concern about the seemingly inexorable centralization and consolidation of banking. He worries about the role regulation plays in that, and about the future of local lending, and about the future of America.

My home in New Mexico is in a small town, and I’ve done a lot of consulting in them. Years ago, I did extensive strategic planning consulting with small banks, mostly in the Midwest. I spent a many days in little towns where, when lunchtime comes and you walk to the sandwich place with the bank president, half the people on the sidewalk greet him by his first name. There’s a reason why these banks are called “pillars of the community.”  It’s because if they disappeared, things would collapse. Talking with John made me remember one holiday-season visit with a little bank, where the management team told me they’d had to cover an emergency year-end budget shortfall for three local nonprofits, which would have failed without the help. One was a health clinic, one the library, and I can’t recall the third. The giving was a significant hit to the banks earnings, but they’d done it anyway because, quite simply, no one else could -- and because without these facilities, the town’s population would continue to shrink, and age.

Think about this question….What would happen to America’s rural communities if they lost their banks?

And what would happen to America, if we lost our rural communities?

These places are the wellspring of much of our unique national heritage. It seems to me they matter, in ways both visible and invisible.

Their problems are hard to solve. They deserve new thinking, and the future of community banks has to be part of it.

More information on John Ryan

John Ryan is president and chief executive officer of the Conference of State Bank Supervisors, the national organization of financial regulators from all 50 states and U.S. territories.  Prior to becoming president and CEO in 2011, he was CSBS’s Executive Vice President, and Assistant Vice President of Legislative Affairs. Mr. Ryan also led the financial services consulting practice at a public affairs firm and worked on the U.S. House Banking, Finance and Urban Affairs committee. He has a B.A. in political science and economics from the University of California at Berkeley.

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We have new episodes coming up. We’ll be posting the series I recorded from the floor of the ABA’s annual Regulatory Compliance Conference, including one with Gene Ludwig and Alistair Renee of IBM’s Watson Financial on how artificial intelligence and machine learning will transform compliance. Those also include an interesting discussion with prominent regulatory attorney Andy Sandler. In addition we’ll talk with Sanjay Jain, who helped build India’s revolutionary “tech stack” project to capture customer identity on more than a billion people. And we’ll talk with Sopnendu Mohanty, the Chief Fintech Officer of Singapore.

Keep innovating!

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