ABA to OCC: Clear and Meaningful Path to Innovation and Digitalization is Essential for Community Banks

In a new letter to the Office of the Comptroller of the Currency today, the American Bankers Association offered comments on how community banks are working towards digitalization, the challenges they face, and recommendations for the OCC and other regulators to support responsible innovation. The letter, written in response to a request for information from the OCC on community bank digitalization, outlines the unique set of challenges facing the nation’s community banks, including nonbank competition, talent recruitment and sustaining a beneficial relationship with core technology providers. It includes input from ABA’s Community Bankers Council, the Core Platforms Committee, and several of the association’s working groups focused on issues like third-party risk management, cybersecurity, artificial intelligence, open banking and payments. 

“Community banks are a critical part of the American economy, and it is essential that there is a clear and meaningful path to innovation and digitalization,” ABA wrote. “The RFI serves as an important step in developing a transparent and cohesive approach to regulating and supervising community banks as they pursue such initiatives.” 

According to the letter, the top three challenges for community banks adopting new technology are costs, core technology provider responsiveness and the complexity of integration with legacy systems.

Community banks often rely on core technology providers for their essential banking infrastructure—such as deposit processing, loan servicing and customer account management. “To pursue any digitalization initiative, community banks must coordinate with their core,” ABA wrote. “Often, cores dictate the field of opportunity for community banks through their product offerings, selection of preferred third-party vendors, and willingness to support integrations with non-preferred third parties such as new fintechs or startups.” 

Community banks’ reliance on third-party services requires them to conduct due diligence assessments, which “can be labor-intensive and costly, often involving initial screening of 3-5 vendors before selecting a preferred partner for detailed review and contract negotiations.” Even after a thorough assessment and careful selection, community banks contemplating new partnerships may walk away due to regulatory uncertainty. Additional challenges include negotiating contracts and on-going third-party monitoring. 

Community banks must also navigate data governance and cybersecurity challenges when working with third-party providers to ensure compliance with the law and to reduce risk. Advances in artificial intelligence and machine learning offer new opportunities for community banks but with limited resources they must develop a strong risk management framework to manage regulator expectations.

The letter also outlined several recommendations for OCC, in coordination with other bank regulators, to support responsible community bank digitalization including that the OCC:

• Conduct risk-based examinations of third parties pursuant to the Bank Service Company Act;
• Provide transparency on “significant service providers” and related exam findings;
• Proactively share information on examination trends and regulatory concerns;
• Engage in meaningful, development-stage dialogue with all stakeholders; and
• Conduct robust external education and outreach.

Read the full letter.