The Federal Reserve's chief regulator praised industry efforts to expand
While banks have played a "pivotal role" in improving financial inclusion, Fed Vice Chair for Supervision Michael Barr said their
"Innovations in banking services are important to improving financial inclusion," Barr said. "But to have a durable impact on society, innovations must be adopted responsibly."
Barr's comments came on Tuesday during the Federal Reserve Board's Financial Inclusion Practices and Innovations Conference in Washington, D.C. He highlighted expanded offerings of small-dollar loans, the inclusion of alternative data to assess creditworthiness and the creation of new consumer-facing tools as key developments in recent years.
Yet Barr urged banks to also ensure their risk management and legal compliance functions are keeping pace with their product and service innovations, especially when third parties are involved. He noted that when banks failed to manage these risks, customers have been harmed.
"In communities where people are living on tight budgets or with limited access to financial services, disruptions of this kind can be catastrophic," he said.
Third-party risks have been a focal point for the Fed and other regulators in Washington. The central bank joined the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency in issuing guidance on the matter
There has also been a rash of enforcement actions issued by all three agencies
During his remarks, Barr touted the potential inclusionary benefits of instant payment processing — both through the central bank's FedNow service as well as the privately operated Real Time Payments network.
"These services will enable banks to offer customers the ability to send and receive money immediately, which can help customers weather income disruption and unexpected expenses," he said. "By reducing payment delays and the high costs for consumers associated with those delays, FedNow can over time improve access to the financial system and lower costs."
Barr also touched on the advent of so-called
"As with most innovations, regulators will need to ensure appropriate measures are in place to protect consumers and promote financial stability," he said. "For example, regulators will need to be diligent so that the entities to which consumers grant access to their data safeguard privacy and data security."
Speaking at the same event, Fed Gov. Michelle Bowman also touted the benefits of small-dollar lending, noting that the practice spares low- and moderate-income consumers from having to turn to costly alternatives, such as payday loans and pawn shops.
Bowman also called on banks to improve their systems for handling remittance payments to and from family members in other countries. She noted that improved practices could
"Greater inclusiveness in the financial system is an ongoing priority for the Federal Reserve," she said. "While we have made great progress, there is more to be done for both the public and private sectors."
