Data privacy, AI, regulation: Small-business lending is changing fast

The largest banks in the country can afford to invest billions in new technology every year, so how can a community bank possibly keep up in this digital age?

Karen Mills has some ideas about that.

“I think it is very important that we have and maintain our community banking system here in this country — it’s one of our unique assets and it’s under pressure,” says Mills, who led the Small Business Administration under President Obama and is now a senior fellow at Harvard Business School.

“We used to have 14,000 banks. When I started at the SBA, we were down to about 8- or 9,000 banks. Now we’re down to 5,000 banks.”

Much of the technology that is transforming how small-business lending gets done is coming from fintechs, and Mills sees “the next wave of the fintech evolution” as a partnership between these innovators and banks. “Particularly small banks,” she says.

But regulators need to help make this possible, in her view.

Big banks like JPMorgan Chase have community banks — and even regional banks — worried about their ability to stay competitive on the technology front.

JPMorgan Chase pegged its technology spending last year at about $11 billion. During an industry conference in November, its chief information officer, Lori Beer, said about $5 billion of that amount goes toward strategic investments, such as exploring quantum computing or developing new retail products.

One response of community banks — as they also have had to greatly increase their spending on compliance in the wake of the financial crisis — has been a deregulation push.

But, “the answer is not just less regulation,” says Mills, whose new book, “Fintech, Small Business and the American Dream,” talks about what she expects small-business lending to look like in the near future, the dynamics of innovation cycles and the need for change in U.S. banking regulations.

“It turns out the answer for the community banker’s future is actually smart regulation that allows them to take advantage of technology. By that, I’m talking really about opening banking,” she says.

“I believe that if community banks support a regulatory environment that supports open banking, that allows for innovation, they’re going to win in the end.”

In this podcast, Mills also talks about data privacy and the benefits and risks of AI — along with the regulatory challenges that these issues present.

She calls data privacy “the absolute most complicated and difficult and meaningful issue that is going to face financial services regulation, and in fact technology regulation, coming in the next year or two."

California and other states have begun to pass consumer privacy laws, just as lawmakers in Congress are beginning to address the issue as well. (See a roundup of what’s passed and what’s pending where.)

This patchwork approach is a challenge for banks that operate in multiple states and could end up with different laws to follow in each one.

Mills believes this happens too often.

“I really want to issue a challenge to the regulatory world that they have to step up to some of these difficult conversations and create clarity. They have to remove some of the overlap and confusion in regulation,” she says.

Regulatory clarity would benefit innovation too.

“I am a fan of the innovation sandboxes that have been created in the U.K.,” Mills says.

“The U.K. is an excellent example we should follow. They have two major regulatory agencies. They have a lean-in to innovation and competition. …

“And they have a rule where they review regulation two years after it’s made in the fintech area and make sure it had the intended consequences.

“We don’t review our legislation. We have regulatory agencies that fight with each other and don’t collaborate. This is inexcusable.”