ViewPoint Live: Banking Conditions in the Southeast - November 16, 2016

Banks Should Track Emerging Business Models

From self-driving cars to financial services apps, disruptive new business models can have consequences for financial institutions.

During the Federal Reserve Bank of Atlanta's November 16 ViewPoint Live webcast (see the video below), Lauren Foley of the Atlanta Fed's bank supervision and regulation team discussed how traditional firms such as hotel operators and retailers are being affected by the new breed of competitors. In turn, financial institutions that lend to the traditional firms must weigh the effects on their own operations, explained Foley and Mike Johnson, executive vice president of the Atlanta Fed's Supervision and Regulation department.

For example, if self-driving cars were to become popular, their proliferation would likely affect real estate development. An office building might require a smaller parking deck, which in turn could affect a lender's decision on whether to finance an office project.

Perhaps the most direct impact for traditional lenders will come from financial technology, or "fintech." But the impact has two sides, Foley noted. Banks can use technologies to expand their product base and geographic reach. On the other hand, fintech players that are not tied to banks threaten to poach customers and make it easier for consumers to switch financial services providers. After all, downloading a new app and moving information is simple.

"That's something banks should keep on their radar screens, how they're going to maintain relationships with their customers," Foley said 

The proliferation of mobile banking could also affect bank branches and regulators themselves, Johnson pointed out. A more dispersed customer base could redefine what a branch is, even for the purposes of measuring compliance with the Community Reinvestment Act (CRA). If a smart phone rather than a physical location becomes the main vehicle to deliver services, it is not yet clear how regulators will account for that in terms of the CRA, he added.

Enacted in 1977, the CRA essentially requires financial institutions to meet the credit needs of all community members, including residents of low- and moderate-income neighborhoods.