Responsible Innovation: Consumer Protection or Regulatory Nightmare?

(Mark Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA NewsLink. He can be reached at or at 440/725-9402.)

Innovation has taken once again center stage when it comes to reinventing all aspects of financial services. With the Great Recession a seemingly distant memory, firms have been notching record profits and clawing back the trust of their once wary consumer base.

Innovation, once dominated by automation of processes (i.e., front, middle and back offices) for efficiency savings, has permanently changed. Process design and reengineering made popular by leading experts such as Davenport, Drucker, Peters, Hammer and Champy has evolved in a response to regulations and significant changes in consumer behaviors as a result of technological capabilities.

Cognitive advancements or machine intelligence coupled with ubiquitous, compartmentalized apps layered across the financial supply chains are reaching a tipping point once thought fantasy–promoted by visionary individuals such as Raymond Kurzweil (noted author, inventor and Google advisor).

Additionally, as an industry, we are dismantling decades old practices of settlements (i.e., T+3, digital cash), credit assessments, consumer behaviors and digital offerings across nearly all aspects of financial products and services. As financial firms, we are fast becoming technology firms with financial offerings, destroying what is commonplace, and dealing with uncertainty across cultures that thrive on certainty. Is it really that surprising that central bankers, economists and flip-flopping politicians are hard pressed to find solutions that last more than a few months?

However, what is the outcome of these “advancements?” What are the paths forward when mapped against existing infrastructures and practices? Can a cohesive, less reactionary plan of attack be created which creates growth, while avoiding further marginalization of unbanked or underbanked? Does the industry really need more regulations–to protect business margins and models from non-traditional entrants–while they secure patents, align with partners and source innovative solutions?

Enter the Age of Responsible Innovation
The word innovation as an identifier or action has become nearly meaningless during the past decade–it has become a marketing word more than a reality of intent or realization. When a consumer researches financial firms and their products and services, the word innovation is liberally sprinkled across materials, media messages and websites, not to mention content pushed down to mobile users in an effort to strive for attention.

Merge in speculative money ($14-$20 billion) being “invested” in FinTech startups and the landscape becomes a peppered mosaic of modern piecemeal solutions. It is all quite confusing and bewildering for anyone evaluating or assessing differences, and I’ve been a computer scientist for nearly four decades.

With the turn of the millennia, the idea of responsible innovation surfaced primarily in the European Union as part of its Horizon 2020 program, and also within the United States among academics. In general, responsible innovation seeks to balance responsibility, values, authority, sustainability, ethical, policy, legal, social, accountability and corporate governance from cradle to grave for innovations (for a primer, see Responsible Innovation: A Primer for Policymakers, Brookings Institution). In essence (and blended together from hundreds of pages of text), it is places a “burden” on the inventor or originator of an innovation (or innovative solution set) to determine the boundaries of its use and to help with the enforcement across its deployment life.

More recently, this iteration or transformation of how innovation need to be responsible has been raised by the Office of the Comptroller of the Currency in its recent paper, Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective. Whereas responsible innovation is now an emerging discipline, it begs a fundamental question-who decides what is “responsible?” Is responsibility the same across all demographic segments? Is what is responsible today irresponsible tomorrow? Who is going to determine adherence to responsible innovation, with what criteria and penalties against stepwise or evolutionary transformation?

While it seems evident that the OCC has embarked on responsible innovation to determine and lessen risk taking by institutions and those who in proxy serve their agendas. It is, from what is written, about ensuring proper supervision and stability across technology advancements, which are likely foreign to stoic government agencies who do not want to be blindsided as they were back in 2006-2009.

Responsible innovation provides a promise of a framework to regulate financial institution investments and deployments. As Thomas Curry, Comptroller of the Currency, delivered in March at Harvard Kennedy School of New Directions in Regulation stated, “Not every innovation is appropriated for a regulated financial institution, and not every innovation that is appropriate for a regulated institution is appropriate for all regulated institutions.”

Curry continues: “A responsible innovation is one that is consistent with sound risk management practices. That means the bank understands the product and the risks it carries, and has the capacity to manage those risks…and finally, responsible means that it complies with laws and regulation, particularly those aimed at protecting consumers.”

When these comments are merged with the actual report outlining eight principles for OCC action, it is the last three principles where the “devil is in the details”–encourage banks to integrate responsible innovation into their planning, promote dialogue with formal outreach and collaborate (on responsible innovation) with other regulators.

So there is a question for industry leadership: “Is responsible innovation going to help when placed under the filters of a regulatory agency who is seeking to redefine their scope of influence?”

Are We Ready to Accept Responsible Innovation?
Responsible innovation is definitely an emerging set of principles, ideals, social programs and disciplines. That is honorable , but also plants the seeds of uncertainty and subjectivity at this stage of its definition.

For banks already operating with internal innovation centers of excellence, they would likely within these boundaries have to add time, expense and delay market offerings if the supervising agency is unfamiliar with the solutions or the crossover porting of an existing offering. For regulators, this means that they will need to individually or collectively establish their own labs, experts, process, and practices and approval mechanisms to vet financial technologies that are accelerating faster than even the internal corporate groups can assimilate. A tall order for any agency in an era of austerity let alone enhanced global competition and changes.

Factor in the intense need for privacy and security as part of cybersecurity solutions and the expertise, budgets and implications of approving or denying any FinTech offering will require an investment measured in the millions, if not billions.

While to the credit of the OCC, they are asking for comments on their scope and approach. However, the idea of responsible innovation in this context puts another layer of vetting and approval that doesn’t exist today against a set of standards and criteria that are yet to be determined.

For the industry to accept that the pace of financial technology will be throttled by an agency that implicitly admits they need to adapt and educate themselves leads to the question across globally interconnected financial supply chains of “what unintended consequences” will be implemented putting domestic firms at a competitive disadvantage and higher cost basis?”

There is much to be discussed in these types of solutions. However, the industry, their leaders, politicians, policy makers and the public need to weigh in on what if any responsible innovation they are willing to accept and by what rules. A failure to not vet the ideals or to place shackles on FinTech before it even has a disintermediation impact is hardly capitalism. It indeed is an overreach that should be discussed before it is too late.

(Views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at