JohnWilliams, whoheads theFederal Reserve Bank ofa city that has been ground zero for innovations disrupting industries aroundthe world, does not think digital businesses equipped with rapidly advancingfinancial technology will end traditional banking any time soon.
In alate March interview in Singapore, he acknowledged that the use of technologyto broaden access to bankingservices in underserved areas, from inner-city neighborhoods in theU.S. to far-flung villages inAsia represents "the biggestchanges to banking in decades." The president and CEO of the San FranciscoFed was in the Asia-Pacific financial hub to speak about the state of the U.S.economy and global risks.
Williams, however, believes banks willcontinue to have a role in financial systems that fintech firms cannot fill.
"Thereis nobody out there saying 'I will replace the banking system,'" Williamssaid. "What may happen is that some of the fintech companies may become banks."
Williamsdiscussed digital banking at length, a topic that is increasingly on the mindsof bank executives and regulators, as easier online services from fintechstartups threaten conventional lenders.
Yet,one key function fintech companies cannot easily replicate is the acceptance ofdeposits, because in many jurisdictions, managing a pool of customer moneyrequires a license. And applying the existing rules to digitally orientedcompanies is often not simple, as seen in the case of South Korea, where ittook a long time to lay the regulatory groundwork for the introduction ofInternet banks.
On theother hand, assessing borrowers as banks do may not jibe well with the ideabehind fintech in the first place.
"Now suppose an algorithm forlending produces red lining? That would be a bad outcome," Williams said."It may also be an unintended consequence for many of these startups whowould say, 'That's not what we want todo' but by using zip codes to identify credit risk, they may end up doing."
Suchtasks may be better left to conventional lenders such as community banks in the U.S., which has advantages inmeasuring the credit worthiness of borrowers as they know customers well.
"They'rebest placed to decide if a certain area of a city can accommodate, say, a new dental office," Williams said.
Bankingsystems in Asia have been more rigid than those in the west, with thedevelopment of fintech lagging. But that is changing quickly, so much so that Ernst & Young has come up with an index for for the region.
TopAsia-Pacific banks, such as , are now busy beefing up on their own or incollaboration with startups. Regulators are making moves too. The , for instance, plans to open a one-stop virtual shop for all things fintech in May.
At thesame time, the explosion of fintech firms, particularly payment serviceproviders or peer-to-peer lenders, is raising concerns about risks, becausethey offer little protection for users.
Forauthorities, there is a fine line between regulating those companies and encouraginginnovation. Some, such as HongKong Monetary Authority, are taking steps to oversee payment firmsand P2P ventures, albeit cautiously not to stifle the sectors.
As faras Williams is concerned, it is critical to establish prudent protocols earlyon for information security and anti-money laundering, through efforts likeknow-your-customer rules for banks.
"Iworry about consumer protection," Williams said. "I worry about fraud and predatory lending."