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February 9, 2023

Key Takeaways from Dianne Dobbeck on Innovation in Community Banking

In an article for the Federal Reserve System’s Community Banking Connections publication, Dianne Dobbeck, head of Supervision at the New York Fed, discussed technological developments in the financial services industry and the need for firms to practice responsible innovation to protect consumers and ensure the safety and soundness of the financial system.

She said:

“Banks innovate responsibly by understanding the ongoing changes to the way they do business and by establishing proper risk management frameworks and practices to keep up with emerging risks from new product offerings.”

“The increasing competitive pressure from tech companies entering the industry has pushed banks to improve their integrated digital offerings at an accelerated rate. Banks of all sizes recognize the need to innovate to retain customers and stay competitive.”

“Community banks need to understand how their shifting business strategies affect the safety and soundness of their operations and consumer protection.”

The article discusses emerging trends among community banks, including new partnerships with third-party service providers and fintech firms. Dobbeck stressed that community banks must keep their risk management capabilities up to date. “Prior to onboarding new partners, they may need to enhance their vendor due diligence frameworks to better understand their risk exposure,” she said, adding that it is essential that banks “thoroughly understand and properly monitor for new market, operational, reputational, and financial risks arising from new partnerships.”

Among other trends, Dobbeck observed an “emerging impetus for banks to explore crypto-asset services and products,” and noted that firms must maintain technical expertise to help management understand risks from new products and types of assets—and the implications for customers. She also highlighted that a few community banks in the Federal Reserve’s Second District are offering or expanding “banking-as-a-service” operations. “These are partnerships in which banks provide the back-office functions that support the financial products and services offered by fintech companies to the public,” she explained.

Dobbeck cautioned that “technological innovation and digitization have the potential to alter the traditional approach to relationship banking,” and urged bankers to understand how evolving consumer preferences and behaviors may affect the community bank’s business model and overall performance.

“Community banks need to understand how their shifting business strategies affect the safety and soundness of their operations and consumer protection,” she said. “New York Fed examiners continue to work with supervised institutions to ensure they are implementing safe risk management practices as their products, services, and operations evolve.”

Read the full article on Community Banking Connections.

Shelley Pitterson is a corporate communications specialist in the Communications and Outreach Group at the New York Fed.

The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


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