➤ The industry needs consistent, formal guidance on how banks and fintechs should work together, according to Jelena McWilliams.

➤ That interagency guidance could come before year-end.

➤ Regulators must be less suspicious of innovation, or they risk putting banks at a competitive disadvantage to nonbanks, McWilliams said.

Jelena McWilliams was sworn in as the 21st chair of the Federal Deposit Insurance Corp. in June 2018 for a five-year term. Since taking over at the agency, McWilliams has overseen changes to the Volcker rule and the community bank leverage ratio.

McWilliams sat down with S&P Global Market Intelligence at the Money20/20 USA conference in Las Vegas to discuss her priorities for the coming year and new regulatory approaches to fintechs entering banking. The following is an edited transcript of that conversation.

FDIC Chair Jelena McWilliams Source: FDIC

S&P Global Market Intelligence: What are your priorities heading into 2020?

Chair Jelena McWilliams: We're going to be proposing a new rule on brokered deposits, hopefully by the end of the year. Finalizing that is going to take most of 2020. It's going to be one of the more consequential rulemakings at the agency during my tenure.

We're also taking a look at how banks are dealing with fintechs. Is our staff appropriately trained to look at technology and understand what's going on? Are we giving enough guidance to the banks on how to partner with fintechs? Fintech used to be a dirty word. You would say fintech, and it would be like, 'Don't go near a bank with a fintech partnership.' That has changed.

The last few years have shown that banks and fintechs can not only coexist but coexist in a symbiotic union. There is an opportunity for fintechs to provide something that the banks are unable to do in as agile and technologically advanced [an] environment. There's an opportunity for banks to expand their offerings and customer base and services through the fintech.

We need to figure out if they have guidance from us on how to do that in a safe manner. The worst thing you can do as a regulator is not provide that guidance. Then the banks are concerned about partnering up, and they don't.

Is guidance on bank-fintech partnerships an interagency effort?

There's definitely a lot of interagency dialogue.

Most of the banking regulatory agencies — [the Federal Reserve, the Office of the Comptroller of the Currency] and the FDIC — as well as the market regulators — the CFTC and the SEC — have some form of innovation effort, whether they call it the tech lab or innovation office, on premises.

While we are all working individually within our mandates on how to foster innovation, should there be something bigger than that? As we look to update our supervisory approach, all the agencies are at the table — [the Federal Financial Institutions Examination Council, the Consumer Financial Protection Bureau], banking regulators and state regulators.

I believe in more agility. You can accomplish so much through just calling up the other agency leadership. If there's willingness, it will happen.

Is there a need for formal written guidance?

We have to do formal guidance. Bankers are very concerned [when] our examiners orally tell them one thing that if they get a different examiner on the next exam, it could be different. All the banks we regulate, regardless of our mandates, should have the same or very similar guidance.

On the big-picture innovation, dialogue can be more constructive than having a formal committee or working group. If I think something is really good in the innovation space for banks and for consumers, I will pick up the phone and call [Comptroller of the Currency] Joseph Otting. That's quite often more efficient than going through a myriad of meetings at different levels of each agency that can take months for the decision-making to come to the principal level.

You have to have these relationships with the regulators, with your peers, to be able to move the ball forward.

What is the timeline for that guidance?

[Formal guidance is] underway. We have had a draft for some time. We're making sure the other agencies are comfortable with the draft and are able to provide their input. Hopefully, we have something in the works by the end of the year.

The first document we put out in terms of guidance is a starter document. As digital technology and how technology companies and banks are using these technologies evolve, our guidance may have to change.

This is not a brick-and-mortar document. It's going to evolve, and we need to be open.

What are the FDIC's and other regulators' biggest challenges in innovation?

Do we understand it? Do we have appropriate staffing expertise?

To understand the technology, you need people who are able to understand the algorithms. We need data scientists. We need quants. We need people who are up-to-date with technology as it has evolved. If we don't, we need to bring the people in or train our people to have that expertise.

The second challenge is that, by nature, regulatory bodies are very risk-averse. The gut reaction you have when somebody brings you something new [is], "I can see all the bad things that can happen." You want to make sure that that's not the first answer you give. We must not do that.

Innovation will happen whether we like it or not and whether we approve or not. The more we restrict banks' ability to develop such technologies and think outside the box, the more that technology is going to develop in nonbanks.

When it develops in nonbanks, we'll have less input about safety and soundness and consumer harm. In the meantime, our banks are going to lose the competitive advantage to those companies.