Home > First Issue 2021 > A Message from Governor Bowman

A Message from Governor Bowman
by Governor Michelle Bowman

The pandemic has tested community bankers like nothing before. Bankers have risen to the challenge with dedication and creativity, embracing innovative ideas to help their customers and communities. Community banks expanded hours and services at drive-up facilities, implemented plans to perform key functions remotely, and found ways to continue meeting customer needs when in-person services were disrupted. Through the ups and downs of business closures and reopenings, bankers maintained operations in part through the expansion of new technologies. “We closed lobbies,” a banker from Nebraska told me, “but we never closed the bank.”

As we look ahead to the future, the eventual end of restrictions on in-person banking does not, and should not, mean that the kind of technological innovation that has been so vital for the past year should disappear. The shift by many customers to remote banking and other technological solutions to help banks operate during the pandemic will likely continue. Technological innovation holds great promise to help community banks compete and succeed in the evolving financial services landscape. For this reason, it is my intent to continue to elevate issues related to technology to the top of the regulatory agenda.

Like community banks, the Federal Reserve is also continuously investigating how technological innovations can transform the way we offer services. In one space that is familiar to you — payments — I would like to highlight several features of the FedNow Service that will enable financial institutions of every size to provide safe and efficient instant payment services in real time.

Community Banks’ Pathway to Innovation

The continued success of community banks depends on their willingness to embrace innovation that aligns with their overall business strategy. When used effectively, technology can result in greater efficiencies, lower costs, and better service. We have seen, and are encouraged by, many examples of entrepreneurial community banks embracing technological innovation. Development or adoption of digital deposit and lending products and the use of technology to enhance operational efficiency are increasingly more common among community banks.

Financial technology (or “fintech”) will never completely eliminate what is the hallmark of community banking — personal interaction and relationships with customers and communities. However, there are clear benefits to responsible partnering with a fintech company to leverage technology when a bank has limited in-house expertise or resources. A partnership with a fintech company can lower operating costs and improve a bank’s services. Despite these benefits, community banks face challenges finding partners and knowing how to navigate the regulatory and legal environment once an institution identifies a potential partnership arrangement. I hope that some of our efforts, including refreshed and better-aligned interagency third-party risk management guidance, a due diligence guide for community banks, and a staff paper on fintech partnership practices, will support technological innovation at community banks.

Interagency Guidance for Third-Party Risk Management
To aid community bankers in evaluating the implications of partnering with a third party for technical services, I have directed Federal Reserve staff to work with our colleagues at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) to enhance and align interagency guidance for third-party risk management. One purpose of this guidance is to eliminate the need for banks — including, and perhaps especially, community banks — to navigate multiple supervisory guidance documents. The proposed guidance will align each agency’s existing supervisory expectations into interagency guidance.

A Due Diligence Guide for Community Banks
There is recognition by the agencies that community banks need information on third-party risk management practices that considers the uniqueness of their business model. Therefore, staffs at the Federal Reserve and the other federal banking agencies are developing a guide that will provide information to community banks on what to consider when conducting due diligence of a potential third-party service provider. The guide will be a resource that community banks can use when conducting due diligence prior to establishing a relationship with a third party, particularly fintech companies.

A Fintech Partnership Staff Paper
While many community banks recognize the benefits of integrating technology into their strategic objectives, the process of exploring a fintech partnership can be daunting, and these partnerships are not “one size fits all.” As I mentioned at a December industry conference on technology and the regulatory agenda, I have asked Board staff to develop a paper describing the spectrum of community bank partnerships with fintech companies, which I hope may serve as a resource for community banks as they navigate this landscape.

Federal Banking Agencies’ Service Provider Supervision Program

Given the increasing importance of technology to the banking industry, we understand that banks benefit from receiving timely information on the results of the federal banking agencies’ (agencies) supervision program1 for certain technology service providers. This is especially true for community banks that may not have the in-house expertise to evaluate a service provider’s performance. In my conversations with bankers, I have heard that community bankers would like to receive more timely information on the results of agencies’ assessment of the risks posed by a service provider to its client financial institutions.

I am pleased that the agencies have recently taken steps to improve the distribution of their supervisory reports on service providers to client financial institutions. The agencies have implemented an automated distribution system that notifies a client financial institution when a new report is available. The FDIC is coordinating this service for the agencies and will make a report for client financial institutions available electronically for 30 days from the date that the agencies release a report. After 30 days, client financial institutions can still request a copy of a service provider report by contacting their primary federal regulator. I should note that service provider reports are available only to client financial institutions and are not made public.

Artificial Intelligence and Machine Learning

The Federal Reserve is also considering whether the rise of artificial intelligence (AI), including machine learning (ML), in banking might require an adjustment in regulation and supervision. This is a topic of interest to banks of all sizes and one that hinges on new technologies. Therefore, the Federal Reserve and the other banking agencies have been jointly conducting significant outreach to the banking industry and other stakeholders to better understand the benefits and risks posed by AI. For more information, listen to the December 16, 2020, Ask the Regulator session, held to engage the industry on AI and ML issues and to support responsible innovation in this area.2 The Federal Reserve also hosted a symposium in January 2021 on the use of AI in financial services as part of our broader effort to understand AI’s application to financial services, assess methods for managing risks arising from this technology, and determine where banking regulators can support responsible use of AI and equitable outcomes by improving supervisory clarity. The Federal Reserve is committed to continuing this dialogue to determine whether there are areas in which we might provide additional clarity on the use of these technologies.

The FedNow Service

The Federal Reserve also embraces technological innovation and is launching a new payment service — FedNow — sometime in 2023 or 2024. The FedNow Service3 will provide a new interbank 24x7x365 real-time gross settlement service with integrated clearing functionality to support instant payments in the United States. Financial institutions of every size will be able to provide safe and efficient instant payment services in real time. Businesses and individuals will be able to send and receive instant payments conveniently, and recipients will have full access to funds within seconds. I encourage community banks to learn more about FedNow via its website.

Looking to the Future

Supporting community banks as they adapt to new technologies and evolving industry dynamics continues to be a priority in my work at the Board. As part of my continued outreach with bank executives, I look forward to hearing views on ways the Federal Reserve can support the efforts of community banks and the pursuit of technological innovation.

Back to top

System Outreach

The Federal Reserve System provides various resources for training, services, and more.

Learn more »

Policy and Guidance

Connect to various Federal Reserve resources, including SR and CA Letters, regulations, request for comment on rulemaking proposals, the latest Federal Reserve System speeches, and more.

Learn more ยป


Community Banking Connections is a quarterly Federal Reserve System publication available electronically or in print.

Learn more »


We want to hear from you! Please share with us any comments, suggestions, or topics that you would like to see on our website or in our publications.

Learn more »