As Prepared for Delivery on March 1, 2022
Good morning, it’s my pleasure to join you today and welcome all of you to Washington, in person, for this year’s Governmental Affairs Conference.
When we gathered for this conference this time last year, in a digital format, we were obviously coming out of a particularly bruising year. We were still very much in the throes of the COVID-19 pandemic, although vaccines had just become available, so we had good reason to hope things would be improving soon. Moreover, as a result of the pandemic, we had suffered a severe and quite sudden contraction marked by high rates of lost jobs, business failures, and lost growth, and we were still struggling with the economic impact.
Now here we are a year later, and what do we see? The pandemic remains a challenge, but it has definitely moderated. I do recognize that many of your institutions continue to struggle with staffing difficulties. Still, we’re much further along the road than we were even just a year ago, and I expect we’ll see continued improvement. In addition, we’ve seen some reassuring signs of economic recovery, compared to where we were two years ago or even one year ago. With a surge of 467,000 added jobs and evidence of wage gains, the January employment report was undoubtedly welcome news.
At the same time, we also see a number of signs that remind us the economy is not yet back to pre-pandemic levels, and there are other looming challenges that are a matter of concern. To take the most obvious example, there’s no getting around the reality of rising prices, with inflation at 7.5 percent in January — the highest we’ve seen in nearly four decades. That poses a real concern around interest rate risk, which I know you’re all watching closely, as am I. And of course, it goes without saying that those higher prices for food, gas, and other needs are understandably causing a lot of anxiety and pain for consumers and having a real effect on the financial well-being of many of your members and their families. I am also watching how inflation will put pressure on credit union operations. The growing national debt and how this will eventually impact the overall economy also is something I’m watching.
Related to that dynamic, the supply chain crisis remains an abiding concern. To take one prominent example that could significantly impact consumer lending, we’ve all seen reports of shortages in the supply of semiconductor chips, which leads to depressed inventories for new cars. It remains to be seen how long that situation will endure, but again it’s likely to have an impact on your members and your institutions’ ability to generate auto loans.
It’s not my intention to dwell on the negative — in fact, I do remain optimistic that things will continue to improve. But we do need to look reality squarely in the face to recognize that the conditions are still challenging and will likely continue to be so for the immediate future. We need to plan accordingly for an environment marked by tremendous uncertainty.
You’ve heard me speak before about the importance of resilience in our business planning and risk management, and that remains a critical factor. And when it comes to credit unions, the key to the resilience of this industry will be an unshakeable commitment to what it is that makes this industry different, which we find embedded in the values of local control, with one member one vote, and the system of cooperative credit that puts people ahead of profits.
This is why, if you look at many of the regulatory reforms I’ve worked on over the last several years, so much of what I’ve focused on at NCUA, first as Vice Chairman over a decade ago, most recently as the eleventh Chairman, and now as a Board Member, has been centered around initiatives that allow for more competition, credit union control, and maintain an effective but not excessive regulatory environment. So, for instance, when I look back at what I discussed at this gathering last year, among the principal issues I discussed were the need for more charters and expanded lending authorities for credit union service organizations.
Those ended up being some of the top issues the NCUA Board worked on from the regulatory side last year, and I’m pleased to report we had some real progress. For instance, when we look at new credit union charters, in 2020, we only had a one new credit union established. In 2021, we saw four new charters. Now, I’ll grant that four is not a large number. On the other hand, it’s a positive step forward, and I hope we can continue with more progress on that front. I also appreciate Vice Chairman Hauptman, who has provided outstanding leadership on this issue, and Chairman Harper for their commitment to de novos in addition to our Director of the Office of Credit Union Resources and Expansion, Martha Ninichuck.
Additionally, the Board also took a positive step in October 2021 with the new rule to grant CUSOs more flexibility in lending and allow credit unions to compete in the digital marketplace through CUSOs, especially in auto lending. Again, that’s an area where I’d like to see even more progress, but I’m pleased with the steps we’ve taken so far.
Another area I’ve been focused on is getting serious about clarifying the rules for financial services providers to conduct business with marijuana-related businesses. This is a long-overdue reform, given the rapidly changing legal environment around cannabis and hemp. I’m convinced, and many of you share this conviction, that full legalization of marijuana at the federal level is going to happen — it’s just a matter of “when.” So, we need to be prepared.
I intend to keep pushing on these and other regulatory forms. The great thing about the NCUA Board’s structure is that all of us, whether it’s the Chairman or any other Board Member, can play a positive role to effect change.
Right now, the trend lines continue to look very positive for credit unions, based on the numbers. In the third quarter of last year, federally insured credit unions continued to show strong performance. Since the start of the pandemic, we’ve seen that credit unions have added more than 7 million members, and loan growth has been strong while delinquency rates remain manageable. Particularly in light of the severe headwinds we’ve faced these last 24 months, those results are a testament to the fact that the credit union model continues to be a strong option for consumers seeking quality financial services and affordable, reliable credit.
The NCUA Board was also able to deliver some great news for the industry in January, when we approved $15 million in surplus operating funds to be returned to federal credit unions as a credit. This was something I had requested the Board to consider as a cost-saving measure, and I’m pleased that we were able to return those funds to help credit unions during these challenging times.
On a variety of fronts, we’re seeing very reassuring trend lines. At the same time, we can’t deny that, over the last several years, this industry has lost some footing in the area of consumer preference, something I believe has happened because of the shift to digital banking, particularly among younger demographics.
If there’s a lesson we’ve learned from the challenges of the pandemic, it’s that this industry cannot rest on its laurels. And the reality is that there are some serious competitive challenges that credit unions will need to be addressed related to fintech. Right before our eyes, we are seeing the financial services model move from a retail delivery model to a digital delivery platform.
To meet those challenges will require focusing on opportunities to reach new demographics and, especially, younger generations of banking customers. That’s one of the reasons I’ve been so focused on financial technology. I’ve spoken with many of you about fintech before, as it’s an issue I’ve been studying deeply for the last several years to determine what we need in terms of regulation.
When we talk about the various fintech offerings —whether it’s mobile banking, innovative loan products, or data aggregation services, the list goes on — we’re talking about tools that will be the future of financial services.
Truth be told, that’s already happening. We’re seeing rapid and dramatic growth in the fintech space. According to an October report from the National Bureau of Economic Research:
- Mortgage lending by fintech companies grew 32.5 percent per year between 2016 and 2020;
- Fintech consumer lending grew 11.9 percent over the same period; and
- Fintech business lending grew 43.1 percent over that time.
With growth numbers like that, there’s no question that some of those fintech providers are emerging as serious players in financial services. At the same time, a lot of the biggest traditional financial services firms have the resources to develop their own proprietary fintech solutions. That’s a dynamic that could leave credit unions in a tight place, getting squeezed from both sides, if the industry doesn’t work proactively to integrate these technologies now.
From a regulatory standpoint, I’ve sought to be supportive without being overly prescriptive while the industry figures out how to do that. Which is why I’m focused on things we can do at the agency level to provide that support.
For example, the Board established an Office for Financial Technology and Access at the NCUA because we knew we needed an accountable entity within the agency explicitly focused on fintech issues. This office must also help fintech providers better engage with the regulator. We all know how frequently regulators have been caught flat-footed when confronting new technologies, and I want to ensure the NCUA is prepared.
To help facilitate contacts and conversation between credit unions and fintech providers, I’d like the agency to host tech sprints that is intended to serve as a forum for focusing on problems and solutions and how credit unions and fintechs can work together. I hope to work with my colleagues on the NCUA Board to bring this to fruition later this year.
I’m also focused on developing a new fintech rule with my Board colleagues, so this is an area where I hope to see a lot of movement in the coming months.
Of course, with any opportunity will come new challenges, and that’s the case with fintech. Perhaps most importantly, more technology will inevitably bring more cybersecurity challenges. I know from my discussions with credit union leaders that this is one of the issues that keeps us all up at night.
When it comes to data protection and data security, credit unions need to lead the way, so don’t wait until your institution is compromised and your members are victims. I urge you to make use of the resources that are already available, and I would certainly recommend the cybersecurity assessment software that the NCUA released in December.
But even with those obvious challenges, fintech is a promising avenue that I encourage credit unions to explore as a strategic imperative. Now to be clear, I should emphasize I am not endorsing any firm or technology. Technology is simply a tool to support your mission, and it needs to be used wisely. So, let’s be mindful about how we approach integrating fintech into the credit union experience and that you do so in a way that makes the most sense for your institutions and your members.
This is not about chasing after the latest fads or fashions; I want to see credit unions approach fintech with a sense of purpose and clarity. Let’s be open to innovation and experimentation, but always with the primary commitments being of service to your members, ensuring the performance of your institutions, and protecting the safety and soundness of the broader system of cooperative credit.
I started working in the banking industry more than 30 years ago, which might as well be a century ago in terms of technological change. Of course, the financial services industry has long been a leader in adopting new technologies, but the rate and scope of technological change we’ve seen in just the last few years has been breathtaking. I believe that in the current environment, those technological changes will only accelerate.
That said, we also need to temper our enthusiasm for fintech with a reminder that these technologies are tools — and like any tool, they can have positive effects and they can have negative effects. And we’ll not always know in advance what those effects might be. Which means we need to foster an environment of innovation, competition, and experimentation in which the best concepts and solutions can emerge and rise to the top.
So as a regulator, I’m seeking a balanced approach when I think about how fintech will integrate with credit unions. I want to support and encourage innovation and the growth of the industry while at the same time ensuring it serves the needs of credit union members, protects the interests of those members in terms of privacy and security, and does not compromise our commitment to the industry’s safety and soundness.
In my discussions with fintech leaders, I remind them that when they’re dealing with credit unions, they’re working with an industry that is fundamentally different from other financial services providers. I emphasize to them that these are not just “banks by another name.” These are member-driven, not-for-profit institutions that are rooted in their communities, with a long historical commitment of service to those members and those communities. Those members are typically people of modest means — working and middle-class families, single parents, farmers, small business owners, and so on — who need reliable access to financial services, whose needs may not be well-served by other financial institutions.
And I remind them of the size of that industry. With almost 5,000 institutions nationwide, serving 128 million members, and holding more than $2 trillion in assets, this is a substantial market in and of itself.
Most importantly, I remind them of credit unions’ long and proud history of providing services to underserved communities. Today, that often means places where many larger banks have pulled out or where banks have closed down. Many of you have heard me speak about the importance of financial inclusion as a guiding principle for the financial industry. You also know I value the role credit unions play as critical front-line responders when it comes to extending financial inclusion where it’s needed most. I believe that fintech will be a critical force-multiplier to improve our ability to help underserved communities of all kinds, boost entrepreneurship, and put more working families on the road to financial security.
So, we need to get this done, and we need to get it done right. And getting it done right means that we get substantial input and feedback from credit unions and fintech leaders during the process. I’ll be looking forward to hearing from you to get more input and feedback on what NCUA is doing well, what we may be overlooking, and where we might do better when it comes to fintech regulation.
I’ll close with a famous quote from Steve Jobs, one of the great entrepreneurial thinkers and doers, who said, “innovation is the ability to see change as an opportunity, not a threat.” In this case, the changes we’re seeing could either be a threat to the credit union model, if the industry were to fail to integrate these technologies, or they could be a tremendous opportunity. So, with all respect to Mr. Jobs, who certainly knew a few things about innovation, I think we need to be more proactive. We need to be sure we steer these innovations in the direction of opportunity, so credit unions and their members truly benefit from these technologies. That’s something I look forward to working with all of you to achieve.
Thank you very much.