Too many small banks are ‘digital have-nots’: FDIC innovation chief

As the Federal Deposit Insurance Corp.’s new chief innovation officer, Sultan Meghji has a few things on his plate: making the financial system more inclusive for consumers, fostering innovation within the agency and helping banks — especially small ones — keep their technology up to snuff.

Meghji was appointed to the newly created role Feb. 16, the FDIC said, in large part to lead its efforts to promote the adoption of innovative technologies across the financial services sector.

“Innovation is not optional,” he says.

Meghji was formerly the founder and CEO of Neocova, one of a new wave of startups offering cloud-based core banking to banks. He is also an adjunct professor at Washington University in St. Louis, a nonresident scholar at the Carnegie Endowment for International Peace and a member of the Bretton Woods Committee, a nonpartisan group in Washington that promotes international economic cooperation.

He started his new job with a bang, briefing congressional staff on his first day about financial inclusion, fintechs, artificial intelligence and other topics. In an interview, Meghji shared some of his goals.

“One of the great things about where we are now is I don’t have to convince anyone that innovation is important,” says Sultan Meghji, chief innovation officer at the FDIC.

What can you tell me about your new role?

SULTAN MEGHJI: The FDIC chairman [Jelena McWilliams] has said she wants to lead on innovation, especially around inclusion and making sure that we’re creating a banking platform for this country that’s accessible and usable in an equitable way for all Americans. There’s more work to be done there. I’m also looking at the resilience of the overall system. Just this morning I posted my first official message on social media, asking people to reach out to me, because I want the entire ecosystem to help us figure out how to prioritize. That is the most effective way for us to figure out where people’s needs really are. I’m looking for as broad a population as possible to come in and tell us what’s going on — traditional community banks, fintechs and everything in between.

So your mandate as chief innovation officer is more about helping the industry innovate rather than helping the FDIC itself innovate?

It’s both. But definitely a market-facing perspective is a big piece of that.

Where do you see the biggest gaping holes?

As someone who has spent nearly 30 years in technology, I will naturally be drawn to where technology is helping, and where we need to accelerate that or where we need to do work to keep it from being a roadblock.

For a lot of banks in our portfolio, the single largest noninterest expense they have is technology. And that has to drive some real value. The market is changing. The requirements are changing. You look at [Bank Secrecy Act and anti-money-laundering rules], that’s changing. Cybersecurity is changing. And humans on their own can struggle to keep up with everything going on. So what can we do to help with that?

The other biggest thing is, there are a lot of players who touch the banking sector but aren’t banks. They’re not chartered, regulated institutions. How do we figure out how to get everybody to play together in a thoughtful way that keeps the system as stable and secure and safe as it currently is, and then maybe even do better.

This isn’t specific to the FDIC, but sometimes when I talk to banks about how they’re going to innovate, how they’re going to implement new technology, they’ll say, the regulators in Washington are open to it, but when the field examiners come in and look, they have a million questions, they don’t necessarily understand newer technology and they sometimes say no. Is that something that you see and maybe want to change?

If you look across this entire ecosystem, whether it’s federal regulatory agencies, state agencies, trade associations, institutions themselves, there is a gap between where technology is and where it’s being implemented, and where the capabilities are, especially in places like artificial intelligence. Not everybody in that whole ecosystem is up to speed on all of that. And that’s something that I think we as an industry writ large could do a much better job of.

I’ve been a scholar at the Carnegie Endowment, and we’ve been working on a project focused on the security of the financial system. Out of that, we’ve published openly for everyone a toolbox, communications guidance and things like that that are helpful to solve some of these problems across the whole ecosystem and hopefully begin to solve some of the education gaps.

It seems like you have a big mandate. How are you going to improve innovation across an entire complicated industry? Are you going to be able to build a team that’s going to be able to extend and support what you’re doing?

I have a very large number of roles I have to hire here very quickly. We did a posting for a deputy here that I’m working through right now. The wonderful thing about this organization is there are so many innovative functions going on already that really, this is about wrapping it in a thoughtful strategy. A lot of thoughtful players in the market realize that innovation is not optional. Just like having thoughtful cyber policy and technology and management is not optional in this market. One of the great things about where we are now is I don’t have to convince anyone that innovation is important.

The biggest issue is figuring out what to prioritize, what to put resources in and how we as an industry can work together to move the needle in a more thoughtful way across the entire industry. I do worry about the digital haves and the digital have-nots moving forward. We don’t want smaller institutions to be left behind because they don’t have tens of millions of dollars to invest in technology. It’s really about finding the right-size technology, the right acquisition models, the right partners in the ecosystem that can help move all of these people forward.

A lot of community banks have found the pandemic really challenging because they don’t all have state-of-the-art digital channels.

Exactly. In September, a bank CEO was telling me that they did a lot of [Paycheck Protection Program] work, and their technology failed entirely. They basically were running three eight-hour shifts a day, seven days a week, having people do it all manually because that was the only way they could get it done. And that really hurt his organization.

In the midst of a pandemic, in the midst of all the other things going on, you’re having people work these crazy shifts on weekends. That really did hurt his organization quite seriously.

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