December 2, 2016 / 1:52 PM / 9 months ago

Fed's Brainard cites promise, risks of 'fintech'

Federal Reserve Governor Lael Brainard delivers remarks on "Coming of Age in the Great Recession" at the Federal Reserve's ninth biennial Community Development Research Conference focusing on economic mobility in Washington, DC, U.S. on April 2, 2015.Yuri Gripas/File Photo

WASHINGTON (Reuters) - New technology that can speed the processing of loans or evaluate credit using only an internet search could revolutionize the financial sector, Fed Governor Lael Brainard said on Friday.

But those innovations must protect consumers and the financial system, and not let practices like redlining take root in the developing "fintech" industry, she said.

"'Run fast and break things' may be a popular mantra in the technology space," Brainard said in remarks prepared for delivery to a conference on financial innovation at the Fed. "It is ill-suited to an arena that depends on trust and confidence."

"There are more serious and lasting consequences for a consumer who gets, for instance, an unsustainable loan on his or her smartphone than for a consumer who downloads the wrong movie or listens to a bad podcast."

Some of the applications and innovations being developed by financial technology firms could be of great benefit to households and small businesses, Brainard said. It might, for example, allow cash-strapped workers to be paid continuously, as they earn, rather than waiting on a paycheck and relying on high-interest payday loans in the meantime.

But "it would be a lost opportunity if, instead of expanding access in a socially beneficial way, some fintech products merely provided a vehicle to market high-cost loans to the undeserved, or resulted in the digital equivalent of redlining," she said.

The Fed is studying the full range of "fintech" innovations and ideas that are beginning to transform the nuts and bolts of the financial system. These range from software that bases credit analysis on an applicant's online profile and behavior, to the sophisticated blockchain technology that allows financial companies to share an encrypted ledger.

Along with ensuring those technologies comply with existing consumer protections and safety and soundness provisions, fintech carries the extra weight of guarding against hacking and other cyber threats.

Brainard said the aim in the Fed's review is to let innovation continue, while also being "vigilant to ensure risks are well understood and managed."

Reporting by Howard Schneider; Editing by Chizu Nomiyama

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