'A widening gap filled with risk': Jo Ann Barefoot on regtech innovation

Jo Ann Barefoot, shown speaking at the American Bankers Association Regulatory Compliance Conference, believes regulatory technology can make the financial system more accessible and fair.

Courtesy of the Alliance for Innovative Regulation

Recent bank failures, the rise of generative AI and the continued questions around crypto have made regulation technology, or regtech, a rising focus in financial services. But to Jo Ann Barefoot, regtech has been the main focus for years.

Barefoot’s work in regtech tackles two angles: one is using technology to innovate regulation and the other is updating regulation to keep up with technology. She uses the phrase “gradual, but urgent” to describe the imperative for regulators to move forward with regtech. 

“I think we can fix this problem,” Barefoot said. “We’re in a race against time. I think if we don’t do a good job with this, the world will be a much worse place. Some of these new technologies are going to do a lot of harm unless we’re smart about how we regulate them, and how we craft best practice around them. And if we do this right, the world could be a much better place.”

In 2019, Barefoot and David Ehrich founded the Alliance for Innovative Regulation, which works with institutions, companies, trade groups and government bodies to accelerate their regtech knowledge and capabilities. Barefoot said that better technology tools to regulate, along with better regulation around technology, can make the financial system more accessible and less biased, and prevent crimes like money laundering, human trafficking and terrorism.

For her work teaching, connecting and furthering progress in the sector, Barefoot is one of American Banker’s most influential women in fintech.

Barefoot, who spent her early career at the Office of the Comptroller of the Currency, said the U.S. financial regulation system doesn’t keep up with the pace of technology innovation. She added regulators’ stasis is a “feature, not a bug.” She said the recent turbulence in the banking sector, including the runs on and failures of several banks, has made the agencies care more about regtech, but not enough. 

“They have to develop ways to speed up,” Barefoot said. “They’re designed to be very careful and deliberative and cautious. They don’t have the luxury not to be, like a startup might. But I really think that the slowness of our policymaking and regulatory work, compared with the speed of technology change in the industry, is creating a widening gap that’s filled with risk.”

Rodney Hood, board member of the National Credit Union Administration, also sees technology as a strategic imperative for financial regulators, and credits Barefoot for blasting it to his radar. The NCUA launched its Office of Technology and Access this year, under Hood’s supervision, to evaluate fintech solutions and expand access to the financial system.

Hood added that the NCUA has invested almost $60 million in its new regtech tool. In 2021, the agency began rolling out MERIT, a modern examination and risk examination tool, which Hood said replaces a 25-year-old program and will “revolutionize how we do exams.”

“It would be really hard for me to accomplish any of the things that I’ve been doing with financial technology and regulatory affairs without Jo Ann Barefoot for guidance,” Hood said. “She’s doing this out of a position of wanting to make a difference, and wanting to just really make sure that we’re being armed and equipped with data and research. That’s what’s going to undergird a lot of the success we’re going to get through working with partners like her.”

Hood added that while regulators won’t be able to adapt to technology as fast as Silicon Valley or startups, he said having the right structures in place for continuous learning is vital.

Education and facilitating collaboration are core parts of Barefoot’s work in regtech. AIR coordinates tech sprints, which bring together technologists and stakeholders for a brief session to find a solution to a specific problem. Barefoot also hosts a podcast that brings on leaders in the regulatory and technology space as guests; she’s written A Regtech Manifesto, which Hood calls his “fintech bible”; and she spent two years researching how technology is changing finance as a senior fellow at Harvard University.

Barefoot wants regulators to adapt, but she also partners with institutions and trade groups to enhance their regtech structures. Nicole Elam, president and CEO of National Bankers Association, a trade group that serves minority depository institutions, said that the biggest challenge facing NBA’s member banks is the cost of technology. 

Elam said the NBA and AIR have collaborated to find funding opportunities for minority depository institutions, and share knowledge with each other. 

“I’m the [bank perspective], in terms of understanding the challenges that my banks are having,” Elam said. “[AIR] knows what’s happening in the regtech space. Where we assist one another is bridging that gap that sometimes exists between what’s happening in the bank itself and the promise of regtech.”

Barefoot said that years ago, she used to be a lone voice in the wilderness talking about regtech to people who had never heard the term. She decided to take the onus of pushing regtech forward through nonprofit work after she had cancer, which she said was clarifying, and made her “completely fearless.” 

Now, success for her would be seeing regtech elevated as a top priority among regulators, and her warnings of its significance are conventional wisdom. 

Courtesy of the Alliance for Innovative Regulation

Jennifer Tescher, president and CEO of the Financial Health Network, said Barefoot can break down technical, jargon-filled concepts in ways that people can understand. Tescher added that Barefoot’s regtech influence helps shift the culture among regulators so that they can be risk-focused, but not technology-avoidant.

“There’s been tremendous progress among the financial regulators in recognizing the need to be on top of new technologies and be thinking about how they can be helpful and harmful,” Tescher said. “Where it’s still lacking is the regulators themselves have not yet embraced tech in the way they supervise and regulate.”

Barefoot said she thinks regtech will make the financial system more equitable and accessible. (She added that she has to be an optimist in this space.)

“I believe that the regulatory system will modernize to adopt great technology,” Barefoot said. “I don’t just believe it, but I’m sure of it. Because number one, they’re going to have to, and number two, they’re starting to do it already.”