Banking and Fintech: The Future is Now
- Good afternoon, everyone. And welcome to the first FDITECH event, focused on banking and FinTechs and how the future is now. I'm Sultan Meghui. I'm the Chief Innovation Officer here at the FDIC, and I could not be more excited for this event this afternoon. We're gonna have three amazing panels with wonderful people that I've met since I joined the FDIC, people from the sector, people for nonprofits. And as we go into this afternoon, I'm excited for the dialogue, I'm excited for the energy, but most of all, I'm excited that we all realize that this future is now, that there is this new sense of urgency in terms of the changes to the banking sector.
We're gonna talk about three specific areas. We're gonna talk about the market itself and how that's evolving. We're gonna talk about how technology is changing it and we're gonna talk about diversity equity and inclusion. These three panels are, I hope are gonna be valuable for all of you and going to be valuable for all of us to learn a little bit. We have just an absolutely wonderful group of people. And as we do that, I wanted to frame up just a little bit of how we've been talking about innovation here at FDIC.
We really wanted to make sure as we launched this new program early this year, that we included these components very early on in the discussion under four innovation things. So first was around inclusion and how can we make sure that we're not just building the most diverse, equitable and inclusive banking system out there, but that we're also looking at what we could do better with the existence system. We're looking at operational resilience. We're looking at how these systems operate and how everything from cybersecurity to climate can impact the banking sector. We're also spending a tremendous amount of time amplifying people. As we continue to evolve from an analog to a digital society, the financial sector and banking in particular is going to evolve as well.
And how do we do that? And then we always have to be thinking about the future. I'm excited that I will tease that I know we're gonna have a little bit of a discussion about something called quantum computing, which is something very close to my heart that I'm incredibly excited for us to talk about. But overall, this is going to be an event that hopefully you find it interesting and exciting. And I hope to bring more of a dialogue like this, moving forward to the discussion. So with that, I will turn it over to Jeff DeLuca who can spend a few minutes with some housekeeping activities, and then we can jump right in. Jeff, it's over to you.
- Thank you Sultan. Good afternoon, my name is Jeff DeLuca. I'm a Senior Financial Analyst with the FDIC and a member of FDITECH.
I am very excited to be moderating today's panel titled innovation in the financial markets. This is the first of three amazing panels this afternoon. Before we begin, I do wanna go over a few housekeeping items. First of which this is a live stream to virtual event. So please do excuse any dogs that may or may not bark in the background, particularly if they're my dogs, they don't actually count. You won't hear them.
Additionally, we do have an event disclaimer which we show on the screen, which I will mention a couple of things here. While many of the speakers with us today would disclaim that their remarks are theirs and not necessarily those of their company or agency, we too preface the event by saying we do not necessarily endorse or agree with all aspects of our speakers views, but we certainly welcome and invite today's conversation. All right, so with that out of the way, I would like to kick the first panel off, we have four outstanding panelists for this discussion, and we'll also be honored to have our host Sultan sit in on the conversation.
I will start off by asking the panels is to unmute and introduce themselves. We will start off with Diane. - All right, Thanks Jeff. Thank you for setting up this panel, including me.
I'm really looking forward to this conversation, sharing my thoughts and also learning from my other panelists. My name is Diane Ellis, I am the Director of the FDIC's Division of Insurance and Research. This division has most of the FDIC's economists, some financial analysts, policy analysts and others. And we do research and analysis on a wide range of topics related to banks and financial services, including macro risk analysis. We also do deposit insurance pricing and fund management. - [Jeff] Thank you, Diane.
Let's go ahead and introduce Rob next. - Great, thanks Jeff and thank you for having me and hosting this wonderful event. Really looking forward to the discussion. I'm Rob Morgan with the American Bankers Association.
I lead our office of innovation. So spend about half of my time working with our banks, helping them work with startups and other technology companies to bring the latest tech to their customers. The other half of my time, engaging in public policy issues to help promote innovation.
- [Jeff] Thank you, Rob. Next, we have Kate. - Thanks, Jeffrey and thank you all for putting together this event. I'm really happy to be joining you all today.
My name is Kate Goldman and I lead the Milken Institute's FinTech program within our center for financial markets. The Milken Institute is a nonpartisan think tank. We have global offices.
And my work in FinTech focuses on access to capital, financial inclusion and lastly transparency and compliance. So looking forward to the panel. - Thank you, Kate, and last but not least Julien, if you go ahead and introduce yourself. - Thank you, Jeff, mirroring, thank you to FDIC tech and to you, Jeff for putting together such an (indistinct) discussion.
It's a real honor and privilege to be with industry peers and delving through to me in this discussion. I'm Julien Le Goc and I'm actually in my old stomping ground. I spent a decade at the FDIC, super happy to be here. However, I'm currently the head of enterprise risk for a company Circle. And so Circle is a FinTech firm, which think of FinTech as the convergence of technology and banking.
And what we do is we help internet native companies accept and send inter-operable type of payments everyone in the world, both on traditional rails, as well as digital financial rails. Very happy to be here. Jeff back to you. - Thank you, Julien.
So this is a discussion. So it's gonna be going back and forth. If anyone has any comments, please go ahead and chime in amongst the panel.
At this time, I'm gonna open up the conversation with our first question for the group. The first question is with a focus on innovation in the financial markets, looking at 2020 and 2021 in the midst of the pandemic, what technology evolved or expanded that you are most excited about for the market over the next few years? Let's go ahead and start off with Diane. - Okay, sure. Happy to kick this off. I don't know if I'll say excited, but I'll say this is the thing that I'm probably most amazed at, and that is the fact that how cryptocurrency has gone mainstream. I think it's pretty remarkable over the last couple of years, how cryptocurrency is finding its way into a lot of our sort of mainstream financial activities.
The Fed has done a survey indicating most Americans view cryptocurrency as more as an investment still, but a payment mechanism sort of like gold, stocks or bonds. And indeed a survey of financial advisors earlier this year showed that one half of their clients were inquiring about investing in cryptocurrencies. 14% of these advisors were already using or recommending cryptocurrency and 26% expected to increase their use of cryptocurrency in the next 12 months.
So crypto is finding its way into retirement portfolios. We've got products like crypto IRA or Bitcoin IRA. The venture capitalists Jamal (indistinct) said Bitcoin has essentially replaced gold. So it's finding its way into sort of traditional mainstream investment activities. We've also got government adopting it.
We've got the example of El Salvador adopting Bitcoin as legal tender last September, we've got other countries considering the same, but actually it's been shown that 27% of U.S. residents support making Bitcoin legal tender in the U.S. You've got cities like Miami launching its own currency or its own coin, Miami coin to invest, allow people to invest in the city and New York City's expected to follow. And then, I noticed recently we've even not nowadays got commercials by Matt Damon and Tom Brady on crypto. So I guess that's what I would mention, is highlights in the last couple of years as crypto currency is going mainstream.
- Thank you, Diane. It's very interesting the way we look at crypto and the way it's hit the mainstream markets more recently. Julien, what do you think on this question? - Well, you can always count on Diane to have a whole bunch of facts and figures. So I'm trying to follow up with her.
Well said, Diane. So this pandemic that started 635 days ago, according to my god son that reminded me last night. He calls it the before time and the aftertime and he just can't wait to get to the aftertime.
But really what it's done is it's brought a decade of change in a couple of years and a change in how business and consumers interact with one another. And so what I think is important here, I know the question is on technology. And Jeff, hopefully you won't pick me out this panel right now, but I think what consumers, businesses and merchants are looking for is perhaps not the underlying technology, but they're looking for outcomes, less so the technology really that makes it happen. So I think the discussion could probably be shifted from that the technology is not as important as the adoption curve. And Diane, you just mentioned it, how many Americans are looking into digital currencies, digital assets, cryptocurrencies.
So I know a lot of people are paying attention to what is next. I personally am paying attention to what is now. And putting a little bit of data here. Diane, you might like this, but today the estimates are that more than 20 million Americans are operating in this digital economy, as well as 200 million worldwide. What does that mean in the context of kind of global GDP, about 15.5% of global GDP is currently involved in the digital economy.
What does that mean, that means it's about half of the U.S. economy. And by the way, it's been growing at about 2.5 X global GDP for the past 15 years. So I think the example here I would have in the analogy is when you hit send on an email, you don't really think about the technology of it going through an SMTP server and a DNS server and a pop, in an iMac and an MTA and all the DNS and all these types of things, you just want the email to get there. And I'm hoping to now the discussion is really gonna be around adoption, which I think has happened and is continuing to happen and really started thinking about the outcome.
- Thank you so much for that comment. The pandemic definitely did push a tipping point in terms of technology. So I think that those are really great reflections and comments there. Kate, what are your thoughts here? - Yeah, similar to what Julien said, I wanted to call out retail investments and the technology behind these. It's not like they were created in March of 2020, but the way that consumers are engaging with retail investment tools has radically shifted.
And I think that's partly because we've all been home for the last two years and because of stimulus checks and just this new found excitement to get involved in investments. And the technology behind retail investments have dramatically shaped the course of how people engage with these financial tools. Now people can invest in fractional shares, right from their phones with fewer fees than we ever could have dreamed about five, 10, 20 years ago.
And then not only that, but we're seeing artificial intelligence and just swaths of data become so readily available to people just through the internet. This user centric, this high touch investment portfolio is all of a sudden become democratized. And I think the last thing that really stood out to me throughout the pandemic in retail trading is just how social it has become.
We saw pools of the internet become communities for investors to communicate with one another, be it Reddit or TikTok. All of a sudden irrespective of where you're living, you're able to communicate with people and share investment tools and discuss and talk amongst one another. I think that is a really fascinating convergence of all these different trends in technology and financial markets and resources sort of coming together in the perfect storm of really interesting use of technology. - Okay, that's a really interesting perspective, especially when you think about throughout the pandemic, the limited in-person interactions we've had and the shift to a social network, to non in person interactions and the push through technology and through investing through those methods. Really good interesting perspective.
Rob, what are your thoughts here? - Yeah, thanks Jeff and at the risk of creating a really boring panel, I wanna agree with everything that's been said today, and then probably put it a different lens on it at least from the banking industry's perspective. It seems like we're all saying the same thing, the story of the pandemic from a bank's perspective. And I think from others has been one of customer adoption.
Banks have been investing in new technology for ages as well. And as we know, customer habits in banking, don't change very often. Why fix what isn't broken.
And I think the pandemic really forced folks to look at how they engage with all the products and services they use and to change some of those habits. So we'd seen in past years, mobile adoption increase, it was the 2019 FDIC how America bank study that showed mobile was now the most prominent way customers were engaging. We at ABA had done some follow-up research that shows now unsurprisingly that has only accelerated since the pandemic.
So in many cases, customers became increasingly aware of the tech their banks already offered, and this was critical for helping customers and communities stay connected with their banks when they needed it most through things like delivery of the paycheck protection program in economic impact payments. Being able to help bring those two communities, whether you were sitting in your living room or if you were out in the community. So that was really important. It's helped banks reach new customers, bring into the banking system who weren't otherwise involved, I think that's something that's really important. Something that we've been focused on. But what's really been interesting from sort of a novelty perspective is the way banks have, as they've made that transition, have maintained the customer relationships and have used technology to do that.
Community banking has always been a relationship business and it used to be that those relationships were built when you walked into a branch and had a conversation about saving for your child's college fund. Today, those interactions are more happening with taps on a screen, creating bits and bytes, and the way banks are using that to better understand their customers and their needs is really exciting. The same way I feel like Netflix knows me, even though I don't know a single person that works at Netflix, banks are using some of that data to understand their customer's needs and bring them the most relevant financial services when and where they need it. - Rob, that's great. I wanna poke a little bit further there. You talked a lot about the opportunities that the new technology or leveraging technology has presented to institutions, whether that's expanding existing relationships or fostering new relationships with the outreach methods.
I'm curious what your thoughts are, if you look at it from like a SWAT analysis. You hit the strengths, you hit the opportunities. I'm curious what your thoughts are in terms of potential threats to the banking sector that you see this new tech... Or new technology developments over the past couple of years posing to the financial environment.
- Yeah, so I think one area where there's both opportunity and risk is sort of in the core infrastructure that underpins a lot of what banks do and their ability to adopt new technology. So the degree to which it works really is critical for banks to offer the latest technology, latest services to their customers. And one thing we have really put a focus on at ABA is core providers. So all of the banks in the country rely on their core providers to effectively interact with customers today.
As those relationships move digital, today 80 or 90% of banks rely on one of three companies to power pretty much their entire tech stack. And in some ways I think this is a story of success. We have been really heavily engaged with these companies over the past three, four years to highlight the needs that community banks in particular have. And we've seen a lot of progress in terms of banks ability to first access their own data. That is one thing that we think is really critical. So community banks' ability to actually go into the systems of record, understand how their customers are using products.
That's something that really is critical to helping establish and maintain that customer relationship. We talked about that a little bit. The second thing area we've seen a lot of progress is in the ability to interface and adopt new technology, whether it's through APIs or other means. We have seen those core providers, both sort of a new batch of competitors, as well as some of the existing players move towards a more open model that allows banks to more easily and more quickly integrate the latest and greatest technology, whether it's from their core provider or whether it's from sort of a newer FinTech company. Something that is so critical to competitiveness going forward.
The end of the day, community banks aren't going to be able to build every single technology themselves. So the ability to work with a wide array of startups and established tech companies to offer those solutions to the end customer is key. And the ability to quickly and easily plug and play is I think critical there. - That's interesting. And we discussed about different intersections between the banking industry and the FinTech companies that are out there in the plug and play process or how things will adapt or incorporate within to the core systems to offer customers different avenues or vehicles. Does anyone else have any comments on that aspect of the current FinTech and banking market? Any other panelists wanna touch that or should I move on? All right, I'll just wanna mention, we do wanna keep the conversation open, but I do wanna ask from a slightly different angle.
Diane, I'm curious, how do you think FinTech might change the structure of banking markets in the U.S. and looking also globally? - Yeah, I think this is a really, to me, one of the more fascinating issues is how FinTech is changing the markets. That's one of more fascinating issues for me to follow, 'cause I think it has a potential to make significant changes to the structure of banking and financial services. And they're really at least two reasons as I see it.
One is the FinTech's ability to unbundle traditional roles of money and then rebundle it with platform ecosystems that offer array of other services. And then also, I get to the data which Rob was just sort of talking about. Their ability to generate capture and analyze an incredibly large amount of data. I'm sure everyone's heard of the concept, data's the new oil in the digital economy.
Well, FinTechs are starting to control a lot of data and a lot of the most valuable data. So if you think about the traditional financial services hierarchy, banks have always sat at the top of that pyramid in part because they had the best data. They had data that no one else had about businesses and consumers, financial lives, and other things like payments, other financial services firms, insurance, wealth management were an extension of the banks normal activities of intermediation, but FinTechs are threatened to disrupt that organization in particular, those involved in payments. When I find particularly is that FinTechs have made payments sexy, like payments was never that interesting.
It was a long time between the development of the check, to the credit card, to the ATM, to the debit card. But now we've got this proliferation of all these payments vehicles and firms, and we're all talking about payments. And they really have unparalleled access to data on customers in both sort of the size of the data and the diversity of the data. There's a really interesting BIS working paper and Julien, I can't help myself quoting some of the stuff. I do lead a research organization.
Anyway, this paper is called the digitalization of money and it discusses this phenomenon and says that we could be moving from a bank centric model to a payment centric model. And in a payment centric model, the payment provider owns the customer relationship and everything else, including a bank, which is in a supporting role. And you can really see this happening in China with Ali Pay and WeChat Pay. Each of these firms has over 1.2 billion users. Ali Pay of course owned by Ant Group and WeChat Pay on my Tencent, they own banks that support their platform, not the other way around.
It's the commercial firm, the payment processor that owns that customer relationship. Now, I'm not sure I can see that happening in the U.S. in the same way, at least because we have a more robust banking system. In China when Ali Pay and WeChat Pay were sort of spinning up, they really had a banking system that was not nearly as robust, it was very easily leapfrogged by those big tech companies.
And that's just not as easy to do in the U.S. where banks already providing a lot of consumer and small business credit. Also, there are certain legal and regulatory barriers in the U.S. that actually prevent a payments provider from achieving the kind of scale the Ant Group or Tencent achieved.
However, I really think it's an interesting phenomenon to think about, and it certainly seems possible that it's gonna reshape this industry in some way. - Yeah, it's an interesting way to think about the way data is generated in the U.S. and globally, the shift of who has the most data and where the data points are coming from. So every transaction produces X number of data points and how we use that data and leverage that data going forward, I think is a fascinating concept, especially looking at expanding relationships and experiences for customers and our institutions. So it's a great lineage where we can go down. Julien, I won't pull you into this conversation a little bit more.
How do you see FinTech flattened in the global markets? - So, first I think we have the quote of the day, Jeff, which is that FinTech made payments sexy. You can attribute it to Diane. I thought that was pretty fantastic. So let me double-click on kind of your question here about flattening global markets. And truth is digital adoption, as we talked about, and Rob very clearly stated in his opening remarks, they've taken him a quantum leap and I'm using quantum as a shout out to Sultan because I promised myself I would say quantum at least once, but I've said it's not on. But we live in an always on economy.
And what does that mean? But for FinTech, the experience that consumers currently have, that merchants currently have, and really how the market operates is within the constraints of a bank holiday or within constraints of a nine to five. And some of the settlement finality times as we know, take days instead of seconds. And I recall for 10 years gonna the wonderful cafeteria to 50 building, as well as in Virginia square. And I swipe my credit card and I walked out with an amazing salmon salad.
The truth is the cafeteria operator, Aramark would only see that money three, four business days, depending on the day of the week that I swipe my credit cards. I think we could do better. And so I think we're far from flattening kind of the financial services environment, the FinTech industry aspires to be 24/7 and making access to the modern financial system a reality for let us not forget 1.7 billion people are unbanked in the world, about as many are underbanked.
Even in the United States or fortress nations like the one that we are, FDIC's numbers in 2017 show 22% of unbanked and underbanked, and the fed trusted the most recent study that it's right around 18%. That means that the underbanked goes to alternative financial services places, which of course are check cashing and payday loans and rentor centers. So what we're trying to do here with FinTech is we're trying to address this current market needs to complete the system. I think also the sentiment that we're feeling right now is this sentiment that we felt before.
Think of telecoms, where you used to pay a telephone call was based on the distance and how long you were on the phone. And today, essentially with a data connection, we're having this free. So think of where we were with email back in the day, where we are today with telecoms and where payments are are going.
So I guess the TLDR is I think consumers and financial needs, they don't take any breaks. And when you need to have a particular financial transaction, whether it's a micro payment, whether it's a remittance, whether you want to ensure that an individual has the funds that they require, it should be on demand and it should be always on. I think that's where public blockchains are trying to bridge that gap. FinTech and bank tech and I guess FDITECH are bringing to the forefront the experience that many FinTech users are having, that it can continually access their finance and that your value should be portable. You should be able to move across the world with your mobile phone, having access to your money, just like if you had cash in your pocket, except it's safer.
- That's an interesting concept, that your value travels with you as long as your phone travels with you, wherever you have access to your value. So does that actually make it so you don't need a bank branch if you travel across the world, that you don't need that representation to access your accounts or funds right there with you. Julien, I think that this is a really good topic and Kate, I wanna bring you into this also. I'm curious how you see financial technology expanding markets and really how. - Yeah, I think it would be faster to say how FinTech isn't expanding financial markets.
It is truly touched every single facet of the industry, but I think at its core in the most simple, but important thing that FinTech has done for financial markets is really its ability to drive down the cost of every layer of the financial interaction, be it with a bank or a neobank or any sort of financial institution. It is never been more frictionless and less expensive to engage with financial institutions and cost is cited as the number one reason why people are unbanked in the United States. Time and time again, FDIC surveys find that cost is the number one prohibitive barrier for people to be engaged in the financial markets.
And so all of a sudden, when you have neobanks and FinTechs that are lean small companies, they're able to save such amount of money on overhead and infrastructure costs that they can pass along those savings to their customers. And then for the larger financial institutions, the technology has allowed them to really open up their revenues and sort of bring in money in different ways. Capitol one this week announced that they were gonna stop bringing in overdraft fees from consumers, which was such a monumental move forward.
And technology opens up so much of that just allows large from the largest to the smallest financial institutions to incur capital in different ways in ways that serve banks or rather serve their customers. And it becomes a much more healthy and sort of mutually beneficial ecosystem between the banks in between the consumers. And then to Julien's other point before, I think the adoption of digital identity systems, it is never been faster or less expensive to onboard new customers. No matter if you're a FinTech, if you're a community bank with digital infrastructures, it is so easy to bring on new customers. So I think all of these pieces from FinTech or just from technology broadly is doing such a huge push to make things more affordable, to make things so accessible.
And the pandemic that is become incredibly important, especially as millions of people are without work this year. - That's great Kate. So you touched on a lot of different things there, but really, it sounds like it's boiling down to a couple areas where FinTechs have really pushed boundaries or added to the current structure, which is access, expanded access, speed in which we are able to access and also costs. And it's interesting to see those advancements flow through the market and where those changes are occurring. Before we move on to the next question, does anyone else have any other comments on this area before we go ahead and touch the next question for the group? - Yeah, I'll interject on the financial inclusion question.
I mean, I agree with everything that was just said, and I think I would just add that this is really demonstrable in places like Africa, where you've got the telecom operators who have made great strides in improving financial inclusion in those countries, because while everyone didn't have a bank account. It was a matter of fact, even larger chunks of people didn't have bank accounts, everyone had a phone and were used to interacting with their phone company. And the phone companies who had the technological investment capability to do it were sort of the first movers in that area.
So it does kind of seem like a mobile phone and some good internet access is a really viable way of sort of closing the gap on financial inclusion in our country as well. - Yeah, if I can add to that, I think Diane, you're probably referring to Vodafone's partnership with M-Pesa in Kenya. And today I think they have over 40 million individuals.
They went from 85% of not access to the traditional financial system down to 15, 20% almost overnight. And so I think what we're doing here is FinTechs are coming on and they're trying to complete kind of the system and really not compete with it, which is why it's such an interesting discussion we're having today. - But one of the things we do have to grapple with, I think here is what they call the digital divide.
I mean, we do need to be thinking about getting broadband access to more places, particularly our rural less populated areas. - Good news is that's the opportunity Diane. So we've got of the 1.7 billion that are unbanked, one billion of them have a mobile phone. And I think the latest numbers is we're at 63% of the globe that is covered access to the internet.
And I'll tell you, in my travels in north Africa, it was amazing that individuals found access to the internet, whether it's going to a Starbucks to access their data points. It's amazing how resourceful individuals are to have access. So fully fully with you. - There you go, Starbucks maybe the key here.
Those are some good facts and figures, Julien, maybe you should think about running a research department. - Don't get me started, I got my mug with coffee. - Last thing I would add to that point is yeah, broadband is a huge precursor to financial inclusion, but also access to identification. In Africa, there's 540 million people across the continent with zero access to formal identification. There's millions, tens of millions in the United States as well who are barred access to financial markets because they don't have access to identification.
And you look at broadband, you look at IDs, those are two things that I think we could all do a lot of work on to broaden access to all of the wonderful things that banking and FinTech are offering in this space. - That's interesting. So it sounds like a lot of the speed the access, the adaptive technology, a lot of the push, I keep hearing the phone and the internet. So the ability of access to, or more access through a mobile device has opened the doors to a lot of different abilities to transact and interact with our institutions or financial markets. And it sounds like the expansion of the internet and whether it's broadband or different aspects there will expand and access even beyond where it is today. So Julien, I heard you use a term and I do want to address it 'cause I like the term and I'm curious what everyone here thinks.
Is FinTech the answer to complete and not compete? Do we see this as a piece of the puzzle to make the experience a whole weed between customers and financial institutions or financial markets or is this another avenue to compete with the current structure or is it a mix? - So I guess I'll take it first, but I really welcomed the panel's input into this. My assessment of the current situation is consumers want optionality. And so you have some consumers that wanna remain in a cash society. You have some countries that have moved to a cashless society. You take Sweden they're about 99% cashless.
So I think what FinTech is bringing to the table is one more option for consumers to leverage what they want. And truth is and I love that Diane said payment system is getting sexy. Most of us, the payment fees have been opaque. When we slide our credit card and we walk out, we don't know that the merchant is paying one, two, three, 4% (indistinct) around the world are 6.8%. They've been stubbornly high for the past decade.
And so this add another level of option for consumers. And I'll be honest with you, I was in Mexico just about a month ago when I received a bill and I was amazed, by the bill was priced differently depending on if I paid in U.S. dollars, if I paid in Pesos, if I paid with my American Express and if I pay with my visa. That was the first time in my life that they actually gave me the option.
And in the end, the U.S. dollar was the cheapest thing for me to pay my bill. - That's an interesting way to look at it, is built in transactional costs within the payment of services. So I've never heard of that before where you've gotten a bill in different forms, but I guess in terms of listening to different areas of the country and seeing how, I guess how those transaction costs get built in to the final product, it's fascinating. Does anyone else have any comments on whether we see FinTech as an area to come complete or compete with the current infrastructures? - Yeah, I'll jump in there. Oh, go ahead Kate, please.
- I would just say, I think it's totally complimentary at this point. If you'd asked us all this question five, seven years ago, I think we definitely say it was FinTechs versus banks. And people realize that, like I don't wanna choose between using Venmo and PayPal and having a bank. In my ideal situation, what we all are afforded right now, it's having the best of both worlds.
And I go to, my bank is actually largely branchless, I use USAA. I think they have one branch in Texas and I've never been to Texas in my entire life, but it's a fantastic banking relationship I have with them. But even still, I'm so glad to be able to use Venmo if I wanna send my friends money. Half of my friends are in Canada and Venmo doesn't work up there, so I can use PayPal. Having all of these options makes for the most healthy relationship with all of these financial institutions. So I think it's totally complimentary.
- Yeah, Kate, I was just gonna echo the same sentiment. I think there was maybe a time where there was a FinTech versus banks dynamic and it's not really a surprise. If you look at the first generation of FinTech, you had a bunch of really smart entrepreneurs who had never really been in banking or connected to banking and wanted to make banking better. So the natural action was to compete. Here's what I think I can fix it in this component. And one of the things we've been working on from an ABA perspective is better connecting those entrepreneurs with some of the problems that banks face trying to help give them the tools, the insight to help solve bank problems.
And I think we've seen a lot of those companies, some that began competing are much more complimentary now and really want to work with banks to help bring the best experience possible for the end customer. - Great, so along these lines, when we're looking at complimentary financial technology in the banking system with these new adoptions of innovative technology, and this is gonna be open and up to the group again. I'm curious to see within the financial markets, how important is trust for the ultimate adoption and push forward for these new technologies. And is trust native for all financial technologies and has it been built into customer-facing technologies? And we'll start off with Kate.
- Yeah, so I think trust is everything. In any relationship with a business and a consumer, trust is paramount. When you look at certain sectors of the market, like social media, where there's such a concentrated group of players, that really, like trust doesn't have to be paramount to their business models because as the consumer, you don't have that many options to go elsewhere.
And so in financial markets, as they've become so competitive over the last few years with the emergence of FinTechs, with the emergence of neobanks, that competition has made trust of your financial institution become so much more important. And it's really forced all of the financial players from like the largest incumbent bank to the smallest neobank to step up their game and become more transparent with consumers. And I think all of that is massively important.
Again, the same survey I cited before from the FDIC, trust is the number two reason why people are unbanked in the United States. And so trust is still integral in the relationship between banks and consumers, both with existing relationships and those that you're looking to build as a financial institution, bringing in the unbanked, bringing in consumers from different financial institutions, all of that is massively important. And the emergence of technology, blockchain, data interoperability, all of that is becoming really key for that trust and for that transparency. And banks have, or financial institutions rather have an easier way to show sort of like, here's what we're doing when it is so transparent or becoming more highly transparent day by day. - So Kate, along those lines are you seeing banks as filling that gap between the customers and these new FinTech technologies or advancements, filling that trust gap. So through the partnerships or through the different avenues.
Is that a role to help facilitate the move forward? - Yeah, I think so. I think banks have the leg up of being sort of legacy institutions in United States. Like when you look at the architecture of a bank, they're marble, they're grand, they're they have this sort of energy about them that makes people feel literally safe. Like the columns, like all of that is done quite strategically to build this sense of like, "Oh, this is where I want to put my money." And FinTechs, yeah, they've had a lot of catching up to do because people are still getting comfortable with the idea of operating in a mobile only relationship. So banks, they can help each other out.
Banks have work to be done on the trust side, but they also have the benefit of being there from the very beginning. - That's interesting. Dan, what's your take here? - Well, first of all, I'd like to say, I love this question about trust because I think it is so important.
I can't agree with Kate anymore that trust is paramount. And by the way, thank you for citing our survey data. We love it when people find it useful like that. But trust is the foundation of our system and financial system. And I think it does often get overlooked, or it's not talked about enough. I mean, you can't have banking, you can't have financial markets, you can't have commerce and so on without trust.
In our traditional financial services system, we have intermediaries. It's the government and financial institutions that have served as a trusted third party. And we think a lot about trust at the FDIC because that's our role, is to back up financial institutions and to make them inspire more trust or confidence so they can do what they need to do. So, you have to come to consensus about the validity of a transaction and in our trust-based model, it's these third parties which serve as the record keeper and incentivize honest reporting and so forth. But I think what's going on here is that trust model is costly.
These third parties extract rents to cover their costs to serve as record-keeper and also to mediate disputes and that increases transaction costs. And sometimes it eliminates the feasibility of small transactions. And also because they're mediating disputes, transactions can't be irreversible because the third parties can't help, but reversing. So parties to the transaction, whether it's a merchant or lender, whatever, they have to conduct due diligence or be wary about their counterparty and of course your fraud and so forth. So when you're dealing in cash, that avoids all those problems, but you can't use cash on the internet.
So, here comes blockchain and I see blockchain on the experiments and developments with blockchain is just trying to figure out how to shift this trust around and make it less costly. So it replaces a trust-based model with the system based upon essentially cryptographic proof. It tries to place trust with competence on a computational system, which is to me two sides of the same coin. So different developments of blockchain are trying to develop trust in different ways.
If you're not gonna have your trusted third parties, banks with a costs, with the fees and so forth that they charge, you're gonna have to do it another way. And so you've got a proof of work concept where you have to use lots of resources to develop that consensus and trust or you've got proof of stake, which essentially looks to other external sources of trust among individuals. But as I see it, there just different ways to achieve trust. I mean, that's sort of what we're in search of, is how to develop that consensus or that trust in the least costly, most efficient way, but still incredibly important. - Diane, thank you for bringing up blockchain.
That's a great segue into a bunch of different conversations we can have into distributed ledger and blockchain technology and how it's leveraged into building trust into an environment that is diverse and a new way to look at transactions. So Julien, I'm gonna refer to the same questions to you and see how you think new technology within the markets and how important trust is for the ultimate adoption and push forward. - Jeff, this is one of those questions that I wish you had called on me first, because going after Kate and Diane is almost impossible. So I'm gonna try to kind of give an answer that's a little bit nuanced, but from a different perspective. So if we start looking at kind of the macro economic angle of trust and adoption, even in some cases where you have sovereign money that is being issued by a central bank, 50% of individuals in the world today, they face hyperinflation.
Now not all countries have an FDIC with a track record of no depository, I'm testing my FDIC memory here, no deposit or having ever lost-- - No insured depositor. - No insured depositor, thank you, Diane. Have ever lost a penny since 1933. Not only to me, is that a trust and innovation enduring type of establishment, but this is for the traditional money.
So now let me shift to blockchain. And Diane, you just touched on that. So what some blockchain projects are trying to do is to build code and conduct trust construct within it into public blockchain. What does that look like? Well, most individuals aren't aware that the most money that's currently in circulation is private money, private issued money and that it's fractionalized banking to ensure that there's free capital out there for lending, which is needed for the economy.
What a lot of these stable coin projects are doing is they're offering something a little bit different that you have a one-to-one backing. And therefore, I think some of the trust that is being built within the FinTech environment is ensuring that you have one us dollar to one stable coin in a fully reserved financial asset class, therefore somewhat different than traditional banking. Again, I think both of them are complimentary of one another and USDC, if you've heard of it, this is circles digital currency is essentially taking a dollar and applying this dollar with the power of the internet. And I think that's extremely powerful and individuals will again have a choice on trusting the traditional bank, which we have done for years or trusting some of the new projects such as stable coin projects on the internet. - All right, Julien, I do wanna circle back to stable coin, but I do wanna ask Rob what his thoughts are on trust. And Rob to Julien's point, I do apologize for you going to have to follow up on everyone else that's commented on it.
I am changing up the order a bit here. I'm hoping that it doesn't become a recurrence among the questions, but Rob, what's your take on new technology in the financial markets and how important trust is the ultimate adoption and push forward? - Yeah, thanks Jeff and I look, I think a lot of this has been covered, but it's paramount. Trust is everything in this space, particularly as we think about innovation.
And innovation is only useful to the degree that we maintain that trust and build on it. And look, I might be willing to get in a stranger's car for a five minute ride, but I'm not gonna give them my life savings. The reality is I probably don't want my bank to move fast and break things. And so trust as we roll out new technology, new innovations, maintaining that trust is really critical. That's one of the reasons we are so optimistic about the role of bank FinTech partnerships. We think it is an opportunity for banks to work with some of the leading edge technology companies to bring their customers the latest and greatest technology in a way that they can trust.
And they know through experience will be backed up. Now, Kate, I would maybe disagree that it is sort of the marble. I think a lot of that trust stems from the regulatory structure, the oversight and ultimately the FDIC back.
The fact that we talked about no insured deposit has ever lost funds. And I think the key there is sort of maintaining it as we go forward. There are some areas we think there's a lot of opportunity, but there's also some risks. As we see this sort of unbundling that Diane hit on earlier, we're seeing new models where you're rethinking the idea of what it means to be a bank. Not everyone who wants to be sort of a bank thinks of it the same way we used to. And a lot of our rules and regulations were built around sort of deposit insurance being the center of what it means to be a bank.
We obviously think that's very important. Our members do think that deposit insurance is key, but there are other business models that don't necessarily rely on uninsured deposits. What we need to do is make sure that sort of the regulatory definitions match up with some of those new business models.
So just because someone is adopting a new technology, a new business model, they don't inadvertently fall between cracks. And I think that's where we risk losing some of that trust, is if you have new business models, companies that can look a lot like a bank offer sort of that rebundled set of products and services that looks and feels like a bank account, but isn't subject to the same proactive supervision oversight as an FDIC insured bank. And I think making sure there's clarity between them and consistency for consumers is really key to maintaining that trust. - Thank you Robert, you mentioned...
Kate touched in the marble aspect and you mentioned that that's obviously not, or not as important as some of the regulatory aspects and the insurance aspects. And it brings me into a thought, I'm curious if you need or what the role is of a physical infrastructure or branch, a main office, a place to actually go to. How does that build into the trust environment? And is there a generational divide in terms of actually walking into a financial center? - Yeah, so this is a question we get asked a lot, our branches going away. I think my answer is no.
And one of the analogies I like to use is one of the sort of most digital forward brands that we all know is Apple. When you think of Apple, you think of the glass front stores and Apple stores don't exist to sort of sell laptops. Apple sells less than 10% of its products through its stores, but the stores serve a really important role.
Number one, the stores exist because Apple sells a really complicated product. I don't know how many megs or gigs I need in my computer to get on this WebEx today. So I wanna go in, talk to someone who understands my needs about what type of product I need. A lot of analogies to banking there. And then the trust is equally important.
If I just hit a button online and the computer shows up at my door, that's fine. But if something goes wrong, I typically want to be able to go in and talk with a real person and get it sorted out. So that's really important.
And I think the last thing as we sort of move back to the banking analogy here is the presence in the community. Banking is that relationship driven model. I don't want to and I think that sort of the sum of these answers is the nature of the branch is changing. You go your branch less for transactional day-to-day activities because you don't need to. I can take a picture of a check, I can video chat with a teller, but that presence in the community is important, particularly for building relationships. So I think the nature of the branch is gonna shift more towards that relationship model.
But even with generational shifts, I don't see branches going away. - Perfect. - Yeah I was gonna say, I do not think that marble is doing more for trust than actual FDIC depository insurance. I think the physical infrastructure of a bank is almost the symbol of that trust instilled by depository insurance, because the average American, they're not thinking about $250,000 per customer insured depository. Like that's not the first thought that goes through our heads when we think about banks, well maybe for the five of us, it might.
But for the average person when they're engaging with their bank, I think they're complimentary and they think they're sort of two sides of the same coin. But yeah, I completely agree with what Rob said and yeah, I think it depends on what demographic of people you're talking about. Older Americans still heavily rely on in-person interactions with their banks.
Younger people less so. I mean, unsurprisingly younger people rely more so on FinTech and are more comfortable with engaging with their banks on their phones or online. And I imagined that we'll shift into more of the majority as you my generation becomes the oldest generation at one point. - I think Jeff, we can start a coalition of replacing in God we trust on every single greenback within FDIC we trust. I don't know, you might start that. I think it might make a difference.
- I'm not sure, we'll see you on that one. We'll circle back on that one. Julien, you touched on a stable coins. I did wanna circle back to that briefly. I wanna open up to the entire panel here on where you think stable coins are today, where they could go in the future and are they a disruptive force or are they something that could put new inroads into financial capabilities and availabilities in a global market? And also what your take is on stable coins? Julien mentioned the dollar backing. However, there may not necessarily be "definition" of that dollar backing or testing of it.
So that's why I'm kind of curious to see what everyone's take is here. Jump in as you see fit since this is just a sidebar conversation. - Happy to go first, Jeff. Kate touched on interoperability, and I think today you may be a Venmo user.
And Kate had the example of her friends have PayPal and Venmo and PayPal owns Venmo, but you can't actually send a Venmo payment to a PayPal user. But if Kate and I go downstairs again, using the Starbucks analogy, I can actually hand her a dollar or $5. So the physical dollar is only good as the length of arm that you can extend it out to an individual. I think this is where stable coin really changes the game where you can actually have interoperability, especially on public blockchain, where you have settlement times that are down in the micro seconds and not the days. And again, I think it just expand the reach of the U.S. dollar. And so you're right, we have a presidential working group, a paper that came out three, four weeks ago that talked a little bit about what stable coin project needs to look at.
I was really excited about it. All I want is a regulator and regulations to tell us exactly how we need to operate. But I think the sentiment also we've felt in the past when telecom companies are rolled out to the FTC and said, internet telephony should be banned and it should be illegal and here we are today. So I think, again, this is a progress and stable coin is a progress.
You may have seen this year, I think the stable coin market, there are approximately 200 stable coin projects. Not all of them are created equal, and we can get down to which ones we think are more equal than others. But it's about $130 billion of value right now, starting out the year, much, much less than that. About 600% increase from last year, something like that. So stable coins I think, are here to play and stay and they just offer one more option for the consumer to extend their digital us dollar on.
- Fascinating. Does anyone else want to add anything or do I move on to the next area I wanted to touch on? - Yeah, I'm happy to jump in quickly. Julien, I thought that was...
I agree with a lot of what you said. I think there's a lot of opportunity here. Clearly it's a market that's developing quickly and obviously challenges a lot of regulatory assumptions. This is one of those markets where we see market adoption, really outpacing regulatory ability to sort of keep up.
We have a product that in many ways looks and feels, and I think it's appropriate that in seeing so many FDIC logos here, it looks and feels like a deposit alternative. And so how do we maintain trust while still sort of harnessing the opportunity that is presented here. You mentioned the presence work in group report.
And I think in many ways we thought that was a really good bath forward. We thought that had a lot of recommendations that made sense, frankly. As you look at what a stable coin is and sort of those assets backing it, it does start to feel a lot like a deposit. You have sort of a basket of assets that are being held. You're validating that it is worth sort of the dollar that you have as that store of value. And whether that is really there is really important to maintaining that trust.
I won't name names and different, but there's a one stable coin where the founder sort of famously said, it's worth a dollar if you think it's worth a dollar, whether or not we have the assets backing it. I don't think anyone on this call would think that is the right approach. So how do we make sure that it really is worth that dollar and that you can maintain that trust? So the recommendations in the report, we think it makes all the sense in the world for issuers of stable coins to be considered ensured depository institutions, because that's what makes do. And so a lot of work to be done, a lot of discussions to have, and I'm sure the market will evolve before we get to that end point and we'll have to evolve with it, but we think that's a good directional path forward. - Hey Jeff, can I ask you a question or is it...
Okay on this line, I'm just curious if anyone's views on the relationship between stable coin and central bank digital currency. I mean, if a central bank CBDC is introduced, does that take care of that interoperability function of that stable coins providing and is there still room for stable coins if the CBDC is around? - So I'll take that one, Diane. So my take is one does not preclude the other. So CBDC is whether at the retail level or at the kind of institutional level, commercial levels. So the retail level, I think, would put a lot of downward pressure on banks.
Therefore, I don't think that's the best solution for central banks. However, you may recall about six months ago, one of the fed's payment rails went down for a day. That caused some chaos. As CBDC at the kind of institutional commercial level, I think makes a lot of sense. If you think right now, how many of us have an account at the fed? Only if you worked at the fed, you would have an account of that fed. But 99.9% of consumers do not have an account at the fed.
However, it would modernize the fed payment rails. Therefore I would see a payment CBDC being something of value to the fed as they interact with regional banks. This is your area, Diane, you c