Financial Health

My high point for May has been becoming chair of the board of CFSI -- the Center for Financial Services Innovation.

CFSI’s founder and chief executive is Jennifer Tescher. She’s now my good friend, but I vividly remember the first time I saw her.  We were at a small roundtable in California, an event where I was a veteran and she was a first-timer. I initially assumed that CFSI was a consumer advocacy group, but as Jennifer began to talk, I realized it was a new kind of mission-driven non-profit. She said things I’d never heard before from an advocate -- or anyone at all -- in all my years of working with consumer inclusion and protection. She spoke about using technology to solve consumers’ financial problems. She defined those problems in terms that transcended lack of income or lack of banking services. She even described making venture investments in startups that were building new financial products.

Through my whole career, policymakers have worked from an implicit assumption that financial inclusion is a regulatory issue, needing solutions like the Community Reinvestment Act. Suddenly, someone had new ideas. And these ideas were built on entrepreneurial energy and technology. In a word, on innovation.

CFSI is unique in how it blends research, convening power, thought leadership, and fostering of cutting-edge innovation. It has a membership network. It runs the Finlab, a fintech accelerator funded by JPMorgan Chase that is already producing successful companies. It conducts research, including the landmark US Financial Diaries study, which has just become a book.  It spun off the impact venture fund Core Innovation Capital. It invented and runs FinX, which will come to any group and help participants experience, on the ground, how marginalized consumers navigate the financial system.

The Diaries and other research are reframing how we think about financial inclusion by identifying a crucial dimension of the problem, namely volatility. Millions of Americans are living within their means -- they spend less than they earn -- but can’t rely on mainstream financial services because their incomes and expenses are volatile. They struggle with cash-flow timing problems that require, today, use of high-cost products like payday loans, deposit overdrafts, and check-cashing. Millions spend hours each month driving around town to pay bills on the exact due dates, because cash gets credited without the lags that permeate our payments system. (See Lisa Servon’s book, The Unbanking of America, and also the important new paper by my Harvard colleague Todd Baker.)

Several years ago, these insights led CFSI to reframe its mission from focusing on financial inclusion and the “underbanked” to a strategy of building financial health. The good news is that today’s innovators are attacking every problem in this complex system. It’s becoming possible to equip everyone to lead a healthy financial life, regardless of their income or situation.

I now sit at the CFSI board table in the place once held by our founding chair (and former OTS Director) Ellen Seidman.  I’m awed by the vision of Jennifer, Ellen, and the other founding directors and staff who saw how innovation could transform people’s financial lives, more than a decade before we even had the word “fintech.”

I hope you’ll get involved with CFSI. Please visit the website for a wealth of material, resources, networking opportunities and ideas, and also come next month to the Emerge Financial Health Forum in Austin. I’ll be there, along with hundreds of innovators in fintech, banking, finance, nonprofits, academia, and government, exploring new solutions.

Here are my past podcasts with CFSI:  Jennifer; Core CEO Arjan Schutte, and the Finlab. I’ll do one soon with Rachel Schneider on the US Financial Diaries book.  

Also coming up shortly, is a podcast with the great Brett King, another fellow CFSI board member. As a matter of fact, I’ll share my very fun appearance this week on Brett’s Breaking Banks Radio show.

Updates and Upcoming Events:

• 10th Annual Assessments Summit, June 29th, Arlington, VA

• My podcast:  Heroic Compliance with Lyn Farrell, Treliant

• My podcast:  Outspoken: Bill Harris, Chairman of Personal Capital, former CEO of PayPal and Intuit

• My podcast: Fiat Currency can be Virtual Too: Jonathan Dharmapalan, CEO or eCurrency

As always, check the website for more updates -- and keep innovating!

Jo Ann

Be sure to follow me on twitter and facebook for live coverage of these exciting events!

Changing the World

In the past three weeks I’ve participated in six events on fintech and regtech with international bank regulators – averaging twice a week. There were three in London during the Innovate Finance summit; one in Washington connected with the World Bank spring meetings; one in San Francisco with a Basel task force; and another in New York.

In March there were two more -- the one in Jakarta that I described in last month’s post plus a briefing in New York for senior bank supervisors from the major economies.

That’s six meetings on three continents, with regulators from six continents, just in March and April -- and just the ones I went to. And I got invited to more.

Something big is happening.

It’s an awakening, by governments worldwide, to the new world they face as innovative technology transforms finance, and especially to the magnitude and speed of the change confronting them. Central banks and bank supervisors are moving to address two things.

First, they have to figure out how best to regulate fintech in order to see its promise fulfilled while blocking the downside risks embedded in it. That’s a daunting task -- walking a knife-edge to avoid choking off innovation that can bring enormous benefits to financial customers and  markets. Regulators are realizing that they must develop new skills, models and cultures, must work toward common principles without imposing static standards, and must learn to move more quickly despite uncertainty. They are recognizing that stepping forward is risky, but so is standing still.

Second, regulators are moving to adopt regtech. The same new technologies that are driving fintech – big data, artificial intelligence, distributed ledger technology (DLT) and others – can now be harnessed to transform regulation itself. Experiments are underway from London to Singapore to Australia.

One example is RegTech for Regulators Accelerator, or R2A, using funding from the Gates Foundation and Omidyar Network, among others, to help several countries develop concrete solutions for specific regulatory priorities. Another is the UK’s Financial Conduct Authority “tech sprints” (hackathons) to fashion new regulatory approaches.

Some of this innovation is about the drive to reach full financial inclusion through cell phones and digital technology (see my podcast ‘Financial Inclusion is Coming Fast’ with AFI’s Alfred Hannig). Some of it is just about bringing regulation into the digital age.

Technology is creating a chance for optimization -- a rarity for government -- that can improve public policy outcomes and cut regulatory costs, at the same time.

The London Innovate Finance and FCA International FINTECH Conference events were especially thought-provoking. Visionary regulators have begun a true global dialogue.

 And it was especially fun recording THIS VIDEO in London with Hub Culture.

Speaking of vision, I enjoyed moderating a session month at the FinXTech Summit in New York, especially because, finally, someone is bringing together fintechs and forward-looking community banks in the same room. I think the future of community banks depends on partnering with innovators.  The summit was sponsored by Bank Director magazine, which also quoted me in an interview this month.

I also was pleased to contribute to the GAO’s important new report on regulatory oversight of financial technology, which came out this month.

Last but certainly not least, I had great fun recording this podcast with Zach Miller of Tearsheet about regulation innovation and my own adventures in podcasting. It’s always delightful to be the guest instead of host!

As always, check the website for more updates.  I hope to see you June 15th, in Austin, TX, for the Center for Financial Services Innovation gathering (CFSI Emerge) and at the ABA’s Regulatory Compliance Conference in Orlando.

Keep innovating!

Jo Ann

Speeding Up

March has been a month of exploring places where change is happening even faster than we realize.

First, I forayed into the land of emerging technology at SouthBySouthwest, or SXSW. This is the huge annual conference that runs three overlapping festivals -- on music, film and tech -- in downtown Austin. SX (“South By,” as it’s affectionately called) has no fintech track, which can make it less appealing to financial professionals than, say, Money 2020 or LendIt (where I also spoke this month on the OCC fintech charter and a panel on China). Nevertheless, I always urge people to go. For one thing, it has great financial content, including panels and product unveilings by major financial companies.

More importantly, SX expands the horizons of finance people, because we tend to forget that fintech is more 'tech' than 'fin'. Its drivers are the huge technology trends reshaping everything about how we live, with finance being just one small facet. It’s easy to underestimate the speed and size of these changes because most of them are developing over the horizon, out of sight, in the tech world itself. SX is the efficient -- and fun -- way to go see them up close, from cars and robots to health and food.

This year’s big trends included artificial intelligence and machine learning, virtual reality, voice technology, and bots, including chatbots, all of which are coming soon to a financial product near you. So are the related challenges around cybersecurity, cybercrime, privacy, data ethics, and many more thorny issues that were thoughtfully explored by SX’s speakers. I posted live to my facebook.

Plus, it was extremely cool to walk around on Mars, via a VR headset, at the NASA booth. And don’t even get me started on seeing the creators and stars of Game of Thrones….

My second exploration in an accelerating world was geographic -- a week in Jakarta at the Fintech Stage Inclusion Forum, sponsored by the Gates Foundation and Omidyar Network for central banks, financial regulators, innovators and banks on how to regulate fintech to build financial inclusion. Regulators came from at least six continents, sharing experience and ideas on how to regulate fintech and how to use regtech, themselves, to redesign the regulatory process itself.

Every time I speak at a global conference like this, my takeaway is that U.S. policy lags far behind the world’s leaders on fintech and regtech. There are good reasons for this -- in some ways our problems are less urgent than those of the developing world, plus our fragmented regulatory structure makes it hard for American policymakers to galvanize change. We need to move forward, though. If we don’t, we could lose our edge in innovation.  

Meanwhile, fresh on the podcast this month is a millennial building for millennials - Ollie Purdue of LOOT.

Plenty more excitement to come! As always, check the wesbite for more updates:

• April 10th, London - Innovate Finance

• April 12th, London - FCA International FINTECH Conference

• April 19th, Washington - World Bank workshop on Digital Financial Inclusion

• April 20th, San Francisco - Brief international financial regulators on fintech

• April 26th, New York - FINXTECH Annual Summit

• June 15th, Austin, TX - Center for Financial Services Innovation (CFSI Emerge)

Technology is transforming finance, and regulation too. But most of us need to move faster to make it work!

Jo Ann

Be sure to follow me on twitter and facebook.

Hummingbird

As someone who spends my time on high-level ideas and trends in financial innovation and regulatory strategy, I took an important step last year:  I cofounded a startup.  It’s called Hummingbird Regtech, and it aims to transform compliance through cutting edge technology, starting with anti-money laundering.

For me this is learning by doing, and the practical, concrete process of designing a next-generation compliance tool has already brought me insights I never would have found by doing policy work at 30,000 feet. The breakthrough moments have come from brainstorming with my colleague Matt Van Buskirk, who is a regulatory expert. Matt likes to say that when you tell fintech engineers about regulatory requirements, their first reaction is usually disbelief, as in, “you have to be kidding -- why would we need to do that?” The next is that they set out to design an efficient, effective way to get it done. If you tackle that task with no preconceptions and no legacy tools, and instead just apply new technology to a blank slate, you can create tools that are faster, cheaper and more effective in reaching public policy goals, all at once.

The Hummingbird work is giving us more than ideas for compliance solutions. I’ve predicted that 2017 will be the year of “regtech,” a term that has two meanings. One is using updated technology to comply with regulations. The other refers to use of new technology by regulators, themselves, to enhance their own work. Regulators around the world are innovating, using big data, machine learning, API data feeds, and other new strategies to rethink everything from bank regulatory reporting to detecting patterns of insider trading.

As I spend time with tech people on these problems, we are finding ourselves evolving a whole new vision for how regulations could be designed in the digital age. The core shift should be from creating regulations as linear processes -- rules, policy, procedure, and the like -- to framing them as technology “systems” that can be flexible, easily updated, and constantly improving. I’m convening a cross-section of regulatory experts, engineers and designers to flesh out the concept and will expand and share this further in the coming months.

This is an exciting time, stay tuned as I will also be sharing more on Hummingbird as it launches live pilots this month! 

In addition to discussing fintech and regtech with global senior supervisors at the New York Federal Reserve Bank in early March, I am also very much looking forward to what's up next: 

• April 10th, London - I’ll speak on regtech at Innovate Finance, and later that week I’ll  join in the regulatory forum of the Financial Conduct Authority

• April 26th, New York - FINXTECH Annual Summit - Panel on Key Regulatory Perspectives

• June 15th, Austin, TX - Center for Financial Services Innovation (CFSI Emerge), FInancial Health Summit.

Technology is transforming finance. It can transform regulation too! Exciting times ahead!

RegTech and the Trump Disruption

2017 will be the year of “regtech.”

That’s partly because this new technology is growing exponentially, and also because it can find fertile soil in the turmoil of Donald Trump’s Washington, where everything is suddenly open to change.

Most of the U.S. financial world has not even heard the term yet (again, that will change this year). It has two meanings. There is regtech for regulators -- applying new technology to the regulatory process itself. There is also regtech for industry, as innovators create new-generation compliance tools that simultaneously slash costs and strengthen public policy outcomes.

Worldwide, these trends are moving fast. Countries from the UK to Singapore have established regtech learning labs, and the developing world is a hotbed of experimentation as regulators rush to keep pace with the financial transformation driven by smartphones. Meanwhile, capital is pouring into startups inventing new tools for financial companies. Innovators are realizing that the same technologies behind fintech -- big data, AI, blockchains, and more -- will also revolutionize regulation.

The trend is slower in the United States, partly because our fragmented agency structure impedes change. However, regtech is the single best path to regulatory streamlining, a top priority of the new administration.

I myself have cofounded a regtech firm to automate AML compliance, which I’ll tell you about soon!

Meanwhile, please enjoy the latest podcasts featuring Theo Cosmora of the OneDollarSmartphone); LendUp CEO Sasha Orloff, and the formidable former SBA Administrator and Harvard Business School Fellow, Karen Mills, on fintech for small business.

 Karen Mills, Harvard Business School senior fellow and former SBA Administrator, says, “The industry needs regulatory policy.”

And here’s what’s coming up :

• March 6th, New York - LendIt USA hosts its huge annual conference on lending fintech. (I’ll join a lively panel there on the OCC’s fintech charter concept.)

• April 10, London - I’ll speak on regtech at Innovate Finance, and later that week I’ll  join in the regulatory forum of the Financial Conduct Authority

• April 26th, New York - FINXTECH Annual Summit - Panel on Key Regulatory Perspectives

• June 15h, Austin, TX - Center for Financial Services Innovation (CFSI Emerge), FInancial Health Summit.

Disrupting Regulation in 2017

Friends,

As the year turns, we sweep out debris and start clean, focused on goals, fixed upon hope.

2016 was the year of disruption. In December I was in Europe, where I found nearly every financial executive, startup founder, regulator, and taxi driver wanting to discuss the U.S. election. The whole world feels shock waves from our seismic event.

Disruption, always, destroys and creates. Old assumptions crack or collapse. Hardened ground softens. Change takes root. The change, always, is both bad and good. The balance of positive and negative outcomes depends, ultimately, on how people use the forces released.  

Financial regulation is ripe for change -- especially as technology disrupts the industry and with it, inevitably, the rigid regulatory framework we’ve built around it. Our regulatory system has important strengths to preserve and serious weaknesses to fix.

My 2017 resolution is to pursue regulatory disruption, to help shape new, better policy for finance. We should foster market innovation through fintech. We should foster regulatory innovation through regtech. We should build new channels of dialogue. We should use disruption to do better, together. I’ll look forward to working with all of you to try to make that happen.

Last month I spoke in Geneva at a global UN regulatory forum on how fintech can build financial inclusion. Two days earlier, I spoke in London at FINTECH CONNECT LIVE, where people from around the world explored disruptive forces ranging from Brexit to blockchains. The world is alive with new ideas.

Let’s learn and think about them, and channel them to good use.

I wish all of you the best of progress, and the blessings of peace, in the new year!

Guest Blogger : Katherine J. Flocken on Not Forgetting those Most Desperate

For the holiday season, here is a moving and thought-provoking post by guest-blogger Kate Flocken, about the the need to make it possible for people of every background, in every corner of the world, to lead healthy financial lives.

I wish you all peace and joy in the new year. Jo Ann

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As the Holiday Season Arrives Remember Those Most Vulnerable

Snow dusts the ground in the woods just outside of Freeport, Maine. It’s 32 °F when Jack and his two dogs emerge from their tent. Jack’s breath makes clouds in the chilly air while he heats his camp stove and prepares for the day. First he will sneak to a nearby RV campground to use the shower facilities, before looking for work, and someone willing to pay in cash.

Jack is not camping — he is running from his debt. When he moved out of his parents’ house to start college he received offers from credit card companies offering him accounts. The sign-up was easy and he started to rack up debt which spiraled out of control. Eventually he became so overwhelmed by his situation that he left his home to move someplace without an address and where his creditors could not find him. He does not see a way out of his present situation. He does not see any way to pay off his debts or rebuild his credit and he is not interested in opening a bank account because he is trying to live an invisible existence — no address. Cash only.

Over 8,000 miles away in a six-person community in southern India, Akshat and Lavanya are gathered with other members of their small community for a meeting. They are arguing with a woman, Padma, with long dark hair and glasses. The people living in the community are all victims of leprosy and the woman is the representative of a charity that is interested in working with them on a micro-lending program. The people in this community live in one building which is made up of small, 5’x4’ concrete rooms. In these rooms they have a mat on the floor to sleep on and a pail of water for both drinking and hygiene. Lavanya has a flower pot outside of her door. There is no electricity or plumbing.

The participants in the meeting are telling Padma that they do not want to be part of the micro-lending program because they do not want to risk losing eligibility for a monthly shipment of rice and beans. Padma is trying to convince them that by participating in the program they will not need the shipment because they will have a better, and self-sufficient, living.

These two situations have far more in common than it appears on the surface. In both cases the individuals involved are struggling financially and are trapped by a sense of hopelessness. They are afraid to seek help for fear of losing what little they have. They also completely lack access to or desire for any sort of financial services.

These situations highlight the immense difficulty of reaching the most underserved. Even if Jack, Akshat and Lavanya had access to a bank branch or any sort of technology, they have spiraled to a point where it is unlikely they would utilize available tools. This underscores the challenge that must be met in order to enable even the most underserved and desperate consumers to improve their financial health.

The financial services industry is experiencing tremendous change driven by startups and other organizations aiming at the un- and underbanked populations all over the world. This revolution of global fintech technology presents a tremendous opportunity to reach the underserved — but it is important to remember those who have fallen so far out of the system that they have given up.

As the temperatures drop and we celebrate the holiday season it is worth taking time to think about those who are most vulnerable and in need of help.People like Jack, Akshat and Lavanya are in need of thoughtful and considered effort to help them build their financial health and regain their pride and self-sufficiency. The first step is understanding that these consumers exist and recognizing the difficulty of reaching them. While we budget for gift buying and strategize how to navigate family dynamics it is important to consider how we can help those who must focus all of their resources on day-to-day survival. Though reaching these consumers is immensely challenging, it is crucial that innovators do not forget the most desperate members of our population — that they consider the possibilities of how their products can meet people where they are — and how new solutions can effectively engage even the most underserved.

Kate Flocken works for a nonprofit dedicated to promoting consumer financial health. She is a former U.S. Senate staff member.

Please note - the opinions expressed herein are my own and are not related to any organization.

Fireside chat with Richard Cordray at Money 2020

Last night I had a fireside chat with CFPB Director Richard Cordray on the main stage at Money 2020.  It was the first time a federal agency head has addressed the world's largest financial conference (11,000 people this year), and he did not disappoint.

Director Cordray explained how the CFPB will play its leading role in regulating financial innovation. Not surprisingly, he called on the thousands of innovators in the audience to design products that help, not harm, consumers. He said startups should have compliance in their DNA, from birth.  He promised to make enforcement tough but fair.  He announced the first-ever report on the Bureau's Project Catalyst, its regulatory "sandbox"-type program that tests innovative concepts that raise regulatory questions.

And then he said two things that are making news today.

First, he said the CFPB is going to assure that consumers can control their own financial data, including to let third parties help them manage their finances. Today's personal financial management (PFM) tools increasingly work by having the customer allow access to bank account information for analysis of income and spending flows.  Examples are Mint and Digit (see my podcast with Digit CEO Ethan Bloch about making saving easy, automatic, and even fun).  In recent months, banks have voiced concern that such solutions may not be reliably safe, and some institutions have cut off access or made these new tools much harder to get. While consumer safeguards may be needed, the core principle of customers' right to their data is fundamental to achieving the promise of fintech. It's also enshrined in the law, in Section 1033 of the Dodd-Frank Act which empowers the CFPB to write rules on the issue. Director Cordray last night announced a priority to move forward in securing these rights.

Second, the Director also said the Bureau will take on the thorny issue of how lenders can use nontraditional data in evaluating credit risk. Many people (including me) believe that new kinds of data are a key to widening financial inclusion (especially when paired with low-cost mobile services). Tens of millions of Americans have thin or no credit files, or complex situations that prevent accurate underwriting under traditional scoring. Today's big data and machine learning make it possible to fine-tune risk assessment of these people and find the many who are actually creditworthy.  That effort collides, however, with the equally powerful policy goal of fair lending. Use of alternative data is so novel that lenders can't tell what factors can be considered without potentially violating the laws against discrimination through "disparate impact." Some data types will undoubtedly have disproportionate adverse effects on one group versus enough in terms of race, gender, ethnicity, and other borrower characteristics. When such effects occur, the burden shifts to the lender to demonstrate not only that the data accurately predicts credit performance, but also that there are no alternatives with less discriminatory results. Precisely how to do so is unclear.

This uncertainty inadvertently undermines the policy goal of encouraging lending to creditworthy consumers who have moderate incomes. Most such loans are not highly profitable anyway, when done responsibly.  When they also carry extremely high regulatory risk, many lenders simply avoid the market. In other words, the goals of consumer protection and inclusion can work against each other.

Today, new technology makes it possible to have both -- if regulators provide ground rules on using non-traditional data that are clear enough to follow without enforcement fear. The CFPB has embarked on a path to provide it.

In our fireside chat last night, I said data is the circulatory system for innovative finance, the life's blood. If it can't readily flow and be used - within appropriate safeguards - finance will develop heart disease. The system will be weakened by blocked arteries and loss of oxygen, and some parts - with high potential to help consumers -- will die. Last night, the CFPB took on not one, but two, of the policy challenges most crucial to building a healthier financial system for everyone. Good for them.


Director Cordray's speech             

New report on Project Catalyst  

New CFSI report on principles for data aggregation