Regulators & Sandboxes: Wai-Lum Kwok on Abu Dhabi's Reglab

“Sandboxes.” “Greenhouses.” “Pilot tests.” “Labs.”

These are not words we normally associate with financial regulation. Yet suddenly, all over the world, regulatory agencies are giving these novel names to a new,  unconventional kind of initiative.

The break from tradition is being driven by a realization:  they are going to need to find new ways to do their jobs well, in the face of fast-moving technology change and fintech innovation.

My guest today oversees one of these fascinating programs -- Abu Dhabi’s Reglab. He is Wai-Lum Kwok, Executive Director for Capital Markets at the country’s Financial Services Regulatory Authority.

The world’s most famous regulatory sandbox is run by the UK’s Financial Conduct Authority (which was inspired, in turn, by the CFPB’s Project Catalyst in the United States). We will have a podcast this fall with the FCA, which has just put out a new progress report. Speaking as a former regulator myself -- I was once Deputy Comptroller of the Currency -- I view the FCA’s effort as a remarkable case of regulatory leadership. (Here’s an article I wrote about it for Fintech Law Report.)

When the FCA’s initiative was launched it quickly caught the attention of other regulators around the world. As of today, approximately twenty countries have some form of innovation hub or sandbox underway or on the drawing board, including notably Australia, Singapore, and Hong Kong. The Aspen Institute will soon issue a report with a global overview, which we’ll link to in this episode’s show notes when it’s published.

These sandboxes have a wide variety of designs and specific objectives. As Wai-Lum explains in this episode, the Abu Dhabi initiative accepts a wide range of companies and gives them two years to demonstrate that their innovations will be beneficial and safe. The Abu Dhabi approach, like the UK’s and others, links to a wider national strategy to attract capital and companies wanting to do business in a regulatory climate that welcomes responsible innovation. Some of these countries are cultivating regional and even global leadership positions in fintech.

Note that we recorded today’s episode late last year. In May of 2017, the Abu Dhabi Reglab announced its first cohort of companies.

We had this conversation in the bustling exhibit hall at the Fintech Festival sponsored last fall by the Monetary Authority of Singapore (think about that for a moment -- a central bank ran a 14,000-person fintech meetup, and this year’s will be even bigger).  Our discussion was short, but the topic is one of the most important ones we’ve ever discussed on Barefoot Innovation. I’ve been thinking hard about how regulators are going to keep up with technology innovation in finance, and the answers are not going to be easy. Our regulatory frameworks are designed to be deliberate -- and therefore slow-moving. And to be conservative, and to focus on preventing risk, not fostering change. Some countries have mandates to foster competition, but most, including the United States, don’t. I’ve been researching this challenge in the book and paper I’ve been writing for the past two years as a Senior Fellow at the Harvard Kennedy School Center for Business and Government. Over that period I’ve talked with regulators, innovators, and incumbent companies throughout the United States and all over the world.

I’ve come to an opinion that might be controversial, but here it is. I think regulators will not be able to do a good job of overseeing emerging technology change, unless they create mechanisms for doing empirical testing. I think sandboxes, in some form, are not just helpful, I think they’re necessary.

Of course, it’s far too early to tell how well they will work and which models are best. The regulators running them emphasize that they are figuring this out as they go along. No one thinks sandboxes are panaceas. Nevertheless, the very process of undertaking these experiments is moving a community of regulators forward in deeply understanding fintech innovation -- both its promise and, importantly, its perils.

Despite the sandbox movement sweeping the world, the term sandbox, itself, has fallen out of favor among many in the United States. For one thing, sandboxes sound, well, unserious. For another, there has been talk of using sandboxes to waive or suspend consumer protection rules while companies experiment on real, live human customers. In practice, such suspensions aren’t happening anywhere to my knowledge, but the issue is obviously politically sensitive. (Also, Innovate Finance in London is working on a “virtual sandbox” that could work by modeling innovations using pooled data, so that real consumers would not be affected).

So, fine. Let’s not suspend consumer protections (even though a lot of these laws don’t actually protect people very well). And let’s call these initiatives greenhouses, or pilots, or, as Abu Dhabi does, laboratories. In our conversation, I told Wai-Lum that I too came up with the name “RegLab” for a project I’m working on, exploring the idea of creating a non-profit that could function as an interagency regulatory sandbox in the United States. The U.S. is unique in the world in our dizzingly complex, fractured regulatory structure (five federal financial supervisory agencies, plus dozens of other federal agencies, plus 50 states). We’re going to have to figure out two things -- how to coordinate a coherent fintech regulatory strategy and how to keep up with exponentially growing technology change. If we don’t, we’ll lose our global competitive edge.

There is much more to say on all this -- again, I think it’s one of the most important issues facing the regulatory community -- and we’ll have more shows on it coming up. For now, please listen to my fascinating conversation with Wai-Lum Kwok about the Abu Dhabi RegLab.

More about Wai-Lum Kwok

Wai Lum joined the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) in June 2015.  He heads up the Capital Markets division responsible for admission and supervision of financial market infrastructures and capital market intermediaries.  The division also regulates the offering of securities, collective investments schemes.

Wai Lum also spearheads FSRA’s strategy and efforts to support the supervision of innovation in Financial Technology (FinTech) and development of the FinTech ecosystem in ADGM.

Wai Lum has more than 10 years of supervisory experience.  Prior to ADGM, Wai Lum served as the Director of the Capital Markets Intermediaries Division of the Monetary Authority of Singapore.  Wai Lum graduated from Imperial College, London with an M.Eng in Electrical Engineering and holds an M.Sc in Applied Finance from the National University of Singapore.  He is a CFA charterholder.

More links

•  The Abu Dhabi Reglab -- www.ADGM.com, or email fintech@ADGM.com
•  ADGM’s Reglab consultation paper
•  My podcast on sandboxes with BMO’s Nitish Pandey
• June 2017 Treasury Department  summary of proposed financial reforms including enhanced interagency coordination
• Bill proposed by Congressman Patrick McHenry (in last Congress) to require financial regulators to coordinate on fostering innovation

More for our listeners

Please remember to review Barefoot Innovation on ITunes, and sign up to get email notifications for new podcasts, the newsletter, and blog posts at jsbarefoot.com.  

Also go to jsbarefoot.com to send in your “buck a show” to keep Barefoot Innovation going, and join my facebook fan page. I hope you’ll also follow me on twitter.

Support our Podcast

Meanwhile, watch for a summer of amazing shows, including CFTC Acting Chairman Christopher Giancarlo; John Ryan of the Conference of State Bank Supervisors; and breakfast in London with the one-and-only Brett King. And watch for our special show that I recorded at the ABA’s Regulatory Compliance Conference in Orlando, including a talk with Andy Sandler and one with Gene Ludwig and Allistair Renee of Watson Financial.

Here’s my perhaps counter-intuitive takeaway from the ABA conference:  #ComplianceIsCool!

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Colleen Briggs : Financial Inclusion Innovation Powered by JP Morgan Chase

Today’s guest is Colleen Briggs, Executive Director for Community Innovation and Corporate Responsibility at JPMorgan Chase. Colleen leads a visionary effort that is part of JPM’s commitment to building “more inclusive growth,” globally, by finding innovative models that build financial access and economic expansion.

Our timing is great because just last week, the Center for Financial Services Innovation announced its new class of winners for the Financial Solutions Lab competition. The Finlab is funded by a $30 million, five-year commitment from JPMorgan that Colleen oversees, aimed at finding, supporting, and scaling innovative ways to promote consumer financial health. This is part of a $1 billion program that the bank has undertaken globally.  

Here is a link to the JPMorgan press release on this year’s competition, which includes an overview of the winners, and here is a further article by the American Banker.

Colleen comes to this work from a diverse background at nonprofits, on Capitol Hill, and now in the private sector, searching for better solutions for lower-income financial consumers. In listening to her, I was struck by the degree to which she has her finger on the pulse of the trends underway, both globally and in the U.S.  She shares insights on how to make it profitable to serve low income customers; how to win the trust of consumers who are wary of digital products; on the failures of traditional financial education; on the primacy of behaviorally-based product design; on the need for new business models; on how to build partnerships between banks, fintechs and community organizations; on how innovative cultures can take root in big banks; on platforms that can get new solutions to scale; on the business opportunity for banks -- and their corporate customers -- from building global inclusion; on mixing high tech and high touch and the limits of automation; and on how to shift the whole marketplace. She has wise advice for all the players.

Since we recorded this episode, I’ve become the board chair at CFSI. Last week we held the Emerge Forum in Orlando, where a record audience talked about exciting new ideas for financial health. There was huge enthusiasm there about the new Finlab winners. In a sign of the maturing of the fintech startup world, three companies in this year’s class are reaching beyond the typical millennial customer base and instead building new tools for seniors. Watch for their progress.

Here are my other podcasts with the Finlab and past winners Digit, Ascend, and Bee.  

More on Colleen Briggs

Colleen Briggs is Executive Director of Community Innovation within the Office of Corporate Responsibility and Global Philanthropy at JPMorgan Chase & Co, a global leader in corporate philanthropy with $200 million invested in communities annually. She is responsible for helping establish and execute the firm’s global philanthropic and corporate responsibility financial capability, including the Financial Solutions Lab, and community development strategies, including PRO Neighborhoods. The Lab is a $30 million, five-year initiative that convenes leading experts in technology, behavioral economics, and design to improve consumer financial health. PRO Neighborhoods is a five-year, $125 million program that works to increase the availability and accessibility of vital economic opportunities in vulnerable neighborhoods across the country. Colleen also manages the Foundation’s portfolio of global financial inclusion grants, impact framework and grant guidelines and works with the lines of business to share best practices to improve the firm’s products and services.    

Prior to joining, Colleen was the Economic Policy Advisor to Senator Debbie Stabenow. In this role, Colleen managed the Senator’s economic portfolio, including policy related to financial services, tax, small business, job creation, community development, manufacturing, and housing. Colleen managed the Dodd-Frank market reforms for the Senate Agriculture Committee, and helped draft the Recovery Act, TARP, the Dodd-Frank Act, and healthcare reform.

Colleen is a member of the Asset Funders Network Steering Committee and the Innovations for Poverty Action Policy Advisory Group. She earned an MBA from the Yale School of Management and a B.A. from the University of North Carolina at Chapel Hill.

More links

Some organizations Colleen mentioned:

Neighborhood Trust / FlexWage / Lending Club / LendStreet / Propel

And more for our listeners

Please remember to review Barefoot Innovation on ITunes, and please sign up to get emails on new podcasts and my newsletter and blog posts at  jsbarefoot.com.  

Also go to jsbarefoot.com to send in your “buck a show” to keep Barefoot Innovation going. Please also join my facebook fan page, and follow me on twitter.

Support our Podcast - Send "A buck a show"

And watch for upcoming podcasts. My guests include Christopher Giancarlo, Acting Chairman of the CFTC; Brett King, founder of Moven; John Ryan of Conference of State Bank Supervisors; and a special series we recorded at the American Bankers Association Regulatory Compliance Conference this month. The ABA show includes a conversation with Promontory CEO (and former Comptroller of the Currency) Gene Ludwig and Alistair Renee of IBM Watson, who have teamed up to bring artificial intelligence to compliance through regtech.

See you soon!

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Making it Easy : Intuit's Al Ko

Here’s a question: Would you like to file your taxes with just a keystroke, after your electronic devices automatically organized all your information and prepared the return? Here’s another -- do you think you’ll still be driving, five years from now?

Today’s episode is a far-ranging conversation with Al Ko, Senior Vice President and Managing Director of the Consumer Ecosystem at Intuit. Among other things, he heads up Mint, which is deeply innovating about healthier ways for us to live our financial lives.

Al reminds us that Intuit founder Scott Cook pioneered PFM -- personal financial management that leverages technology to simplify financial tasks (That story is recounted memorably in Eric Ries’ book The Lean Startup.)  Intuit then acquired Mint. PFM tools work wonderfully, if you have the time and motivation to pay active attention. Unfortunately, though, most of us don’t. It’s been estimated that maybe two percent of people actively use PFM tools. The other 98% struggle, and juggle our many financial tasks, and sometimes drop those balls. Al says American consumers pay $77 billion a year, just in credit card late fees. Just for, basically, forgetting to send in even the minimum payment by the due date.

Fortunately, big trends are bringing new solutions are starting to make the juggling easier, or even unnecessary. Finance will still be complicated, but it will feel simple.

This is critical, because complexity is one of the main drivers of people’s financial problems and bad financial health. Financial services are just inherently complicated, intrinsically hard to understand and hard to manage. If we can make it easy, a lot of problems simply go away.

The foundational breakthrough is that technology can now easily consolidate our disparate financial information in one place, electronically. Once it’s all there, technology tools can easily organize and analyze it. Then that consolidated information can be teed up, through new PFM tools, to give us at-a-glance insight on where we stand -- comprehensively, always up to date, and also benchmarked, if we want, against our goals, like what we’re saving for, or against emerging standards that can help us know whether we’re financially healthy, or not.

Next, and crucially, new tools can also easily take the initiative to send us alerts, reminders, to do things like paying a bill, or like pausing before we make a payment that will cause us to fall short on the next rent payment.  Not wait for us to look up a bill or find a statement, but initiate a reminder, in the midst of our busy lives.

Now add in behavioral science-based tools, so that, instead of being boring, our financial management can become engaging, even entertaining and fun, or even funny (see my past podcast with Digit). Behavioral science can also “hook” us on good behavior through rewards and reinforcement that are psychologically effective.

And then, as Al explains in this episode, all this will become universally accessible across all our devices.  We’ll be able to get those reminders, or get our questions answered, anywhere, anytime, all the time -- in our house, our car, our phone, our watch.

And we’ll be able to do it, when we want to, just by talking. We’ll use smart voice assistants like Alexa, the Amazon Echo, or Google Home.  No need to open apps, or look things up. No need, even, to find the phone, or even press a button. We’ll simply be able to speak, into the air. That may not seem like a big deal to you if you’ve been using, say, Siri, but back to the point on behavioral psychology, the tiny nuance of easiness can make a huge difference in actually using a solution.

Your voice assistant increasingly will be your full financial assistant (Capital One customers can already use Alexa for banking). If you want it to, it will greet you as your pour your morning coffee and say, “The electric bill needs to be paid today. It’s $28.” And you’ll say, “Okay, pay it.” And then you can say, “What’s my account balance?” And, “Have I saved enough for my vacation?” And, “Where am I on my savings goals?”

Now add in geolocation. For better or worse, our phones know where we are. So we’ll soon have financial apps that will send us a text, or vibrate the watch on our wrist, with a message:  “I see we’re at the grocery store. We can spend $75 here today.”  Or, “I see we’re walking toward the coffee shop. You asked me to remind you that this week’s latte budget has already been spent. Keep walking!”

We’ll also be able to give our assistant, our helpful bot, a personality, an avatar, with a persona that is most motivating for us, whether it’s, say, a basketball coach or a friendly dog.

As Al explains in today’s show, Mint has a new bill-pay app that already does some of these things,  and it has many more tools like these on the drawing board. They are not science fiction. These technologies already exist, and innovators are working fast to bring to us.

Are there new risks in these new tools? Sure. There are risks and drawbacks in all innovations, and we should be working on addressing them.

But here’s how I view that trade off. I’ve spent my whole career working with efforts to protect and empower financial consumers through regulation. And now, I look at these new technologies and realize, these are the solutions. With tools like these (and many more that are emerging) everyone will be able to live a healthy financial life, in the sense of easily understanding and managing their money. Easy budgeting, easy bill-paying, easier saving, easier investment, easier selection of the best product, easier self-discipline -- all of it.

To make that happen, there’s a key challenge to solve for:  how will tools like these become profitable enough that providers will offer them to everyone? What are the business models that will evolve, and how can we be sure they’re transparent and fair?

I talked about that with Al Ko, and about the need for consumer empowerment on using financial data, and about what Mint does today, and will be doing soon, and about its ambitious future vision around for Powering Prosperity and Financial Freedom, globally.

More information

My past podcast with Colin Walsh of Varo, which offers a financial assistant chatbot.

More for our listeners

Remember to review Barefoot Innovation on ITunes, and please sign up to get emails that bring you the newest podcast, newsletter, and blog posts, at  jsbarefoot.com.  

Also go to jsbarefoot.com to send in your “buck a show” to keep Barefoot Innovation going. Please also join my facebook fan page, and follow me on twitter.

Support our Podcast - Send "a buck a show"

And watch for upcoming podcasts including John Ryan of Conference of State Bank Supervisors, Colleen Briggs of JPMChase, and a series I’ll be recording from the ABA Regulatory Compliance Conference in Orlando. My guests will include Andy Sandler of BuckleySandler, and also Gene Ludwig and Alistair Renee of IBM’s Watson Financial on how artificial intelligence and machine learning will transform compliance.

Last but not least, I’m now the chair of the board of CFSI, the Center for Financial Services Innovation. Be sure to join us at the Emerge conference in Austin. There’s nothing else like it!

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Fiat Currency Can be Virtual Too: Jonathan Dharmapalan, CEO of eCurrency

Bitcoin began in 2009 -- only eight years ago -- and set forces in motion that are only starting to show their potential power. One was a byproduct -- the creation of the blockchain, or distributed ledger technology, DLT, is now on its way to disrupting activities far beyond payments, from  value chains to contracts. The intentional innovation was establishing a new form of currency -- virtual or digital currency -- that functions as alternative payments system that operates on the internet rather than through banks and the ACH.  The financial system is still in the early stage of grappling with the potential benefits and risks arising from this mold-breaking model (I wrote about some of those issues three years ago in my blogpost on The Benefits of Bitcoin.)

My guest for today’s show brings yet another angle -- a unique one -- to rethinking money. He is Jonathan Dharmapalan, Founder and CEO at eCurrency Mint, Ltd. Jonathan spent 25 years in telecommunications field, including becoming Head of Enst & Young’s Global Telecommunications Center in 2011. His insight, at eCurrency, is that the best way to capture the power of digital currency is to have governments, themselves, issue it.

Jonathan and I met during the annual meeting of AFI, the Alliance for Financial Inclusion, in Fiji, and he explained his vision for building a new system based on government-issued e-currency. He argues that this concept can capture the best of both worlds, combining the stability and confidence that comes with well-managed traditional currency, and adding the advantages of virtual money such as speed, ease of use, and infinite divisibility.

I loved this conversation because it exemplifies how innovative thinking in finance, once it gets “released into the wild,” can spark more and more creative thinking, far beyond what the originator innovators had in mind. Often, it leads to solving problems we don’t even realize we have, because, well, we just assume the world is a certain way and we can’t picture anything else.

It reminds me of the quote attributed to Henry Ford -- apparently erroneously -- that if he had asked his customers what they wanted, they would have said, faster horses.

More about eCurrency

Jonathan’s Background:

Jonathan Dharmapalan is Founder and Chief Executive Officer at eCurrency Mint Limited. He became Head of the Global Telecommunications Center at Ernst & Young LLP in May 2011, responsible for leading a team of over 2,000 telecoms specialists across the world. He has had a 25 year career in telecommunications and the related sectors of technology, media and entertainment, and led Ernst & Young's Telecommunications Center in Beijing. He began his career in telecommunications at AT&T Bell Laboratories. Mr. Dharmapalan holds a Bachelor of Science degree in Electrical Engineering from Northeastern University and a Masters of Science degree in Electrical Engineering from The California Institute of Technology.

More for our listeners

Many exciting things are happening.

First, I’m happy to say that I recently became chair of the board of directors at CFSI -- the Center for Responsible Innovation.  If you haven’t signed up yet to come to our Emerge conference in June, be sure to do so!

Also come, that same week, to the ABA’s Regulatory Compliance Conference. The ABA is innovating in its format this year, including by having me record some very special podcasts straight from the conference floor. I’ll also be holding a fireside chat on the main stage with Gene Ludwig of Promontory and Alastair Renee of IBM Watson, on how regtech will change compliance, including through their formation of IBM Financial to bring Watson’s artificial intelligence to regulatory challenges.

And it’s not too early to put Money 2020 U.S. on your agenda for October. I’m going to MC the conference regulatory track, which has some fabulous speakers.

Remember to review Barefoot Innovation on ITunes, and please sign up to get emails on new podcasts and my newsletter and blog posts at  jsbarefoot.com.  

Also go to jsbarefoot.com to send in your “buck a show” to keep Barefoot Innovation going. Please also join my facebook fan page, and follow me on twitter.

Support our Podcast - Send "A Buck a Show"

See you soon!

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Outspoken: Bill Harris, Founder and Chairman of Personal Capital and former CEO of Intuit and Paypal

In the early days of Barefoot Innovation, one of my guests said something very provocative, that I knew would not sit well with some of our listeners. I considered whether to edit it out. Someone on my team pointed out that my website features a quote from Carl Sagan about the importance of truth-telling, and we decided that it’s the essence of this show to have a wide range of guests and let them speak as they want, without editing, and with the understanding that it’s their opinions rather than mine.

It’s a good thing we have that policy, because otherwise, I would have quite the project figuring out what to do with my very lively conversation with Bill Harris, the former CEO of Paypal and Intuit, and Founder and Chairman of Personal Capital. Bill and I got together, in a little office I was using at Harvard, and had a very far-ranging conversation. By the time we finished, I told him I’ll probably have to offer equal time to all the people he -- shall we say, critiqued -- during our talk.  

Seriously -- if anyone Bill mentions would like to come on the show to offer opposing views, please reach out.

A lot of Bill’s outspoken views these days focus on the controversy over customers’ right to use and share their financial data. Much of today’s most promising innovation works by having people give permission to a fintech to access their bank account, so that the fintech can help them save, invest, or manage their money. This is the model behind everything from Mint (podcast with them is coming soon), to Digit (see our past episode with Ethan Bloch). For the past year or so, banks have been raising concerns that these arrangements can be risky to customers because the fintech may have inadequate security, and/or because there may weak controls on how the fintech uses the data.

The innovators are countering that many of them have better security than banks do -- basically because they have new technology rather than the aging, siloed IT at most banks. They also argue that the potential risks can be managed, including through best practice by data aggregators like Yodlee. Bill is part of a newly-formed fintech group on Consumer Financial Data Rights  (which I have advised) and which is trying to build consensus on how to provide consumer protection while also assuring that consumers can access and use their data freely. The core argument is this information belongs to the consumer, rather than to the company that’s holding it.

There are huge stakes in this, because data is the life’s blood of financial innovation. Regulators and the financial community must assure that it’s protected and not abused, but also have to enable it to flow freely, with the consumer’s permission. If it doesn’t, most of the best innovation underway with wither and die.

In our discussion, Bill talks about this challenge, including the fact that the Dodd-Frank law authorized the CFPB to set out guidance on it. (Here is the CFPB’s request for information on the data rights issue.) Even more basically, he talks about the underlying problem, which is how to actually secure consumers’ data and establish reliable identity verification. Bill has helped to found three major security companies and shares his deep thinking about a security world beyond passwords (which he calls “stupid”).  He also warns against universal data security standards that are rigid or one-size-fits-all. And he offers a vision for how we will really solve identity authentication and security problems -- through the phone.

We talked about his current company, Personal Capital, which provides personal financial management software to about 1.3 million users, for free. For customers that want more help, the company then provides fee-based investment advisory services tailored for people with complex financial situations. It arose from Bill and colleagues deciding that people’s biggest financial challenge is the “chaos” that leaves people leading “unexamined financial lives.” Personal Capital has designed a solution that is simultaneously high-tech and high-touch.

Bill has wide-ranging views (including some praise) about new models emerging in investment management and robo-advising. (Here is the earlier podcast I mention in our talk, with Jon Stein of Betterment.)  Our discussion also included a look into how Bill starts businesses and scales them up, and about the challenges of legacy bank IT systems (stuck together with “bubble gum and sealing wax”).

I think you’ll especially enjoy his stories about past adventures, including the early days at Intuit, and the hair-raising startup of PayPal with Elon Musk, Peter Thiel and Max Levchin, in a “small second floor thing over a bakery on University Street outside of Stanford.”

And listen closely as he recounts an intriguing dinner conversation with Steve Jobs, about financial services.

More for our listeners:

Watch for our upcoming shows, including Colleen Briggs of JPMorgan Chase; Wai Lum Kwok, who leads the regulatory sandbox in Abu Dhabi; Jonathan Dharmapalan, founder of eCurrency; Al Ko, who leads Mint; and the one and only Brett King, among others.

Please review Barefoot Innovation on ITunes. Also sign up to get emails when the new podcasts come out and to get my newsletter and blog posts at  jsbarefoot.com. And go there to send in your “buck a show” to keep Barefoot Innovation going.

Support our Podcast - Send "a buck a show"

I hope you’ll also join my facebook fan page, and follow me on twitter.

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Heroic Compliance : Treliant's Lyn Farrell

This episode is incredibly special, in two ways.

First, Lyn Farrell is not only my former colleague, but one of my very best friends. We had such fun recording this at my apartment in Boston one weekend late last year. In many ways, it’s just a slice of a long conversation we’ve been having more or less continuously for years, including over countless meals on the road together, in the consulting life we used to share

Second, I love it when our podcast discussions are actual brainstorming sessions. This one hit the jackpot on that front. In our back and forth, Lyn came up with an insight that neither of us had when we started, and both of us have found it reshaping our thinking ever since. It comes late in the episode -- you’ll know it when you hear it. I hope you find it as powerful as we did.  

Lyn Farrell is former Managing Director, and now Advisory Board Member, at Treliant Risk Advisors.  She is arguably the foremost expert in the United States on regulatory compliance matters regarding consumer financial protection. As we note in our discussion, she literally “wrote the book” on compliance as the author, for more than twenty years, of the Reference Guide to Regulatory Compliance, published by the American Bankers Association as the foundation material that candidates must master in order to become Certified Regulatory Compliance Managers. Lyn is an attorney, in-demand public speaker, prolific writer, and consultant who has worked with every imaginable regulatory challenge, from the world’s largest banks to small community institutions and fintech startups, and from positive, proactive clients to cleaning up grizzly enforcement problems. She has, simply, seen everything.

Fortunately for us, she has opinions about it all and shares them with bracing candor in our talk. She describes what’s failing in our current regulatory regime and explains what everybody is getting right and getting wrong, from Congress and regulators to bank CEO’s to compliance and risk professionals to IT departments, to her fellow lawyers, to fintech innovators. She offers a cogent indictment, from the inside, of the weaknesses of what we’ve built -- the disclosures no one reads, the high costs of compliance, and the tragic mismatch between where we expend resources versus what consumers actually need.

She’s also expert in bank IT operations. It’s an open secret that most banks have antiquated IT, often accumulated through decades of mergers and acquisitions in which older systems were never integrated but rather, as Lyn puts it, stuck together with “bailing wire.” (We explored solving some of this through blockchain technology in my earlier Podcast with Blythe Masters of Digital Asset Holdings.) These old systems are a hotbed of compliance errors, for reasons she describes. It’s another area where startups have a counterintuitive advantage over banks, thanks to having no creaky legacy IT.

In our discussion, Lyn explores the regulatory present and past (it’s been a long time since I’ve heard anyone mention Regulation Q!), but she’s most thought-provoking about the future.  She works extensively with innovators and has a vision for how we should be using new data and technology to do better.

I always urge people interested in innovation to break out of their work silos and reach across disparate realms.  Lyn does this better than anyone I know. If it weren’t for her, I would never have attended a LEAN seminar, or done free-writing exercises to inspire creative thinking, or read Deep Work by Cal Newport, or watched the Amy Cuddy Ted Talk on “presence.”

Since we made our recording, Lyn has stepped back from her full time role at Treliant to serve on its advisory board, spend more time in the beautiful house she and her husband Brian are building in Colorado Springs, and lead the Treliant Institute for Strategic Compliance Leadership, her brainchild.  Lyn asked me to speak at it, which inspired me to create a dinner talk I call “Heroic Compliance.”  It’s about the need for compliance officers -- even though they often seem more like Clark Kent than Superman -- to save their banks, customers, and industry by leading them into the high-tech innovation age. No one embodies that leadership more than Lyn, and I’m titling this episode with the same name -- Heroic Compliance.

The same day we recorded this episode, Lyn told me she’s launching her own podcast show, aimed at compliance professionals. She said my dinner speech prompted her to give it the name, “Compliance Heroes.” You’ll find it on ITunes and the Android Market.

Here are two more titles in Lyn’s recommended reading:

Emotional Intelligence 2.0  by Travis Bradberry

Presence by Amy Cuddy  

And here is more on her background….

Kathlyn L. Farrell, CRCM, CAMS, AMLP

Senior Advisory Board Member

Lyn Farrell is an experienced Regulatory Compliance executive, with over 35 years of experience in banking law and compliance. She is a Senior Advisory Board Member at Treliant Risk Advisors, LLC. Lyn has led many diverse and complex compliance projects for large financial institutions, including:

• Developing a regulatory compliance strategic plan for a financial institution that primarily operates in the Fintech space;

• Assisting the CCO of a top 10 U.S. bank to make the regulatory compliance program more proactive, strategic and integrated with the businesses and other risk management disciplines within the organization;

• Designing and building a comprehensive Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) audit program for the internal audit division of a top 10 U.S. financial institution, including developing the annual audit plan, scoping the individual audits, and writing the audit scripts;

• Assisting a top 20 bank implement all aspects of the TILA-RESPA Integrated Disclosure Rule (TRID), including revamping business processes, enhancing risk controls, writing policies and procedures and creating job aids to assist first line staff to implement this complex regulation;

• Developing the “UDAAP University” training program for the compliance departments at three of the top 20 financial institutions and for the internal audit departments at 3 of the top 20 US banks;

• Overhauled the Community Reinvestment Act (CRA) program for a top 20 US financial institution, including writing a new program document, reviewing its assessment areas and investments, and implementing a shift in the critical focus of its nationwide community development staff;

• Reviewing the potential acquisition by a top 20 U.S. bank of a large non-bank financial organization and provided advice on limiting the company’s regulatory risk by integrating and expanding the current compliance function and making it more strategic in its execution.

Lyn has a passion for leadership development and has designed the Treliant Institute for Strategic Compliance Leadership, a leadership program exclusively for compliance professionals in financial institutions She is a frequent speaker at banking events and regularly publishes articles on a variety of banking-related topics. Her recent publications include:

• “Strengthening the First Line of Defense” in ABA Bank Compliance magazine, September-October 2016“TRID: A Checklist for Successful Compliance” in Mortgage Banking magazine, March 2016

• Reference Guide to Regulatory Compliance, published by the American Bankers Association, the official study guide to the CRCM examination

• “Is this UDAAP or Not?” in  ABA Bank Compliance magazine, July-August 2015

• “FCRA: A Sleeping Regulation Awakes” in Banking Exchange, August 2015

• “Effectively Managing UDAAP Compliance in Mortgage Servicing” in Mortgage Banking magazine, April 2015

• “Managing UDAAP Compliance Risks in Financial Institutions” in Journal of Taxation and Regulation of Financial Institutions, Nov/Dec, 2013

She received her undergraduate degree from Texas A&M University and her JD from the University of Houston.  Lyn is a Certified Regulatory Compliance Manager (CRCM), and an attorney, licensed in the state of Texas.  

Lyn was the 2012 recipient of the ABA’s Distinguished Service Award.

More for our listeners:

I'll hope to see you all this week at FinXTech Summit in New York and of course CFSI’s Emerge in June.

Remember to review Barefoot Innovation on ITunes, and please sign up to get emails on new podcasts and my newsletter and blog posts at  jsbarefoot.com.  

Also go to jsbarefoot.com to send in your “buck a show” to keep Barefoot Innovation going. Please also join my facebook fan page, and follow me on twitter.

Support our Podcast - Send "a buck a show"

I’m just back from London -- more on that later -- but one highlight is I recorded an episode with the one and only Brett King. Coming soon!

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Financial Inclusion is Coming Fast - AFI Executive Director Alfred Hannig

I’m excited to share today’s conversation with Alfred Hannig, Executive Director of AFI.

When you hear of an organization with a name like The Alliance for Financial Inclusion, you might picture a nonprofit advocating for credit opportunity or community reinvestment. AFI, though, is unique. Its members are governments -- central banks and financial regulators -- representing over 90 countries in the developing world. They all work at the cutting edge of financial transformation, because the mobile phone is suddenly bringing real financial inclusion.

Think about that statement. Throughout history, a large percentage of people have been excluded from, or marginalized by, the financial system. That’s mainly because it simply hasn’t been very profitable to serve them. Finance evolved with a business model that serves people in buildings -- traditionally it was grand buildings with lots of marble -- and by giving them personalized attention. It was mainly for wealthy people, and then for the middle class as technology -- streamlined branches, ATM’s, and telephone and online banking were added to the mix. Generally, though, finance, and especially banks, could not readily reach people with lower incomes, including the rural poor, or at least could not offer them affordable pricing. A lot of public policy has aimed at getting banks to serve those customers despite the challenging economics.

The cell phone is changing that, and fast. The World Bank has a goal of enabling every adult in the world to have a bank account by 2020 -- three years from now. Whether or not that deadline is met, the fact is that access is spreading fast.

Significantly, it’s spreading fastest in the developing world. One reason is that cell phone adoption has been so rapid there, mainly because most people never had landlines. Another is that telcos began offering financial services through those phones, creating a fast and efficient delivery channel. A third is that these new systems often arise in settings that lack traditional regulatory systems, making it easy for innovators to move quickly, but of course raising many kinds of novel regulatory risks.

AFI and its members are dealing with all of this -- both the opportunities and the risks. They’re doing this from the perspective of financial regulators and also with the insight that financial inclusion is a key engine of economic growth, and of empowerment for women and other groups that have historically lacked access.

I had the chance to join in this dialogue at AFI’s Global Policy Forum in Fiji last year, a beautiful event highlighting traditional cultures of the Asia Pacific. More than 80 countries participated, working across diverse languages, cultures, demographics, and economic challenges to distill the keys to fostering inclusion and regulating change. While there, I recorded this episode with AFI’s visionary leader, Alfred Hannig. I’ll leave it to him to tell you his story.

For more information, also check out our episode with Theo Cosmora, CEO of the One Dollar Smart Phone. And here’s a (bad) photo of me with Vuli the Vanu, Fiji’s mascot for financial literacy!

More for our listeners:

This month I’ll be in Jakarta for a global discussion of regulation and financial inclusion. In April I’ll speak at the FinXTech Summit in New York, and in London at both the Innovate Finance fintech conference and the International FinTech Investor Conference sponsored by the Financial Conduct Authority. And I hope everyone is registering to come to CFSI’s Emerge in June.

Remember to review Barefoot Innovation on ITunes, and please sign up to get emails on new podcasts and my newsletter and blog posts at  jsbarefoot.com.  My latest post tells you about Hummingbird, the RegTech firm I cofounded late last year. We’re aiming to use new technology to transform both halves of the regulatory equation -- both how to regulate and how to comply -- starting with anti-money laundering. We’ll do a podcast on this, sometime soon.

Also go to jsbarefoot.com to send in your “buck a show” to keep Barefoot Innovation going. Please also join my facebook fan page, and follow me on twitter.

Support the Podcast - Send a "Buck a show"

And watch for upcoming podcasts, including with Wai Lum Kwok, Executive Director of the Financial Services Regulatory Authority of Abu Dhabi Global Market, Colleen Briggs of JPMorgan Chase, Bill Harris, former CEO of both PayPal and Intuit, and now CEO of Personal Capital, and Jonathan Dharmapalan, founder of eCurrency.

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A Millennial Building for Millennials - Ollie Perdue of Loot

Today’s show features one of the most  interesting startups in London.

I was there in in late 2015 and looked up someone I’d been wanting to meet -- Jean-
Stephane Gourevitch, (see more on Jean-Stephane below -- he is behind many of the most interesting fintech developments in Europe and will be on the show one day soon).  We met for coffee on the south bank of the Thames, near the Shard hotel, and he brought along a young entrepreneur, Ollie Perdue of Loot. Ollie showed me a quick Loot demo on his phone, and ever since, I’ve been avidly watching their progress.

A year later, I had a chance to do a podcast with Ollie. Sitting amidst their whiteboards marked up with problem-solving sketches and waiting list queues, he filled me in on their progress.

Loot is an app paired with a prepaid debit card, offering tremendously useful tools for easy budgeting, payments, and simple ways to set financial goals and get coached about how best to meet them. They also analyze the customer’s spending patterns and benchmark against peers -- helping the huge numbers of people who simply have no idea where they stand compared to where they should be, in financial health.

In our conversation Ollie describes how it all works, including how he got going and how he’s managed to launch something so impressive while still in his early twenties.The company has gotten a lot of attention, including raising an additional $3.13 in venture funds late last year. It’s aimed at young people and is one of the best offerings I’ve seen in hitting that sweet spot. That includes having an in-app ability to do customer service by text with (what else?) GIF’s.

Skeptics often argue that fintech is too narrow because so much of it aims for millennials. To that, I’d say two things. First, startups, out of sheer financial necessity, have to target early adopters -- markets that are likely to pick up a new product quickly and share it virally. That means a high percentage are starting with millennials. However, I don’t know any that plan to stop with them.

Secondly, millennials are the largest generation in the history of the world, both in the U.S. and globally. They surpassed the baby boomers a couple of  years ago. By sheer numbers alone, they’re going to dominate commerce and culture, just as baby boomers did as they came of age.

I made a speech last month to AFSA, who asked me to talk specifically about millennials as customers. Working on it made me think more deeply, myself, about how important it is that new financial technology is emerging concurrently with the rise of this huge generation -- whom we know, as both consumers and employees, want everything to be optimized by technology -- to be well-designed, fast, easy, friendly, engaging, and all the rest. If technology was changing, but customers weren’t, we can imagine slow adoption of innovation. Instead, today, both halves are transforming together -- the product and the user. That will change the market, not only for young customers, but for everyone, and in some ways, faster than we might think.

Millennials should not be underestimated -- especially thoughtful, energetic entrepreneurs like

Ollie Purdue.

More Links:

• IInterview with Ollie: http://www.businessinsider.com/loot-bank-ceo-ollie-purdue-interview-2015-8
• Jean-Stephane’s 2017 conference FintechConnectLive!

More for our listeners:

I'll hope to see you in March at LendIt in New York and SXSW in Austin. Also come to the FinXTech Summit in April and of course CFSI’s Emerge in June.

Remember to review Barefoot Innovation on ITunes, and please sign up to get emails on new podcasts and my newsletter and blog posts at  jsbarefoot.com.  My new post says 2017 will be the year of RegTech. Go there too to send in your “buck a show” to keep Barefoot Innovation going. Please also join my facebook fan page, and follow me on twitter.

See you next time!

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Fintech for Small Business: Former SBA Administrator & Harvard Business School Senior Fellow Karen Mills

Today we’re expanding beyond our usual Barefoot Innovation focus on consumer financial innovation, to explore the parallel issues arising for small businesses. We’ve touched on this before, but are so fortunate, today, to have a guest who deeply understands the whole range of these issues. She is Karen Mills, former head of the Small Business Administration and now senior fellow at the Harvard Business School, where she has just released a comprehensive paper on fintech and small business.

We recorded today’s show in her office on the business school campus, which is just across the Charles River from my fellowship’s home base in the Harvard Kennedy School. She and I first met in Washington a few years back, when she issued a research paper on the state of small business lending. That was in conjunction with the group that issued the Small Business Borrowers’ Bill of Rights (which we covered in our episode with Brian Graham of BancAlliance. In 2016, much to my delight, Karen and her co-author Brayden McCarthy put out an update on her paper, and this time it’s mostly about fintech.

Technology is changing small business lending in the same ways it’s transforming consumer finance, but with different twists. On the positive side, innovators are using technology to do better for SME’s -- small and medium-sized enterprises -- by adopting low-cost online platforms, becoming much smarter about getting and using data, speeding up service, and creating a vastly better user experience than was possible in the past. The data issue is crucial. Thanks to new technology (including Square), small businesses increasingly can give lenders solid, up to date information on their financial positions and cash flows. Innovative lenders can analyze this, determine with precision what the borrower can afford, and often can create a flexible repayment schedule that works with the rhythm of the business, including seasonal ones.

These innovators are filling an enormous gap -- which Karen clearly demonstrates -- because banks just cannot profitably make the smaller loans that so many businesses need.

There are  downsides, though. One is that whereas local banks interact with their business customers face to face,  these new relationships are online. For lenders, this creates higher risk of fraud. And for borrowers, there is rising danger that these entrepreneurs will be harmed by confusing terms and, sometimes, by downright predatory practices online.

And here’s a little-known fact:  small business borrowers have almost no regulatory protections, at least at the federal level. There is no federal regulator for small business lending, as there is for consumers, and even if there were, there are very few regulations that apply. Generally speaking, there are no requirements for standard disclosures to small business borrowers, and no rules against unfair and deceptive practices, beyond those that cover commerce in general.

This is significant, because today’s small businesses are more similar to consumers than ever before. The “1099” or “gig” economy has led to more and more people starting small businesses as their main work, or to supplement tight household budgets, or to tide them over after losing a job. It’s a mistake to assume that, simply because they’re business people, they are therefore financially sophisticated.

Listeners to Barefoot Innovation have probably figured out by now that I’m not a fan of the current regulatory apparatus for protecting financial consumers (even though I myself have been involved in developing some of it). Broadly speaking, disclosures are failing, and regulations are choking desirable innovation. The last thing I think we should do is to transplant our whole system of consumer protection laws into the fresh, green field of small business lending, and have it put down roots there -- like crabgrass. I think we should be deeply rethinking our consumer laws. In the process, though, we should also be thinking about whether and how to create protections and tools for small businesses to use, too.

Karen does recommend extending some consumer-type protections to these firms, including APR’s (we had a good exchange on the pros and cons of that). She also has tremendous insights into the structure and nature of the market, and on what to do about what she calls the “spaghetti soup” of regulatory agencies and rules, which now make it so hard to move toward a smarter system.

She focuses, too, on the critical need for clearer, updated regulatory guidance for banks that want to work with fintechs on small business lending. A wide spectrum of new models are emerging, partly because these two industries need each other -- they complement each other. Both sides will suffer, and so will business borrowers, if banks can’t navigate the third-party risk rules of their prudential regulators. (As I often say, the regulators have the hardest job in all this.)

More information on Karen:

Karen Gordon Mills served as the Administrator of the U.S. Small Business Administration from 2009 until August 2013.  She is currently a Senior Fellow at the Harvard Business School and at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School focusing on U.S. competitiveness, entrepreneurship and innovation.

As SBA Administrator and a Cabinet member, Mills served on the President’s National Economic Council and was a key member of the White House economic team.  At the SBA, she led a team of more than 3,000 employees and managed a loan guarantee portfolio of over $100 billion.  Mills is credited with turning around the agency during the financial crisis and with streamlining loan programs, shortening turnaround times, and reducing paperwork.  In addition, Mills helped small businesses create regional economic clusters, gain access to early stage capital, hire skilled workers, boost exports, and tap into government and commercial supply chains.  

Prior to the SBA, Mills held leadership positions in the private sector, including as a partner in several private equity firms, and served on the boards of Scotts Miracle-Gro and Arrow Electronics.  Most recently, she was president of MMP Group, which invested in businesses in consumer products, food, textiles, and industrial components.  In 2007, Maine Governor John Baldacci appointed Mills to chair Maine’s Council on Competitiveness and the Economy, where she focused on regional development initiatives, including a regional economic cluster with Maine’s boatbuilding industry.   

Mills earned an AB in economics from Harvard University and an MBA from Harvard Business School, where she was a Baker Scholar. Additionally, she is a past vice chair of the Harvard Overseers, and is currently a member of the Council on Foreign Relations and the Harvard Corporation.

And listen, too, to our episode from last year with Sam Hodges of Funding Circle, a leading example of platform lending to small businesses.

More for our listeners

We have some amazing shows coming up, including one with Chase’s Colleen Briggs, several focused on global trends, at least one with a CEO of a community bank, and one that I will call a barn-burner with the former CEO of PayPal and Inuit, Bill Harris. Don’t miss them!

Remember to write a review of Barefoot Innovation on ITunes, and please sign up at www.,jsbarefoot.com to get email notices when new podcasts come out, as well as my newsletter and blog posts.  Go there too to send in your “buck a show” to keep Barefoot Innovation going. And remember to  join my facebook fan page and follow me on twitter.

Support the Podcast

Thanks so much for listening, and I’ll see you next time!

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Getting People on to the Credit Ladder: LendUp CEO Sasha Orloff

Today’s episode is about new ideas about a very old problem in consumer finance -- high-cost lending to high-risk borrowers. My guest is LendUp CEO Sasha Orloff, who is one of a new generation of fintech founders building alternatives to traditional payday lending.

In public policy, there has been a long-standing assumption, sometimes implicit and sometimes explicit, that widespread access to credit -- especially mortgages -- is a good thing. A host of government regulations, programs, and bank supervisory activities aim to promote more credit, because we’ve assumed that wider credit access is, broadly speaking, good.

Is it, though? Most people would agree that up to a point, it’s good, and beyond some point, it becomes bad. It definitely becomes bad at the point where the borrower can’t realistically repay the loan. It can also become bad if the pricing is so high that the person ends up worse off for borrowing, instead of better, especially if the borrower doesn’t understand the terms

We could do many episodes on the tough issues embedded in this question. One is whether it’s better to have high-cost loan options that are legal and subject to regulation, or to outlaw them, knowing that shutting down legal options will drive some desperate people to use illegal ones, which hurt them even more. Another is the philosophical question of how much the government should protect people from themselves. If the price of a high-cost loan is clear, and borrowers understand it, should the government respect their decision on whether to take it, or substitute its judgment for theirs and remove the option?

Again, public policy has been debating these issues for decades --  maybe centuries -- and still is, including through many of the initiatives taken to date by the CFPB.

In this podcast, we won’t tackle those questions, but will instead ask a very different one: What if we didn’t need to resolve them? What if, thanks to technology, we could solve the problems surrounding high-cost credit -- or a big chunk of them -- not through regulation, but in the marketplace.

LendUp.  Sasha Orloff founded LendUp to provide more affordable credit to the 50% of Americans with credit scores below 680. He had worked at a big bank, and at an NGO in the developing world, and had a brother in the technology world who kept telling him that better software could create better products. He finally founded LendUp, to build them.

LendUp offers credit products online -- which means it has, automatically, a lower cost structure than the traditional bank model of branches. As Sasha explains in our discussion, it has also designed its products to offer borrowers a gateway to better credit scores, credit options, and financial health.

LendUp is backed by major investors including Y-Combinator, Google Ventures, QED Investors, Startfund, Kleiner Perkins, A16Z seed fund, Thomvest Ventures, Kapor Capital, Bronze Investments, Founders Co-Op, Data Collective, Susa Ventures, and Radicle Impact.

Sasha and the firm have been featured in the Wall Street Journal, NYTimes, Financial Times, CNN, NBC, TechCrunch, Venturebeat, Inc, Wired, Bloomberg, Fortune, Dow Jones, American Banker, Marketplace and many others. He has presented at TEDx, and LendUp, and they won Finovate Best In Show. FastCompany named the firm as one of the World’s Top 10 Most Innovative Companies in Personal Finance, and it won runner up in Webbys for best website design. They have presented at LendIt, Emerge, Money20/20, The HubSF, NBC News, and Huffington Post Live, and participate in The Clinton Global Initiative on Financial Inclusion. Sasha also serves on the Consumer Lending Advisory Board for TransUnion (one of the three major credit bureaus)

A regulatory note.  After Sasha and I recorded this episode, the CFPB announced an enforcement action against LendUp. The order is, among other things, a warning flag for startups about the importance, and the great challenges, of maintaining complete regulatory compliance in the midst of rapid growth. The company has responded with a massive expansion of compliance staff. Following the announcement of consent order last fall, it issued this statement:

We started LendUp because the traditional banking system wasn’t working for more than half of Americans. From day one, we’ve committed ourselves to offering better, safer and more transparent credit products and to aligning the success of our business with the success of our customers.

We genuinely believed the product features that were identified by the CFPB and the California DBO– like optional expedited funding and a 30 cent per day discount for early repayment—were in the best interests of our customers. But we fell short in the execution and in meeting the expectations of our regulators.  We have since taken action to resolve every issue they’ve raised, including beginning to refund customers prior to entry of the Consent Order and Settlement Agreement.

We’ve also made significant investments to build out our legal and compliance operations. In this respect, we are a different company today, with a completely new legal and compliance team that is larger now than our entire company when we started these exams. Importantly, those teams are brought in at the beginning of the development lifecycle for every new product and feature.

We are proud of the progress we’ve made to expand access to credit, lower borrowing costs and provide credit-building opportunities to our customers. LendUp has:

• Graduated more than 20,000 borrowers to the highest rungs of the LendUp Ladder in more than 11 states

• Saved Californians alone more than $18M in 2016 (and an estimated $40M to date nationwide)

• Delivered over 800,000 free credit education classes; and

• Helped LendUp customers improve their credit scores: according to TransUnion data, 66% of LendUp customers showed a credit score increase – more than those in the control group using similar types of products from other lenders.

We are eager to keep building on this track record, and look forward to continuing our work to put our customers on paths to better financial health.

I have found Sasha to be one of the most thoughtful people in fintech. I think you’ll be fascinated by his overview of the shrinking of the American middle class, the impact of the smartphone revolution; innovation models fort startups versus banks; how making financial education interesting; and how to redesign regulation for the 21st century,

The loans at Lendup cost less than traditional payday options, but more than loans to prime customers, because the borrowers are simply higher risk. If lenders can’t charge enough to cover that risk, they won’t serve these customers. If they can, though, and if they can leverage technology to gain efficiency and underwriting accuracy, and if they can enable high-risk borrowers to build and repair credit records, and if they can educate people about managing their finances, and can also make a great return on capital and then truly scale up…. then seemingly unsolvable problems can, maybe, begin to.get solved.

More links:

• Study on LendUp impact on credit scores.
• LendUp education on credit scores.

More for our listeners:

I'll hope to see you at "LendIt in New York in February, SXSW in March, FinXTech Summit in April and of course CFSI’s Emerge in June.

Remember to review Barefoot Innovation on iTunes, and please sign up to get emails on new podcasts and my newsletter and blog posts at jsbarefoot.com.  My latest post argues for some healthy regulatory disruption as a new administration takes office. Go there too to send in your “buck a show” to keep Barefoot Innovation going. Please also join my Facebook fan page, and follow me on twitter.

Support the Podcast

And watch for the next podcast, because we’re going to turn to innovation in small business lending. My guest will be Karen Mills, the former Administrator of the SBA and at Harvard Business School, where she has just issued an updated study on small business lending This one is focused mainly on fintech. We had a fascinating conversation. See you then!

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The One Dollar Smart Phone -- Theo Cosmora, CEO of SocialEco

Greetings for the holiday season, and apologies for my recent backlog in posting podcasts. The main reason for the latter is that I have been traveling almost constantly. In November and December I was in Singapore, Geneva, San Francisco, London (twice) and Washington multiple times, and of course, back in Boston in between.

And not long before that, I was in Fiji, where I recorded this podcast, with Theo Cosmora, CEO of Social Eco and the OneDollarSmartPhone.

Developing countries are the world’s learning laboratory on financial inclusion.

What I learned from these recent travels is that the world is alive with new ideas about both financial products and financial regulation. Fintech and regtech, are everywhere. And both are, surprisingly to some, more advanced in other parts of the world than in the U.S. The reason for that is simple:  Other countries, and especially the developing world, have leaped straight to new technologies, and especially mobile financial services, because they never built the complex financial and regulatory infrastructure that predominates in the developed world, such as widespread telephone land lines and personal computers. Those financial systems have flaws, but broadly speaking, they work pretty well for middle and upper income people, getting financial tasks done through banks, bank branches, checks, plastic credit cards, plastic debit cards, cash machines, funds transfers and all the rest.

That means that the impetus to change entrenched infrastructure, not to mention entrenched consumer habits, is weaker in highly developed markets.  It also means that investing in such change takes more time to pay off there, and is extra expensive because providers have to maintain all their traditional systems while simultaneously building new ones.

The developing world lacks that problem. For people who have never had access to financial services, for whom no one ever would have built a branch, there’s nothing to replace except cash and barter. Planting new systems in new ground is, generally, easier than growing things amidst a mature forest.

This fact has made developing countries into the world’s learning laboratory on how to build really an innovative financial system -- especially for low-income people. People throughout the world have mobile phones -- as of 2013, more people had access to cellphones than to toilets. Everyone knows how to use them. Increasingly, these are smartphones that can access wifi, which is spreading fast too. While the United States is still focused on the Community Reinvestment Act obligation of banks to maintain branches in lower-income neighborhoods, other countries are bringing whole new affordable financial services to low income people, by the hundreds of millions, through converging new technologies. That’s not just the cell phone, but all the other changes underway in digital identity, voice technology, block chains, big data, and much more.

And regulators, especially in developing countries, are working hard to harness the same technology trends into new “regtech” strategies, to foster this progress and, simultaneously, to prevent new dangers that will grow along with it.

We’ll talk more about this revolution in other episodes -- I recorded several more in Fiji and my other travels -- but for now, let’s focus on this incredible breakthrough -- the affordable phone.

Theo Cosmora

My guest for this episode is Theo Cosmora, co-founder and CEO of Social Eco and the man behind the OneDollarSmartPhone. Theo notes that four billion people can’t afford smartphones; that this is potentially the world’s most valuable market in the world, worth $5 trillion; and that people spend an average of three hours a day using phones if they have them. That means that connecting everyone to smart phones will connect them, both horizontally and vertically, into every dimension of the larger economy and culture.

How to solve the phone affordability gap? Theo has devised a business model in which companies or governments will sponsor pre-set apps on a phone, to subsidize the price enough to reach people who can’t afford the phone, but do have and spend money -- farmers, workers, migrants, others. This is somewhat like the model developed by the internet itself, or by players like Google -- or for that matter, broadcast television -- where a core service is free or nearly free, because it’s creating access to markets for third parties. (As an aside, I’ve been thinking a lot about fintech business models, and the need for transparency and true consumer understanding around them. I’ll be talking more about that in 2017.)  I think you’ll be fascinated by Theo’s insights on this market and how serving it can unlock value throughout the global economy, as well as lifting people out of poverty and isolation. If you’re a business, regulator, or central bank, anywhere, with interest in this market, Theo would like to talk with you about sponsoring phones.

You’ll also enjoy his insights about regulators, who he thinks are suddenly seeing the potential and becoming helpful. We recorded our conversation at the annual global forum of AFI, the Alliance for Financial Inclusion, which consists of the financial regulators and central banks of the developing world. The meeting dramatically bore out Theo’s optimism on regulators embracing fintech and regtech, as we’ll discuss in future episodes.

For listeners in the United States, some of this may not seem directly relevant, but I want to encourage you to think about it. Initiatives like this are pointing the way to affordable, inclusive, profitable financial services -- for everyone. U.S. public policy has been striving toward that goal for decades, with results that are limited at best. Suddenly, technology is opening up a whole new way to go at them.

Some say you can’t make money serving people with no money -- at least not without cheating them. I’d love to know if our audience thinks that was ever true, and even if so, will it still be, as technology makes more markets profitable by making it inexpensive to reach and serve them. If you have thoughts, please share them at www.jsbarefoot.com.

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Remaking the Financial Rails: Ripple CEO Chris Larsen

Welcome to today’s show.

One night last summer I attended a small dinner in New York hosted by the editors of a global financial publication, on financial innovation. We had some of fintech’s brightest stars seated around the table, but I remember offering the view that the person there who was most likely to actually revolutionize the financial system was Chris Larsen, the CEO of Ripple. Most fintech innovators are building new things on the system’s old footings.  Ripple is trying to reshape the foundation itself.

As you’ll hear in our discussion, Chris and I first met about five years ago when the wider world had barely heard of Bitcoin, and blockchains and digital currency were still causing mostly head-scratching (at best). He had an impressive past that included co-founding eLoan and Prosper before Open Coin, which is now Ripple. The company’s mission is to create  interoperable global finance -- easy movement of money, and other forms of value, throughout the world. An analogy (which we also discussed in my earlier podcast with Circle CEO Jeremy Allaire) is to do for money what the internet did for information, enabling it to move instantly, cheaply, and accurately to everyone, everywhere.

I notice that people whose work is hard to explain use lovely, lively language and imagery. It’s certainly true of Chris. He talks about paper mail and rails and siloes and blocked pipes and, my favorite -- shipping containers, which he says boosted global trade by 700%, with the simple step of standardizing containers so they can fit efficiently on any ship, truck or train, anywhere in the world. He discusses a book on how this changed the world -- The Box by Marc Levinson. That inspired me to include the picture below, of a fully-loaded container ship as it passed along beside my apartment, which overlooks Boston Harbor.

In this episode, Chris says interoperability in finance is the last missing link that’s needed for truly efficient global commerce. He discusses the possible “science fiction” of connecting 50 billion devices through the internet of things. He describes how micropayments can transform functions ranging from ocean monitoring to financial access. He talks about people in huge swaths of Africa who have phones and Google but no connected way to pay for things -- and imagines the global growth that would be sparked by adding two billion people into mainstream payments and commerce. He imagines these solutions even helping to solve the problems caused by globalization.

Chris also talks about the crucial roles of banks, which are key partners for Ripple, and of regulators, including the risk that America’s splintered regulatory system could undermine our leading global role in finance which he says will be “up for grabs” as many countries compete.

And he explains, tellingly, how his views on “disruption” have evolved over time.

We recorded this discussion last summer -- before the presidential election, which he mentions -- and also before Chris’ announcement this month that he plans to step down as Ripple CEO at the end of 2016 in order to rebalance his life. He’ll remain active with Ripple and will work closely with its incoming CEO, Brad Garlinghouse.

More links:

• Chris's blog post on stepping down as CEO is HERE
• Ripple video  
• My blog post: The Benefits of Bitcoin

I loved this conversation with Chris Larsen, and I think you will too. Enjoy!

Barefoot Innovation news….

We’re posting this episode during a flurry of activity. Ten days ago I had the fun of doing a fireside chat at Money 2020 with CFPB Director Richard Cordray -- who used the venue to make some big new on big data and data aggregation.  I raced back from that to speak last week at the FTC’s fintech conference, and I’ll be missing the SEC’s first fintech event next week because I’m off to the Singapore fintech/RegTech festival that’s being co-sponsored by the Monetary Authority of Singapore, MAS. Money 2020 drew 11,000 people this year -- the largest financial conference in the world -- and the Singapore conference expects over 10,000, including for the first-ever RegTech conference in Asia.

Meanwhile, our direct subscribers to Barefoot Innovation more than doubled last month. Every week I’m encountering people who tell me they’re fans of the show. Please do send in your “buck a show” to help us keep it going -- I’m having to bring in more helpers for it. And please remember to review us on Itunes. Also come to the new Facebook fan page. And please come to www.jsbarefoot.com  to get onto our mailing list.

Most of all, come back next time, when my very special guest will be Alfred Hannig, the executive director of AFI -- the Alliance for Financial Inclusion. We recorded this one on an idyllic day in beautiful Fiji!  AFI is driving tremendous change in global financial inclusion and I know you’ll find the episode fascinating.

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Colin Walsh of Varo

I’ve been looking for a chance to do a podcast with today’s guest for months. Colin Walsh is the founder and CEO of Varo, an online tool that aims to make it easy and affordable for consumers to manage their financial lives. Colin and I first met at last year’s fintech conference hosted by the Federal Reserve Bank of San Francisco, and I’ve enjoyed, ever since, watching the rapid growth of his startup.

Varo was still in development when we talked and is now in private beta, with plans to launch next year. I find them especially interesting in many ways, including that they raised $27 million this year; that the founders are very experienced banking executives; and that they are creating an ambitious product to meet multiple consumer needs at once. Maybe my favorite thing is that they are creating the Varo Bot, a chatbot that uses artificial intelligence to actually take the initiative to help customers manage daily money tasks easily and well. The move toward fintech solutions that are proactive instead of reactive is a real breakthrough, because it attacks one of the biggest obstacles to consumer financial health -- people not really understanding how best to manage their money, or just not thinking about that question before, rather than after, they spend or borrow. Varo is solving for that.

Colin has two and a half decades of leadership experience with global brands in Europe and the US, including as an EVP at American Express, Managing Director at Lloyds Banking Group, and an EVP at Wells Fargo.

In this episode Colin explains his motivation in undertaking a fintech startup after years at big companies. He talks about why Varo’s initial focus is simple, transparent mobile tools for millennials. He talks about the power of starting from a clean slate, with no legacy of what he calls “bad revenues,” and no challenges caused by having data “trapped in silos,” which is a major problem for banks. He also has thought-provoking advice for both banks and regulators.

Here are some links:

• Varo is at www.varomoney.com
• He also refers to the book Scarcity: Why Having Too Little Means So Much, by Sendhil Mullainathan and Eldar Shafir on consumer decision-making behavior.

I know you’ll enjoy hearing his insights.

And more for our listeners:

To help you keep up with innovators like Varo, I’ve been launching a series of social media channels that feature all my podcast guests as well as my blog posts and speeches. Sign up for my new monthly newsletter at jsbarefoot.com, head to my new facebook fan page, and please follow me on twitter.  I have some big news coming up – I’m co-founding a RegTech venture, so don’t miss hearing about it!

Also, please send in your “buck a show” to support Barefoot Innovation. We now have thousands of listeners around the world, and we need support to keep the show coming and keep it timely, with my little band of part-time helpers.

Support our Podcast

Meanwhile, be sure to come back next time, when my guest will be the CEO of Ripple, Chris Larsen.

Harvard's Brigitte Madrian on Saving for Retirement: "We are Not Making it Easy"

Today’s program is really special, because my guest is Brigitte Madrian. Brigitte is the Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School, and also co-director of the Household Finance working group at the National Bureau of Economic Research. She is a leading expert in behavioral economics and consumer decision-making regarding both health and finance, and in finance,especially savings and retirement. Importantly to me, she is also my faculty advisor for the book I’m writing.

Regular listeners know I’m spending two years as a Senior Fellow at the Center for Business and Government in the Kennedy School.  As I started into my fellowship last year, I had the great fortune of linking with Brigitte as my faculty advisor for the book.  She is part of the movement in economics that’s rethinking the classical theory that assumes that everyone behaves rationally. That work goes to the very heart of the condundrum in consumer finance, where both policymakers and industry have to grapple with the fact that consumers don’t always make the choices that are best for them. Understanding the many reasons why that happens, and how to elicit better decisions, is one of the keys to improving consumer financial health.

For this podcast, I met with Brigitte in her office on a lovely summer day. The Kennedy school is a complex of brick buildings clustered on the bank of the Charles River – it’s located about halfway between the Harvard Business School, on the other side of the river, and the old Harvard Yard, which is the traditional heart of the college (Harvard was founded in 1636). The Kennedy School has been undergoing construction ever since I got here – I get a fascinating display of cranes and I-beams and such from my little office space in the Belfer building – but Brigitte and I had a quiet talk during summer semester, with most of the students away.

She came to Harvard about 10 years ago, and in our talk, she quoted someone once saying that professional schools tend to be run very much like the professions they represent. It’s certainly true of the Kennedy School, which is all about gathering together a multiplicity of voices to grapple with public policy challenges. And it’s especially true for my center, which is the Mossavar-Rahmani Center for Business and Government. All of our fellows are working on finding practical solutions at the nexus of public policy and the private sector.

That’s what Brigitte has done in her research. She started out by looking at data on retirement plans (her first paper was about automatic enrollment), and she found the results so compelling that she didn’t even need to do statistical analysis to see that automatic enrollment led to dramatic increase in savings plan participation, especially among the groups least likely to participate -- employees who were younger, lower-paid employees, newly-hired, black and latino. The automatic enrollment caused an amazing 50-60% increase in plan participation.

That paper got a lot of attention and led her to a 20 year research agenda trying to understand financial decisions. I think you’ll be very interested in her views about the track record for policies like financial literacy education and financial incentives to save. She pinpoints complexity as a critical problem, and she’s not a fan of disclosure as the solution.

Our talk was especially timely because we met shortly after release of an important study she helped produce, by the Retirement Security and Personal Savings Commission of the Bipartisan Policy Center in Washington.   The report is titled Securing Our Financial Future, and makes recommendations for policymakers on how to increase income security for older individuals. She’ll describe some of the highlights.

I’m excited about behavioral economics because when these insights are combined with new technology, it becomes possible to create vastly better financial products. You may remember my discussion with Ethan Bloch of Digit, which incorporates these same principles of letting people save automatically instead of through daily effort, and in trying to bring financial decision-making time to zero. Easy and sound financial management is suddenly becoming possible.

Brigitte’s biography:

Brigitte Madrian is the Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School.  Before coming to Harvard in 2006, she was on the Faculty at the University of Pennsylvania Wharton School (2003-2006), the University of Chicago Graduate School of Business (1995-2003) and the Harvard University Economics Department (1993-1995).  She is also a research associate and co-director of the Household Finance working group at the National Bureau of Economic Research.

Dr. Madrian’s current research focuses on behavioral economics and household finance, with a particular focus on household saving and investment behavior.  Her work in this area has impacted the design of employer-sponsored savings plans in the U.S. and has influenced pension reform legislation both in the U.S. and abroad. She is also engaged in research on health, using the lens of behavioral economics to understand health behaviors and improve health outcomes; in the past she has also examined the impact of health insurance on the job choice and retirement decisions of employees and the hiring decisions of firms.

Dr. Madrian received her Ph.D. in economics from the Massachusetts Institute of Technology and studied economics as an undergraduate at Brigham Young University.  She is the recipient of the National Academy of Social Insurance Dissertation Prize (first place, 1994) and a two-time recipient of the TIAA-CREF Paul A. Samuelson Award for Scholarly Research on Lifelong Financial Security (2002 and 2011).

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Also….

Please sign up for our mailing list, which includes our newly-launched newsletter highlighting events of the month and my thoughts about them. I have some big news coming up – I’m co-founding a Reg-Tech venture, so don’t miss hearing about it!

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Also, please send in your “buck a show” to support Barefoot Innovation. Have you ever noticed that we often have long lapses of time between when we record a podcast and when we post it? That’s because the show is free, but takes huge amounts of time to produce. And we produce it on a shoestring – I work with my little cadre of young part-timers. If we can develop more revenue, we want to get onto a more frequent and regular schedule. You won’t belive the amazing episodes I have already recorded, but haven’t yet been able to share. So if you love the show – and I hear constantly that people do, and we have thousands of people listening around the world – it would be great for you to send in a little bit of support.

Support our Podcast

Remember, follow me on twitter at @joannbarefoot, and please review us on iTunes.

And come to my new Facebook fan page HERE

Last but not least, come back next time for an exciting conversation with Colin Walsh, right around the time he is launching his new fintech venture….Varo.

See you then!

Innovation in Small Business Lending: Sam Hodges of Funding Circle

Welcome to our first conversation with an innovator in small business lending – my guest is Sam Hodges, Co-founder and U.S. Managing Director of Funding Circle.

Funding Circle was founded in 2012 and is the world’s leading marketplace lender that’s exclusively focused on small businesses. It has made more than $2.5 billion in loans to 20,000 businesses in the U.S., Germany, Spain, the Netherlands and the UK (where it is based). It customers borrow directly from a wide range of investors, including more than 50,000 people, the UK Government, and divers entities like local councils, a university and various financial organizations.

Funding Circle was created because the founders were small business owners themselves and learned how hard it is to access finance, even for a successful business. Even when a loan was approved, they found the process difficult, or the terms unattractive. Sometimes they even felt misled. After opening their 96th loan rejection letter, they decided this was a systemic failure – that the traditional bank loan system was broken – and they set out to build a new solution. The financial crisis created fertile ground for them, as so many business suddenly had trouble accessing capital (the number of small businesses has dropped every year for the past 8-10 years). And their timing fit with the emergence of marketplace lending as a new model.

As Funding Circle’s Co–Founder and U.S. Managing Director, Sam oversees the company’s overall strategic direction and its day–to–day operation in the U.S. He was previously Vice President of Business Development at SecondMarket, the leading marketplace for alternative investments, where he was responsible for corporate and business development and the company’s geographic expansion efforts. Sam was also part of the investment team at Pequot Capital, an $8 billion global fund manager, covering investments in financial technology and information services. He started  his career as a strategy consultant at Katzenbach Partners, advising financial services and technology companies. He currently serves on the boards of two private companies. He received his MBA and MS from Stanford University and graduated magna cum laude from Brown University.

Sam points to three key Funding Circle innovations:

• One is delivering a superior borrower experience. They can on-board and evaluate customers sometimes in minutes, or a few days, for situations where a bank might need 30 man-hours to reach a decision.
• Second, they’ve re-architected how they do credit evaluation. Sam says it’s not a silver bullet, but they’ve have created their own rigorous data-driven approach to understanding risk, and they’re using new data, in new ways, to serve more borrowers.
• And third, he argues that the marketplace model can be more scalable and profitable than the traditional bank approach, enabling them to grow a global business.

In our conversation, Sam expresses his continued confidence in the marketplace model. He discusses Funding Circle’s risk analytics (he says they hire world class risk officers from world-class institutions). He explains the role of alternative data in driving more sound and inclusive lending.

I was especially interested in how Sam contrasts the U.S. regulatory model with the U.K.’s efforts, especially on P2P lending. He thinks the fragmented American structure makes innovation here difficult. He also has suggestions for regulatory innovation, including sandboxes and a graduated scale of coverage that would allow small innovators to get up and running more easily.  He emphasizes the need for interagency coordination and consistency. He says transparency needs to undergird the whole industry, and that requires smart, sound regulation that everyone understands. (To listen to our previous episode about the “Regulatory Sandbox” with Nitish Pandey of BMO, click here.)

Sam welcomes smart customer protection regulation – he discusses his involvement in creating the Small Business Borrower’s Bill of Rights we discussed in an earlier episode with Brian Graham of BancAlliance.  See also this Harvard research paper by former Small Business Administration head Karen Mills on small business lending.

I hear increasing discussion about more regulation of small business lending. It’s partly because the online lenders are transforming the market, and partly because the “1099 economy” is producing more little businesses that arguably are functionally-equivalent to consumer borrowers.  The sector is covered by some of the federal laws on consumer protection, but not by most of them.  My own view is that regulation will probably need to come, but that we should NOT transplant the existing consumer protection rules into it without first updating them for the digital age. Speaking as someone who helped develop some of these rules, I will say they have a mixed record, at best, of protecting consumers. And complying with them costs a fortune. If we’re going to bring new regulation into the small business sector, let’s use the chance to take a fresh look, and apply some RegTech thinking.

Other notes:

Newsletter:

I also want to share an announcement -- this month we’re launching a newsletter. It will be pithy and punchy and useful, highlighting the most interesting things that have happened, the most exciting things coming up. It will be a way to share some of the fascinating things I’ve been getting involved with. One example is that, this summer, I joined the Netherlands’ Queen Maxima (who leads the UN’s work on global financial inclusion) on her trip to Silicon Valley. Another is that I just returned from a week in Fiji at the global policy forum of the Alliance for Financial Inclusion, which represents the financial regulators of more than 90 countries in the developing world. I’m also working on ideas for promoting regulatory sandboxes in the United States. And in November, I’ll be speaking in Singapore at Asia’s first RegTech conference. And I’m doing a lot of work on RegTech. In fact, in Fiji I heard a new term – “SuperTech.” It’s a branch of RegTech that means technology-driven solutions for bank supervision.

The newsletter will share some of the intriguing things that are going on, outside our poccasts.

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Remember to send in your “buck a show” to keep the podcasts coming

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Remember to rate us on ITunes. 

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Coming guests:

And look for some amazing guests coming up. We have none other than the leaders of Varo, Ripple, LendUp, and Loot (from London)!

We have two amazing, mold-breaking innovators from the developing world – eCurrency and OneDollarCellPhone, as well as the head of AFI, the Alliance for Financial Inclusion.

And back in the US, we’ll have the community bank perspective on innovation.

But first, next up, we have Harvard professor and behavioral economics expert, Brigitte Madrian.

So, enjoy my conversation with Funding Circle’s Sam Hodges … and come back soon!

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Innovation and Consumer Protection - Lauren Saunders, National Consumer Law Center

Today's show explores financial innovation through the eyes of one of America's most respected consumer advocates. My guest is Lauren Saunders, Associate Director of the National Consumer Law Center.

The NCLC has been active in consumer financial protection for over 40 years. Lauren manages its Washington, DC office and directs its federal legislative and regulatory work on issues like prepaid cards, electronic payments, small dollar loans, credit cards, bank accounts, and consumer protection regulation overall. She also contributes to NCLC legal treatises, including Consumer Banking and Payments Law, Consumer Credit Regulation, and Fair Credit Reporting. Previously she directed the Federal Rights Project of the National Senior Citizens Law Center; was Deputy Director of Litigation at Bet Tzedek Legal Services; and was an associate at Hall & Phillips. She graduated magna cum laude from Harvard Law School and was an Executive Editor of the Harvard Law Review. She holds a Masters' in Public Policy from Harvard's Kennedy School of Government and a B.A., Phi Beta Kappa, from Stanford University.

In our conversation, Lauren talks thoughtfully about what worries her about consumer finance today and how she thinks we should address emerging problems. We had a wide-ranging discussion, including about what would happen if traditional payday lending was no longer an option (she'd like a "Goldilocks" approach on loan length). She also discusses her concerns about both easy credit and fast credit; partnering between banks and marketplace lenders; using alternative data in underwriting; and the future of overdraft products as we move toward increasingly fast - and even real-time - payments.

For a look into the innovators who were mentioned in the show (and who have been featured as previous guests), check out their websites: Digit, Even, and Simple. Also note Lauren's mention of the American Express-backed movie, Spent.

Also ....

Time is running out to vote for my SXSW panel!  Remember to vote for my panel for SXSW 2017. It's Regulation Innovation - how to modernize regulation to optimize financial innovation. My fantastic panelists are CFSI's CEO Jennifer Tescher, the White House's Adrienne Harris, and Simple CEO Josh Reich. To vote, just go to http://panelpicker.sxsw.com/vote/67829 (there's a quick signup to be sure the votes are real). And please plan to come to SXSW!

Remember to like us!  Also remember to like Barefoot Innovation on ITunes; follow me on Twitter @JoAnnBarefoot; and contribute your "buck a show" to keep our podcasts coming.
 

Going global:  I recorded the introduction to this episode from the airport en route to London (I figure if Tim Ferriss can do this - and he inspired me to try pod-casting - I can give it a try). I'm heading to the UK for meetings on progress so far with the regulatory sandbox that was launched this year by the Financial Conduct Authority, to distill some lessons for the United States with our much more fragmented regulatory structure.

Two days after I return from London, I'm heading to Fiji for the annual global conference of AFI - the Alliance for Financial Inclusion, which is made up of the financial regulators of the Global South. In November, I'll be speaking at the FinTech forum of the Singapore Monetary Authority - in the portion that will be Asia's first-ever RegTech conference in Asia. And I recently had to turn down invitations to speak in Tokyo and in Shanghai, and to participate in a UN gathering in Tanzania.

All of which is to say, financial innovation is global, and so are the global challenges of how to regulate it, and so is Barefoot Innovation. We have listeners throughout the world, and I'll be recording fascinating podcasts on these travels. Watch for widened horizons this fall.

Upcoming: Meanwhile, come back next time for my special guest, Sam Hodges of Funding Circle.

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Don't forget to send in your buck-a-show to support Barefoot Innovation

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Insure-Tech : QED Founding Partner Caribou Honig

Today we have our first-ever episode on Insure-tech. Happily, it also turned out to be one of the most fun, funny and thought-provoking shows we've ever done. I'm pretty sure it's the first one where we've talked about the internet of things, and CRISPR gene research, transportation as a service, and drones.


My fascinating guest is Caribou Honig, founding partner of QED Investors.


QED is a venture fund cofounded by Caribou, Frank Rotman, and Nigel Morris, who first came together in the early days of Capital One. They have helped launch some great fintech companies - for instance LendUp and DriveFactor. Caribou's investments span an array of marketing, payments, and insurance technology companies, particularly where B2C customer acquisition drives the business success. He developed a passion for data-driven marketing when he led key marketing initiatives at Capital One, including responsibility for a $50 mm marketing budget, managing a 200-person underwriting operation, and cracking the code on digital credit card originations. Recent investments led by Caribou include, Remitly, TheMuse, and KNIP.  He also serves on the Advisory Council for the CFSI Financial Solutions Lab.

As you'll hear in our conversation, moreover, he's a Renaissance man. He holds a bachelor's degree in Physics and Philosophy from Harvard University, an MBA from the Darden School of Business, and a JD from the University of Virginia School of Law. He and his wife have two children and, what he describes as two occasionally annoying dogs. Over the years He's taken time off to be Mr. Mom and to listen to the universe, as he puts it. And of course, he has an interesting name, which he'll explain in our discussion.

I reached out to Caribou because I knew he was working in Insure-Tech, which has been on a slower track than other kinds of fintech but is starting to gain real traction. Caribou is Chairman of the InsureTech Connect, a new conference that's scheduled for October 5-6 in Las Vegas.

I found our conversation incredibly interesting, especially in how insurance is being transformed by types of technology that have nothing to do with finance -- because its product is usually about managing risks in the physical world ranging from health to roofing materials to self-driving cars.

As it turned out, about half of our talk is on insurance, and half is on his broader thoughts oninnovation, and also on regulation. He really sparked my own thinking on some of the tough regulatory issues, like how to resolve the conflicts between alternative data and fair lending disparate impact, and the pros and cons of state-based regulation, and his advice to regulators.

Plus I'm stilling thinking about "parametric insurance" - skipping the adjudication process and agreeing in advance to let outside parameters - big data - determine the appropriate claim. New ideas, everywhere!

Finally, for all you innovators in the audience, note that Caribou shares an open invitation to bring him interesting ideas.  I know you'll enjoy hearing him.
 

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Vote for my SXSW Panel!

Also, remember to vote to help get my Regulation Innovation panel selected for SXSW 2017 - it's at http://panelpicker.sxsw.com/vote/67829. My panelists will be Simple's Josh Reich, Adrienne Harris of the White House, and CFSI's CEO, Jennifer Tescher. We need your vote - voting is only open to  September 2. And please plan to come to SX in Austin.
 

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Don't forget to send in your buck-a-show to support Barefoot Innovation -- and leave a review on ITunes.

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Upcoming Shows

Finally, come back next time. We have fantastic guests coming up, including Lauren Saunders of the National Consumer Law Center, Sam Hodges of Funding Circle, Colin Walsh of Varo, and Harvard professor Brigitte Madrian.

See you soon!
 

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Innovating in Compliance, Citi CCO Kathryn Reimann and Wells Fargo CCO Yvette Hollingsworth Clark

My guests today are two of the most thoughtful people in the United States on the topic of regulatory compliance. They are the chief compliance officers of Citigroup and Wells Fargo – Kathryn Reimann and Yvette Hollingsworth Clark.

Our listeners include a lot of people who are not fascinated by the topic of regulatory compliance, to put it mildly. The fact is, though, that compliance has shifted, rather suddenly, from being boring to most people, to being fascinating. And whether it fascinates you or not, it has become absolutely critical to whether financial companies can thrive. Becoming great at compliance – both effective and efficient -- has become mission-critical competencies for every financial company, large and small.

Let’s step back and think about what’s happening.  Technology is disrupting finance, which means that it’s also disrupting financial regulation, which therefore means that it’s also disrupting compliance, inevitably. It will completely change how financial companies implement the massive set of regulatory requirements that pervade every aspect of what they do.

This is going to be – already is – a wrenching process. For better or worse, consumer financial protection regulation has always been hypertechnical. built mainly around highly prescriptive rules. Congress passes laws, the regulatory agencies issue regulations to implement them, and the industry implements the regulations. I’ve spent much of my career in this field and have watched it mature into a major function – major cost center – in every bank, into a profession of experts, and into an industry of technology vendors and consultants and lawyers who help financial companies follow these rules. With a few exceptions, the system is about getting the details right.

That’s still true, of course. We still have voluminous, detailed rules aimed at consumer protection. But the financial crisis shifted the ground under this whole system, by supplementing the traditional “rules-based” system with a new “principles-based” overlay that aggressively requires that financial products be not only “compliant,” but also “fair” – able to meet heightened prohibitions on practices that are unfair, deception or abusive (which we in the compliance world, with our habit of using acornyms, call, “UDAAP.”

And then, as if that weren’t a big enough change, the financial world has now also been hit with a second huge wave of change, in technology innovation. And it’s even more challenging than the shift from rules to principles, because it’s coming faster, and it’s even more unknowable than regulatory change.

All this means we’ve entered into a state of permanent uncertainty. The products and market and technology are changing too fast for the legislative and regulatory process to keep pace. The regulatory process can’t, and won’t, provide clarity on exactly what the industry has to do. Instead, it will review what has been done and will, after the fact, penalize actions that are judged to have been illegal because they’re subjectively determined to have been unfair, deceptive, abusive, or discriminatory in effect.

The result is that financial companies are going to have to build a whole new kind of compliance model. They won’t have the luxury of waiting for clear-cut rules. They’ll have to figure out for themselves how regulators may react to rapid change, and make their own decisions, in the absence of clear guidance, about what is risky.

This requires a full overhaul of the traditional compliance model. For one thing, it means deeply, actively engaging the CEO, the board, and the business-side leadership of every company in proactively managing regulatory risk. They can’t delegate it and assume that their experts and technology will take care of it. They have to make their own decisions, and they have to do it not reactively, but proactively. Again, they’ll have to think for themselves.

And they’ll also have to adopt a new generation of regtech solutions, which are starting to emerge to improve outcomes and cut costs.

There’s a lot to say about what’s ahead on all this, but for today, we’re going to pick the brains of two of the most impressive leaders anywhere in the compliance world.  Yvette Hollingsworth Clark is the chief compliance officer of Wells Fargo, and Kathryn Reimann leads this work for Citigroup. I’ve known them both for years, and I was lucky enough to catch them together while we were all at the same event, and carve out some time to talk.

Listen to their views on how compliance is changing, the impact of technology, and the need to bring a “fairness” lens to absolutely every regulatory question. They talk about how to do that, including how to integrate teams that can bake it into daily decision-making. They talk about the challenges arising because of the accelerating the speed of change. And they discuss the challenges of working with old legacy IT systems that were created long before today’s regulations and technology. They talk about the need for a level regulatory playing field for banks and nonbanks, how to work with regulators, and advice for regulators. They also talk about their own journeys – Kathryn notes that when she started working as a lawyer, the compliance profession didn’t even exist.

We’ve come a long way.

These are people who are pioneering new ways of tackling compliance. They’re doing it in some of the world’s biggest, most complex, and most highly-regulated companies, but their insights apply to every financial company – large and small, and old or brand new.

Also….

Vote for my panel on the SXSW PanelPicker!

I need your help getting my panel selected for inclusion in South By Southwest – SXSW – the huge technology conference that runs in Austin TX each year in conjunction with the famous music and film festival. I attended SXSW (“South by,” as people call it) for the first time last year, and it was absolutely fascinating. It’s unique among the conferences I attend, in that it’s broader than finance. It’s about technology overall. I believe fintech is more tech than fin, in the sense that it’s being driven by enormous and converging technology trends. We in the financial realm tend to underestimate how big these are and how fast they’re moving, because we think of them in terms of the financial products they’re reshaping – but they’re much bigger than those. SX is a great place to go to learn and think about these wider trends, while also seeing the most interesting new things emerging in fintech, as well.

So I have proposed a panel discussion there on RegTech – the shift toward using new generation technology to get to win/wins on regulation, by reducing regulatory costs and burdens while improving outcomes for customers at the same time. I’m calling the panel REGULATION INNOVATION and my amazing guests will be Josh Reich, the CEO of Simple; Jennifer Tescher, CEO of CFSI; and Adrienne Harris of the White House.

Last year, SX received 4,600 proposals, so, I need you to vote for the session on the SX Panel Picker. Voting opens up on Monday, August 8 and closes September 2. Please Google the SXSW PanelPicker during that time period, and vote for session called Regulation Innovation. And then plan to come to SX, which is 3/6-10 in Austin. I’ve been thinking maybe we should take a group of financial folks. What do you think?

You can vote for it HERE
 

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Support the podcast

Please support the show!

Last but not least, thanks so very much to those who have sent in your “buck a show," as we call it, to support Barefoot Innovation. Donations are essential to keep the show going, since it’s taken on a life of its own and requires a massive effort to produce.

And also, please be sure to like the show on whatever ITunes or wherever you listen to it.

We’ll see you soon with some incredibly interesting new guests – startups, banks, and even someone from Harvard. Til next time!

As Kathryn rightly states, such an overhaul of the system requires updating perspectives of themselves and of their hires. It also requires a great degree of inter-departmental collaboration and communication. This is something that I have seen to be true all across the map of regulation - open dialogue is essential. In a previous podcast, Thomas Curry, the Comptroller of Currency and head of the taskforce on responsible innovation agrees.

Kathryn and Yvette explain that compliance officers have a very tough job ahead, and I couldn't agree more. They have to balance a fine line between assessing and preventing massive risk from such huge amounts of data sharing while not becoming an obstacle to innovation. As Yvette states, we want to use innovation to regulate innovation.

Important links:

• Citi
• Wells Fargo

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CFPB'S FIFTH ANNIVERSARY: DIRECTOR RICHARD CORDRAY

Welcome to today's episode with my very special guest. He is the Director of the Consumer Financial Protection Bureau, Richard Cordray.

We got together in Washington to mark the fifth anniversary of the CFPB's opening its doors, on July 21, 2011.  I had the pleasure of serving on the Bureau's Consumer Advisory Board, or CAB, for its first three years. It's been fascinating to watch the launch of this agency, which is the first in many years to be built from scratch, as opposed to something like, say, Homeland Security, that amalgamated existing agencies. As Director Cordray says in our discussion, the CFPB has actually faced many of the same challenges as private sector startup. There are obvious differences, of course, but they still began with a small team, like founders, and went through the stresses of very rapid growth amid having to deliver against a lot of tough deadlines - and under a bright floodlight of scrutiny.

A unique thing about the CFPB is that it looks at consumer financial services as a holistic marketplace. Most of our financial regulatory system is bank-centric, with numerous agencies closely overseeing bank activities, while nonbank financial companies - while generally subject to the same rules -- don't normally face the constant, close scrutiny that banks do. This has led to a highly uneven marketplace in terms of both de facto regulatory standards and compliance burdens. That unevenness, in turn, produces some unintended consequences. One is uneven protection of consumers based on what financial company they deal with. Another is some distortion of what products banks and nonbanks are willing to offer, based on their assessments of the related regulatory risks. Moving toward a more uniform framework lays groundwork for a system that can potentially be more fair and workable for both consumers and providers.

The CFPB has also been a leader in pioneering regulatory exploration of innovation. Its Project Catalyst was the first initiative in the world, to my knowledge, to create a learning laboratory for looking at regulatory issues in innovative fintech.  In our conversation, Director Cordray mentions that they have special powers to allow trial waivers of disclosure rules for companies that have better ideas. They're open for proposals on this -- it would be great to see some new thinking come out of those tests, to move toward updating our old, low-tech disclosure models.

I think you'll enjoy hearing Director Cordray's thoughts about Project Catalyst; about how the Bureau thinks about innovation and fintech; and about CFPB itself being a startup and how hard it is to do that inside government. You'll also be interested in what we discussed about the agency's priorities as it enters year six, and about what he has learned from the first five years.

Here's more information:

• CFPB Video: Making Consumers Count
• Download the full video 
• 5 year anniversary factsheet
  • CFPB's enforcement actions have resulted in $11.7 billion in relief for more than 27 million consumers.
  • They've taken nearly one million consumer complaints.
  • They provided millions of consumers with materials to Know Before You Owe.
  • They issued new rules on mortgage lending
•  Blog and infographic 
• Four factsheets by topic:
  • CFPB's work By the Numbers
  • How CFPB supervises financial markets and enforces consumer financial law
  • CFPB's work in developing consumer protections
  • Financial education, engagement, and empowerment

The Consumer Financial Protection Bureau at age 5!  Enjoy my conversation with Director Richard Cordray.


And a note about our next show....

My guests next time will be the chief compliance officers of two of America's largest banks -Yvette Hollingsworth Clark of Wells Fargo and Kathryn Reimann of Citi, who are leaders in - if you can imagine this phrase - innovating in regulatory compliance.
 

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Fintech for Everyone : Vinay Patel and Max Gasner from Bee

I enjoy all my guests on Barefoot Innovation, but if someone forced me to choose my favorite episodes, this one would be on the list. It’s partly because my guests, the co-founders of Bee, were so fun to talk with, and so thoughtful. And it’s also because they are addressing one of the objections people raise to fintech – the notion that it’s only for millennials.

Bee was founded in June of 2015 by Vinay Patel and brothers Max and Alex Grasner as an outgrowth of One Financial Holdings, a 'venture-backed laboratory for innovation in retail financial services'. In pioneering an innovative capital-light model using pop-up kiosks and street teams to sign up customers in-person, Bee is able to offer top quality financial services at a significantly lower cost than traditional brick-and-mortar bank branches. Bee is specifically targeting the lack of quality services for low-and moderate-income underserved people (although my guests point out that 'underserved' and 'underbanked' are not words people use to describe themselves). The product is intended to function as an alternative to checking accounts, structured as a prepaid card paired with a mobile app. Bee partners with Community Federal Savings Bank to offer alternatives to checking and savings accounts to its customers in New York and California. 

Part of what makes this interesting is Bee’s specific hybrid model of personal touch and high tech. They’re trying to put the human beings where customers need them the most – in explaining and opening the account. And then they’re trying to drive down costs overall by not providing branches and tellers for routine functions. Bee’s team goes in person into underserved neighborhoods in New York and San Francisco, and they set up eye-catching mobile kiosks, which they compare to food trucks. They get people interested and then help them through a thorough process of thinking through their needs; opening an account; setting up and learning to use the app; and then, often, letting the new customer stay on to take advantage of the Bee wifi hotspot.

The in-person signup process also helps guard against money laundering, since people are seen face-to-face. 

I think you’ll be fascinated by Max and Vinay’s insights into these consumers, including their huge financial savvy -- how thoroughly they know their money situations, and how they optimize their spending on their phones (and the challenges of working with such a wide array of phones that may be old or broken). Vinay and Max talk about their customers’ worries about both pricing uncertainties and payment delays (issues that are being tackled by other innovators as well).   

One repeated theme is the company’s commitment to treating these customers with respect by providing a product that is obviously high-quality, right down to the thickness of the card, and providing a truly fantastic user experience on the app. They say customers often take selfies with the Bee team, at the end of setting up an account. 

Bee’s CEO, Vinay Patel, has a joint law degree and MBA from NYU. He spent 5 years teaching at NYU Business school and at Columbia Public Policy Business School. He then moved on to McKinsey and Co. as a consultant to banks and government. 

Max Gasner has a background as an investment stock broker on Wall street from 2007 – part of what motivated this work. He has also worked in the Bay area at an AI company  - Prior Knowledge, and then moved on to a tech company which eventually morphed into Salesforce. 

We recorded this episode several months ago. Since then the company has grown. It also won national recognition in New Orleans in June at the Emerge Conference, as one of the winners of the Financial Solutions Lab competition run by the Center for Financial Services Innovation and funded by JPMorgan Chase.

Max and Vinay are eloquent on the need for regulators to allow space for robust innovation – just one startup might create the 10X breakthrough that can change people’s lives. They’re also thoughtful on their commitment to earning compelling returns for their investors, including Blumberg Capital, Fenway Summer Ventures and AXA Strategy Ventures.  They aim to do this with their unique formula of delivering personal attention and high value to a huge, largely untapped market, at very low cost.

 Enjoy my conversation with Bee.

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More Links and Information

• One Financial Holdings Blog
• Bee card website and access to kiosk locator
• CFSI
• CFSI research on consumer financial health and the financial situations of underserved families
• Blumberg Capital
• Fenway Summer Ventures
• AXA Strategy Ventures
• My blog post on CFSI’s research on underserved consumers, “Underserved and Underestimated” 

More about Vinay

Prior to Bee, Vinay spent five years at McKinsey & Company, where he advised leaders of US banks and public sector organizations on executing large-scale IT modernization programs. Vinay is a faculty member at both NYU Stern School of Business and Columbia School of International and Public Affairs, where he has taught courses on Enterprise Strategy, Game Theory, and Data Visualization. Vinay holds a J.D. and an M.B.A from NYU, and a B.A. with honors in Economics from the University of Chicago. He is happily married and lives in Brooklyn.

LinkedIn

Twitter: @patelpost

More about Max

Prior to Bee, Max built and sold a machine learning company to Salesforce.com and traded equities in NY and London. Max holds a B.A. in South Asian Languages and Civilizations from the University of Chicago, where he graduated after spending two years at Deep Springs College. He lives in West Oakland.

LinkedIn

Twitter: @gasnerpants

More about Bee

Bee is a financial technology startup built on the principle that all Americans deserve convenient, high quality retail financial services. Bee has pioneered an innovative capital-light model using pop-up street teams and kiosks to sign up customers in-person for financial services at significantly lower cost than with traditional brick-and-mortar bank branches. Bee partners with Community Federal Savings Bank to offer alternatives to checking and savings accounts to its customers in New York and California. Bee has ambitious plans to expand its product offering and geographic footprint over the coming years.

Its major investors are Blumberg Capital, AXA Strategic Ventures, T5 Capital, Fenway Summer Ventures, and Western Technology Investment

Websites: www.onefinancialholdings.com and www.beecard.us

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