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All right.
Are we ready to go? Yes. Okay.
That's the afternoon energy that I'm looking for.
I appreciate that. My name is Alex Johnson.
I write a newsletter called FinTech Takes.
I am delighted to be moderating this session.
What should the U.S. banking system look like?
You might have noticed on the agenda that this is the session that doesn't look like all the others.
All the others are very practical, focused on tactics.
What can we do? What's actually happening in the market?
We're gonna get deeply theoretical and have a discussion about what should the US banking system look like?
I have the exact right mix of folks to have this conversation with.
So before we go any further, I would love it if each of you could introduce yourselves.
Why don't we just go down the line. So, Lizzie, start with you.
Hi, everyone. I'm Lizzie Hartley.
I'm a partner at TTV Capital.
We are early stage FinTech investors.
We're proud investors of MX.
We invest in seed and series A stage companies, so relatively early in their journey and stay with them all the way through the amazing growth of companies like we see with MX.
I'm based in San Francisco.
Awesome. Jeff. Cool.
Yeah. I'm Jeff Otero.
I'm the VP of Experience Design at ENT Credit Union in lovely Colorado Springs.
ENT is 67 years old, somewhere over half a million members.
Started off actually on an Air Force base there that doesn't exist anymore, really.
And, yeah. I've been with ENT for just coming up on four years, and unlike everybody else here, I'm new to financial services.
My background, was software before that and before that, 10 and a half years with the Walt Disney Company.
Jeff was an Imagineer. I was, yeah.
Did you see that murmur? Yeah, that was pretty cool. And if you go far enough back, I was an architect and went to business school and all that fun stuff.
So it's an interesting mix.
Awesome. Ashwin.
Hey everyone. Ashwin Vasan.
I'm a partner with FS Vector.
FS Vector is an advisory firm and a lobbying firm based in Washington DC.
We help fintechs — I like to say — with everything from licensing to lobbying and all innovative financial services.
I would say more broadly, I spent a bunch of my career at the CFPB, most recently left the agency, with my second stint in 2023, where I oversaw, the team that wrote, many of the rules and policies, including the open banking roles.
And I'm excited to not speak in an official capacity on this topic.
Sorry. You are gonna have to officially comment on behalf of this.
I've got some questions later. All right.
So, as again, you can tell exact right mix of folks to have this conversation.
I think the thing that strikes me about a lot of the things that are being talked about at this conference, whether it's competition in financial services or innovation in financial services, we're essentially dancing around a core question, which is, what should the U.S. banking system look like?
And again, it's highly theoretical.
Most people tend to answer this question in a very narrow sense.
so they'll focus on a question like, well, how many banks should there be in the U.S.?
By the way, does anyone know off the top of their head how many banks there are in the U.S. right now?
Just shout it out if you know.
42. Yeah, it's, it's a little over 4,500.
Last I looked.
And of course it depends a little bit on how you count.
What's interesting though, is that that is down from, I have the number right here.
Uh, 15,000 banks in 1985, right?
So we know that the banking system is consolidating.
But the question is, what does that mean?
15,000 is definitely more than 4,500. Is 15,000 the right number? Is 4,500 the right number? In Canada — and I'm just gonna pick on our neighbors to the north probably a couple times in this session, just 'cause there's such an interesting contrast.
There are 32 banks and three credit unions for the whole country.
The top five banks in Canada control roughly 90% of the market.
Is that good? Is that bad? It's really hard to say. Right?
And the inspiration I had for this session and for putting this together, really came from a speech that acting comptroller Mike Sue gave, where he talked about what the composition of a banking system should look like and tried to tackle it from a first principles perspective.
And his contention, which I think I largely agree with, is that the composition should match the economy and the market that it's serving.
And so maybe Canada's banking market should look different than the U.S. banking market, which should look different than Australia, which should look different than the U.K. which should look different from India.
And specifically, his contention in the speech was that the banking market should reflect the fact that the U.S. economy is large, dynamic, meaning that it constantly changes and reinvents itself, and diverse — meaning that there's lots of different communities, there's lots of different segments of customers in the market.
There's a wide range of different small businesses, large enterprises, so large, diverse and dynamic.
And I think that's a useful place to start when thinking about this.
So I think Lizzie, I'd like to go to you with the first question.
When you think about competition, obviously you invest in FinTech companies, as I understand it, some of them, like MX as an example, are working to help banks and credit unions modernize, become more competitive.
Some are trying to compete directly with banks and credit unions.
What's the right mix?
How do you think about the role of competition in creating a better financial system?
It's a great question.
And our firm has been around for 25 years investing in early stage FinTech companies.
And so you're right, we've invested in both software serving financial institutions and enabling them to be more digital and serve their customers.
And also trying to invest in companies that are disruptive to traditional financial services.
incumbents and I, there's not necessarily a winner in either business model.
It's very different. I think we have examples in both categories that are important to highlight.
But more than anything, we look to invest in companies that are solving problems that exist today.
And we sometimes look for sexy problems and things that get a lot of hype like crypto and AI and all these things.
But some of our best companies have been building software to solve a problem that is an observable event.
Something that is very, very straightforward.
You can take Greenlight, for example, one of our portfolio companies in Atlanta, and it started with the founder having to dole out cash to his kids all the time.
And he was like, what the heck? This is so annoying.
Why am I pulling out cash and giving this to my kid?
Why can't they just have their own credit card or debit card?
And that was really the inspiration behind Greenlight.
And we've seen that company grow significantly.
And it started really as a direct to consumer product and had a ton of success in the direct to consumer side.
And then banks sort of woke up and were like, oh, interesting.
Maybe we should white label that and offer that to our customers as well.
And so there's a way to both be disruptive and also enable banks and work with them to offer more products that they may not be able to innovate within their own organization, but that they can offer to their customers.
And so we work with several bank partners.
We've strategic LPs in our fund that invest in us, and we look to them really, and we try to hear what problems they face, what problems their customers face.
And then we go searching in the market to find a company trying to solve one of those problems.
And, you know, we meet 10 to 15 companies a week at a minimum.
And so there's probably some founder out there trying to solve one of those problems.
And those are the companies that we try to invest in.
Got it. Jeff, you said this as if it's an embarrassing fact that you haven't worked mostly in financial services.
That's a point of pride. You should be proud about that.
So as our resident person who hasn't spent all their time in financial services, how do you think about the role of competition in sort of shaping the market?
I love competition. That also keeps me up at night.
So I guess you could say it's a love, fear relationship, But it's great because as Lizzie talked about, I mean, and having come from a software company, our focus is on understanding our users and understanding the problems they're trying to solve.
The jobs to be done would be the language that we'd use.
Mm-hmm. And to bring that same mentality to a financial services organization, especially one that's been around for, you know, over 60 years, you can see how, you know, things kind of, it's not calcified, but you can get to the point where things like, we do it because this is the way you do it.
Sure. And to be able to bring in that different sort of mentality and really understand, bring design thinking into what the organization is doing, not just in digital.
'cause my team is also responsible for all the member touchpoints with the credit union.
And so really trying to think about what is the job to be done at each of these things and how can we do that?
And that's all because competitors, both fintechs and other financial institutions are all innovating, doing things and doing a great job of solving some of those problems because that's what they're focused on.
So I think it's good for us.
Yeah. Ashwin, here's your first opportunity to speak officially for the CFPB.
I'm just trying to get you in trouble.
The, uh, I think the CFPB is a relatively pro competition agency in a lot of ways, especially relative to other regulators.
But there's also a consumer harm aspect that can come out of innovation.
I think we've seen certainly recently a lot of challenges with startups or with disruptors breaking things, things that, you know, consumers rely on.
So when you think about kind of the role of competition in, I guess ultimately delivering better outcomes for consumers, where's that kind of balance?
I mean, I think it's a — one of the nice things about working in, first of all, I'll start, I'll have a lot of respect for the acting comptroller, the OCC.
Right? But yes. You know, I think the framing of the question, the framing of it is how many banks should we have?
Feels kind of narrow. Yeah. Yeah.
Like, you know, if you look at the major, at least consumer facing markets, you know, the largest one multiple trillions in assets is mortgages was essentially a federally run program with a non-bank distribution channel.
Student loans are federally run, auto has a substantial footprint in non-banks.
You know, you've got credit cards, but it's basically like eight players.
Yeah. And Kelvin's here, you may take offense.
So you know, it, it really depends on the product, right?
And so just counting banks and pretending that banks are sort of like all the same.
And very uniform is a little misleading.
And I think yeah, like when the CFPB looks at it, we looked at it in a very functional way.
Yeah. Right? Is competition working in the mortgage market?
And if it's working in a way that gets better products at cheaper prices to consumers, essentially it's a pretty clear north star.
And if you go market by market, there are a lot of dysfunctions in different ways in all of those.
And I think, again, how many banks is less important to it than how like the market is actually performing for consumers.
And even if, you know, if, and I can, we can go product by product, but I think there are different pinch points in each as well that like create those challenges.
Yeah. No, I think that's very well said.
I mean, the first principles way of thinking about this is that competition needs to be a function of what makes this market work well, what leads to better outcomes for consumers?
What allows for enough choice, right.
That you do have the ability to move around and find the best option for you.
Lizzie, I wanna come back to you because the flip side to innovation and competition is stability.
Right? And speaking of acting comptroller, Sue, that's kind of their principle job is to make sure we have a nice stable banking system.
I promised we'd pick a little bit on our neighbors to the north and Canada, but Canada's really interesting to me because obviously the big five banks are very dominant from a market share perspective.
I would say it's probably not a stretch to say that they have a relatively close working relationship with regulators in Canada.
That relationship is probably beneficial from the perspective of being able to slow down, or perhaps stop innovation or disruption, which is a natural sort of instinct for incumbents.
But the flip side is Canada has a very stable banking market, right.
Apart from when us in the U.S.
or other parts of the world sort of disrupt the global economy, Canada just sort of chugs along and doesn't really have a lot of financial crises.
So I know you guys have invested in Canada specifically.
So I'm curious, what is the sort of trade off that you think about when it comes to sort of introducing competition into markets that really don't have a lot and kinda that role of stability So different from Greenlight.
We invested in a company called Koho, which is trying to disrupt completely the banks in Canada.
So they are building a no fee challenger bank in Canada.
And it's another fun founder story where the founder grew up with a single mom and she was always working several jobs, and it was a tough financial life for him growing up.
And when he sort of reached an age of maturity and had money of his own, he went back and did sort of a deep dive of his mom's financial profile and realized that she had paid so many fees over the course of her lifetime because of the banking system in Canada that allowed that.
And so what really sticks out to me in Koho, the difference between good financial products and great financial products over a lifetime can be enormous.
And so Daniel Eberhard went out to start Koho, which is a bank that offers products with no fees, and he has over, I think, a million customers to date.
And so you can see that there's clear product market fit, and there is a need and a demand in that market for something different.
And there's no doubt, we see this in the U.S.
and Canada all the time.
Fintechs move really, really fast, and they often times break things.
And so not every fintech is stable.
And that's why we've seen so many fintech companies I think shut down over the past five, 10 years, etc.
But when you do have a fintech that is built with dignity and strength to be stable and build true financial products to serve a market in a compliant way that is, you know, safe for everyone involved, it can have a really big outcome for consumers.
All right. So you teed me up perfectly for my next question, which I'm also gonna direct back to Ashwin because I told him I'd give him all the hard questions.
There are, again, 4,500+ banks in the U.S.
One of the benefits of that is that there are a lot of small banks that are willing to let new market disruptors build on top of their infrastructure.
And on top of their charter. This is a loaded question, given everything that's happened over the last 18 months, but has banking as a service been a net plus or a net negative for the market as a whole?
I think about it a little differently.
I mean it feels like a natural consequence of not having a regulatory framework that is like more functionally driven and very bank centric.
So when banks are the only players that can get access to the payment system, get access to deposit insurance, get access to national preemption then everyone wants to work with banks.
And yeah, I'm sure there have been great partnerships.
Some have benefited small banks, some have benefited fintechs, some haven't.
That's natural in the market.
But the deeper dysfunction is that there's only one gateway.
And not every country does it that way.
I think, so I don't, it's sort of more neutral on it.
It feels like an inevitable consequence of our regulatory architecture and one that is probably here to stay and one will have to figure out how to make.
Right? Yep. So I, you know, being a pragmatist, I think you sort of, we take this wave of enforcement actions and consent orders and say, well, how do we build on this to make it more constructive?
Yeah. I would say that there's, one of the things in banking though, and you'll see with, I think maybe you've written about this, Alex, is with these partner banks as they're going through these consent orders and the compliance expectations are growing.
You sort of further that kind of — banking is a scale job, right?
It's essentially bits and bytes and it's technology.
So you've got a lot of natural economies of scale, many parts of the banking ecosystem.
And so, you know, 4,500 banks, if you're gonna have 4,500 banks, you are going to have technology service providers that are much more concentrated.
And the core service providers are a perfect example.
Because the fundamental job of it's, you know, it's not, you know, a bar it's not getting a haircut, right?
Yeah. It's not like a people intensive, it is something that naturally scales.
And in a modern economy, if you're gonna choose like 400, 4,000, 500 distribution points, there's gonna be something under that has competitive concerns.
And so that's gonna drive the customer experience one way or another.
So again, back to my initial point, broadening it away from just banks and how many banks you need is kind of misses the point. 'cause, you know, I think that's fair. I mean one of the things I'm working on right now is a piece talking about banking as a service, and it kind of looks at the difference between software businesses, which, Lizzie, to your point, are great at solving problems and focusing on, like delivering great end user experiences or products to consumers, but they're very deterministic by their nature, right?
Like, you have inputs, you have outputs, it's very predictable, it scales very well.
That's why investors love and give great multiples to SaaS businesses.
I think what we've learned through all the things with banking as a service is that banking is a probabilistic business.
Right? It's not a deterministic business.
And what that means is there's always a probability of bad things happening.
You're managing risk. And so it doesn't scale the same way.
And, you know, I think Ashwin to your point, it'll be interesting to see how this wave of consent orders plays out, because a lot of the response I'm seeing from regulators so far is, well, if you're having a compliance problem, throw more bodies at it.
Right? And there's a limit to how many banks can do that, especially at a smaller scale.
Jeff, coming back to you, the other thing that I wanted to ask about based on the fact that you work for a credit union that's based in Colorado is rural banking.
Right. And this comes up a lot in the discussion about what should the U.S. banking market look like?
Because there are consumers that live in banking deserts.
Right. And I have the stat right here.
According to the Fed, 12 million Americans live in a banking desert.
A banking desert is defined as a geographic area without a physical bank branch within a specified distance.
Two miles for urban communities, five miles for suburban communities, and 10 miles for rural communities.
Looking at the map, Colorado doesn't have as many banking deserts as other states, but it does have some. How do you think about the role of A credit union sort of being in market and being able to address the local concerns of your members?
Yeah, we're actually working on a new branch in Alamosa right now, which isn't exactly rural, but I mean, it's starting to get out there.
Sure. Because we're pretty much up and down the I 25 corridor from Pueblo up to, you know, Fort Collins and Loveland.
So Alamosa, I think from my house, it's like over a three hour drive to get there.
It's a long way to deposit a check.
It is, isn't it? Yeah.
But, and then we're looking at mountain towns and things beyond that which are smaller and smaller markets.
But I think having the rootedness in that area, having been there for over six decades is one thing that, you know, gives us some solidity that, that people find valuable.
But the other thing is, I know at the Alamosa branch and then other ones we do, they're really trying to recruit and build up a different kind of branch manager, someone who really is gonna go, become part of that community, obviously will live there, but at the same time really be part of what they're doing.
Understand in that case, like Ag loans and things, which is a whole new realm for us.
And so really becoming an expert and a key part of the community wherever we are.
And I think that's something else that'll help.
And that's what I think is really cool about our opportunity wherever we are, is having boots on the ground.
Yeah. And not just boots on the ground, but actually we live there, we work there, all those different things. Relationships on the ground. Exactly.
History too.
But at the same time, marrying that with the best in technology, the best in convenience, and so trying to bring people those options.
But we've gotta figure out the economics of what that looks like as we go further and further out to the west and maybe out to the east, into the plains.
I mean, the reach of physical distribution is really interesting to me.
And Nick, in the previous session referenced that Chase is planning to build a hundred branches in low income communities across the country, and they see a pretty strong economic case for doing that.
They have, I think, a similar idea, which is to have folks working in the branch who are really like rooted in those communities.
Lizzie, I think the thing I'm curious about from like a fintech investment technology perspective is when we're defining banking deserts, we're defining them based on proximity to a physical branch.
It's 2024, we don't necessarily need to do everything, in a physical branch.
In fact when Elon Musk worked at Scotiabank as an intern a million years ago, that was the first observation he had, right?
Is that money is all just ones and zeros.
There's no reason for any of this cost or this infrastructure.
I don't know that I totally buy that, but I do see the point, and I think there are a lot of things that banks and credit unions have done to sort of justify the existence of branches rather than make branches a strength or a point of differentiation from more of a fintech lens.
How do you think about the difference between reaching underserved consumers and small businesses digitally versus doing it through a branch?
Well, a small funny anecdote is, I just got married recently, and my husband and I went to open our first joint checking account. Did you go to a branch? And I was online, we bank at Chase.
And I was like, weird.
I can't find where I can open a joint account online.
And I was like, this is so embarrassing.
I invest in fintech companies.
And he's looking to me like, what do you mean we can't open this digitally? And so Haven't you fixed this yet?
We went to a branch, turns out you can't open a joint checking account online. You have to do it in person.
And I was prepping for this panel and I was like, wow, this is so important to talk about.
It's perfect because this bank, you know, you'd expect them to have best-in-class digital services, and they spend like half a billion dollars on technology a year.
And they, you still can't open a joint checking account digitally.
And so it just sort of reemphasized that.
I do believe that we are still in a hybrid world where you'll need physical branches, but you also need digital solutions.
And consumers are getting more used to digital solutions.
And so they're looking for that online first before going into branches, really for convenience.
This came up last night also, if Barb is in the crowd, we were talking Wintrust Bank, they really only invest in branches.
And that's because their customers love coming in.
They have served cookies and coffee for a long time, and that's what their customers want.
And they don't want a digital solution.
And so it's sort of interesting to really be thinking about what the consumer wants and who your customer, what your customer wants, and who your customer is.
And so I think you touched on something really interesting.
Personalization is a huge theme in the investment world right now.
Like all of these companies are looking to verticalize and get super personalized in their product offerings to address underserved markets.
And that can be farmers, that can be the aging population.
We're invested in a company called Charlie that serves the aging population, and they give early access to social security deposits.
And they are a digital first company.
And we invest in a company called Curb Waste.
It's building software for waste haulers, and they have payments with that.
And so it just sort of makes you realize that there are so many different demographics and types of consumers out there, and they all need different things, and they all want different things, and they're coming to expect those in their banking.
And so I think you do need branches, but you also will need the digital solutions and how you marry the two together and make the economics work is sort of the key.
That's where it starts to get really cool.
I mean, that's what attracted me to go to work for it four years ago, is that that promise of being able to bring the digital and the physical together, if you will, and, and have the whole be greater than the sum of those parts.
And I think what it, you know, the nature of what you do in a branch or what you can do with a branch starts to change.
Like we're experimenting with designs for some of our future branches where it's not full of offices and everything like that.
It's full of meeting rooms in the emphasis is on one-on-one meetings, on group meetings, creating flexibility in the space.
So maybe after you're done with the kind of banking day, you could pull a bunch of chairs out there and you could have classes on, you know, financial wellness on that kind of stuff.
And so again, when you start to move out into some of those mountain towns, maybe we, it's not economical for us to build all that square footage ourselves, but if we've got a small footprint, then can we work with other facilities there to do those kinds of things?
But I think gathering together, like fewer and fewer people are willing to put up with having to go to a place to do a transaction, I should be able to open my joint account online.
That's ridiculous. I think we can do that.
You can come to, you know, Wrong state, but solve that problem. Yeah.
But, but all that said, I think bringing those relationships in, and then for us as a credit union, having the opportunity to bring people together, I think there's power there and helping people improve their financial wellness that, is just, it's really attractive and it's kind of fun to be reaching towards that.
Absolutely. I mean, the other thing that you touched on there, and I think actually, both end and, some of the companies that you mentioned are a good example of this is in the credit union space forever, we've had this concept of field of membership, right?
And one of my, I think, critiques of both community banks and credit unions over the last, say 30 years is that they become a little flabby about field of membership and about just defining who your customer segment is really concisely.
And I think that's where fintech is sort of demonstrating how much we've sort of drifted away from that.
I was doing a strategy consulting session with a, credit union a while ago that works with airline employees.
That's kind of their specialty and their field of membership.
And they're like, well, what kind of product could we build that would be unique?
And I'm like, well, what's a thing that you guys know that no one else knows and no one else understands?
And they thought about it for a second and they're like, well, there's this special type of housing that exists on airports inside the security perimeter that's only available for pilots to buy.
And they buy them because, if you're constantly going through different hubs, you need a place to stay, but you have to meet very specific requirements.
There's a lot of paperwork, they're difficult to underwrite, and they're like, we do a lot of those mortgages.
Do you think that's specialized?
I'm like, yeah, that is like perfect.
Like go build a better digital version of that.
That sounds amazing. Like, that's something that, you know, and no one else knows.
So I guess maybe Jeff, to go back to you real quick, when you think about defining a field of membership, not in terms of geography necessarily, but in terms of like what you know about your members that other people don't know, what are some things that stand out as opportunities that you guys can do?
And you mentioned like Ag loans and things that are specific to Colorado, but like, where do you think those opportunities are?
And this is just me talking now, so just thinking about where I'd love to see us go, but, I'm really fascinated by the idea of, so we are, even though we don't talk about this a lot, we are a not-for-profit financial co-op, and really starting to lean into the co-op piece of it a lot more.
So for instance, we do a lot of charitable work throughout the communities that we serve, but it's really the employees that are doing it and how can we invite the members into that?
How can we actually all start working together to improve and transform our own personal financial lives, but then also the lives of those around us.
And so I think that's actually something that, again, is unique to being in a spot.
I realize maybe it doesn't quite go where you're thinking, but no.
How can we actually come together to help improve everything?
We recently became the official banking partner of the Broncos and the Broncos, and part of the affinity there between the, I was gonna say, talk about Affinity.
That's a good one. Yeah.
Well, and but also too, it's, there's a charitable organization Affinity too, because both organizations are involved in some of the same things, and how can we even do that to kind of enlarge what we're all doing together, I think is really, really, really exciting.
Yeah, I don't know. No, That's a good one. One thought, I'm just gonna chime in from the fintech investment perspective.
You talk a lot about these very niche products, and that's something that we do see all the time, especially in these verticalized markets that I talked about.
And our first question always as investors is how big is this opportunity?
And how big can this be?
And sometimes we see things that are super cool and super innovative and definitely address a problem and a need, but it's not big enough to see a billion dollar outcome.
And so that's where I think it's on the banks to innovate on those specific things and not rely on fintechs to have that innovation.
And again, you know, your customers more than investors do.
Yeah. So just something to keep in mind. I Love that we don't have to try to win the entire country.
It's huge, right? Yeah. It's absolutely huge.
Well, and I think Lizzie, to your point, the other thing that reminds me of that I think is really interesting is there is this, I think, kind of gap in the middle of the market, which is, hey, that's a great idea.
Banks and credit unions, because of the nature of how they build products and their technology capabilities and just the way they think about product development, probably aren't gonna build that.
It's not a billion dollar outcome, so we can't really invest in it, but it's a good idea and it should exist in some capacity in the market.
And I do think, when I think about this large question of what should the U.S. banking system look like, one of the things I would like to see is a mechanism for allowing those kinds of things to exist, right?
And even if it doesn't turn into a billion dollar exit, that's a return the fund winner for a vc.
How can we do that? Right.
And there are examples I think, that are starting to proliferate.
Like there's a digital bank that was started called Roger, that's for new military service members, right?
And it's specifically geared towards new service members that are just sort of reconciling the financial challenges of being on active duty and sort of figuring that out.
And obviously there's a lot of predatory financial services that target service members.
And so they're trying to sort of cut that out and be a better answer.
It was created by Citizens Bank of Edmond in Oklahoma.
But what's most interesting to me is they are not talking about essentially franchising that model and making it available to other community banks and credit unions.
And that's a very cool model to me, because to your point, Jeff, they don't really care about customers outside of Oklahoma.
Like that's outside their market.
So if you want to use our technology to go serve service managers, go do that.
Yeah. Right. And so I think getting back to our core question, what should the U.S.
banking system look like?
There is a benefit to that almost co-opetition model.
And if you only have five banks, I don't think you necessarily have that.
So I wanna wrap up by actually asking each of you to wave a magic wand and pretend for a second that you could reshape the U.S. banking market however you want it.
Real quickly, you can pick on any particular part that you would like.
What is a thing that you would change and why?
And Lizzie, maybe we'll start with you and we'll go all the way down.
Sure. I can go first. Sure. You have a great answer.
I, it's a hard question.
It is, and it's hard to envision it changing dramatically in a short period of time.
And I think that's because of all the regulation in the industry, but I do hope for more.
The ability to commercialize with banks right now is very challenging.
And fintechs that do have billion dollar opportunities Often times can't commercialize with banks because they don't move fast enough.
And realistically, fintechs are on time clock of time and capital, and they only have so much time and so much capital to prove to their investors that customers wanna buy their product.
And even if banks love the product and wanna use it, their bureaucracy moves so much slower that they can't often times partner with fintechs.
And so we see so many fintechs die before they really should because they've, because the sales cycle with banks is so long, and for a long time, fintechs filled that void.
Fintechs hold to fintechs, and that was a great solution.
It was a faster way to get revenue, sort of showing product market fit, but not landing those big whale deals.
Those sort of came later and there was after some more validation in the market where banks got more comfortable working with those fintechs.
But that's not happening as much right now.
Partially 'cause of the bass meltdown.
There's a lot more fragility in the fintech market.
And so we're just seeing buying of software go down in the space.
And so my hope is that fintechs are able to sell into banks more easily, and banks are more receptive to taking a risk on early stage companies to really move, move the ball forward.
Yeah, I think that's a great call.
The distinction between the amount of time that fintech companies have and the piece at which banks move is a really great observation. Jeff, how about you?
I'm really fascinated by the potential of what AI could bring to the banking experience in kind of two different realms.
One is certainly bringing capabilities to consumers that they, a lot of people just can't afford or have access to today.
Bringing intelligence, bringing advice, bringing all kinds of things.
I think a lot of people and myself included, actually pretty lazy when it comes To their money.
And, but if you could imagine now AI giving me, I can actually have a tax accountant with me all the time.
I can have a bookkeeper, I can have a financial advisor, and they're all in my phone or whatever.
I think it's pretty amazing. We've got a long way to go to get there.
I mean, we gotta get past hallucinations and all the, the craziness we have today, but still, there's great potential.
And then for the institutions to be able to use it to make ourselves more efficient.
And to be able to focus our resources more on the customer facing, member facing services.
So we always maintain our human face and you're always talking to a person, but there's just incredible technology behind it that can help us get things done faster, more efficiently.
I think there's great potential in both realms. So I'm excited about that.
It's a good one. You get the bonus point for mentioning AI, so well done there.
And I will say that to your point on the consumer side, the idea of AI being able to empower like perfect discovery for consumers where it's like you're always getting the best answer, you're always finding the best product that has some really big implications for the structure of the U.S. banking market, right?
Yeah. Like that notion, I think should really scare Prudential bank regulators because suddenly, like deposits are flying all over the place.
Yeah. You're constantly refinancing loans, like it's a much more portable market.
The CFPB would be happy, but maybe some others might be a little challenged.
And then on the institution side I mean you hear Sam Altman from OpenAI talk about this, like, there's gonna be a billion dollar company that has one employee, right?
And it's like, how far can we push operational efficiency and what does that allow us to do in terms of number of companies versus number of employees?
So I think that's a really great answer.
Ashwin we’ll end with you.
I mean, since I think my perspective is, is primarily as an ex-regulator, I would probably go back to something I said earlier, which is I think the regulatory framework between the federal and state level and then also between banks and non-banks is pretty patchworky.
Yeah. Yeah. And I think it creates a lot of weird incentives.
And since we're waiving wands, because in no way do I imagine this to be a reality, but I, you know, a universe where, or a world where, you know, like if you're lending, you have certain clear requirements at the federal level, and it's whether you're a bank or non-bank, and you, and then you're overseen for that if you're taking people's money bank or non-bank, same requirements and overseen in the same way.
Yeah. Right. If you're moving money, same thing.
And I think the absence of that creates a lot of, of friction and complexity.
Yeah. I work for a firm that we do 50 state licensing strategies all the time.
Right. So it's against my economic interest.
Yeah, yeah. But Some not sponsored by FSV, But some simplicity on that front I think would be welcome.
But it's a long way from where we've evolved for various historical and institutional reasons.
Ashwin hates the dual banking system. That's the takeaway.
That's not No, No. I mean, it, it's a really good point, right?
'cause I do think the other thing that you touch on there that's really important is it's very, very difficult to navigate these things.
And like one thing that I was very surprised to learn recently is that the number of de novo banks in the U.S. has just plummeted since the, the Great Recession.
Right? And a lot of times the regulatory response to a crisis will be well-meaning, but the consequence of it is that it's suddenly a lot less attractive to start a bank.
And maybe it's more attractive to start a fintech company that can build on top of a bank.
And so you get these very strange incentives.
But one of the things I'm very cognizant of from a banking as a service perspective is the more we sort of crack down on the space, again for very good reasons, the more we're sort of raising the floor of what you need in order to participate in this system.
Right. And one of the things that I constantly hear right in the newsletter is I'll get someone who reaches out and it's a person who's never worked in financial services before, but they have a vision for a thing that should exist that they want to build.
And it's brilliant, right? And they give me the pitch.
And they're probably not the smoothest entrepreneur 'cause they've never done it before.
The pitch is a little rough around the edges.
Often times they're coming from a diverse or minority background, and I love everything they're pitching.
And at the same time, I know their odds of getting VC funding are very low and their odds of being able to get a bank partner are increasingly low because there's just not enough capital.
There's not enough bank partners to go around for all of those things.
So when we cut off the bottom of the market and make it hard for new entrepreneurs to come in and try things, I worry about that a lot.
So with the remaining four minutes that we have, if anyone has any questions about how we would restructure the U.S. banking market with the unlimited power that we have up here we'd be happy to entertain those.
I also can just wait you out in complete silence.
'cause I was a public school teacher. So What would you do about data ownership?
About what? Data Ownership?
Data ownership. It's a good question.
Maybe Ashwin, we’ll start with you and we can work our way down.
Can you say more about the question? Sorry. I feel like today we don't own our data.
Access to the data, but yeah. We do anything different.
Oh, you can wave a magic wand.
You have unlimited power. Yeah.
I mean, if I could, yeah. I mean I don't think I can imagine the technological control world of technologies that would sort of put data ownership completely in the hands of consumers.
Yeah. Maybe we'll get there in 10 years.
I just, I don't have that technologist mindset, but yet in theory it sounds for me. That's a good idea.
Yeah. I've had two magic wands.
One would be I can own it and two would be I can monetize it. Yeah.
Jane Barratt is smiling somewhere.
You just said that. Go ahead, Lizzie.
I'm gonna take a slightly different approach to the question that sort of inspired by a conversation I had last night with the Chief Data Scientist of MX and the power of the insights of data.
And right now, consumers don't really benefit from a lot of the signals that we give to the market on how we're spending, where we're spending, what we're spending on, etc.
And so companies like MX can add so many more layers of personalization that can benefit the consumer that then they're happy about.
And so if companies like MX can have ownership of the data and then use that to actually enhance the customer experience, I think no one cares who owns their data if it's helping them and providing them more opportunities, better services and better products that they can buy.
Yeah. I mean, I think building on that, just one quick thing I would add is that, I think the vision for open banking in a broad sense in data ownership is a lot more transparency for consumers, right?
Because I think one thing we don't have right now is a sense of, am I getting screwed by my bank?
And the problem is, it's not in the interest of the bank to broadcast the fact that, yeah, you haven't checked your savings rate recently.
And so we didn't ask if you wanted a higher savings rate.
And it turns out I'm not getting a good deal.
And the thing I think is really cool about just the shift towards data ownership is it makes it easier for consumers to share access to the data, which then makes it easier for competitors to my incumbent financial institution to say, you know what, you're not getting a great deal there.
And we're starting with basic transaction data.
We're starting with pricing, we're starting with a couple of things, but I don't think there's any reason why in the future, particularly with generative AI and its ability to handle more unstructured data sets, why can't I share a history of every single customer service chat that I've had with my bank and have someone else analyze that and tell me things I might not know about how I'm getting served by that bank and how I could potentially do better.
And that's like a radical shift in transparency that's enabled, I think, by this data ownership.
And Ashwin, to your point, it's gonna take us a long time to get there.
This is very pie in the sky, but these are the first kind of baby steps towards that.
And I think that could really restructure the market in a fundamental way.
Mm-Hmm. Awesome. That is all the time we have.
Please join me in thanking everyone for this wonderful session.
Thank you.
What Should the U.S. Banking System Look Like?
If we could wave a magic wand to design the perfect banking system — one that is diverse, dynamic, and balanced to deliver the ideal outcomes for consumers, SMBs, businesses, and financial providers, what does it look like? What should we keep? What should we change? Do new banks and services emerge? Do old ones die? This session will dive into these questions and more.
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Transcript
Are we ready to go? Yes. Okay.
That's the afternoon energy that I'm looking for.
I appreciate that. My name is Alex Johnson.
I write a newsletter called FinTech Takes.
I am delighted to be moderating this session.
What should the U.S. banking system look like?
You might have noticed on the agenda that this is the session that doesn't look like all the others.
All the others are very practical, focused on tactics.
What can we do? What's actually happening in the market?
We're gonna get deeply theoretical and have a discussion about what should the US banking system look like?
I have the exact right mix of folks to have this conversation with.
So before we go any further, I would love it if each of you could introduce yourselves.
Why don't we just go down the line. So, Lizzie, start with you.
Hi, everyone. I'm Lizzie Hartley.
I'm a partner at TTV Capital.
We are early stage FinTech investors.
We're proud investors of MX.
We invest in seed and series A stage companies, so relatively early in their journey and stay with them all the way through the amazing growth of companies like we see with MX.
I'm based in San Francisco.
Awesome. Jeff. Cool.
Yeah. I'm Jeff Otero.
I'm the VP of Experience Design at ENT Credit Union in lovely Colorado Springs.
ENT is 67 years old, somewhere over half a million members.
Started off actually on an Air Force base there that doesn't exist anymore, really.
And, yeah. I've been with ENT for just coming up on four years, and unlike everybody else here, I'm new to financial services.
My background, was software before that and before that, 10 and a half years with the Walt Disney Company.
Jeff was an Imagineer. I was, yeah.
Did you see that murmur? Yeah, that was pretty cool. And if you go far enough back, I was an architect and went to business school and all that fun stuff.
So it's an interesting mix.
Awesome. Ashwin.
Hey everyone. Ashwin Vasan.
I'm a partner with FS Vector.
FS Vector is an advisory firm and a lobbying firm based in Washington DC.
We help fintechs — I like to say — with everything from licensing to lobbying and all innovative financial services.
I would say more broadly, I spent a bunch of my career at the CFPB, most recently left the agency, with my second stint in 2023, where I oversaw, the team that wrote, many of the rules and policies, including the open banking roles.
And I'm excited to not speak in an official capacity on this topic.
Sorry. You are gonna have to officially comment on behalf of this.
I've got some questions later. All right.
So, as again, you can tell exact right mix of folks to have this conversation.
I think the thing that strikes me about a lot of the things that are being talked about at this conference, whether it's competition in financial services or innovation in financial services, we're essentially dancing around a core question, which is, what should the U.S. banking system look like?
And again, it's highly theoretical.
Most people tend to answer this question in a very narrow sense.
so they'll focus on a question like, well, how many banks should there be in the U.S.?
By the way, does anyone know off the top of their head how many banks there are in the U.S. right now?
Just shout it out if you know.
42. Yeah, it's, it's a little over 4,500.
Last I looked.
And of course it depends a little bit on how you count.
What's interesting though, is that that is down from, I have the number right here.
Uh, 15,000 banks in 1985, right?
So we know that the banking system is consolidating.
But the question is, what does that mean?
15,000 is definitely more than 4,500. Is 15,000 the right number? Is 4,500 the right number? In Canada — and I'm just gonna pick on our neighbors to the north probably a couple times in this session, just 'cause there's such an interesting contrast.
There are 32 banks and three credit unions for the whole country.
The top five banks in Canada control roughly 90% of the market.
Is that good? Is that bad? It's really hard to say. Right?
And the inspiration I had for this session and for putting this together, really came from a speech that acting comptroller Mike Sue gave, where he talked about what the composition of a banking system should look like and tried to tackle it from a first principles perspective.
And his contention, which I think I largely agree with, is that the composition should match the economy and the market that it's serving.
And so maybe Canada's banking market should look different than the U.S. banking market, which should look different than Australia, which should look different than the U.K. which should look different from India.
And specifically, his contention in the speech was that the banking market should reflect the fact that the U.S. economy is large, dynamic, meaning that it constantly changes and reinvents itself, and diverse — meaning that there's lots of different communities, there's lots of different segments of customers in the market.
There's a wide range of different small businesses, large enterprises, so large, diverse and dynamic.
And I think that's a useful place to start when thinking about this.
So I think Lizzie, I'd like to go to you with the first question.
When you think about competition, obviously you invest in FinTech companies, as I understand it, some of them, like MX as an example, are working to help banks and credit unions modernize, become more competitive.
Some are trying to compete directly with banks and credit unions.
What's the right mix?
How do you think about the role of competition in creating a better financial system?
It's a great question.
And our firm has been around for 25 years investing in early stage FinTech companies.
And so you're right, we've invested in both software serving financial institutions and enabling them to be more digital and serve their customers.
And also trying to invest in companies that are disruptive to traditional financial services.
incumbents and I, there's not necessarily a winner in either business model.
It's very different. I think we have examples in both categories that are important to highlight.
But more than anything, we look to invest in companies that are solving problems that exist today.
And we sometimes look for sexy problems and things that get a lot of hype like crypto and AI and all these things.
But some of our best companies have been building software to solve a problem that is an observable event.
Something that is very, very straightforward.
You can take Greenlight, for example, one of our portfolio companies in Atlanta, and it started with the founder having to dole out cash to his kids all the time.
And he was like, what the heck? This is so annoying.
Why am I pulling out cash and giving this to my kid?
Why can't they just have their own credit card or debit card?
And that was really the inspiration behind Greenlight.
And we've seen that company grow significantly.
And it started really as a direct to consumer product and had a ton of success in the direct to consumer side.
And then banks sort of woke up and were like, oh, interesting.
Maybe we should white label that and offer that to our customers as well.
And so there's a way to both be disruptive and also enable banks and work with them to offer more products that they may not be able to innovate within their own organization, but that they can offer to their customers.
And so we work with several bank partners.
We've strategic LPs in our fund that invest in us, and we look to them really, and we try to hear what problems they face, what problems their customers face.
And then we go searching in the market to find a company trying to solve one of those problems.
And, you know, we meet 10 to 15 companies a week at a minimum.
And so there's probably some founder out there trying to solve one of those problems.
And those are the companies that we try to invest in.
Got it. Jeff, you said this as if it's an embarrassing fact that you haven't worked mostly in financial services.
That's a point of pride. You should be proud about that.
So as our resident person who hasn't spent all their time in financial services, how do you think about the role of competition in sort of shaping the market?
I love competition. That also keeps me up at night.
So I guess you could say it's a love, fear relationship, But it's great because as Lizzie talked about, I mean, and having come from a software company, our focus is on understanding our users and understanding the problems they're trying to solve.
The jobs to be done would be the language that we'd use.
Mm-hmm. And to bring that same mentality to a financial services organization, especially one that's been around for, you know, over 60 years, you can see how, you know, things kind of, it's not calcified, but you can get to the point where things like, we do it because this is the way you do it.
Sure. And to be able to bring in that different sort of mentality and really understand, bring design thinking into what the organization is doing, not just in digital.
'cause my team is also responsible for all the member touchpoints with the credit union.
And so really trying to think about what is the job to be done at each of these things and how can we do that?
And that's all because competitors, both fintechs and other financial institutions are all innovating, doing things and doing a great job of solving some of those problems because that's what they're focused on.
So I think it's good for us.
Yeah. Ashwin, here's your first opportunity to speak officially for the CFPB.
I'm just trying to get you in trouble.
The, uh, I think the CFPB is a relatively pro competition agency in a lot of ways, especially relative to other regulators.
But there's also a consumer harm aspect that can come out of innovation.
I think we've seen certainly recently a lot of challenges with startups or with disruptors breaking things, things that, you know, consumers rely on.
So when you think about kind of the role of competition in, I guess ultimately delivering better outcomes for consumers, where's that kind of balance?
I mean, I think it's a — one of the nice things about working in, first of all, I'll start, I'll have a lot of respect for the acting comptroller, the OCC.
Right? But yes. You know, I think the framing of the question, the framing of it is how many banks should we have?
Feels kind of narrow. Yeah. Yeah.
Like, you know, if you look at the major, at least consumer facing markets, you know, the largest one multiple trillions in assets is mortgages was essentially a federally run program with a non-bank distribution channel.
Student loans are federally run, auto has a substantial footprint in non-banks.
You know, you've got credit cards, but it's basically like eight players.
Yeah. And Kelvin's here, you may take offense.
So you know, it, it really depends on the product, right?
And so just counting banks and pretending that banks are sort of like all the same.
And very uniform is a little misleading.
And I think yeah, like when the CFPB looks at it, we looked at it in a very functional way.
Yeah. Right? Is competition working in the mortgage market?
And if it's working in a way that gets better products at cheaper prices to consumers, essentially it's a pretty clear north star.
And if you go market by market, there are a lot of dysfunctions in different ways in all of those.
And I think, again, how many banks is less important to it than how like the market is actually performing for consumers.
And even if, you know, if, and I can, we can go product by product, but I think there are different pinch points in each as well that like create those challenges.
Yeah. No, I think that's very well said.
I mean, the first principles way of thinking about this is that competition needs to be a function of what makes this market work well, what leads to better outcomes for consumers?
What allows for enough choice, right.
That you do have the ability to move around and find the best option for you.
Lizzie, I wanna come back to you because the flip side to innovation and competition is stability.
Right? And speaking of acting comptroller, Sue, that's kind of their principle job is to make sure we have a nice stable banking system.
I promised we'd pick a little bit on our neighbors to the north and Canada, but Canada's really interesting to me because obviously the big five banks are very dominant from a market share perspective.
I would say it's probably not a stretch to say that they have a relatively close working relationship with regulators in Canada.
That relationship is probably beneficial from the perspective of being able to slow down, or perhaps stop innovation or disruption, which is a natural sort of instinct for incumbents.
But the flip side is Canada has a very stable banking market, right.
Apart from when us in the U.S.
or other parts of the world sort of disrupt the global economy, Canada just sort of chugs along and doesn't really have a lot of financial crises.
So I know you guys have invested in Canada specifically.
So I'm curious, what is the sort of trade off that you think about when it comes to sort of introducing competition into markets that really don't have a lot and kinda that role of stability So different from Greenlight.
We invested in a company called Koho, which is trying to disrupt completely the banks in Canada.
So they are building a no fee challenger bank in Canada.
And it's another fun founder story where the founder grew up with a single mom and she was always working several jobs, and it was a tough financial life for him growing up.
And when he sort of reached an age of maturity and had money of his own, he went back and did sort of a deep dive of his mom's financial profile and realized that she had paid so many fees over the course of her lifetime because of the banking system in Canada that allowed that.
And so what really sticks out to me in Koho, the difference between good financial products and great financial products over a lifetime can be enormous.
And so Daniel Eberhard went out to start Koho, which is a bank that offers products with no fees, and he has over, I think, a million customers to date.
And so you can see that there's clear product market fit, and there is a need and a demand in that market for something different.
And there's no doubt, we see this in the U.S.
and Canada all the time.
Fintechs move really, really fast, and they often times break things.
And so not every fintech is stable.
And that's why we've seen so many fintech companies I think shut down over the past five, 10 years, etc.
But when you do have a fintech that is built with dignity and strength to be stable and build true financial products to serve a market in a compliant way that is, you know, safe for everyone involved, it can have a really big outcome for consumers.
All right. So you teed me up perfectly for my next question, which I'm also gonna direct back to Ashwin because I told him I'd give him all the hard questions.
There are, again, 4,500+ banks in the U.S.
One of the benefits of that is that there are a lot of small banks that are willing to let new market disruptors build on top of their infrastructure.
And on top of their charter. This is a loaded question, given everything that's happened over the last 18 months, but has banking as a service been a net plus or a net negative for the market as a whole?
I think about it a little differently.
I mean it feels like a natural consequence of not having a regulatory framework that is like more functionally driven and very bank centric.
So when banks are the only players that can get access to the payment system, get access to deposit insurance, get access to national preemption then everyone wants to work with banks.
And yeah, I'm sure there have been great partnerships.
Some have benefited small banks, some have benefited fintechs, some haven't.
That's natural in the market.
But the deeper dysfunction is that there's only one gateway.
And not every country does it that way.
I think, so I don't, it's sort of more neutral on it.
It feels like an inevitable consequence of our regulatory architecture and one that is probably here to stay and one will have to figure out how to make.
Right? Yep. So I, you know, being a pragmatist, I think you sort of, we take this wave of enforcement actions and consent orders and say, well, how do we build on this to make it more constructive?
Yeah. I would say that there's, one of the things in banking though, and you'll see with, I think maybe you've written about this, Alex, is with these partner banks as they're going through these consent orders and the compliance expectations are growing.
You sort of further that kind of — banking is a scale job, right?
It's essentially bits and bytes and it's technology.
So you've got a lot of natural economies of scale, many parts of the banking ecosystem.
And so, you know, 4,500 banks, if you're gonna have 4,500 banks, you are going to have technology service providers that are much more concentrated.
And the core service providers are a perfect example.
Because the fundamental job of it's, you know, it's not, you know, a bar it's not getting a haircut, right?
Yeah. It's not like a people intensive, it is something that naturally scales.
And in a modern economy, if you're gonna choose like 400, 4,000, 500 distribution points, there's gonna be something under that has competitive concerns.
And so that's gonna drive the customer experience one way or another.
So again, back to my initial point, broadening it away from just banks and how many banks you need is kind of misses the point. 'cause, you know, I think that's fair. I mean one of the things I'm working on right now is a piece talking about banking as a service, and it kind of looks at the difference between software businesses, which, Lizzie, to your point, are great at solving problems and focusing on, like delivering great end user experiences or products to consumers, but they're very deterministic by their nature, right?
Like, you have inputs, you have outputs, it's very predictable, it scales very well.
That's why investors love and give great multiples to SaaS businesses.
I think what we've learned through all the things with banking as a service is that banking is a probabilistic business.
Right? It's not a deterministic business.
And what that means is there's always a probability of bad things happening.
You're managing risk. And so it doesn't scale the same way.
And, you know, I think Ashwin to your point, it'll be interesting to see how this wave of consent orders plays out, because a lot of the response I'm seeing from regulators so far is, well, if you're having a compliance problem, throw more bodies at it.
Right? And there's a limit to how many banks can do that, especially at a smaller scale.
Jeff, coming back to you, the other thing that I wanted to ask about based on the fact that you work for a credit union that's based in Colorado is rural banking.
Right. And this comes up a lot in the discussion about what should the U.S. banking market look like?
Because there are consumers that live in banking deserts.
Right. And I have the stat right here.
According to the Fed, 12 million Americans live in a banking desert.
A banking desert is defined as a geographic area without a physical bank branch within a specified distance.
Two miles for urban communities, five miles for suburban communities, and 10 miles for rural communities.
Looking at the map, Colorado doesn't have as many banking deserts as other states, but it does have some. How do you think about the role of A credit union sort of being in market and being able to address the local concerns of your members?
Yeah, we're actually working on a new branch in Alamosa right now, which isn't exactly rural, but I mean, it's starting to get out there.
Sure. Because we're pretty much up and down the I 25 corridor from Pueblo up to, you know, Fort Collins and Loveland.
So Alamosa, I think from my house, it's like over a three hour drive to get there.
It's a long way to deposit a check.
It is, isn't it? Yeah.
But, and then we're looking at mountain towns and things beyond that which are smaller and smaller markets.
But I think having the rootedness in that area, having been there for over six decades is one thing that, you know, gives us some solidity that, that people find valuable.
But the other thing is, I know at the Alamosa branch and then other ones we do, they're really trying to recruit and build up a different kind of branch manager, someone who really is gonna go, become part of that community, obviously will live there, but at the same time really be part of what they're doing.
Understand in that case, like Ag loans and things, which is a whole new realm for us.
And so really becoming an expert and a key part of the community wherever we are.
And I think that's something else that'll help.
And that's what I think is really cool about our opportunity wherever we are, is having boots on the ground.
Yeah. And not just boots on the ground, but actually we live there, we work there, all those different things. Relationships on the ground. Exactly.
History too.
But at the same time, marrying that with the best in technology, the best in convenience, and so trying to bring people those options.
But we've gotta figure out the economics of what that looks like as we go further and further out to the west and maybe out to the east, into the plains.
I mean, the reach of physical distribution is really interesting to me.
And Nick, in the previous session referenced that Chase is planning to build a hundred branches in low income communities across the country, and they see a pretty strong economic case for doing that.
They have, I think, a similar idea, which is to have folks working in the branch who are really like rooted in those communities.
Lizzie, I think the thing I'm curious about from like a fintech investment technology perspective is when we're defining banking deserts, we're defining them based on proximity to a physical branch.
It's 2024, we don't necessarily need to do everything, in a physical branch.
In fact when Elon Musk worked at Scotiabank as an intern a million years ago, that was the first observation he had, right?
Is that money is all just ones and zeros.
There's no reason for any of this cost or this infrastructure.
I don't know that I totally buy that, but I do see the point, and I think there are a lot of things that banks and credit unions have done to sort of justify the existence of branches rather than make branches a strength or a point of differentiation from more of a fintech lens.
How do you think about the difference between reaching underserved consumers and small businesses digitally versus doing it through a branch?
Well, a small funny anecdote is, I just got married recently, and my husband and I went to open our first joint checking account. Did you go to a branch? And I was online, we bank at Chase.
And I was like, weird.
I can't find where I can open a joint account online.
And I was like, this is so embarrassing.
I invest in fintech companies.
And he's looking to me like, what do you mean we can't open this digitally? And so Haven't you fixed this yet?
We went to a branch, turns out you can't open a joint checking account online. You have to do it in person.
And I was prepping for this panel and I was like, wow, this is so important to talk about.
It's perfect because this bank, you know, you'd expect them to have best-in-class digital services, and they spend like half a billion dollars on technology a year.
And they, you still can't open a joint checking account digitally.
And so it just sort of reemphasized that.
I do believe that we are still in a hybrid world where you'll need physical branches, but you also need digital solutions.
And consumers are getting more used to digital solutions.
And so they're looking for that online first before going into branches, really for convenience.
This came up last night also, if Barb is in the crowd, we were talking Wintrust Bank, they really only invest in branches.
And that's because their customers love coming in.
They have served cookies and coffee for a long time, and that's what their customers want.
And they don't want a digital solution.
And so it's sort of interesting to really be thinking about what the consumer wants and who your customer, what your customer wants, and who your customer is.
And so I think you touched on something really interesting.
Personalization is a huge theme in the investment world right now.
Like all of these companies are looking to verticalize and get super personalized in their product offerings to address underserved markets.
And that can be farmers, that can be the aging population.
We're invested in a company called Charlie that serves the aging population, and they give early access to social security deposits.
And they are a digital first company.
And we invest in a company called Curb Waste.
It's building software for waste haulers, and they have payments with that.
And so it just sort of makes you realize that there are so many different demographics and types of consumers out there, and they all need different things, and they all want different things, and they're coming to expect those in their banking.
And so I think you do need branches, but you also will need the digital solutions and how you marry the two together and make the economics work is sort of the key.
That's where it starts to get really cool.
I mean, that's what attracted me to go to work for it four years ago, is that that promise of being able to bring the digital and the physical together, if you will, and, and have the whole be greater than the sum of those parts.
And I think what it, you know, the nature of what you do in a branch or what you can do with a branch starts to change.
Like we're experimenting with designs for some of our future branches where it's not full of offices and everything like that.
It's full of meeting rooms in the emphasis is on one-on-one meetings, on group meetings, creating flexibility in the space.
So maybe after you're done with the kind of banking day, you could pull a bunch of chairs out there and you could have classes on, you know, financial wellness on that kind of stuff.
And so again, when you start to move out into some of those mountain towns, maybe we, it's not economical for us to build all that square footage ourselves, but if we've got a small footprint, then can we work with other facilities there to do those kinds of things?
But I think gathering together, like fewer and fewer people are willing to put up with having to go to a place to do a transaction, I should be able to open my joint account online.
That's ridiculous. I think we can do that.
You can come to, you know, Wrong state, but solve that problem. Yeah.
But, but all that said, I think bringing those relationships in, and then for us as a credit union, having the opportunity to bring people together, I think there's power there and helping people improve their financial wellness that, is just, it's really attractive and it's kind of fun to be reaching towards that.
Absolutely. I mean, the other thing that you touched on there, and I think actually, both end and, some of the companies that you mentioned are a good example of this is in the credit union space forever, we've had this concept of field of membership, right?
And one of my, I think, critiques of both community banks and credit unions over the last, say 30 years is that they become a little flabby about field of membership and about just defining who your customer segment is really concisely.
And I think that's where fintech is sort of demonstrating how much we've sort of drifted away from that.
I was doing a strategy consulting session with a, credit union a while ago that works with airline employees.
That's kind of their specialty and their field of membership.
And they're like, well, what kind of product could we build that would be unique?
And I'm like, well, what's a thing that you guys know that no one else knows and no one else understands?
And they thought about it for a second and they're like, well, there's this special type of housing that exists on airports inside the security perimeter that's only available for pilots to buy.
And they buy them because, if you're constantly going through different hubs, you need a place to stay, but you have to meet very specific requirements.
There's a lot of paperwork, they're difficult to underwrite, and they're like, we do a lot of those mortgages.
Do you think that's specialized?
I'm like, yeah, that is like perfect.
Like go build a better digital version of that.
That sounds amazing. Like, that's something that, you know, and no one else knows.
So I guess maybe Jeff, to go back to you real quick, when you think about defining a field of membership, not in terms of geography necessarily, but in terms of like what you know about your members that other people don't know, what are some things that stand out as opportunities that you guys can do?
And you mentioned like Ag loans and things that are specific to Colorado, but like, where do you think those opportunities are?
And this is just me talking now, so just thinking about where I'd love to see us go, but, I'm really fascinated by the idea of, so we are, even though we don't talk about this a lot, we are a not-for-profit financial co-op, and really starting to lean into the co-op piece of it a lot more.
So for instance, we do a lot of charitable work throughout the communities that we serve, but it's really the employees that are doing it and how can we invite the members into that?
How can we actually all start working together to improve and transform our own personal financial lives, but then also the lives of those around us.
And so I think that's actually something that, again, is unique to being in a spot.
I realize maybe it doesn't quite go where you're thinking, but no.
How can we actually come together to help improve everything?
We recently became the official banking partner of the Broncos and the Broncos, and part of the affinity there between the, I was gonna say, talk about Affinity.
That's a good one. Yeah.
Well, and but also too, it's, there's a charitable organization Affinity too, because both organizations are involved in some of the same things, and how can we even do that to kind of enlarge what we're all doing together, I think is really, really, really exciting.
Yeah, I don't know. No, That's a good one. One thought, I'm just gonna chime in from the fintech investment perspective.
You talk a lot about these very niche products, and that's something that we do see all the time, especially in these verticalized markets that I talked about.
And our first question always as investors is how big is this opportunity?
And how big can this be?
And sometimes we see things that are super cool and super innovative and definitely address a problem and a need, but it's not big enough to see a billion dollar outcome.
And so that's where I think it's on the banks to innovate on those specific things and not rely on fintechs to have that innovation.
And again, you know, your customers more than investors do.
Yeah. So just something to keep in mind. I Love that we don't have to try to win the entire country.
It's huge, right? Yeah. It's absolutely huge.
Well, and I think Lizzie, to your point, the other thing that reminds me of that I think is really interesting is there is this, I think, kind of gap in the middle of the market, which is, hey, that's a great idea.
Banks and credit unions, because of the nature of how they build products and their technology capabilities and just the way they think about product development, probably aren't gonna build that.
It's not a billion dollar outcome, so we can't really invest in it, but it's a good idea and it should exist in some capacity in the market.
And I do think, when I think about this large question of what should the U.S. banking system look like, one of the things I would like to see is a mechanism for allowing those kinds of things to exist, right?
And even if it doesn't turn into a billion dollar exit, that's a return the fund winner for a vc.
How can we do that? Right.
And there are examples I think, that are starting to proliferate.
Like there's a digital bank that was started called Roger, that's for new military service members, right?
And it's specifically geared towards new service members that are just sort of reconciling the financial challenges of being on active duty and sort of figuring that out.
And obviously there's a lot of predatory financial services that target service members.
And so they're trying to sort of cut that out and be a better answer.
It was created by Citizens Bank of Edmond in Oklahoma.
But what's most interesting to me is they are not talking about essentially franchising that model and making it available to other community banks and credit unions.
And that's a very cool model to me, because to your point, Jeff, they don't really care about customers outside of Oklahoma.
Like that's outside their market.
So if you want to use our technology to go serve service managers, go do that.
Yeah. Right. And so I think getting back to our core question, what should the U.S.
banking system look like?
There is a benefit to that almost co-opetition model.
And if you only have five banks, I don't think you necessarily have that.
So I wanna wrap up by actually asking each of you to wave a magic wand and pretend for a second that you could reshape the U.S. banking market however you want it.
Real quickly, you can pick on any particular part that you would like.
What is a thing that you would change and why?
And Lizzie, maybe we'll start with you and we'll go all the way down.
Sure. I can go first. Sure. You have a great answer.
I, it's a hard question.
It is, and it's hard to envision it changing dramatically in a short period of time.
And I think that's because of all the regulation in the industry, but I do hope for more.
The ability to commercialize with banks right now is very challenging.
And fintechs that do have billion dollar opportunities Often times can't commercialize with banks because they don't move fast enough.
And realistically, fintechs are on time clock of time and capital, and they only have so much time and so much capital to prove to their investors that customers wanna buy their product.
And even if banks love the product and wanna use it, their bureaucracy moves so much slower that they can't often times partner with fintechs.
And so we see so many fintechs die before they really should because they've, because the sales cycle with banks is so long, and for a long time, fintechs filled that void.
Fintechs hold to fintechs, and that was a great solution.
It was a faster way to get revenue, sort of showing product market fit, but not landing those big whale deals.
Those sort of came later and there was after some more validation in the market where banks got more comfortable working with those fintechs.
But that's not happening as much right now.
Partially 'cause of the bass meltdown.
There's a lot more fragility in the fintech market.
And so we're just seeing buying of software go down in the space.
And so my hope is that fintechs are able to sell into banks more easily, and banks are more receptive to taking a risk on early stage companies to really move, move the ball forward.
Yeah, I think that's a great call.
The distinction between the amount of time that fintech companies have and the piece at which banks move is a really great observation. Jeff, how about you?
I'm really fascinated by the potential of what AI could bring to the banking experience in kind of two different realms.
One is certainly bringing capabilities to consumers that they, a lot of people just can't afford or have access to today.
Bringing intelligence, bringing advice, bringing all kinds of things.
I think a lot of people and myself included, actually pretty lazy when it comes To their money.
And, but if you could imagine now AI giving me, I can actually have a tax accountant with me all the time.
I can have a bookkeeper, I can have a financial advisor, and they're all in my phone or whatever.
I think it's pretty amazing. We've got a long way to go to get there.
I mean, we gotta get past hallucinations and all the, the craziness we have today, but still, there's great potential.
And then for the institutions to be able to use it to make ourselves more efficient.
And to be able to focus our resources more on the customer facing, member facing services.
So we always maintain our human face and you're always talking to a person, but there's just incredible technology behind it that can help us get things done faster, more efficiently.
I think there's great potential in both realms. So I'm excited about that.
It's a good one. You get the bonus point for mentioning AI, so well done there.
And I will say that to your point on the consumer side, the idea of AI being able to empower like perfect discovery for consumers where it's like you're always getting the best answer, you're always finding the best product that has some really big implications for the structure of the U.S. banking market, right?
Yeah. Like that notion, I think should really scare Prudential bank regulators because suddenly, like deposits are flying all over the place.
Yeah. You're constantly refinancing loans, like it's a much more portable market.
The CFPB would be happy, but maybe some others might be a little challenged.
And then on the institution side I mean you hear Sam Altman from OpenAI talk about this, like, there's gonna be a billion dollar company that has one employee, right?
And it's like, how far can we push operational efficiency and what does that allow us to do in terms of number of companies versus number of employees?
So I think that's a really great answer.
Ashwin we’ll end with you.
I mean, since I think my perspective is, is primarily as an ex-regulator, I would probably go back to something I said earlier, which is I think the regulatory framework between the federal and state level and then also between banks and non-banks is pretty patchworky.
Yeah. Yeah. And I think it creates a lot of weird incentives.
And since we're waiving wands, because in no way do I imagine this to be a reality, but I, you know, a universe where, or a world where, you know, like if you're lending, you have certain clear requirements at the federal level, and it's whether you're a bank or non-bank, and you, and then you're overseen for that if you're taking people's money bank or non-bank, same requirements and overseen in the same way.
Yeah. Right. If you're moving money, same thing.
And I think the absence of that creates a lot of, of friction and complexity.
Yeah. I work for a firm that we do 50 state licensing strategies all the time.
Right. So it's against my economic interest.
Yeah, yeah. But Some not sponsored by FSV, But some simplicity on that front I think would be welcome.
But it's a long way from where we've evolved for various historical and institutional reasons.
Ashwin hates the dual banking system. That's the takeaway.
That's not No, No. I mean, it, it's a really good point, right?
'cause I do think the other thing that you touch on there that's really important is it's very, very difficult to navigate these things.
And like one thing that I was very surprised to learn recently is that the number of de novo banks in the U.S. has just plummeted since the, the Great Recession.
Right? And a lot of times the regulatory response to a crisis will be well-meaning, but the consequence of it is that it's suddenly a lot less attractive to start a bank.
And maybe it's more attractive to start a fintech company that can build on top of a bank.
And so you get these very strange incentives.
But one of the things I'm very cognizant of from a banking as a service perspective is the more we sort of crack down on the space, again for very good reasons, the more we're sort of raising the floor of what you need in order to participate in this system.
Right. And one of the things that I constantly hear right in the newsletter is I'll get someone who reaches out and it's a person who's never worked in financial services before, but they have a vision for a thing that should exist that they want to build.
And it's brilliant, right? And they give me the pitch.
And they're probably not the smoothest entrepreneur 'cause they've never done it before.
The pitch is a little rough around the edges.
Often times they're coming from a diverse or minority background, and I love everything they're pitching.
And at the same time, I know their odds of getting VC funding are very low and their odds of being able to get a bank partner are increasingly low because there's just not enough capital.
There's not enough bank partners to go around for all of those things.
So when we cut off the bottom of the market and make it hard for new entrepreneurs to come in and try things, I worry about that a lot.
So with the remaining four minutes that we have, if anyone has any questions about how we would restructure the U.S. banking market with the unlimited power that we have up here we'd be happy to entertain those.
I also can just wait you out in complete silence.
'cause I was a public school teacher. So What would you do about data ownership?
About what? Data Ownership?
Data ownership. It's a good question.
Maybe Ashwin, we’ll start with you and we can work our way down.
Can you say more about the question? Sorry. I feel like today we don't own our data.
Access to the data, but yeah. We do anything different.
Oh, you can wave a magic wand.
You have unlimited power. Yeah.
I mean, if I could, yeah. I mean I don't think I can imagine the technological control world of technologies that would sort of put data ownership completely in the hands of consumers.
Yeah. Maybe we'll get there in 10 years.
I just, I don't have that technologist mindset, but yet in theory it sounds for me. That's a good idea.
Yeah. I've had two magic wands.
One would be I can own it and two would be I can monetize it. Yeah.
Jane Barratt is smiling somewhere.
You just said that. Go ahead, Lizzie.
I'm gonna take a slightly different approach to the question that sort of inspired by a conversation I had last night with the Chief Data Scientist of MX and the power of the insights of data.
And right now, consumers don't really benefit from a lot of the signals that we give to the market on how we're spending, where we're spending, what we're spending on, etc.
And so companies like MX can add so many more layers of personalization that can benefit the consumer that then they're happy about.
And so if companies like MX can have ownership of the data and then use that to actually enhance the customer experience, I think no one cares who owns their data if it's helping them and providing them more opportunities, better services and better products that they can buy.
Yeah. I mean, I think building on that, just one quick thing I would add is that, I think the vision for open banking in a broad sense in data ownership is a lot more transparency for consumers, right?
Because I think one thing we don't have right now is a sense of, am I getting screwed by my bank?
And the problem is, it's not in the interest of the bank to broadcast the fact that, yeah, you haven't checked your savings rate recently.
And so we didn't ask if you wanted a higher savings rate.
And it turns out I'm not getting a good deal.
And the thing I think is really cool about just the shift towards data ownership is it makes it easier for consumers to share access to the data, which then makes it easier for competitors to my incumbent financial institution to say, you know what, you're not getting a great deal there.
And we're starting with basic transaction data.
We're starting with pricing, we're starting with a couple of things, but I don't think there's any reason why in the future, particularly with generative AI and its ability to handle more unstructured data sets, why can't I share a history of every single customer service chat that I've had with my bank and have someone else analyze that and tell me things I might not know about how I'm getting served by that bank and how I could potentially do better.
And that's like a radical shift in transparency that's enabled, I think, by this data ownership.
And Ashwin, to your point, it's gonna take us a long time to get there.
This is very pie in the sky, but these are the first kind of baby steps towards that.
And I think that could really restructure the market in a fundamental way.
Mm-Hmm. Awesome. That is all the time we have.
Please join me in thanking everyone for this wonderful session.
Thank you.
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