Regulators and the Fintech-Banker Wedding

American culture and commerce frequently offer huge frustrations to would be rebels and revolutionaries of every stripe.

It is not that the country’s institutions and practices are so strong but rather that the establishment is extremely flexible. As soon as “radical” propositions gain traction, established power, instead of resisting, coopts and commercializes them.  In less than a few months, outward symbols of rebellion, once shocking, form the basis of a new fashion line, while starlets on the red carpet pause to endorse “the revolution.” Those who want to overthrow established power must seethe when stuff like this happens.  

For business and financial innovators – fintech included – this cooption can also offer tremendous compensations. This is the way things look now between established banking and its once fintech rivals. What was once a contest has largely morphed into a mutually profitable cooperation. Even though media sometimes couches fintech events in terms of a contest, cooperation and partnership have gained ground and seem likely to dominate the future.

A recent move by the Federal Deposit Insurance Corporation (FDIC) underscores how the former bank-fintech battle lines to have turned into something of a wedding procession.

FDIC Chair Jelena McWilliams has indicated the need to categorize the deposits collected by technology firms as they move increasingly into retail banking. In doing so, she has acknowledged two important things about this part of the financial landscape: First, fintech firms have become significant players in the space and will become more prominent in time. Second, just about all the most prominent tech moves in finance have of late occurred with a conventional banking partner, the people her outfit insures.

Specifics behind the FDIC move revolve around the insurer’s need to determine which deposits are “sticky” and which are not. When a bank collects deposits directly from individuals and businesses, the bankers and the FDIC have confidence that they will likely remain in place during all sorts of economic and financial environments. They are “sticky.” The more such deposits predominate, the less likely it is that the bank will run into liquidity problems and the easier and cheaper it is for the FDIC to insure the deposits. When deposits flow from money brokers of various kinds, the sense is that such funds are more likely to flee suddenly in difficult times, making institutions where they predominate less secure and less easily or cheaply insured. When fintech and the banks were separate and at odds, fintech’s control of money hardly factored in to such FDIC calculations. Tech-based firms like Bettement and Social Finance offered their own deposit insurance.

But with the recent trend toward partnerships between banks and fintech, the FDIC needs to get a notion of the kinds of funds that lie behind both the fintech firms and the partnerships.

FDIC bigwigs have yet to make a determination.  It will doubtless depend on the specifics of each relationship. The details of each judgment can become mind boggling, but they basically divide into two groups. The most straightforward is the sort I wrote about last month — Google’s entry into retail banking with Citibank behind it. The broad outlines of that deal effectively have Google acting as a marketing and client service front with Citibank doing the banking. It is, as described last month, a good deal for both firms. For Citibank, Google offers a new source of customers, while Google gets the benefit of riding Citibank’s license, its experience with regulations, and, ironically, its possession of superior technologies that Google lacks and would take years to develop. In this arrangement and others like it, the deposits collected would resemble those Citibank might gather directly and so be judged “sticky.”

The matter becomes dicier with other forms of fintech-bank partnerships.  In these, usually smaller regional banks have teamed up with fintech lenders of various stripes.  The banks gain because the fintech lenders have superior screening software. The banks gain further from this marriage by having a place to send borrowers they cannot accommodate.  The fintech lenders gain because the deposit base of the banks offers a best resource for their lending. The FDIC’s worry is that some of the deposits surrounding these loans are more stable and secure than others.  Even when the fintech partner takes a loan onto its own books, it often has deposits at the associated banks. Because these loans are often riskier than the banks would make, they carry a much greater likelihood of failure.  The FDIC would then be inclined to classify these deposits as broker based. Because the insurance would then cost more, the bank would hold back on the fees it would willingly give to these fintech partners.

How these arrangements sort out will depend on the sometimes arcane and frequently unpredictable assessments of the regulators. However unpredictable the FDIC may be, its decisions will determine the willingness of all these parties to enter into such partnerships and how they will share the associated returns. What matters at this point is how the FDIC’s reassessment acknowledges the altered nature of finance in this country as well the powerful influence fintech has had and will continue to have. The need for a response for the FDIC has also made two other less important but charming points clear: First is that this revolution to which financial journalism has returned time and again has turned out, as so many other things, differently from the simple sports-like contest of the early predictions. Second is that this economy continues to show a remarkable ability to adjust to new realities, including those that this fintech revolution has created.

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Why economists need English majors

The Washington Post published an article recently that I’ve been waiting to read for the better part of a decade. World-renowned economist Robert Shiller believes the world needs more English majors.

You might be thinking: Has the man who brought us the Case-Shiller Index gone soft in his old age? Is he petitioning for more raw, beating hearts in this world? Dreamers with a penchant for Hemingway but prose like Fitzgerald?

Not quite. Although you can probably guess where I stand on the issue.

No, Shiller believes finance—and the world economy itself—is in desperate need of financial storytellers. With more than a 25% decline in students majoring in English since the ‘08 crash, we’re facing the prospect of a shortage, you see. A scarcity of skilled writers who can decode the inner workings of market movements and translate it all to the masses. A deficit of gifted communicators who can responsibly control and deliver information to the underbanked or to the new professional saddled with student debt.

For a moment, the Washington Post headline placed English majors and storytellers in the spotlight, granting them their (long overdue and well-deserved) 15-minutes of fame. And, this English major turned financial storyteller is just about jumping up and down.

It’s not every day a national newspaper writes an Op-Ed in defense of the bookworms and the poets. To say English majors get a bad rap is an understatement. Comedian John Mulaney famously uses his degree as a punchline in a skit on tuition costs. Inciting laughs (present company included) with his line: “I paid $120,000…to accept a four-year degree in a language I already spoke.” That’s not the first time we’ve heard that one, Kid Gorgeous.

No economist worth his salt shows up to a fight without data. And both Shiller and reporter Heather Long have it in spades. Beyond the societal value of storytelling, the data shows: English majors often get jobs earlier than their computer science and engineering counterparts. (Let’s hear it for the readers). And their salaries quickly climb to meet their peers in math and science by mid-career. (Get that money!!)

As much as I selfishly want to celebrate only the long-lambasted English majors, the truth is, we can’t accept all of the credit. I firmly believe the rise of the liberal arts education is setting up graduates across all disciplines to be stronger storytellers. And, perhaps more importantly, it’s setting up students to think critically, to challenge the stories they’re being told in the political realm as much as the economic realm.

That’s the dream, right? The promise of a liberal arts education is creating a cohort of independent thinkers, people who disrupt the status quo and aren’t afraid to voice their opinions.

Shiller’s words celebrate the potential good elements of controlling and shaping a story, but his words are also reminiscent of the dangers hidden in our daily grind. He argues the stories created leading up to the market crash exacerbated conditions and contributed to real families landing themselves in a financial bind. Stories that insisted the American dream was accessible to anyone but overlooked warning signals of risky mortgages and untenable interest payments.

We live in a country with no formal financial literacy education, a knowledge gap we pay $280 billion for every year. The reality is, Americans are learning the ropes of the financial system through personal trial and error, and the stories that journalists and financial brands tell. If that doesn’t scare you, it should. 

I agree with Shiller, stories matter. But, listening critically and parsing out fact from embellishment matters just as much. No matter how diligent and how careful the majority of the country’s financial storytellers are, risky financial offerings will always be a part of the narrative. I hope the financial crisis made us all a touch more skeptical and a bit savvier. And when I do sit down, make my English professors proud, and read Shiller’s full book, I suspect I’ll find he agrees with me too.

My fellow financial storytellers: Wield your power wisely. The responsibility of shaping how the public understands the likelihood of a Recession or whether an investment is wise should weigh heavily on your conscience.

It’s our job to write the stories: let’s make them worth reading.

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