What will the next year hold for the tech infrastructure that underpins banks? How will tech help banks to fight fraud and other crime? And what else can bankers expect from regulation as their jobs get more complicated? Adena Friedman, CEO of Nasdaq and Most Powerful Women in Finance honoree, joins Chana Schoenberger, editor-in-chief of American Banker, in conversation live in the Arizent studio.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Chana Schoenberger (00:10):
Hello and welcome to the American Baker Leaders Forum. I'm Chana Schoenberger, the editor-in-chief of American Baker, and I have with me here today Adena Friedman, who is the chair and CEO of Nasdaq. Also director of the Federal Reserve Bank of New York.
Adena Friedman: It's great to be here, Chana. Thank you.
Chana Schoenberger: Thanks for coming in. So just to start off, everyone thinks that Nasdaq primarily is a stock exchange, but you're much more. Explain what else the company does.
Adena Friedman (00:35):
We are really proud of the fact that we are a great market operator here in the US and we also own the markets in other countries as well. But we have grown a lot over the last eight years to be a much more, a broader and more complete solution provider to our clients. So we focused on what does it take to be a great market operator, transparency, liquidity, and integrity, and then who do we serve? We serve our corporates, we serve investors, and we serve banks and brokers as they're managing their lives in the capital markets. So as we've grown and expanded, we've moved to software and data focused for liquidity on actually providing our technology to 130 other markets as well as robotic or trade lifecycle technology to banks and brokers all around the world to support their trading. And then for transparency, we really focus on connecting investors and corporates together and giving banks and brokers better tools to manage the transparency of the markets and to consume that information. And then for integrity, we really focus on providing anti-financial crime tools, regulatory reporting tools, surveillance tools and help banks and brokers really help us and the brokers manage the integrity of the entire financial system. We're really proud of the expansion we've gone to and the partnership we've developed with the banking community.
Chana Schoenberger (01:52):
And you've been here a long time. You were here, you left, you came back.
Adena Friedman (01:55):
Yeah, so I've been the CEO for eight years. I got back to Nasdaq almost 11 years ago now. Just can't believe that. And I actually spent the first 17 years at Nasdaq and started in 1993. I was an intern, moved up to the CFO role. I left and went to the Carlisle Group as the CFO and helped the company go public. Came back three years later, which is in 2014, and I've been here ever since.
Chana Schoenberger (02:20):
Wow. So I guess the moral of the story is, don't ever leave your job.
Adena Friedman (02:24):
Well. I really love when I do and I love the role that Nasdaq plays. I'm fundamentally a product person and I actually started my career writing product plans in the trading division within Nasdaq. So I've always found product to be so fascinating and Nasdaq's this really interesting tech-first, future-forward technology company. It really is a product company serving the community around us and they have real impact. We can really, by having great markets, we can make the economies work more efficiently and really drive economic growth. And then by all the software solutions we now offer to the banking industry, we can help the banks make the whole system safer, more efficient, more productive, and help them with their compliance with regulators. We feel like we play a really good role as a product for a company.
Chana Schoenberger (03:12):
That was actually my next question is how do you work with banks today? Our members are mostly bankers.
Adena Friedman (03:18):
So we have solutions, as I mentioned, across anti-financial crime surveillance, reporting, and then trade infrastructure technology that serve our whole banking clientele is 3,200 banks worldwide, 2,600 of those banks are here in the United States, and they are primarily a certain number of banks use all those services. We are an anti-financial crime provider across the smallest community banks all the way up to the largest banks in the world. So that's 2,600 of clients of those are really in using anti-financial crime. And then the top hundreds of banks, several hundred banks use our trade infrastructure, regulatory reporting and surveillance tools. And so we, we really are quite a complete solution provider to midsize and large banks and an anti-financial crime provider across everyone. Very exciting. I have to say we love what we do.
Chana Schoenberger (04:13):
That's a lot of banks. Okay, so I'm sure you talk to bank CEOs a lot. What are they most concerned about right now?
Adena Friedman (04:21):
Well, one issue has been persistent since I got back to Nasdaq. When I got back to Nasdaq, the first thing I did was get out and talk to banks, understanding what are their biggest challenges, what are their biggest opportunities? And at the time I was focused more on the capital markets, the role we played, how do they see us as a strategic provider, what are they thinking we're great at? What do we need to get better at? And so how can we have a bigger impact? And there's been one persistent concern, which has been anti-financial crime management and the challenges they have the ever-changing, evolving nature of that role that they play kind of on the front lines of helping to keep the financial network safe and secure. And then the second has been managing the myriad of data, all the data to manage in order to meet all of their regulatory compliance needs.
(05:11):
And so what's interesting is flash forward eight years later, and that's really been where we've decided to focus our time, attention and resources and our expertise because they definitely saw us as someone who could help 'em solve those problems. They saw us as a natural extension, anti financial crimes and natural extension to surveillance, which was a core capability we've had for many, many years. And then in terms of regulatory reporting, we're highly regulated ourselves. We understand the need to have the right relations to the regulators. We understand the regulations inherently. And so now to be a technology provider allows us to be that partner to them. So Verafin is our anti-financial crime technology. Calypso is our trade infrastructure technology and AxiomSL is our regulatory reporting technology.
Chana Schoenberger (05:53):
Okay. We're going to come back to regulation that is sort of, I think we ran something like eight stories on
Adena Friedman (06:12):
Yeah, well, we've done a study drilling into a study with BCG, and it was really interesting. We wanted to try to understand what would be the most impactful way to improve the efficiency really in the risk and compliance base with them. Thanks. But we started much broader and we said, over a 50 year period, the world has gotten six times more complex. So yeah, it's really a matter of all the different inputs we're all having to manage in order to be able to operate within the world around us. So it could be political complexity, regulatory complexity, it can be operating complexity, technology complexity. There's a lot of new inputs that we're all having to manage. But when you then process that down to how are companies in private sector managing that complexity, the world has become 35 times more complicated.
(07:02):
So if you are dealing with, let's say, a new economic challenge that the world has faced, like the credit crisis example, but then how do regulators respond to that and therefore how do banks then have to put people, process and systems in place to manage that and to become more safe, more secure? And the complexity turns into exponentially more complicated this. And when you also think about the fact that they're having to do it on very tight timeframes in order to meet certain requirements, they tend not to necessarily be able to think into, okay, how am I going to do this officially if I can? They're just thinking, how can I get this done as fast as I can? And that tends to introduce more complicatedness than if they'd had the time to really optimize the outcome. So our view is that technology, it can play a huge role in helping simplify that, but we have to work together as a community to figure out how to deploy that technology successfully.
Chana Schoenberger (07:59):
Interesting. Okay. So that's actually, it completely tracks with what we're reporting are because we find that the big CEOs we talk to are really spinning themselves up to a tizzy about fraud and about risk and about all of the different ways in which problems are basically landing on their desk, both fiscal stuff and digital stuff and competitive stuff. And then the regulatory sphere.
Adena Friedman (08:26):
You got it. So that's like think about how many inputs that is into a bank that they're just trying to serve their clients, they're trying to help their communities grow their businesses, they're trying to help people get loans, help people save and earn some income on that savings. I mean, that's what they're there to do. That's their first principle, role and purpose. But they're having it behind the scenes to handle all of that in the process, and that creates an enormous amount of complicatedness. So what we're hoping to do is at least partner with the community to say, okay, well how can we solve these problems differently? I do think, and we'll talk about this, but in anti-financial crime, I do really believe Verifin solves the problem differently. They bring data together across banks through a consortium data lake. They then can therefore they process a billion transactions a leak within their system.
(09:16):
So they're able to see a lot more activity than a single bank can see themselves. And especially over smaller banks. That's hugely valuable because criminals don't bank in one bank. They spread their flow, they spread their activity everywhere, but they do ties to have, yeah, but they do tend to have certain patterns and practices of behavior. So we use AI and Bayesian models to try to create custom topologies to track that behavior across banks. And we can look at information across banks to know that that same actor might be trying to do different transactions across multiple banks and we could tag them more effectively. What that does for the bank is takes down actually false positives because we can know whether that's a legitimate player or not more effectively. And it increases fraud found because we also have a better understanding of who the bad actors are and how they behave. And then now with gen AI, we're working on streamlining the actual workflows around it. The other thing that creates a lot of complexity is having to deal with all the regulatory reporting, the SAR reports and everything else. And now if we can automate a lot of that process that it makes it a lot more efficient. So it's how you can use technology to solve a very complex problem within the regulatory framework. But the question is also are there opportunities for us to change the regulatory framework? So I'm sure we'll talk about that too.
Chana Schoenberger (10:34):
Yeah, I was going to say, I mean it's been a bit of a month here. Our Washington reporters have basically been running flat out just covering everything was going on with the administration, the new priorities. And I think that when you talk to banks or when you talk to their trade associations, what you get is they think everything is rainbows and unicorns. We're so excited, deregulation, we're finally going to get to do whatever we want. We can really conduct our business the way we want to if regulations could get out of our way. And I wonder if that's true or maybe it's not.
Adena Friedman (11:07):
Well, it depends to me on the timeframe. And also we always say, let's focus on smart regulation. And there is regulation exists in our industry for a reason that's not going away. And there's a purpose regulation. So let's focus first on what is the purpose of regulation? Keep the safety and soundness of the system to be able to manage through crises, good times and bad, and is to protect consumers and investors. That's the purpose of regulation. So then you say, okay, well how do we do that as efficiently and effectively as possible? So as we engage with legislators and regulators, I think that focusing on a few things, there is probably a lot of regulation comes into the system and never leaves. So there's probably a lot of regulation that frankly doesn't really serve a modern purpose, which is there and it's been on the books forever and we have to do it well.
(11:58):
Let's see if we can try to find those routes out and get rid of them. The second is what is the regulation actually achieving its purpose is an outcome driven in terms of how it's being measured where it's this input driven in time terms, how it's being measured. Because a lot of times if it's input driven, then it becomes just an activity trap and you're just driving towards showing your inputs as opposed to knowing whether or not it's actually affecting the outcome. So if we can work with the regulators and legislators on looking at the regulation from is it achieving its outcome and is it duplicative? Are there regulations that sit on top of each other that kind of do the same thing but require two different activities or five different activities? So can we work with them? I think one thing we do know is that there is change, that what we're seeing in Washington is an appetite for change. So how do we then work as an industry? You work as a community to be very focused on the purpose. Don't never lose sight of the purpose of regulation, but work with them to undo some of these layers and the complicatedness of it that then allow us to be more efficient and effective and compliant. And we're kind of excited to have an opportunity for the first time, a long time to think differently about how regulation can work.
Chana Schoenberger (13:13):
Yeah, it's going to be interesting to see exactly what happens with that, because I suspect that in some cases regulations will either disappear or stop being enforced at all and that there'll be some cases where regulations bring clarity to something where banks knew they were supposed to act a certain way, but there was no formal rule about it. And then there'll be some third area where no one knows what's going to happen to it.
Adena Friedman (13:39):
I think the only challenge to regulations just not being enforced is that can whipsaw you. So you have a certain political appetite for that not to be enforced, but the next administration comes in and changes. So it's just so much better if we can work at the root cause and say, okay, let's understand there might be some regulations in motion. Can we just pause, take a step back, think about what we're trying to do here, make sure we're looking at it a little bit differently before you proceed, or can we actually peel back some of the rule book and make it so it's more of a lasting change as opposed to just for four years maybe we don't have to enforce. And so I think that's the thing that I would like to see if we can focus on those looking more the case.
Chana Schoenberger (14:23):
Do you feel like there's an appetite in Washington now to discuss that, actually sit down and say, here are the things that make no sense, let's stop doing that?
Adena Friedman (14:30):
I think that there is, I think the answer is probably yes. Now we have to get the leadership in place. We have to have the right leaders inside the agencies that can really effectuate that change. But the appetite I do think is there.
Chana Schoenberger (14:44):
That's going to be really, really interesting. Okay. So let's talk a little bit about the financial crime and fraud. So as we discussed that there's this weave of fraud, money laundering, international terrorism, all these sorts of things. They're crashing into banks. And when I talk to bankers also, I hear how concerned they are and they almost feel helpless in some ways. It's everything from very physical to very digital and it's a huge risk. What should they be doing that they're not doing now?
Adena Friedman (15:20):
Well, I don't know if I can answer that so much as, let's think about the problem and realize, first of all, let, let's acknowledge how fast the problem is, right? So it's $3 trillion is going through the system. Half a trillion dollars is lost to fraud globally on an annual basis. I mean, that's a huge problem. And the government across the world has put banks on the front lines of trying to stop that. And now there is a collective action opportunity. And there are certain cases where you see actually good collaboration between public and private sector where maybe they work collaboratively to solve certain crime or solve certain cases, but on the everyday, let's just try to solve this problem. But one of the biggest challenges with the problem is that it changes every day. And criminals do not maintain the same behavior if something stops working for them because we've found a way to close that door against them.
(16:18):
They'll just look for the next open door. And so it's kind of a forever moving and ever evolving challenge. And of course what's interesting now in the United States is as we've been doing a better job, I think of protecting the digital rails, they're going back to checks, check fraud. Check fraud has had a resurgence. And I do actually think, and I've talked to some banks and they're saying the digital rails are getting better protected, and so therefore they're having to find new means and they're going back. Old school. I mean, "
(16:52):
So now actually what we've done within Verafin is we've actually focused on our check fraud solution. We're rolling out a new version of it that allows us to use the consortia data lake more effectively in identifying the payor or payee. And we're looking at the check, obviously digitally reading it, we're interpreting it, we're using AI actually against it. It's super interesting to try to figure out how you in fact make it so that the banks are more effective in stopping that. But then there's also, as you said, the physical thing. It's out of the branch level. I've heard great stories. Yes, I heard about that too. I've actually heard some great, great stories, just personal stories. A friend of mine, someone, a friend of a friend was subject to a scam and she was insistent that she had to pay a lot of money to someone who was ultimately a scamster. She walked into the branch and the branch manager just didn't let it happen. It was the coolest story of listening, and this was a personal thing. I know this person, and she could not afford to have that happen to her. And the fact that the branch, the teller alerted the branch manager, the branch, and it was just they really had to talk her off the ledge, but they did. So that's why it is also training. It's physical, it's emotional and it's technology. It's all of that together
Chana Schoenberger (18:14):
A lot of it is it's customer education as well. I've have several family members from the older generation who have been, they were not victims because they were too smart to fall for it, but where people had attempted grandma scams on that.
Adena Friedman (18:30):
And those are very scary, very scary. And then also I do think that deep fakes are going to make those much more realistic. It's going to change the nature of fraud again. And therefore, I do think, again, it's a collective action problem. And so the one thing I've noticed is banks have really changed their mindset on this issue from being something that frankly went from competitive to cooperative in terms of collaborating to solve the problem. And that's why I do think our solution is part of that collective action because we bring the data together to help them solve the problem more efficiently. And so therefore, they're willing to contribute the data. It makes them better by being able to access the community of data. But I think that's a change in the way that people are thinking of solving problem, which I personally think will accelerate hopefully our ability to do it.
(19:18):
The one thing we've been really focusing regulators on though, is allowing banks to use AI more effectively here. And the reason is because there are lots of reasons that have good guardrails on the use of AI across every industry, including the financial industry. But there are also certain opportunities here where we're we're playing defense and you're against, frankly, that's like an enemy actor who is using the best capabilities possible. They had no laws or rules that they follow, so they're going to be using the technology to the best of its ability. If the banks are also able to use the technology to the best of the ability, you're recently tying a hand behind their back. So we're working with regulators and legislators to say, how do you look at AI on a use case basis as opposed to a blanket basis from a regulatory perspective.
Chana Schoenberger (20:06):
Interesting. So AI is obviously a huge buzzword right now, but it's also a very serious trend inside banks. Nearly every mutual bank that you talk to tells us that they're doing something either with employee activity or customer care or some other way knowledge bases. What are the most interesting ways that you see bankers using AI?
Adena Friedman (20:29):
Well, I do think that there's offense and defense and then there's efficiency. So you've got the threes, and I do think on customer care, it's a great way to be more consistent with your answers, to be frankly in every way, both in terms of tone and giving the right answer and really also making it so they could train your customer support people much faster and make them more productive more quickly, which I think is very important. There's obviously the offense in terms from a trading IT investing perspective and using AI to find alpha, and therefore, I think that the regulators are very focused on making sure that it's being used for the right purpose from a defense perspective. We also need to bring more AI capabilities in protecting the markets too. And we're very, very focused on that. We do use AI for that in that way.
(21:19):
Then I think on defense, it's a lot of what we've just talked about, using Bayesian models, more algorithmic AI to root out the alerts, but then using Jet AI to go out and research potential entities, bring back everything you've learned about them, write the report and just have it so that instead of having someone have to go do that all manually, it's all curated for them, for them to look at review, approve, and send. And what we've been able to figure out is that we've actually launched that exact tool within our Verafin tool, and now we're launching it out into our surveillance tools, and we're going to be able to bring that into our AxiomSL regulatory reporting tools. And you're going to save a ton of time just by automating all of that processing, and that's going to make the banks even more efficient.
Chana Schoenberger (22:08):
One sort of open question is how this is going to affect human capital. I was talking to one economist who was, the problem is that it can very easily get rid of the bottom two levels of the organization because you don't need people to write these, do the research or write reports anymore. That could easily be done by AI and then just reviewed by a senior person who has the experience and perspective. But if you don't train those junior people, you'll have no one to promote.
Adena Friedman (22:33):
And I think that's something that every industry is going to have to face. So that is not unique to this industry. I think that's where we are looking at how you're deploying AI to make your organization more efficient and productive. Well, what do you do about either re-skilling, retraining, or recognizing the fact that you have to find a new way to make, to create those skilled employees if they're not having that more monotonous role early in their career? And I actually think that's a societally universal issue that we're going to have to face over time, but including in the financial industry,
Chana Schoenberger (23:09):
Maybe there's a way in the future that we can actually get the AI to help us with the training. So you don't need to spend two years as an analyst to learn how to do the job.
Adena Friedman (23:16):
Yeah, that's the thing is I think we just don't really understand AI. It's adapting so quickly. It's advancing so quickly. I don't think we necessarily can roll the tape forward five years and know how it's being used, because technology will be so different and we'll discovery ways to use it like that. So for instance, we were talking about as we want to onboard our employees faster, we're a growth company and we're growing nicely, which is awesome. And that usually we're onboarding new people, but you want to make them proactive as fast as you can. And with some of our technical jobs, technology jobs, our client facing jobs, you want to make sure they're ready and that you're going to train them up before you put them onto the field. And this is definitely improving the time to value at saving those employees because we're able to accelerate the training in very material ways. And I think that's a good example of that.
Chana Schoenberger (24:10):
Well, we're almost out of time, but I have one last question for you. What is the coolest thing you've seen recently in financial services tech, not at Nasdaq?
Adena Friedman (24:20):
Well, I get to go out and see how technology is being used in really unique ways. And I guess I would say there's both physical robotics and other things that are being brought into every industry, including finance. I find robotics really interesting because robotics is not in our space. We're, I'll call it, a digital company and we don't have manufacturing, but robotics in terms of bringing more capabilities into thinking about managing cash. And so that's kind of neat to see some robotics there. And then I think, obviously I do think that there are incredible capabilities that are being brought into the markets in terms of really thinking about managing risk in the markets very effectively using AI, make AI while also finding alpha. And so more and more of our broker dealer clients are really using AI in really material ways to manage their lives in the capital markets, which allows them to deploy liquidity a lot more efficiently and manage risk more effectively, which is the name of the game in terms of being effective in generating alpha in markets. And we're using AI a lot to also manage our technology, just make sure that we're managing even, it sounds very technical, but strike management in the options world. Little things like that that can make the whole system more efficient. I think everyone's looking for those ways, but those are the two, the robotics are cool and developing very quickly. And then the algorithmic AI continues, in my opinion, to be a really good use case.
Chana Schoenberger (25:53):
It'll be interesting to see what happens with that. Well, thank you so much for coming in. I really appreciate it.
Adena Friedman (25:57):
It's great to talk to you too, Chana. Thank you.
