What will banking look like in 2035?

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Transcription:

Penny Crosman (00:03):

Welcome to the American Banker Podcast. I'm Penny Crosman. What do the next few decades look like for the banking industry? Theo Lau and Brad Leimer, who run the consultancy Unconventional Ventures, where they work with all kinds of players in the industry, recently wrote a blog laying out different scenarios for the future, ranging from bright to dark. They're here with us today to talk about what they see coming and what banks might do to create better futures for themselves. So welcome Theo and Brad.

Theo Lau (00:34):

Thank you so much for having us.

Brad Leimer (00:37):

Thanks Penny.

Penny Crosman (00:37):

Thanks for coming. So the first scenario is pretty happy. You talk about the idea that banks transform themselves, they regain trust, they have business models that are transformed to help them regain trust and so forth. Tell us a little bit about both the transforming and the regaining trust idea, which I think you linked together. What kinds of transformations do you think are required for this bright future that you envision?

Theo Lau (01:15):

I think that's an interesting question, and I would say we have seen a little bit of that in the past two years, especially with the onset of the Covid 19 pandemic. We have seen banks and credit unions, actually businesses in general, come together and say, Look what we will do, what we need to do to support our customers. You see banks putting out pneumatic tubes and saying, Well, since you can't come into the branches, we are going to use the technology that we have to keep servicing you. Or we see organizations that said, We will not charge you for late fees. So there have been a variety of activities, if you will, that we have seen where they say it's more important to serve our customers and to support them in such difficult circumstances than it is to continue the journey that we have been on. And we've seen also banks taking models from fintech startups removing the late fees and providing earned wage access, getting consumers and giving them the tools to actually become a little bit more financially healthy. So that has been ongoing positive trends that we see that banks are doing better.

Brad Leimer (02:44):

And I would just add to that. This idea in the first scenario of positivity post pandemic is this transformation around trust. But when we go back and we think about the last 15 years, the setup for this was really that there was a lot of other type of transformation that was happening to the industry itself. There was a lot of value that was added as fintechs and other types of technology players came into different spaces and different parts of the business model. And so when you think about how much our lives have changed, how much work has changed and how much banking has changed, there's still a huge opportunity to take all of those things, just like Theo was saying. And we have been closer and closer to our customers and to the members of credit unions and to the customers and users of fintech applications than we ever had been before.

(03:37)

We have so much more technology now to be able to serve people and their unique needs. And we see that going through all of the different explosions of types of fintechs that have come out to serve our various communities. And so if we've lost trust post great recession, and then during the pandemic, regain some of that connectivity as people had to rely on these digital tools, then I think that is a very likely scenario, at least pieces of that where people can learn more about their own financial lives on a daily basis. Companies can learn more about their customers on a daily basis and banks can be part of all of that. So it all sort of wraps together in one of those sort of great hopeful scenarios that we write about in the book and these type of things,

Penny Crosman (04:23):

A virtuous cycle. And that's your book Beyond Good, I imagine?

Brad Leimer (04:28):

Yes, absolutely. The idea of course is that hope is what we'd like to see in the business model itself, a better future for everybody who banks can serve.

Penny Crosman (04:40):

Sure. And also in this first scenario, you talk about customers having more control over their money, which you talked about, but also their data. And there has been work done to transition from screen scraping people's data into the fintech apps they use to a more API-driven, more controlled way of sharing customer data. Do you think the financial industry is on the right track in terms of giving customers control over their data? Are they doing enough?

Theo Lau (05:17):

I'm seeing positive trends, again, celebrate small wins, if you will. I'm becoming more realistic as I get older, but one of the things that is really interesting, I'm not sure if you're familiar with Project Reach. So it is a collaboration between several U.S. banks, including J.P. Morgan, U.S. Bancorp and Wells Fargo and Citi. They're working together to expand credit access for people who are typically underserved. And for those of you who are familiar with the economy in the United States, a lot of these are immigrants. A lot of these are people who typically do not earn enough or do not trust financial institutions. And what this project does is, one of the programs it's launching is they're planning to issue credit cards to people that do not have credit scores.

(06:25)

And Penny, you talked about data. And what they're using is they're using information such as the income where they spend, how much they spend to use those data to measure creditworthiness and also helping small business owners, typically women and veterans from underrepresented communities, to get credit by changing their underwriting standards. And one scenario they cited is using lower credit score thresholds. So those are the things that we see financial institutions using data and using data in a better way to serve people that they don't typically service. So that's a good thing that we see.

Penny Crosman (07:08):

All right. So your second scenario talks about climate change and it envisions the banking industry really getting on board and making efforts to, as you say, heal the environment from the impact of long-term climate change which is really optimistic and I really like it. Do you think that's happening today? Do you think banks are making the efforts that they need to make to try to clean our environment and lower carbon emissions?

Brad Leimer (07:42):

I think in this scenario, this idea that we have ignored the climate change for so long in corporate global corporate affairs, I think we are much more deep into sort of ESG related activities. And we talk about everything from Ant Forest which is part of Ant Group's initiative to let consumers be part of replanting trees based on their financial activities and their daily behavior. And we look at all of the global banks and all of the sort regional banks being very much part of reporting and doing analytics around ESG activities. It's not just in banking as well. And that's why this increased attention to climate change and how we can avoid things like continuing to rely on fossil fuels and invest and supply capital toward alternatives, these things are going to be absolutely necessary. The problem is that are we past that tipping point and can the industry do more? And I think that is definitely the case.

Theo Lau (08:52):

I like your positivity, Brad. I think I would add though we see for example, the Net Zero Banking Alliance, and we see the banks such as Citigroup, Wells Fargo, Goldman Sachs, what have you, pledging that they will try to get to a certain goal if you will, net zero emissions by 2050. However, with that being said, those are also the big institutions that have spent a combined $137 billion on fossil fuel projects last year alone. Now one will say, Well, we can't completely go to zero and shift away from everything that is carbon intensive. Correct. But at the same time, and this is something that we actually talked about in Sibos recently. If you look at the banks that are committing to certain goals and then you are looking at their pushback on being held accountable, then my question is, are you just doing something when it's convenient for you or are you actually committing to doing something for good for our environment? Because one of the things that came out recently, it was an article in the Financial Times, banks were pushing back and saying, "If you are going to hold us legally liable or accountable for Goal X, we're going to pull out from the Alliance. So my question is, okay, so how sincere are we as an industry to actually change the status quo?

Brad Leimer (10:29):

But I mean, that's the thing though. So all large corporations are going in lockstep with how governments approach climate change. And the challenge is that especially here in the U.S., you have between administrations changes dramatically in terms of how they're supporting the Paris Climate Agreement. And the EU carbon border adjustment mechanism came into effect that require both EU-based and foreign companies to pay a carbon tax. We're doing some of those things in California and other sort of interspersed reactions to climate change in different states. But being part of the way that California as a California resident is sort of addressing climate change at the government level down, it's sort of a hodgepodge, unfortunately, of what banks have to look at and how enterprises have to look at climate change. And I do see a lot more investment from banks into solar and wind infrastructure.

(11:20)

And I see this activity that is at least working in a portion of lockstep with not just regulatory requirements, but knowing how that's going to impact the business model, knowing that's how going to impact our customers. And so managing climate risks are going to be, it's continuing to be over the last several decades, a work in progress. We have a lot more focus on cultivating ESG data, understanding what risks are and putting that into our strategic scenario planning. And so I think it's as difficult to plan this at the government level, at the state and federal level, and then take that into a corporation. It's reactive. And the challenge is that we're all going to be impacted by climate change. And so it's nothing we could ignore.

Theo Lau (12:09):

It should not be reactive, though. And you know, talk about risk. We talk about the consequences. This is the consequences. The global south, the people who can ill afford the impact of climate change, they are the people who do not have a voice at the table, and they are the ones who have to take whatever consequences of what the rest of the developed nations are going to be doing. Let's talk numbers. According to the United Nations, 660 million people will face hunger in 2030. That is twice the population in the United States. That is not acceptable. And we talk about the world, over 70% of the earth is covered in water, yet billions of people do not have enough water at least one month of the year, billions of them. And it's not just global south, it's not just Southeast Asia and Africa, it's also the United States. Not everyone has access to clean water. But going back to your point, are we doing enough? No, we are not.

Penny Crosman (13:15):

That's interesting. I mean, it is such a huge problem, and I think Brad and I were starting to talk about this recently, that there's this effective altruism movement where there are some leaders in the defi space and in corporate America, not a lot, but some who are trying to apply their money to as much good as possible to the most amount of people as possible. So applying it to our problems like water access and water purity and things like that. So to me, it's interesting that we are seeing groups of people take more and more interest in this and trying to push actually using their own private money and their companies' money to try to push forward some of these things that in the past probably wouldn't have been on the table, just this growing awareness of climate change and all the effects of it.

(14:25)

Do you guys see factory farming as a part of this? And I know this is a bit of a soapbox for me, but one of the groups I'm a member of is the ASPCA. And according to the ASPCA, 14.5% of all human-caused greenhouse gas emissions come from animal agriculture. And 50% of the corn and 70% of the soy grown in the U.S. is produced to feed animals raised in factory farms. And of course, on these factory farms, there's systemic cruelty to animals and to workers, and yet there's a group called Banks for Animals that ranks banks according to their efforts toward animal welfare. And U.S. banks rank incredibly low, their scores are very, very low. And I've actually reached out some of the largest banks to say, What do you think about this low score you have? And none of them will comment. Do you think this could change? Do you think this could become more a part of ESG, more a part of the climate change awareness and something that companies could be held more accountable for their support of factory farms working with, buying from factory farms, et cetera?

Brad Leimer (15:43):

Well, when you think about agriculture and the cultivation of the food to serve 7 billion people's daily needs there's a lot of inconsistency, obviously, and there's a lot of gulf between subsistence and hunger obviously, and what the west seems to enjoy in terms of what they eat. Now, the challenge is when you think about putting capital into farming and putting capital into more sustainable forms of both raising livestock, fishing having agriculture sort of done in a different way, one of the things that I learned from growing up, my dad actually grew up on a farm, and you talk about things like basic crop rotation, and you think about how animals are raised in the majority of feed lots today, and it's so dynamically different than what it needed to be over the last several decades. And there's a lot of effort to change the way that we raise animals, not just in a less cruel way, because putting all of these animals of any kind into these huge livestock farms produces lots of bad things, as we probably all know. The more we think about a more sustainable ecosystem for sustenance, for basic things like water, food, shelter, et cetera, the better I think we will be. And I think there's a realization that those type of goals have been put into a portion of ESG metrics that are tracked by large institutions. The challenge is that big agriculture, especially in this country, has huge lobbies, and this is why it's so embedded in our politics. But there's a lot of change happening. It's just not happening fast enough to change the way that we raise animals and we raise crops. But things have been changing, and I think it's trailing the way that we are looking at energy. If you think about how solar and wind farms and other things are becoming so much more not just invested in, but we're seeing these physical projects pop up around the world, I think sustainable farming is something that has been trickling into sort of normality. And we will see a lot more investment into more sustainable farming and more raising livestock according to the way it really should be done to ensure the health of the soil ensure that the better health of the animals as well.

Penny Crosman (18:10):

Well, that's encouraging. Thank you. So your third scenario is dark. You talk about a fragmented world where the industry sees new opportunities, new challenges after the liberal economic order has faded and is replaced by a fragmented multipolar geopolitical landscape with increased regionalism, conflict and widening social inequalities. So when I read that, the first thing I thought of was the war in Ukraine. In Ukraine, and how we're seeing Russia kind of throw off all of the normal rules of war, rules of economic order that exist in the United Nations and among most countries. Is that kind of what you were thinking of, or did you have a different view of this?

Theo Lau (19:02):

The war is definitely a big trigger but I think even before that, we have started seeing and experiencing fragmentation in, shall we say, the global order between China, for example, and the United States each juggling for position and wanting to be a leader of the world for lack of better words. And politics aside, I think what is worrisome is seeing a lot of the development, for example, of limiting access to technologies, of not trusting each other. I think that will hurt us all in the end because a lot of the challenges that we were talking about, hunger or access to food and shelter and water or climate change, all of those challenges that we face as a society will require all of us to work together. It will need cooperation and trust as the underlying most important layer or foundation that we need before we do anything else.

(20:11)

And so if we do not have trust, if we don't trust what each other is doing and we keep putting punitive measures on everything that we do, I worry what would happen. One of the things is data. We need access to data. We talk a lot about AI, artificial intelligence. For us to be able to use that for good, we need access to different data, huge amount of data. And when we start putting up walls between nations, between China and India, for example, Germany and UK and the us, this is not going to bode well for what we need to do.

Penny Crosman (20:52):

Well, yeah, that is a really good point. And Brad, you guys talked about opportunities that could emerge out of all this. What may be opportunities for financial services firms in all of this seeming chaos and increasing divisions?

Brad Leimer (21:12):

Yeah, I mean, the article that we wrote has come from looking at SAS' Banking in 2035 study with Economist Impact, which kind of outlines these three scenarios. And it was something that we really thought about. Is it going to be hopeful? Is it going to be sort a cataclysm of a mess based on things like the war in Ukraine and sort of unknown events? Well, we know things like climate change are happening. We know that there's going to be economic instability caused by political instability. That's always been the case, and that's what we need to think about and plan for. I think the possibilities for a more hopeful view, even coming out of this last scenario, which is a little chaos is that we have the opportunity to really question at this moment in time what the purpose of banking is.

(22:03)

It's one thing to say that we're facilitating everything from payments and global trade and what have you, but in a time and day like we're living today where there's mass inflation, where there's flux in the job market, when there's flux in a lot of business models coming out of a pandemic. And a lot of this is a geopolitical shift that has been trying to figure out what the post pandemic world is. But when we think about the changes over the last 5,000 years in this business model, we still come down to the brass tacks of serving our customers and serving our communities. And so to me, the hopeful side of this is that we're looking at that problem differently. We're looking at the problem of how do we serve the financial needs of our customers as they evolve, because banking itself needs to evolve. And so there are those green shoots of being able to serve more markets.

(22:59)

There are those green shoots of the fact that despite all of the chaos, we still have brought 600 million more people into the global financial system to consider them banked in some way. And yet, we still have a lot of problems with optimizing and with understanding the way to best serve these communities. But I remain hopeful that as the business model matures, as more players continue to come in as data is leveraged down to the personal level that we can on the aggregate make banking better. Now, there's a lot of things that we could talk about in terms of where things are going in terms of digitization of currency, where we're looking at tokenization of different assets, but it's not the technology in the end that's going to serve the financial needs. It's going to be the way that that banks approach serving their communities and serving individual customers. So there's a lot of hope, but at the same time a lot of uncertainty.

Penny Crosman (23:54):

Well, I like that hopefulness, and I like that concept of green shoots. Well, Theo and Brad, thank you so much for joining us today, and thank you all for listening to the American Banker Podcast. I produced this episode with audio production by Kevin Parise. Special thanks this week to Theo Lao and Brad Leimer at Unconventional Ventures. Review us, rate us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman, and thanks for listening.