Open Data, Open Banking: Creating a More Competitive Financial Services Ecosystem

hi good morning or good afternoon everybody thanks for joining us today we have a really expansive perspective to share with you all given the different points of view on this panel about open banking my name is Melissa Cody I have stood up and run an organization fin reg lab we are a not-for-profit research organization evaluating and testing technology and data in the financial system to inform market practices and public policy we've been doing a fair bit of work ourselves really looking at the use of data new types of data in the underwriting of consumers and small businesses and I share that with you because also in this work that we've been doing to evaluate bank account data our cash flow data and underwriting we're actually digging deep into the policy and regulatory questions that immediately arise when we think about new types of data flowing through new entities and being used in our financial system so that's in part why I am sitting here moderating this fantastic panel today I'm gonna talk a little bit in a few minutes about what we are referring to when we talk about open banking what the agenda is behind that before I do that though I want to go ahead and open it up so that the panelists who are with me here today can introduce themselves you want to kick us off sure happy to Thank You Melissa thank you to the Milken Institute for having me and having us my name is Craig Schachter I head up the fin tech ecosystem globally for our organization been in this wonderful industry of ours in the financial technology space prior to the phrase fin tech I think was actually created for about 25 years fenestra for those that don't know us we are the with third largest financial technology provider in the world based on revenue we're about a two billion dollar a year company we've got about 10,000 employees we've got about 8,500 customers on a global basis and we serve the needs of both large and small financial services organizations on a global basis that's great great thank you overview yes my name is Saahil Kinney I run a fin tech company in open API banking called se2 we're based in Bangalore in India I was also involved in the early team at Adha which is India's biometric ID program which has one point 1 billion people enrolled as part of the early team there and after that when part of the think tank called I spirit which has been working on a set of platforms public digital platforms to enable what we referred to as presence less people less cash less transactions which involved the design of mobile payments protocol which is interoperable between banks which went from zero to eight hundred million transactions per month in 30 months of launch we've been building these public platforms and designing systems that allow people to transact and live their lives on mobile phones far more affordably and then me and a colleague of mine Nikhil Kumar who was instrumental in the launch of UPI together decided that it was time to start a private company to push that conversation even further and allow people to access their multiple bank accounts that we've opened in the last 350 million in the last four years through their smartphones in other applications which we'll talk about more that's perfect great Seema hi everybody my name is Seema gandhi i run business development at plaid plaid is a company about like a 7 years old who came out of beta about 4 years ago and what we essentially enable consumers to do is to link your bank account into any financial service application you may want another way of thinking about that is allowing you to log into your bank account and convert your information into a digital format that you can move into services like venmo or acorns or betterment today we support over 90% of all FinTech apps they're all built on our platform so when you think about the FinTech ecosystem in the background enabling all of that functionality is and so when we talk about open banking we like to think about it with a lowercase o and a lowercase B it's not regulation per se but it is allowing banking and data to become more open here in the US we support all 10,000 institutions on our platform which to us is really important because it means every consumer no matter where they choose to bank can now tap into digital financial services great I my name is Jill gate I'm founder and CEO of small what started as a community bank in New Jersey FDIC insured some 10 years ago 11 years ago actually in June of 2008 admits of a banking debacle we rapidly evolved into the FinTech space facilitated a lot of the marketplace lenders to get access to a balance sheet and also to an origination platform nationwide fast forward way today we have 16 platforms originate roughly about 10 billion dollars of loans that represent about 5 million consumers on the manual basis and and we provide a host of services to those particularly to those marketplace letters some of them you may have heard of like a firm upstart marlott rocket loans in what we do for them is that we originated with the originator of record nationwide and we also balance sheet those loans we hold anywhere between 10 to 50 % of those zones on balance sheet and we have a capital markets desk that also securitizers and sells those loans off to the market in addition we got into payments about four years ago whereby we're providing access to payment schemes and payment where else to a host of FinTech players who did not have a somebody to talk to or the large banks because they were involved in the risking something that Melissa knows a thing or two about and we are and we kind of redirect so in other words we were open for business for a lot of those fin tech companies that needed access to the payment schemes and a banking platform so today we provide services to folks like coinbase for example Google Wallet transferwise my neighbor he replied and and host of others that will mention later on yeah that's great so how many of you in the room know what open banking is just so we have some context okay so mixed so we'll get into some of the details around this but I think one of the things that I hope you're going to appreciate is you really are hearing voices and perspectives from across the ecosystem and frankly also even across the globe which is an important consideration there have been a lot of discussions over the past two days about the value of data consumer data in financial services in the healthcare sector I've been a part of conversations where we're both thinking hard about the real potential personalized benefit that may come from access to one's own personal financial or health data and that is a big impetus I think for all of us sitting in this room and for the companies who have been a part of these endeavors to make that kind of financial information or health information available in flow to consumers for their benefits we were having a conversation when we were backstage talking about what was the impetus in the financial sector in terms of data flowing is it policy that's driving it is it the technology that's been driving it what we didn't ask ourselves is frankly is it consumers themselves who are demanding it and that's sort of an interesting aspect of this there's a little bit of a chicken or an egg do consumers really know what they can get and benefit from in terms of access to their data until there are these products that are evolving that really are setting out to meet their needs whether it's underwriting or access to benefits or the ability to really have nuanced understanding of one's own personal finances and what are the decision the decisions in the moment that people are making knowing a full picture of what their financial circumstances look like but also decisions that they're making that may have long-term implications for them and so this notion of open banking is really the idea of consumers being able to command access to their data and to be able to ensure that that data is shared with third parties at the consumers behest for a variety of purposes many of the fintechs that Jules talked about what we've been seeing globally is that countries themselves are really embracing this opportunity for consumers the UK has pursued an open banking agenda Europe has pursued this payment services directive Australia has an endeavor underway Canada has an endeavor underway there are other countries also that are really trying to drive the ability of the data for consumers to be able to permission and access and see their financial data flow to these new typically technology-enhanced products and companies that are having this benefit for consumers I think maybe what would be helpful here in the u.s. much of the data flow is really enabled by technology service providers like what plaid is doing and seem is here to talk about that perspective but Simona do you want to I know we're going to talk a little bit about this potential need as we think about the flow of data and consumers permissioning it to really think about how are we putting consumers in the in the center of understanding what is the data that will flow how are we really presenting or what are some options for presenting to consumers what is that data that could flow you all have been thinking about it other actors in this ecosystem have been thinking about it are there things there that you can share with us as you think about what does the consumer really need to understand and how might we think about even contemplating portals that enable consumers to look at and see what are data that might so from the very beginning we've always been keeping what the consumer understands top of mind I think there are companies in the space that would enable consumers to move their data but then they would take it and sell it to hedge funds and that cast a very negative power on our industry and so we were working against what this negative sentiment was and we realized that we need to take a really market stand and stand out from what that industry was doing so very early on we introduced something called Lync which is essentially a front end so whenever a consumer is using platon their data they're going through a very standard experience this is really important because then no matter what app you're using you as a consumer get trained to see a very consistent experience which helps also prevent against phishing and enables us to build very standard security practices across the ecosystem so now you as a consumer will go to let's say Vemma or acorns and you'll log in and you'll see a credential screen which again Platt has created and here's where it gets really cool you'll now see a very standard consent screen where it says demo is requesting information from your bank account here's the type of information they're requesting and here's what they're gonna do with it oh and if you do want to read more and learn more maybe because you're a lawyer you're Melissa and you're interested in the regulatory aspects of it now you can go see the privacy policy and understand what's happening to your data that was really important because it brought transparency to consumers and impressively once we introduce these consent flows user adoption actually went up we saw a conversion go up a couple percentage point so it's just pretty material when you're talking about already very high conversion so when we look at the next step it's about how do you now give more transparency and control to consumers how do you enable them to revoke consent that's revolutionary no one right now Andy Bowles consumers to do that but I think really important and part of all of this is that the consumer has to be able to permission their data so when we talk about open banking we'll talk about epi is later and I don't want to get to the punchline already but you know when you have api's or other types of technology that banks are hosting sometimes they're limiting what the consumer can actually permission underlying what we do is enabling the consumer to permission whatever they see digitally into a different format and I think that's really important when you think about open banking and you think about the consumer at the center and consent as the arbiter of what should and should not be permissioned that's really helpful I think it's also frankly exciting how you all are thinking about really presenting to are these ideas of what access what information may flow where consumers will be able to potentially view that kind of information and then make decisions about what flows and what doesn't flow it raises lots of other questions that we can talk about further but I think that's that's a really important sort of evolution in this ecosystem go ahead though let's talk about api's one because I think we don't have everybody in the room who fully appreciates you know we're talking about data literally bank account transaction level information that sits within financial institutions depositories banks and it making its way to end-users a creditor a PFM tool full list of different potential third-party providers of services I remember when we were looking at this emerging development eight years ago ten years ago even sitting at the Treasury Department you know you would go when we talked to the technology companies who were sitting in the middle to facilitate the data flow and how exactly are you getting that information and the way that they would get it would be so screen scraping is an older technology and again has a very negative reputation I think it's often associated with companies that didn't do so great things with the data and so you know the industry and screen scraping has received a lot of criticism and api's has often been seen as the answer to what screen skipping was from our perspective screen scraping is an old technology and so yes it has its downsides but there are more modern versions that allow for companies to access data even outside of just api's and what's really important about these though is that again underlying all of this as the consumer is giving permission and the transparency piece that we were just talking about is what should be governing here we're supportive of api's again if you think if the spectrum of the modernization of technology of course we want better technology that's going to give better access to the data but the data needs to be there and so our challenge is we really want folks to get focused on the fact that when you think about epi is that's just a means to no end think about what the end is if a PRS are just an excuse to control what consumers can permission that's not a great outcome from our perspective it should really be about consumers being able to permission their data what's transparent consent into the different services that they want and this is a topic of hot discussion because in the u.s. right now you know companies like ourselves are able to do this with the consumers permission but when you look at markets where regulation is encouraging the movement of api's or open banking from top down the challenge is that the conversation is usually around the api's and the specs not around how much data is actually being able to be permission through that API and if an API is an excuse for consumer to only be able to permission a little bit in amounts of data we think that's a missed opportunity all right so let's turn to a bank's perspective on this and jeez you said in a really sort of unique position you are a partner for many many fintechs I don't know well actually you'll answer that question but as a partner for many fintax but also as a depository that is actually sitting with the transaction consumer transaction level data how do you think about these questions around how the data is pulled API is Bank control over data and sort of how do you manage that because you actually yourself may be a user of data that's coming in through the aggregators as well directly to the bank so I'm as a consumer myself I'm as user as a bank I mean so we facilitate so so the difficulty comes here is the fact that many banks are not equipped to talk API technology at the stage right and they have to rely on their coal processors and now it's a question of whether their core processors want to be able to share the data because then they open a can of worms and they open themselves to the competition and they also are driving consumer transactions away from those core processors and that's how they make money because they are basically corn operating machines so the the difficulty here is to have enough critical mass of banks to embrace the strategy that plaid quo vote for example has been enabling a lot of consumers to access which is you know I want a new product for a savings account that will gather information from all my bank accounts which is like let's say five or six because many of us have different bank accounts with different purposes right so do I have a repository of all that data into one concentrated offering that actually enables me to make a an educated financial decision and the with this is where the consumer goes from something that is nice to have so what I think is really a must-have so what folks like plaid and API banking has been enabling is to turn something that consumers thought and perceive was a nice-to-have into something that they should have had for a very long time that the banks were preventing the consumers to have access to because of that competitive competitive pressure that was that were exposed to so as a as an enabler of FinTech companies to gain access to payment rails we do need the accessibility of the data in real time most of the coprocessors that the banks use is patched if you don't have the ability to make a decision in real time you will not be able to educate the consumer properly on the outcome of their financial lives so all this is enabled by API calls so now the I think there is a very big change that is looming which is at the core level and we know that some folks are trying to concentrate there is at the core level are we're going to see a sea change of of the way that banks are going to be able to operate a bank account on behalf of the consumers is it going to be bachelors is going to be real-time is it going to be API called or is it going to be traditional technology or blockchain others so this is where I would say the crops were the discussion resides as far as we're concerned we've made the election to develop our own core precisely because all those obstacles that we encountered as a bank in enabling us to service folks like Google Wallet for example or coinbase or stripe or others the only way we can service them is to actually develop our own core that is real-time whereby they could do an API code so choose so that they can better service their consumers and their small businesses so that's the I would say this is the choice that we made strategically about a few years ago because we were just banging ourselves you know banging our heads against the wall it was extremely difficult to convince the the coprocessors to listen to our story and to say could you please help us deliver the product that is that all the consumers are aspiring to get and they were saying well we'll put it on the roadmap talk to us in about four years so we decided to develop it on our own and I think you're gonna see a lot more folks doing this whether as a BAS solution so that you know Bank has a service that means there's a non-bank or like us which embeds the bas solution with a banking platform and which i think is very robust and very very complimentary yeah that's really useful we were also having a conversation backstage and now I'm appreciating the question you raised I don't know if you would have anything to add but we've obviously started to see some consolidation and we're gonna turn to you in a minute so you be ready to weigh in on this but definitely some significant consolidation in the core processing sector WorldPay being acquired eff is or it is FIS any any sort of projections on what the implications of that may be in terms of the core processors really positioning their functionality to be responsive for these real-time calls or not many any thought there so WorldPay is a phenomenal company and that real that truly understands the FinTech echo system they were feeding that company the quintessential success story yeah and I think it's a very smart move for a an incumbent and somebody who is a little bit has been as a reputation to have been stuck in the Stone Age a little bit even though they do have a digital story here from FIS I used to be at FIS all right but but I think I think this this preemies I mean it's very difficult and it's not necessarily that they lack the enthusiasm and the the foresight to enter to venture into the digital world it's just that they couldn't because the banks were not equipped to accept it themselves so you also have to compose with you know the regulatory environment the regulators knocking on our doors and saying what are you guys doing why you you know catering to those kind of companies to those kind of products to those counter consumers there are high risk and then you have to reserve and most of the banks on at the adequate capital to be able to reserve against that so you have a lot of things to compose with so it has to have you know some sort of a or perfect tension of all actors moving in tandem so when you have a core processing technology if is Jack Henry and and first data and and Fiserv they have to be listening to the aspirations of their banks which by the way just an interesting statistic is that 85% 85% of the banks in the country are less than five hundred million dollars in assets so the community bank environment which are by far the you know the clients of those core processors are very small in size and can't afford to venture into the technology world so how do we help them so through policies so I think this is where the big the capital o in the capital B comes into play in a very important way I think it starts with a small oh and the small B but then it has to move towards the policy making to force these people to think differently concurrently all together at the same time we've got to move the needle because if not the consumers are gonna run somewhere else right right right where they miss the opportunity and the value thing or or them is the opportunity in which case you know the community banking environment there's a lot to worry about and this is something that is a real hot topic yeah on many panels that I I agree with you it's a good point to call out Craig do you wanna pick it up from the course perspective and I mean you're working with thousands of banks globally what does it look like from your perspective both on the technology what you all are building what you offer but also the ability to partner with these banks who you know may not have otherwise the sophistication does embrasure know thank you so to Jill's point we're one of those cores that that does provide software and and technology and services to banks large and small so those thousands of customers or small banks here in the US is a major market for fenestra in addition to the fact that we go and talk to and serve 48 of the top 50 banks in different ways shapes and forms so the one one of the letters in that open banking phrase that that hasn't been referenced yet is the letter I for innovation and I think one of the things that we've done as opposed to the FIS is and the Phi serves who who again without knocking the competition I don't want to do that necessarily but they have not done a tremendous amount of innovation when it comes to that core the core platforms and one of the things that we're doing is working with with our cores we have we have built a platform that enables and opens up the data so one of the one of the real challenges and and the banks especially in the community space here in the US but also on a global basis they deal with is that they are in fact slave to these core systems it is and on you know either fortunately or unfortunately the lifeblood of the bank and the whether it's a core true core retail infrastructure or a lending infrastructure or a capital markets infrastructure they are beholden to to these core platforms so and some of those are xxx we talked about you know some of the systems in the industry are still from the 70s which is older than some of us here on the on the panel and so it's really really challenging to go and make change in these organizations and the case for change the return on investment that they get these banks get is is not something that would ever hold water so how do we go and enable things like open banking and and facilitating some of the the regulatory change that is demanded on these banks whether it's here in the US or globally it's it's by using open api's it's by unlocking that data and providing it to the banks themselves so that they can manage what it is that they need to away from the course and that's the the focus that we've actually taken the other that we talked about the three F's the the FIS the Phi serves and the fin Astra's of the world and two of them are going one direction which is to continue to consolidate fin Astra is working towards opening up the platforms and innovating with our customers and quite frankly with our partners in the industry whether it's a large tech company like Microsoft who has helped to enable our platform as well as not just the platform itself but also helped us put three thousand customers on the public cloud here in the US but the smaller fintax as well that are out there in the world that have come up with really great ideas that have had real challenges in one breaking into the banks to integrating with the core platforms that are out there so we're providing them with scale instantaneously with some of the work that we're doing and some of the are our big theme these days is we have not cornered the market on brains and we want to work with others that are out there throughout the world who can help to bring solutions and services to these banks again under the guise of open banking I'm gonna ask a question that we didn't actually prepare for but we're dancing around here we go lots of questions ultimately around liability responsibility in these discussions between the banks and the core processors and the idea of the data being able to be accessed much more quickly real-time etc is part of the contemplation of the core processors in never mind the sort of up front costs associated with building the technology to enable are there discussions even at that level in terms of responsibility for the accuracy of the data as a data would be you know made available to the bank's I mean this is something we thought about a lot Seema know as well once the data is moving beyond the banks but it does occur to me that you know there will be lots of lawyers involved and thinking through you know if this evolution and yields you should weigh in on this - if you have any perspective about it yeah I think that we as an organization and the banks as organizations do a very thorough job of negotiating terms and conditions in the software agreements that that we have sometimes very very challenging but I think the you know the liability and interestingly enough I mean there was just an article out today that one of our competitors is being sued by by one of their customers for lots of security flaws and and bugs and things of that nature so bugs in software sort of unfortunately still synonymous in a lot of ways but I would say that the liability generally resides with the bank as a the fiduciary party responsible for all of that information we will provide them in an enabling tool to open up some of that information as I said or tools to open up that information but I would say the liability generally speaking resides with the bank yeah those I think that I think it's a great great point and in the sense that since the liability resides with the bank the bank should own the data and should they should be able to monetize that data so what open banking is creating is to say well you guys can carry the responsibility you're gonna hold a bag but we're actually gonna you know remove the data from you we've got to make it open and totally accessible to all so we need to level set a little bit here in the sense and by the way I'm just I'm not speaking on on on cross river banks behalf and just speaking on the industry's behalf probably just to make sure that the data is accessible and there is no hold back because some banks are thinking well you know I'm carrying the responsibility I'm not going to share that I'm not going to participate I'm not gonna open the books to somebody else for them to use the data to monetize it to make money out of it now what is the best way to serve the consumer is it to sell that data and to make the product better or is it a way to retain the consumer so in other words you're not selling the data you're just making the product better because the consumer is already yours so there is a that we have to stop thinking that you know monetization to death and that's one of the things that is a hindrance to innovation a hindrance to you know the banks withholding the data not sharing it or so the technology players thinking well I own the data because I'm the one who actually provided you access to that data to begin with if now you would have access to it so I think that's a very important point that's a point of contention point of discussion that I think if we resolve this we'll make a lot of improvements in the way that the data is shared then towards open banking as a whole this is a very heated topic and you know we we get this question a lot because we are essentially enabling consumers to move their data and so we often get asked well what's your responsibility here and I think it's really important to keep in mind earlier the conversation we were having around the technology that folks like connacher are building out and you know the API is that cross reverse doing and we haven't talked about Neels work but you know the work that he was doing in India and making that happen but I think when you think about the technology piece you have to also think what the philosophy and the business mindset there's still a lot of banks that have this very siloed approach where I have to control everything because that's how it's done and control lets me win fundamentally that's going to have to change Craig has a good quote later on when he gets a chance I'll probably say it but it talks about change being able to embrace change and I think if you can't do that then you know using security and liability excuses just kind of falls flat on its face the example I use is you can put me in a room and put 12 locks on the door and say you're safe now it's not a great experience if I can't get in and out of the door so you got to figure out how to solve for it and these are tough questions but just like when we went from a world of paper based statements to creating the first online thinking platforms and allowing consumers to log in digitally you did it because the consumers wanted a and you figured it out so you've got to just figure it out now and it's not gonna be easy but everyone's willing to come to the table and those that aren't are gonna be the ones that ultimately are gonna struggle and I'm gonna come to you in one minute because I know you have things to add but I want to really press because the point you make 3/4 of the banks in the US are these small community institutions and this feels like an existential threat to them right now we're talking about these non-bank entities leveraging data extending products how do they get over it how do they see that there is some potential opportunity for them in the building the technology the capability but then having the you know the desire and the wherewithal to allow their consumers to leverage in accessing information so a lot of them are not aware of the threat that's a sad truth hmm I think I think the industry is doing a terrible job at preparing them for the inevitable I think things are changing we've seen it change we get now in balance about once to inbounds a week from these smaller institutions saying how do I get on the plaid platform because my users want to use acorns I'm gonna you lose my user if they can't log on to acorns so I think that there is a growing realization of this and I do think some alternatives to the traditional cores vanastra being one of them there's another interesting company called q2r helping them realize that journey but we're definitely in early days yeah I agree I would say that the it's starting to change a little bit I would say that the majority of them that we've seen have have not prepared accordingly and they are still in a situation where they are beholden to to some of the technology that they have in the problem and challenge and this has come up multiple times on different panels this week is that they are limited in their resource they are there you know we may be you know a larger number here on this panel than the folks in their entire IT infrastructure we're going to say in some cases so it becomes a real challenge if they are stuck and they can't move and we see we see a tremendous amount of activity right now in this particular part of our customer base looking to leverage new technologies and opening up that data so that way they can start to partner with all of the other great players in the market yeah sounds like a real market opportunity for somebody who can make the case and free the data huh yeah we're doing our best so we're having this very narrow us small Bank conversation but typically what people from DC often do let's go global you wanted to chime in on this conversation please do I'd love to hear we'd all like to hear your thoughts on that moment I was I heard that the data is the banks the data is the technology company nobody said the data is the individuals if it's about us then it's ours and nobody else can say that it's art that it's that I'm monetizing it you're liable because you're the custodian it's your responsibility you're making money off a bunch of other services by taking by taking my data so don't turn around and then say it's your data it's not it's the it's the end users and that's the that's the fundamental truth that that people almost always forget in the financial world when you're talking about these things for India it's a question of it's not question of innovation it's not something that's you know neat and it's trendy and FinTech is coming up there's a lot of funding it's a question of survival our GDP per capita is $2,000 we are three times poorer than the next poorest BRICS country right the next poorest BRICS country is South Africa their GDP per capita is 6600 for context the United States is at 54,000 right we are poor and we have one-fifth of humanity sitting under that sovereign government right 1.3 billion people this is this is not a question of what what the next innovation is it's a question of how these people are going to feed themselves and how this country is going to move forward we have half 600 million people more than half a billion people who live on less than $3,000 a year at the household level that split five ways that's how poor we are if you're not going to get technology to actually drive increased access to capital increased access to healthcare the human cost there is incredible so when we talk about building public infrastructure when we talk about exchanging data these are not these are not theoretical questions these are not questions about another 20 bits on margin this is the question of giving credit to someone who who who only had access to credit at an APR of 400 percent right right and and to allow them to pull themselves out of out of the situation that they find themselves in and so increasing access to information increasing access to capital and doing it urgently in in the most democratic way possible is is is our at least the people who are more privileged in my country such as myself I'm fortunate but it's our bounden duty to build systems that actually empower the people the the whole idea of you know and we this journey began about 10 years ago when Adha began can you explain at her so other is India's biometric ID project we it's basically the Social Security system on steroids right it's it's with its with biometrics it's authentic able on the cloud in real time we we launched this in September of 2010 I was part of the early team I was fortunate enough to be there at Ground Zero and we went from 0 to 1 point 1 billion people enrolled in six and a half years that's faster than Facebook reached its first billion and we continue to keep pushing that forward but now that there is a fundamental this was initially so the the government itself could why currently distributes the benefits yes reduce the fraud yes yes absolutely look we are still very much a socialist country we have for for those six hundred million people who live below the poverty line the government is God because that's the only food that comes to them comes from the government so public service delivery is a key question and the way we I usually like to describe it as before odd ah if you took the entire public benefit system as a cake that you have to slice and give it to billion people what would happen is you'd cut it up into big chunks and give it to somebody and say you cut it up into smaller chunks and then give to the people and so on and so forth and what ends up happening is when you give a piece of cake to someone they tend to eat it at least a piece of it so what what ends up happening is towards the end there's very little there was a statistic that said out of every every dollar that went we would pick only three cents would reach the intended beneficiary because there's so many layers red by the time you'd know at a time it gets there ah da was a scalpel it allowed you to cut the cake into 1.3 billion tiny parts and to give it directly to the people involved that that's what it was built for and and then it so happened that it has your name your address your your gender your date of birth in your photograph and it's a verified piece of identity and so a lot of people used it for kyc and and right now private use of Adar has been stopped because of Supreme Court judgment that came through but really as a result what ended up happening is in the last three years people got a taste for instant cheap kyc the cost of onboarding and that's a quote okay if I got a taste for instant uky see and it's like crack right after that for for the FinTech he cases I know who you are so the the point is that if you're going to be for the last four years one out of every two bank accounts opened worldwide was an Indian bank account we opened 350 million bank accounts in the last four years you know why we did that because of odd ha that's what made it possible it took a process that took almost a week and well north of 15 20 dollars to acquire someone and took that to just a few cents and made it instant and that's how you'd start delivering services we are ridiculously under penetrated and pretty much any key metric that you look at right you're our household debt to GDP ratio is 12 percent the United States were for reference is 113 percent that's another problem but but it isn't it isn't it isn't because it isn't because Indians don't borrow it's because we borrow from the wrong places because we don't have a choice we can't borrow from the banks because the kind of borrowing that Indians do at most of India at least is for small amounts and it doesn't make sense to service a two hundred dollar loan or a fifty dollar loan if the cost of enrollment itself is $20 right it just it doesn't work out so the so the banks can't take care of you so you have to go to the money lender next door same goes for insurance our insurance penetration rate is three point nine percent this is premium under return to GDP global average is six and a half United States is much higher that's another problem again but the point being that when you start going through these two percent of our population actually has mutual fund access right how are people going to protect themselves against against externalities invest in their growth and and borrow to kind of power their own kind their own business growth for example these are all critical questions the only way you're going to be able to do that in a country of 1.3 billion people 786 languages 94 different scripts five companies six companies consolidation that's not going to solve India's problem there are literally tens of thousands of different India's just seventy years ago we were five hundred and fifty different princely states those brought together in the instrument of accession to the Dominion of India but the point is that it is hubris on behalf of any company to think that they can serve all of India therefore the only way to do it is to open up the banking system and the payment system and the data rails to as many companies as are qualified and certified and want to do this in a responsible manner and delivering that payment and that access to banking systems that had access to the data rails is basically we we made a start with public digital platforms we like Aadhaar and UPI which was a payments platform and then a couple of us a few of us that have worked on these systems decided that the next push has to come from a private company that actually implements reference implementations of how should this be done and and so our team is a collection of policy guys of lawyers of designers of obviously finance experts and technologists to come together and build a system because consent for example in India yeah what what does consent mean what does it can we are we're a country with like a literacy rate of 65 percent right what about the thirty five percent so just because they can't read this is what I'm going to do how do you design a consent system for them how do you design less than eleven percent of India actually speaks English and like I said we have seven hundred eighty six languages 90 different scripts what is the right way to make that happen is it audio is it video possibly right and and so innovating on authentication you know waiting consent innovating on mobile interfaces which were not designed in the valley in the sense the the paradigms for design that makes sense here are natural and what's you know it just works doesn't just work for India and so you're gonna have to think about a whole new design paradigm for the movement of money and maybe it works out to be something simple like in Hindi I'll say Melissa kudos or okay bass DJ which is you know send Melissa two hundred rupees and the fact that it's coming from my phone from my voice and I'm saying it in a way to a contact that's probably in my in my phone maybe that does the authentication on its own that's far away but this is a journey that that needs to be taken with the user in mind first not about you know competition not about who's you there are people too awfully uplift and that's something that we cannot lose sight of right that's really helpful we're gonna open it up for questions but before we do we've got I want to cover a few more things you're out there now building this API yes system I'm assuming you're building the API system that would then be a conduit between yes between banks and other companies and and the in the financial system as a whole yes talk a little bit more about how you're thinking about building that API system in light of what you were a part of in building at her absolutely so like I said there are tens of thousands of India's so literally there are tens of thousands of different need states a farmer in Ratlam will who's growing tobacco will have a very different cash flow curve than a wheat farmer in other pradesh from a from a carpenter from a schoolteacher there are so many thousands of India's all of them are cohorts they all have different need states which means they require a certain type of credit they require a certain type of insurance they require a certain type of savings product to make sure that their cash flow curve is smooth and over time and so that they can they can grow and create wealth over time so if you're going to do that the traditional distribution architecture of financial markets where the the distributors are essentially to nothing but financial distribution which is your brokers your agents your aggregators and and understand that sort are not the right people to distribute financial products to these people because they have to spend money to reach these people and in itself like we discussed makes a product unaffordable right particularly at a small at a small scale so the right people to service these cohorts are people who already have transacting relationships with them so there's a cash flow relationship that's already been established the collection can be integrated data flows and Trust is already built in because these people have been transacting for a while now therefore you want to be able you want not not every company but any company should be a fin tech company right you want to enable any company to become a fin tech companies so that they can provide these loan products and insurance products and and and payment products to the people who are interacting with them now to do that I can't design tens of thousands of different financial products that's just that doesn't scale so the way we do it is by by building by unbundling the entire banking and financial system in two building blocks what we call primitives right so stored value accounts and is a very engineering term called thrud create read update delete which is mutually exclusive and collectively exhaustive set of operations that you can carry out on a stored value account and a stored value account could be any type could be a savings account current account alone account to mutual fund and insurance policy anything that holds present or future value and is regulated the want to be able to programmatically create read and delete these accounts the you of this is essentially payments because money in money out that's an update on the stored value account across the rails I am agnostic to Rails v8 bank transfers be it card visa Amex master doesn't matter want to do a dressing which is creating and resolving addresses but what we refer to as issuing infrastructure can I assure a virtual account number can I issue a virtual card number can i issue a UPI ID and route it addressing authentication authorization authentication these days is known only as pin but you know it could be like an orc type login with login with plate or login with cross river login with an institutional login and then authentication sorry authorization is there is nothing but a rule engine to say what is the permitted credit and debit sure and then the last category is what we call utilities so it could be data API is it could be kyc it could be bank account verifcation api's which is where plaid began it could be any of these that facilitates a transaction now if you actually know this is all unbundled into three categories if you choose the right set of blocks from these categories you can actually design theoretically any financial product so you take a loan account you take a fund transfer API and you take a tax salon or a tax invoice verification API you essentially have an invoice discounting product because you have a verified tax data you have a loan account on tap that you can open up and you have the fund transfer API to finance that invoice with a loan account the same goes for you take a mutual liquid mutual fund right and you take a card debit card issuance API and you take a bank account verifcation if PR you put them together you have nothing but alibaba's you a bow which is your leftover treasure kind of money market fund on tap that you can spend from right so you could theoretically design any financial product which makes sense for a particular cohort and that's what we were your products is basically enabling these different functions yes we do how is let's turn to policy how is the Indian government supportive enabling providing guardrails protections for consumers especially is now the private sector is leveraging what the government has built yeah in in in in my considered opinion the Indian government and the regulatory landscape there is the absolute tip of the spear it is the cutting edge as far as regulatory landscape schoo worldwide we we've taken a lot of time studying GDP are studying PhD to studying what the Monetary Authority of Singapore has been doing frankly we've not spent a lot of time studying the Americans because the system here is decades behind it's true it takes you three days to clear a transaction is 2019 come on guys but but so the the point is that when when when we're kind of looking at a regulatory landscape our the way we form regulation in the way we form policy has has almost been informed by the way we built our constitution back in back in the 40s right we study the American Constitution we study the French Constitution study the British constitution and came to came up with something that today is considered the benchmark on how democratic constitution's need to be architected same goes for the way we look at regulation right we waited for PSD to to come out before our the Shri Krishna Committee on data protection actually put out something we've waited for gdpr to come out and actually settle down a little bit because then we put in then we then we go back to the same thing fair enough fair enough but but but we are we are we go by design principles and and the fact that the data is the users and whoever has the data is a custodian right we refer to them as a data fiduciary and therefore they it comes with certain responsibilities so these design principles essentially dictate the kind of policy that we end up doing the the good part is that regulators themselves have become much more open to listening to new ideas from external think tanks and that was that an evolution by the way yes definitely and and I think it began pretty much without hardware they realize that there are people in the private sector who come with a public service mindset who really want to build systems that and allow the that that allow the economy to be unlocked in ways that the government possibly couldn't imagine so it's very design principle lead and and it's always the citizen who is at the center of it and the government has had many years of kind of of policymaking experience knowing that if you don't protect the citizen the the little guy then they'll get eaten alive right and it's even more critical in a country like India with these kind of right so we're gonna open it up for questions do we have a show of hands in the room excellent I'm going to ask one question I just like getting audience perspective how many people believe the this is not a legal question but that their financial data or the financial data that you have generated that sits in a bank is your data just show of hands it was curious okay helpful okay question over here to the left actually on that point while the questions being asked we actually did a survey and we found that 70% of people believe that the data should be theirs that they own it but that only about 30% of people actually feel like they do so there's definitely a gap there because people want in what they believe the reality is all right so can I just go a little bit deeper on one of the topics that you brought up it's gonna be a jump ball question for everybody though you mentioned that you believe India actually is leading with regard to regulatory prowess innovation etc I think you wanted to use the word dinosaur with regard to America could the panel comment with regard to how everybody thinks the world is being allocated with work with regard to regulatory prominence is the u.s. really that far behind everybody cuz right now on the panel we have an opinion on us is all the way over here we have in the all the way over here can you give it perspective across the world please can you let us know who you are - Aaron pelicans with Jefferies great thanks I'll chime in first I guess so from a we've done some research at vanastra around the world with respect to really three global regions one us I should say countries and regions so the US UK as well as AIPAC in general as a whole and we did an extensive study with a partner of ours in in a PAC to really see Czech readiness with respect to open banking as a matter of fact but what we found from a regulatory perspective is I think the u.s. is probably a bit ahead of the UK right now the UK is a slow follower with regards to what they're looking at what they're looking to and and they're the banks as well as the bank's customers are really looking to step back and wait for things to happen first I would say that AIPAC is probably as a region a leader and in particular we found from a readiness perspective and a regulatory leadership perspective singapore's is a leader for sure I'm just gonna say it's a little bit easy to say that the world is a leader in terms of policymaking and regulatory environment we just have to take a look at the landscape here I mean you have 12 federal regulators plus for each bank you have 50 state regulators that want to try and then you have agencies and then you have like a whole host of different payment schemes that don't talk to each other and and and all this is due to the privatization of the whole system like for example natural right for ACH purposes and then you have the Fed controlling the Fed line and I mean it's all this is is just it's very difficult to make everything ubiquitous and to get to everybody in the same room saying let's crack the code it's not gonna happen and it's it's gonna take decades if not you know centuries to be able for all of us to get into a room and to figure this out so that's the reason why technology has led the way in the u.s. and people like Platt for example they saw they crack the code they actually managed to solve this issue of connecting 99.9% the banks in the country and to make the data ubiquitously communicated amongst stakeholders so now the policy will follow at some point but it's almost irrelevant it's so we shouldn't care that much as to how policy is being designed as long as the consumer is being served by the technology providers yeah I mean maybe I'm biased cuz I worked at the Treasury Department with Melissa so I actually think we have it pretty okay here in the US and you know yes we're a little behind but it's also because we were the first and so it takes time to now leapfrog ourselves I think what India and the u.s. have in common versus the UK or you know U is we lead by principles so in the u.s. we let the markets figure it out and then the regulator's articulate principles around the behavior they want to see so make sure the consumer is empowered but they don't say include this this and this this is exactly how your consent flow should look like make sure that screen 3 says X whatever the principle is there and make sure they they have transparency in India it's a bit more of a paternalistic I think philosophy because of the population and what you're working with there and so but still it sounds like from what you were articulating that it's still much more principles based approach whereas when you look at GDP are you okay you know what's happening in the UK right now regulators tried articulating the technology standards that the banks had to release and that's created a problem by the time you articulate technology Stan nerds you've already moved beyond that so the API so the banks are releasing don't actually have the data that you need to really encourage and facilitate the innovation which was the intent that wasn't what they did a principle based approach would have been consumers need the ability permission their data and they need people do it quickly and seamlessly whether that's through a more modern version of screen scraping or through an API what the means dictate the ends but don't try dictating the means and I think that's really important when you're thinking about from a regulatory perspective so yes the policy will follow here in the u.s. it may take time but in the meanwhile we do have open banking with a lowercase o and B and that's pretty impressive go ahead Lee huh deteriorated wealth partners so my for many years we had on the books a regulation that you could not have more than 10% of the deposits in the United States no bank could have more than 10% of deposits three banks have blown through that cap been given exceptions I don't know even know if that law is even on the books if it is it doesn't matter because these banks have 11 12 13 % each of our deposit base what effects is that has that had on you know the entire ecosystem and do you think it'll change you should take that one I think yeah I think I think it's gonna be very similar to it and Jill's particularly there on the pressure that it puts on smaller institutions I think you know these institutions are gonna have to figure out how to lower the cost of their technology and they're gonna have to figure out how to go more direct-to-consumer and you know really create more value through that and that I think is going to come through tapping into the FinTech ecosystem and I know Craig has used on this as well but in a lot of ways fin tech and the services that they provide are gonna give the bank's the option to compete with the larger banks so I think you're starting to see some of this upstart is a lending company that's now offering their platform to different institutions acorns which started off as a very consumer app is now looking to partner with institutions who want to have really great savings type tool for their customers and when they're looking to these fintechs and they're putting the cost of technology on them and able to leverage that it means that they're not paying for that from some mediocre core that that's a big change and so I think the company the banks that are able to leverage the value that comes out of that system and apply it back to the consumers because remember they've got the relationship right and we all know that the cost of acquisition is what's really hard here are they're going to be the ones that are able to compete effectively and and if I may add I mean I think it's an invariant question that you're asking of concentration of deposit bases one of the economies that you should look to to see what the warning signs of the results of such concentration is Brazil where 90% of the deposit base is actually split across just four banks and and eta whoa Banco do Brasil a couple of others if Santander and one more blood ESCO those are the four and and the immediate result that you'll see is that there is they will be often a cartilage a shin where rate-setting will get the competition or the rate setting starts going away particularly when it comes to processing fees and transaction fees so there Brazil has some of the highest transaction fees in the world for moving money which is essentially what you're moving bits from one server to another it should be practically free and and that's again something if you try and propose right now market market solutions alone don't drive the innovations that you need they call law they I think a Harvard professor called law those wise restraints that set men free and and the problem with the very laissez-faire approach is that those wise restraints become absent and and you end up with concentration of power where you're sucking money away from the average person just so that shareholder value can be created and so it's it should not be allowed it should not be allowed under any circumstances yeah I just just one that's why I know we're we're up against it here but one of the things that we need to keep in mind especially in this country is that the community banks the credit unions of the world who are gonna really struggle against the scale of those large banks that is the lifeblood of the communities the towns the city states what-have-you that we have here and we need to make sure that those are going to say there will be continuous consolidation across banks of all sizes but we need to make sure that they continue to thrive a little bit through technology and one of the things we talked about a little bit and backstage was getting uncomfortable with partnering and and technology organizations and bringing that into the into the faults of those small banks in particular absolutely need to do that or else they will be they're gonna be disrupted and if it's not from the big banks it's going to be from the the technology companies that are already servicing the small and mid-sized enterprises that are out there I would just say I think one of the things that's sort of somewhat even ironic part of the ambition behind some of the opening banking efforts is basically to drive competition because of concentration UK is the obvious case here in the US were a very Depository centric financial system and our regulatory system reflects that - I think the reality of the fact that you know our large institutions are holding such a predominant number of our accounts means that there's a lot of weight that's given to the perspectives on open banking and what needs to happen and how policy needs to evolve and who owns the data so there's a lot of credence given to those large institutions which plays out somewhat differently I would argue and this was our lightning round last but I know we're over time but very quickly until we really start to press and understand what are these sort of responsibilities liability responsibilities around the data flow I think it's going to be hard for the industry to ultimately really manifest in the ways that it can be so beneficial and so I'll put in a plug we're actually about to release a paper that talks about what our policy options for this flow of data in the cash flow context for underwriting but keep an eye out for it regulation yes no Geo's you said at the beginning we need it you standing with that yes in the u.s. we do my verify that consumers have the right to own their data and to share it yes 10:33 yes yeah as long as they were pretty much on the same page yeah yeah as long as it protects the end consumers yes your new regulations yeah agree I would I would say that just need to keep those end consumers in mind with every with every part of this process right great well if you'll join me in thanking our panelists [Applause]

Channel: Milken Institute

Views: 20,805

Keywords: Milken, Institute

Id: eh_JJgfi0E0

Length: 64min 25sec (3865 seconds)

Published: Thu Jun 27 2019