John San Filippo
The Future of Financial Services
Onsite Coverage of Reach 2022
By John San Filippo
Reach 2022, the annual meeting of the California and Nevada Credit Unions Leagues, was held Nov. 12-15, 2022, in Palm Springs. The second day of the conference opened with a general session titled “The Future of Financial Services.” Billed as a panel discussion, the session opened with each panelist speaking for 15 minutes on their field of expertise.
The four participants were:
Lamont Black, associate professor of finance at DePaul University (cryptocurrency)
John Janclaes, president of Nymbus CUSO (niche banking)
Mike de Vere, CEO of Zest AI (AI-based underwriting)
Larry Palochik, EVP of the California and Nevada Credit Union Leagues (moderator)
Lamont Black on Cryptocurrency
Black has been a guest speaker at several credit union conferences this year. He usually gives a 90-minute presentation packed with important information about cryptocurrency. For Reach 2022, he distilled his presentation down to 15 minutes.
“Technology itself is not good or bad. It's just neutral. It's just a tool,” Black told the audience. “People have very strong opinions about crypto. Some people love it. I'm kind of a fan myself. Some of you might be totally skeptical, and that's okay. But let's not make it about good or evil. It's just technology. The question is, can we use it for good?”
Black went on to explain why he believes the answer is yes.
Cryptocurrency and blockchain, he said, have the “potential to transform the nature of what you do as a credit union.” He suggested that every credit union should develop a cryptocurrency strategy, even if that strategy is to do nothing. The idea is to put some well-informed thought into it.
Drawing the distinction between blockchain and cryptocurrency, Black called blockchain a platform, while cryptocurrency is simply one of potentially many applications built on that platform. He then asked attendees, “What do you do with a platform? You build applications.” He likened blockchain with other platforms that are more familiar to the credit union industry, like core processing.
Black continued, “The question is, what is the next platform? I'm here to argue that blockchain is the next platform. Now, I could be wrong, but I think if you start to understand this, you can understand how people are starting to build applications on blockchain that are moving in your direction.”
To simplify the topic, Black used an acronym, MAP, to describe cryptocurrency. MAP, he explained, stands for cryptocurrency as money, cryptocurrency as an asset, and blockchain as the platform on which cryptocurrency is built.
“If you think about a $20 bill, this is a peer-to-peer monetary instrument. I can walk into a retail location. I can spend $20 buyer, seller, no Visa, no MasterCard, no third parties, no interchange fees,” said Black. “The problem with physical cash is that it is physical. As we move towards e-commerce and a digital economy, this doesn't work anymore. That's where crypto comes in as digital cash.” He acknowledged that there are plenty of ways to transfer money electronically – e.g., PayPal, Venmo, and Zelle – but they all lack anonymity and require third-party intermediaries, unlike cryptocurrency.
“Now think about crypto as an asset. That's where we are today,” noted Black. “Your members are buying crypto to grow their wealth, to improve their financial wellbeing.” However, he suggested that credit unions need to think beyond cryptocurrency when considering blockchain.
“All aspects of our economy are digitizing,” Black told the audience. “I want you to start thinking about non-fungible tokens or NFTs as a way to record digital ownership. Could we do car title or real estate title as an NFT? NFTs aren't just pictures on the internet. They are a way to record ownership on a blockchain.”
Black then moved on to blockchain as an enabling platform. “What is blockchain? It is a system of record keeping, keeping track of information on the internet,” said Black. “That's important because we live in the information age. You can think about it as either accounting or data. What makes blockchain different is that it is shared record keeping. It's sharing information in a distributed ledger or a shared ledger.”
One significant benefit of blockchain, according to Black, is that it doesn’t require any sort of reconciliation at the end of the day. “Instead of doing backend cleanup, blockchain flips that on its head and says, let's agree on what's going into the ledger. That's where you get the idea of decentralized because now you have a network and the network is agreeing on the information on that network.”
John Janclaes on Niche Banking
“It is fintechs and challenger banks who are really capturing our members' attention about where they want to do their financial services,” warned Janclaes. He said that many of these challengers offer consumers more than financial services. Noting Nymbus as an example, he added, “Our brand is about helping you do good by pushing back on global warming. How do we do that? Open a checking or savings account with us and will help to reforest the forest. We'll plant a tree on your behalf.”
Janclaes went on to explain that, in some respects, credit unions invented niche banking. “When you think about our origins, didn't we start at a single employer, trying to figure out the needs of that employee group? So this is kind of our birthright. I would encourage you to think that way.”
According to Janclaes, the biggest obstacle for credit unions wanting to engage in niche banking is a lack of adequate technology. “The constraints are that the technology stack that I have today doesn't allow me to go ahead and quickly move and stand up these individual brands,” he continued. “It's very hard to get to market with new ideas using old technology.”
Janclaes acknowledged that, while lack of a modern core may be the issue, a core conversion isn’t necessarily an option, either because of cost or a long-term contract with the current processor. One option, he said, is to engage a company like Nymbus, whose “credit union in a box” product allows credit unions to outsource their entire niche brand. In addition to allowing credit unions to go to market much faster with their niche brands, he said this approach also helps credit union employees prepare for the future.
“As you go through time, your people are beginning to understand how to run a modern technology stack,” said Janclaes. “We run it on your behalf, but you coordinate and you work with us. The people portion of this is everything from a call center to loan officers that we support, compliance marketing, digital marketing. You get to learn how to run the niche and then when it comes time, if you want, we can transfer it to you.”
Mike de Vere on AI Underwriting
“The current credit system is failing America,” said de Vere, setting the tone for his presentation. “Does everybody buy that? Is it failing America? There's a reason when you look at the disparity between a FICO score for female borrowers versus a FICO score for male borrowers.”
On average, deVere said, a female borrower will have a FICO score 40 points lower than a male even though their debt is 18% lower than a male. “The issue,” said de Vere, “is that the system that we're using today, the underwriting approach that we're using today, was created in the 1950s.”
According to de Vere, the solution is “automating your underwriting process through more accurate and inclusive lending insights.” He said this is best achieved with the use of artificial intelligence.
“When we look at the existing credit system today, FICO looks at about 20 variables,” said de Vere. “The challenge is that one out of 500 members don't fit in that they’re thin file or no file. They're left out of the credit system. You're looking at 46 million Americans. We can do better. How we do better is by consuming more data and applying better math.”
This can be accomplished through the use of artificial intelligence (AI), he said. “We do that through this automated underwriting process that's powered by AI,’ explained de Vere. “We start with data that you already have. This is not exotic data. We're not scraping social media accounts, doing anything creepy like that. It's raw tradeline data, roughly 70 to 80 variables. We do feature engineering and we come up with hundreds of variables.”
By looking at more data through the lens of advanced AI technology, credit unions are able to make better loan decisions, automate more loan decisions, and, according to de Vere, approve more loans. He said that some credit union s even see a significant increase in tier-one credit approvals. And by automating more loan approvals, lending employees are freed to spend more time with members who really need the extra help.
“It's about knowing that you're able give every member a fair shot at credit,” said de Vere. “That's not Republican, that's not Democrat, that's really American.”
Key Quotes From the Panel Discussion
Black, on credit unions that now offer bitcoin services through a fintech partnership: “I want to caution the industry to not get stuck there because it potentially becomes a bit of a dead end where bitcoin just becomes an account that's now on my phone and the number goes up and down. Part of what I'm trying to help people understand is that crypto is functional. The idea of a digital wallet, being able to send and receive transactions, being able to do a smart contract for automated lending, but doing it on chain. There's so much more than just buying bitcoin.”
Janclaes, on partnering with fintechs: You're going to be managing relationships outside the organization. Do they have the same kind of culture match as you, like how you actually get work done? That's a new competency to be thinking about. I've got a book coming out the first quarter that's on this called the Partnership Advantage. I'm working with some academics to help us think about, how do you do an assessment of where you're currently at?”
de Vere, on fear of the unknown: “I think it really comes down to building trust. Technology for many of the executives and many of the teams that we meet, is a bit scary. The topic of AI, it's like the Terminator is coming for you. It's taking over your credit union. And so there's this fear. We actually build the model ahead of time and we're able then to compare it against these traditional industry scores out there so that the credit union itself can get confident and understand that if they had been using AI-automated underwriting for the last 18 months versus one of those industry scores, here's how it would've performed.”