Connecting Conversation

<v ->Hello everyone, and thank you for joining us</v> in this question and answer segment

as part of the Cryptocurrency: Beyond Bitcoin Teach-Oout. My name is Jessi Kittel, and I’m with the Center for Academic Innovation. And I’m joined today by Adrienne Harris and Bob Dittmar. Thank you both so much for joining.

<v ->Thank you.</v> <v ->My pleasure.</v> <v ->Adrienne Harris is a Professor of Practice</v> at the University of Michigan as well as the Faculty Co-Director of the Center on Finance, Law and Policy. She’s also a FinTech entrepreneur and investor. Bob Dittmar is a Professor of Finance at the Stephen M. Ross School of Business University of Michigan. He’s also the Faculty Co-Director of the Ross FinTech Initiative. And Adrienne and Bob are both part of the U-M FinTech Collaboratory an interdisciplinary forum dedicated to research, technical development, and innovation in financial technologies. Over the next 20 minutes or so we will be addressing your questions about FinTech and how cryptocurrency fits in. So to begin, many learners had questions about the nature of FinTech.

Briefly what is it? What types of FinTech should everyone have a basic understanding of?

<v ->So I’m happy to jump in.</v> I mean, FinTech is essentially what it sounds like it’s the blending of financial services and technology. So in that respect, it’s not new. You might say electronic trading or the ATM are early examples of FinTech. But generally we think about the technology when it’s added to financial services making something faster, cheaper, more efficient, more delightful for users and easier for them to use. So that’s generally how we categorize or think about the attributes of FinTech. And as you alluded to there’s lots of areas Insure Tech, Reg-Tec, crypto, distributed ledger, all of which are parts of what we call FinTech.

And I think users should strive to understand as much about the space as possible. I don’t know if you have additional thoughts, Bob? <v ->I don’t think I have a lot to add to that.</v> Hopefully this isn’t building up too much onto another question to some extent but the only thing that I guess that I would add to it to some extent is, as Adrienne said, there’s nothing new here. I mean, I would even go so far as to say coins and cash are examples of FinTech from long, long ago. To me, the biggest difference kind of what’s going on right now is that it’s a much more tech driven as opposed to finance driven innovation.

And so we’re seeing entrepreneurs that I think naturally belong a little bit more in the space of technology making the foray into finance rather than vice versa. <v ->Where would you place cryptocurrency</v> within FinTech right now? <v ->To be honest,</v> I think that it’s actually a very fringe part of FinTech. I think there are a lot more interesting, exciting, and applicable places that FinTech is actually seeing innovations. You know, as Adrienne mentioned, there are all of these innovations across the entire space of financial services that we see.

And crypto really is sort of, I mean, I guess I would call it as being sort of a payment tech but it’s a payment tech that not a lot of people are really adopting at this point. And isn’t actually kind of, as I mentioned in the videos doing all that well in terms of being a form of payment. And so to me, although it certainly is the aspect of FinTech that I think is perhaps the most hyped in the popular press and the media, it’s probably, at least to me, the least interesting space basically out there as far as FinTech is concerned.

<v ->And I’ll add, I think to Bob’s point</v> when we think about crypto, we think about Bitcoin, Ethereum, right? And as Bob said, we haven’t seen broad adoption, right? You don’t see people making their online or even their physical purchases yet really using crypto currency. But I do think is interesting about the space is the delivery mechanism or in other the distributed ledger technology that underlies crypto, that has implications for lots of other parts of FinTech and financial services, right, that are not payments. And I think some of those use cases are gonna continue to develop and be very compelling.

When it comes to crypto per se, I agree with Bob and I think the most interesting part of that is maybe not crypto itself, although it’s proving to be sort of an interesting asset if you’ve got the stomach for it, but the way it’s driving a discussion around central bank digital currency. So it’s forcing governments to modernize how they think about money and Bob mentioned there are coins and bills, right? And now we have electronic money but we don’t really have digital fiat money. So the popularity of crypto is really forcing governments to rethink how they deliver money to the economic and financial systems.

And I think while that’s not a sort of a compelling feature of crypto itself, it’s a compelling impact that it’s having in a larger scale. <v ->Absolutely interesting</v> to see how it has these larger impacts and that some other things that people commented on. Bob you were talking about some of the more things that you find exciting about FinTech, what would examples of the problems that FinTech is trying to solve right now? <v ->A lot of the things</v> that I’ve been interested in personally are more in the investment space and in the lending space quite a bit.

There have been a ton of innovations it seems like that have been made in what I guess I’d call lending tech which are increasing access to resources for potential entrepreneurs that might not have been able to secure a loan or some other kind of financing before. And because of the fact that we have machine learning algorithms and a lot more data on which to base these decisions there are a lot of non-traditional sort of factors that can now go into making a lending decision. These aren’t necessarily without costs. There’s always issues of privacy and things like that that one has to attend to when considering these kinds of things.

But it is expanding financing to a whole set of entrepreneurs that would potentially otherwise be shut out of the market. And I’m very hopeful in that case especially in emerging markets, that it gives us some sort of a vehicle to expand opportunities for people. <v ->I think Bob is absolutely right.</v> When we think about access to credit, there’s no question that the ability to use new types of data well it comes with some risk is expanding the credit box for lots of borrowers both in developed and emerging markets.

Payments we talked about a little bit with respect to crypto but even putting aside crypto or the ability to make payments more efficient, especially cross border and when we think about remittances, immigrant populations that are sending money back home and they’re able to do that faster and with lower fees or potentially no fees, that’s an incredibly important innovation when it comes to inclusion. And Bob mentioned AI, and we could spend hours probably just talking about AI in financial services. But one of the things I think is really interesting is AI in financial decision-making. There’s tons of science that shows us how terrible we all are making financial decisions for ourselves even if you’re actually relatively well off.

And if you combine that with the behavioral science about what stress does and particularly toxic stress does to your decision-making ability, you can see how it make it that much harder for somebody who’s really in a financially bad situation. So leveraging AI to help us make good and efficient financial decisions and allocate our resources at the best possible way I think is a really compelling use case. <v ->Several people brought up AI,</v> can you talk a little bit about the perceived risks and safeguards that AI might provide to people who are using these types of FinTech? <v ->Yeah, one of the risks is privacy</v> as Bob mentioned right?

The more data that’s out there and being used to make a decision about you, and there’s a concern that richer people will be able to afford privacy, right, and people who are less well off will be forced to give up more data in order to have access to some of the services. From a regulatory point of view, right, people get concerned that you don’t necessarily understand how the math works, the so-called black box problem. So if we delegate all of our decision-making to the machines, but don’t really understand how the machine is coming to a decision how do we control for things like discrimination, like price, right, other important social objectives that we have.

<v ->Kind of interesting</v> ‘cause I just reading a book by Noah Yuval Harari, I think it was called “21 Lessons for the 21st Century”. And he devotes a fair amount of time in there talking about AI. And I think one of the points that he makes that I think is really relevant for a lot of us who have fears about AI is that there’s a huge difference between artificial intelligence and artificial consciousness.

And I think what people are afraid of when they think about AI a lot of the times is the sort of matrix type world where the machines have taken over and have decided that we’re all irrelevant for whatever reason, but for that to happen you would have to have a developing of consciousness. And it’s not clear that there’s any reason that there would ever be a developing of consciousness in AI. It’s just ability to do pattern recognition way better than we possibly can do as human beings and make decisions without those sort of emotional biases that Adrienne was talking about. The thing that I worry the most about when it comes to artificial intelligence is mostly irrelevance.

That basically you have a bunch of people who sort of are in charge of the AI and it’s a fairly small part of the population. And the rest of us just don’t really have anything to do because our jobs are able to be taken care of by AI. And I know that that goes quite a bit beyond FinTech per se but since I work in the finance area I guess that’s where I would worry about it myself.

<v ->When AI specifically touched on</v> within the baking industry do we expect the jobs to now be increasingly run by AI and how will it impact other different industries so that makes a lot of sense. <v ->If I can just add to that I think they actually,</v> the answer is in a lot of cases yes. I mean, there’s just a lot of stuff that people are doing that can be automated in some way and a machine can potentially do it better than a human can.

I shouldn’t say this since I’m in the job of educating young financial professionals. So, but I would worry about I don’t think it’s gonna happen in the very near term but that at some point jobs in banking and investment banking and things like that might become somewhat irrelevant relative to what we see today. <v ->I mean Bob smartly points out</v> the spectrum of cognitive technologies, right, from machine learnings, from pattern recognition with human in the loop feedback all the way up to like what’s a human, right. And there’s a long way to go (chuckles) before we get to the what’s a human.

And so it’s really about managing that spectrum in the meantime, for all the social objectives that we have including jobs, right, discrimination, all of those things. But managed well I think the efficiencies that can come from machine learning, from predictive analytics can be very powerful in the financial sector. <v ->It sort appears that FinTech is going to impact</v> different types of people differently. And that’s something that seems to have come up frequently throughout the cryptocurrency teach out which was that different populations are being impacted by these types of technologies. So one of the things that was brought up was developing countries. Another was talking about vulnerable populations in more substantiated countries.

Do you have any thoughts on why FinTech affects people differently and how you might see that happening in the future? <v ->Yeah, I mean I think it’s not unlike any technology right,</v> throughout the course of history, is that the benefits come unequally to populations. Take, let’s put aside for a second sort of developed and emerging markets and how technology impacts those, but if you take the United States for instance, right, we still have a pretty significant digital divide, right? So some of us are able to bank every day and choose between our phone, our laptop, right, while other people don’t have steady internet access, right, and are still then forced to use a physical location right?

There are issues around trust which I know we’ll talk about a little bit later. So the benefits of technology are typically sort of unevenly applied as are the risks. It’s not a reason not to make technological advancements but it is a good reason to be very aware of the unevenness of how the benefits and risks apply to populations. And I think it’s incumbent upon both industry and policy makers to manage that imbalance. You know, I put aside emerging markets because we do see in emerging markets where they don’t have legacy infrastructure.

They’re often able to leap frog and make more significant advancements in a lot of ways than countries like the U.S or the UK, right, where we have a really robust financial infrastructure. So you see countries in Africa who have moved to mobile payments and made great strides and inclusion because they didn’t have the change management issues that we have in say the U.S. <v ->I think Adrienne actually touched on exactly the points</v> that I was going to touch on. I mean, I think the biggest source of inequality in terms of access to FinTech in developed markets is the lack of broadband infrastructure.

You know, one of the reasons that I’m very hopeful that some sort of an infrastructure bill actually gets passed is to provide, think of it like rural electrification back in the great depression or something like that. It’s just a huge sort of access issue. And I feel like most of the stuff that I see that talks about FinTech being discriminatory tends to actually be a problem of access to broadband technology as opposed to an inherent problem with the FinTech itself. And I was actually also gonna make the exact same point and so hopefully I’m not just being redundant here as Adrienne about developing markets.

You know, when I traveled to China, I am just amazed at how far ahead of us they are as far as payments are concerned. And of course they’ve instituted a digital currency as well which of course, that raises a whole bunch of other issues which I guess is too much to get into right now, in terms of how much you want the government knowing about what you’re doing with your currency sort of in some senses.

But in any case, it’s exactly, as she said since they didn’t have the legacy system in place and the incumbents that are trying to protect their turf and things like that, they’ve been able to make much faster progress than we have in the United States where you still have people trying to keep things going the way they used to be done in some ways. <v ->It’s so fascinating</v> to hear about how it’s all playing out. Several learners anticipated that an issue to implementing new financial technologies would be a lack of trust or uncertainty in those technologies. What are your thoughts on that?

<v ->So I’ve actually spent a lot of time researching</v> and thinking about this issue of trust. And it’s interesting because if you think about trust in banks pre-financial crisis was decently high if you look at Edelman Trust surveys and Gallup polls and the like, and of course then it fell precipitously as a result of the financial crisis. It started to tick back up, right, but it sort of plateaued, it’s still a far lower level than it was before. At about the same time, as a financial crisis, you had tech ranking very high on a lot of these trust barometers, right?

But of course as we’ve seen more scandals come out of Facebook, right, and the big tech giants have really encountered the problems that come with being very large institutions and big public companies, trust in tech which was very high in the aftermath of the financial crisis has now come down considerably. And so you have the sort of this clash of two relatively low trust spaces coming together.

You know, so it’s an interesting question I think it’s evolving pretty constantly, but you know back to our discussion about the inequities that may result in FinTech or the lack of broadband, I think you see people who are well off financially right, early adopters tend to have higher trust versus people who are traditionally excluded from lots of advancements, right, tend to have lower trust and they just widens the chasm even more. So it’s really important, I think from a regulatory perspective and from an industry perspective to really make sure that the trust is there whether we’re talking about privacy, cyber security, right, all of those important issues.

<v ->I would agree, I mean, I think</v> one of the impacts as Adrienne mentioned of the financial crisis was just a massive level of distrust in banks. And in some ways I almost feel like some of these FinTechs have an advantage just because they’re not perceived as part of the traditional financial system. And therefore not as sort of linked to the Wall Street interests that people sort of blame for the problems that we had a decade or so ago.

And since a lot of the FinTechs are sort of more in the startup space as opposed to necessarily being part of the big evil tech corporation, sort of oligopoly, there is the potential for them to have a little bit more… You have some distrust ‘cause they’re new but then you also don’t have necessarily the sort of, well I was going to say patina, but whatever the opposite of a patina is that you have because of those big tech companies in some ways.

But

in some ways it’s like any new technology, that people are going to adopt it or they’re not. I mean, there was someone writing a check in the grocery store in front of me just a couple of days ago. And I was sort of like, “Wow, people are still doing that, huh.” I mean, but it happens. And so there’ll probably be some people who are never going to trust it for whatever reason. And I agree that there is a sort of relation too to the level of inclusion that Adrienne talked about where people with wealth tend to be the people who are more willing to take those bets because they have less to lose quite frankly.

<v ->I think its a few of the things that you both mentioned</v> may lead into one of these next questions, which was, why is this discussion happening now as opposed to any other time, why are these the stories that we’re listening to in the news? <v ->Let me just touch on Bitcoin</v> and crypto for a second as an example of that. Basically Bitcoin emerged about the same time as the financial crisis. And one of the big narratives during the financial crisis was that of the Fed “Printing money”.

Now there’s a lot of different definitions of printing money and so it’s a little bit hard to say what exactly was going on, but there was this huge fear that the currency was gonna be debased, that we were gonna see some sort of a return to either inflation or we’d wind up in a deflationary kind of a world. And one of the things that Bitcoin kind of does in addition to sort of providing an anonymous platform for transactions is by acting as kind digital gold that essentially controls the supply of the currency.

Now I’d argue that we already have a technology gold that does that reasonably well, and so I’m not sure why we need Bitcoin except for the anonymous part of that which then starts to get into, well, what are people doing that they feel the need to be so anonymous about it but maybe that’s just because I’m a cog in the machine instead of being one of the people who really understand what’s going on. And I can’t remember if it’s the red pill or the blue pill that you’re supposed to take in the matrix to figure out what’s going on.

But in any case, I mean, I think a lot of it has come out of the financial crisis and distrust in the standard financial system, and that coupled with the tech boom that we’ve seen as well and just so much innovation in that space. And then tech entrepreneurs realizing that finance is this kind of old hidebound system that’s ripe for being revolutionized in ways that Amazon has done to the retail space, I think just makes it a perfect time for all of these things to come up.

<v ->Yeah, I will echo everything Bob said.</v> I mean, it’s really extraordinary if you think about the arc of history that you had, from basically 2006 to 2009, the first iPhone, Amazon Prime, right, Facebook, the financial crisis in a very very short period of time, right, three or four years, essentially you’re talking about, and then fast forward, less than a decade or about a decade right, and we’re having these massive realizations shamefully right, about inequality, about social injustices. So if you think about just what’s happened in the last decade from a technological point of view, from a trust point of view, from an economic point of view, it’s a lot happening in a small space.

And that’s why I think we’re having a lot of these conversations now as opposed to other points in history, right. But they’re all what does mark Twain say, “History doesn’t repeat itself it rhymes,” right? This is a phenomenon we have seen before just with a few different fact patterns thrown in, right. <v ->I just wanted to bring up one other thing</v> that does kind of hit my head just to maybe give any listener who’s out there sort of a sense of like the sort of resistance to change in the financial industry.

It wasn’t that long ago, I mean, probably 20 ish years ago that the exchanges finally were willing to quote stocks in pennies as opposed to quoting them in 16ths or I can’t remember what the finest denomination was as far as that goes. and then fixed income, at least in government markets, treasury markets, they’re still quoting in base two increments basically. So it’s like if a bond would cost $100 in one 256th of a dollar, it used to just be an eighth and then they realized that wasn’t fine enough so they went to a 16th then a 32nd.

It’s just ridiculous in my mind, when we have technology that allows us to sort of divide things infinitely as much as we kind of want to that we should put these artificial hurdles in place. And so, I only bring it up just to sort of say that the mindset in a lot of the financial industry has been about what we call protecting rents basically just kind of making sure that they get to hold onto their piece of the pie. And people are recognizing now that there’s a lot of room for efficiency to sort of cloth some of that back.

<v ->One of the final questions</v> that a lot of people came up with was what should they be doing right now knowing that this conversation is increasingly complex, what can they be doing to keep up with FinTech to prepare for their financial future?

<v ->Yeah, well, I’ll say</v> part of the reason why this conversation is so important is because there’s nothing that happens in the economy that doesn’t have financial services in the background somewhere, right? We tend to think of financial services as an industry vertical in and of itself and it is, but there’s no other part of the economy that runs without a bank, an insurance company right, payments, capital markets making it go. So it’s important for people to understand what’s happening in FinTech ‘cause ultimately that’s gonna impact whatever other industry they’re in or they care about. There’s lots of ways to keep up with it like any subject matter, right? There are endless podcasts and newsletters and all of that.

But I think for just the regular consumer who’s thinking about their own financial situation and financial health, just being aware that there are new tools out there that can help you manage your student loans or think about your investments as Bob was saying or think about access to capital, and approaching those with a critical, but open mind, I think is gonna be important for your personal financial success going forward. <v ->I mean, quite frankly,</v> I personally am overwhelmed trying to keep up with kind of what’s going on in this space. And I am chronically behind as far as that’s concerned.

And probably don’t personally in my own sort of financial management picture take as much advantage of the technology is out there. I mean, that being said, there are some sorts of things that are relatively infrequent decisions, I mean, I don’t ask for a loan every single day that usually only happens every so often. And so when you do, it makes sense to try to get educated as to what the options are that are out there. So when you’re making in particular big financial decisions, I mean I think that’s a time to really do some research to try to understand what your alternatives are. <v ->Thank you both so much.</v> That was a constant theme throughout the course.

And our learner questions was keeping up with all the content doesn’t seem like something that anyone can really be doing, but by staying relatively well informed specifically about your own interests, yeah, it’s the best way for them.

Thank you both so much. Would there be any final thoughts that you’d like to end on?

<v ->No, I would just say, yeah, thank you Jessi</v> for putting this together. And Bob, as always for a great discussion and I would just encourage people to continue learning about the space, as I said, with a critical and open mind. <v ->Thanks, thanks, Jessi and Adrienne.</v> It’s great to talk to you both again. I guess the only thing that I would add is don’t be too afraid, jump in. It’s not gonna… People get afraid of finance in general and then technology layered on top of it people can get kind of afraid but most of the time it’s not gonna bite.

And I would say just explore what’s out there and realize that a lot of it is just making life easier quite frankly. <v ->That’s an excellent note to end on.</v> So thank you both again and thank you to our learners for submitting your questions.