On Friday, March 8, I attended the 2019 MIT Fintech Conference at the Aloft Boston Seaport Hotel in downtown Boston. This was the fifth annual conference planned and hosted entirely by a team of graduate students, primarily from the MIT Sloan School of Management and Harvard Business School. I was impressed by the quality and professionalism of the event, which exceeded some professional events I have attended. Most of all, I was impressed by the energy and enthusiasm of the students for the fintech space; one of the bank panelists during the event lamented that banking had become perceived as “boring” by students over the years, hindering recruitment. I think that is changing; the conference sold out well in advance, and had about an equal mix of students and professionals. If incumbent financial institutions can find a home for these students, they will be well positioned for the future.
I was particularly impressed by the pitch from AlmaPact, which won the competition; the company is rethinking student lending by engaging university endowments, pension funds and high net worth investors to provide individual loans to students with unusual terms: instead of paying a fixed rate, the graduate commits to pay a percentage of their annual pre-tax income. As this grows, the payments increase, but always remain affordable. Initially, the company is focused on students at prestigious schools pursuing careers with strong earning potential, making it safer for investors to participate, but anticipate expanding access as they grow.
Having just reviewed my colleague Brian Riley’s excellent examination of asset-backed securities in the credit card sector, I immediately thought that AlmaPact could eventually securitize these loans, dramatically increasing the size of the program and allowing even more students to participate. I am not a lending specialist, but it certainly seems to me that this idea could be highly disruptive to the student lending industry, which is currently facing a crisis of defaults stemming from the extreme indebtedness of college and university graduates, who often face a crippling loan burden if they do not luck into a high-paying job. Small-government conservatives should be particularly interested in this strategy, which is a market-based approach to dealing with the problem that requires no government subsidies or interest rate caps. Banks with a student lending portfolio should follow this company and see how they do.
Another key takeaway, although it should not be that surprising at this point, is how thoroughly incumbent financial institutions and processors have incorporated the fintech sector into their long-term strategies. Despite being labeled “Incumbent Financial Institutions Fight Bank,” the session featuring senior executives from Goldman Sachs, J.P. Morgan, and Barclays started out with all three stating (a) that they saw fintechs as partners, not competitors; and (b) that they were all working with fintechs, either through accelerators that they had established themselves, or on a product line basis. Tanya Baker, the Global Head of GS Accelerate, represents a bank-owned accelerator, and Dan Packham was there as the Head of Innovation Corporate for Barclays. When I worked for FIS, I was part of the accelerator the company started with The Venture Center in Little Rock, Arkansas, which also supports an accelerator program with the Independent Community Bankers Association (ICBA). Also attending the conference was Ashley Nagle Eknaian, the head of Eastern Labs at Eastern Bank, who moderated a panel titled “New Models of Fintech Evolution,” featuring more innovation leads from Fidelity Investments and Vanguard, along with MassChallenge FinTech.
While there were obviously differences in details between the incumbents, such as whether to sponsor an accelerator, partner with fintechs, or actually host internal innovation labs, a key shared concern was how to bring innovation into the company and overcome inertia or outright hostility. The challenge is that, if you try to have an internal innovation group, as Fidelity Investments or Eastern Bank have, you run the risk of having line employees view the group as a kind of “ivory tower,” without the burden of meeting quarterly targets or running a profit. On the other hand, if you leave it up to the business lines, they will tend to focus on improving existing products rather than inventing new ones, since their incentives are tied to the profitability and sales of the existing products. One way of dealing with this is to have a rotation program, where product managers and executives from the business lines are assigned temporarily to the innovation group to work on specific projects that they can then build support for upon their return. A less formal mechanism is to involve line of business personnel in innovation projects, either through weekend “hackathons” or part-time ongoing participation. Another idea offered by one of the panelist was to practice internal “pitch sessions,” where you pitch ideas to the business lines just as you would to a prospective customer or venture capitalist. Dan Packham of Barclays pointed out that there is innovation going on within the business lines, too: in fact, one of his jobs is too connect and coordinate multiple groups in different silos working on the same problem. Along these lines, one of the panelists said that one of the things they want to encourage is everybody being innovative for the firm, not just one area.
One of the keynotes featured Lou Maiuri, the COO of State Street Bank, who claimed State Street is the biggest contributor of code to Hyperledger. Maybe that is just among banks, but still impressive. In addition, State Street is developing global inflation index, which I think could definitely be monetized through an Open API (or just used to add value for clients). In some ways, this incumbent is doing more actual innovation than many fintechs.
In conclusion, the thing I was most surprised by while attending the conference is how the lines have blurred, between incumbent and challenger, between large organizations and startups. Collaboration was everywhere, between groups within large organizations, and between traditional financial institutions and startups. This seems to me a most promising harbinger for the future; rather than wasting time and resources fighting each other, all participants are working together to fulfill the promise of financial services. As one participant observed, if you want to change the world, financial services are one of the best ways to do that at scale.