America’s Financial Health Crisis
The day started with a presentation by Lending Club’s CEO, Sam Sanborn. There is a financial health crisis in this country he said, and the patient is the U.S. Consumer.
Today, 57% of Americans, or 138 million people, are considered financially unhealthy, meaning they do not have access to the savings or insurance products others use to manage their financial lives. As incomes have remained stagnant these past two decades, he says, costs for new homes have risen approximately 31%, costs for college by 69%, and costs for healthcare premiums by more than 100%. Perhaps unsurprisingly, the American savings rate has plummeted.
“They do not have the cushion they need to absorb financial shocks,” he says.
When that’s the case, American’s have increasingly turned to debt to make ends meet: student loan, credit card, and auto loan debt have all grown significantly in recent years, Sanborn says. And 45% of Americans with debt are spending half their incomes to service this debt.
In addition to the financial strain higher loads of debt can cause to a household, debt also carries an emotional cost. 175 million Americans report dissatisfaction with their present financial condition, Sanborn says. 43% of Americans report that financial issues cause significant stress, he says, and cites a report which found that delinquency on a single account leads to a 5% increase in mortality risk — on the flip side, a 100 point increase in FICO scores leads to a 5% decrease in mortality risk.
“Bad credit is literally killing us,” Sanborn says.
Said a different way, it’s lowering our life expectancy. And though Macabre, it’s not as if Americans’ retirement savings are built for the long-term.
A recent World Economic Forum study found that there is a $37 trillion retirement savings shortfall, and that number is growing alarmingly fast. By 2050, per the study, that figure is projected to reach $137 trillion — a rate of more than $3 trillion per year, or roughly five times the annual U.S. defense budget.
While financial institutions can’t solve for stagnant incomes, they do affect the cost of debt, access to credit, and overall financial behaviors. They can help increase savings rates and long-term investment contributions. And more significantly, financial institutions can promote financial inclusion, innovate around the current regulatory environment, and find a way to better align the financial success of the organization to the financial success of its customers — a strategy in which credit unions are already well versed.
“These barriers are not that hard to fix,” Sanborn says. “We got this. But we better get to working. We have a big crisis looming.”
Who Will Invent The Shipping Container?
“There is a ton of noise in the blockchain space,” says Ripple co-founder Chris Larsen. “People think it can cure every ill. And 98% of it is utter nonsense.”
One thing that, to him, that is not nonsense is the development of an Internet of Value — which will allow for the quick and efficient movement of money, goods, and data. That’s the future, and it may be the most significant application of blockchain technology.
As it relates to money, we are still living in a pre-internet world, Larsen says. Sending money from country to country is the equivalent of sending a letter — once it’s been sent, it travels and travels and travels before it hopefully arrives to its intended recipient.
The White Whale, then, is developing the interoperability of money across the globe.
To do that will require an interledger protocol (a protocol for payments across payments systems).
“That will be the next shipping container,” Larsen says.
“The shipping container changed global commerce,” he says. When it was first adopted in the 1950s, goods became interoperable to any port anywhere in the world. Shipping goods became standardized.
The container itself is a basic, simple technology that could be easily adopted across the world. And that’s why it was. Shipping companies popped up around the container and, according to Larsen, foreign trade increased 700% in the first years after its adoption.
He draws a straight line to today, where enabling the quick and efficient global transfer of money is missing its shipping container. But when that happens, and Larsen believes it will happen soon, huge global economic growth will follow.
“Just like the shipping container, just like the internet, interledger protocols will add new customers to new markets and create huge economic growth,” he says. “It will make financial technology so much easier. And that will be great for everyone.”
The Changing Definition Of Financial Institution
10 years ago Wells Fargo, CitiBank, and Bank of America combined for 27% deposit market share among all financial institutions. Fast forward to today, and the three largest banks combine for 32% market share.
But today, the definition of a bank (or credit union) is changing.
“Most consumers have thought of a bank and a bank account as a vault for their money. You put money in when you want, take money out when you want,” says Zach Perret, co-founder and CEO of Plaid, which provides API solutions. “That definition is changing.”
Now, he says, the back account has become a hub of activity. According to data he’s collected internally, he finds that consumers typically connect 15-20 third party accounts to the traditional bank account. That creates a more entrenched consumer (imagine changing bank account information across 20 additional products) and underscores the need for easier and simpler third-party integration.
In fact, that integration will play a large role at the bank or credit union of the future.
The consumer relationship with their bank is changing, says Abhinav Anand, managing director of Goldman Sachs’ Marcus. Financial institutions, he says, no longer need to build everything from scratch. The rise of fintech allows these institutions to add better services and products to support customers and members more effectively.
And while that sounds great in theory, legacy core systems will need to evolve in lockstep. It becomes incumbent on cores, like Jack Henry, to democratize access to data, promote openness, and altogether support “fintegration,” says Mark Forbis, vice president and CTO of Jack Henry & Associates.
“We are not going to build the best mousetrap anymore,” he says. “Someone is going to build something better and we want to be able to integrate that into our system. That’s how financial institutions are changing.”
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