Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy
From MIT Golub Center for Finance and Policy
As the keynote speaker at a recent conference of the International Consortium on Government Financial Management held in Washington DC, I had the opportunity to discuss with representatives from over 40 countries one of the primary challenges facing governments around the world – citizen engagement.
My remarks emphasized that recent populist movements should be a wake up call to everyone involved in government – including those in the budgeting and finance communities – on the need to turn citizen cynicism into engagement and buy-in.
The growing availability of technology and data should be enabling a highly informed citizenry (i.e., voters) armed with actionable information. Moving beyond tired factory-like mindsets where government financial staff spend their days grinding out reports, preparing audit remediation plans and manually executing budgets, a modern approach enables technology to drive iterative, customer-focused engagement and creates and marshals electronic resources.
A high-stakes competition is underway between traditional financial services institutions and disruptive FinTech startups.
The Economist reports that more than $25 billion has been invested in financial technology — FinTech — in the last five years, with 4,000 firms challenging banks in just about every product line. As financial services comprise about $1.2 trillion of U.S. GDP, increased levels of investment are likely.
Big banks have the advantage in this fight — at the moment. These institutions have well-earned reputations for safety and security. They benefit from strong, multi-generational customer relationships, have considerable brand equity, and offer myriad financial products and services.
Except well-funded, agile FinTech startups including SoFi, Billguard, Square, Wealthfront, Venmo and Neighborly are innovating and nibbling away at banks’ market share. They’re doing this by offering custom solutions for everything from student-loan refinancing and payment processing to lending and facilitating neighborhood investment.
Not surprisingly, at least some people at the Securities and Exchange Commission have reacted negatively — this is stepping onto their turf, after all. And the lobbyists are, naturally, out in full force.
But with sufficient White House willpower, the administration can see this through. What is needed is a change in the rules set by the Department of Labor, which has jurisdiction over retirement-related issues.
No doubt industry defenders will claim that current practices benefit small investors — a point disputed directly by the CEA. The broader and more interesting question is: Where are the statesmen in the financial industry? Where are the leaders who push for a race to the top, by better serving their clients’ best interests?
The British vote to leave the European Union has shaken world financial markets. The immediate and medium-term prospects for economic growth in the United Kingdom are severely diminished, and the impact on the rest of Europe will be negative.
Some of the obvious political winners from Brexit are people who do not like Western Europe and what it stands for. Ironically, the United States — Europe’s greatest ally and the EU’s largest trading partner — may also end up as a beneficiary, though not if Donald Trump, the presumptive Republican nominee, wins the presidential election in November.
Britain has a population of just over 65 million people and what was, at least until Thursday, the world’s fifth-largest national economy, with annual GDP totaling nearly $3 trillion. In the context of a $75 trillion global economy, Britain’s is a relatively small, open one that relies heavily on foreign trade — annual exports are typically in the range of 28%-30% of economic activity.
After nearly a decade of crisis, bailout and reform in the United States and the European Union, the financial system — both in those countries and globally — is remarkably similar to the one we had in 2006. Many financial reforms have been attempted since 2010, but the overall effects have been limited. Some big banks have struggled, but others have risen to take their place. Both before the 2008 global financial crisis and today, just over a dozen big banks dominate the world’s financial landscape. And yet the ground is shifting beneath the financial sector, and big banks could soon become a thing of the past.
Few officials privately express satisfaction with the progress of financial reform. In public, most of them are more polite, but the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, struck a chord recently when he called for a reevaluation of how much progress has been made on addressing the problem of financial institutions that are “too big to fail” (TBTF).