Former Citigroup CEO Vikram Pandit on Wall Street, Capitalism

Eric, it's nice to be with you. I think that's a good question. I think we in the financial system have benefited from that experience. A lot of people came together, we developed stress tests, and we developed a very resilient approach to managing banking. And you're seeing some of the impact of that come through now. Obviously, it's still early days, we're not through it. Having said that, the crisis allowed the banking system to put together tools, measurements, and other methods to handle what might be thrown at it. And you're seeing that today. If anything, there's been more consolidation. Yes, you've had certain other types of institutions arise. I mean, if you looked at the top 10 financial institutions in 2010, they were all banks. And if you look at the top 10 financial institutions today, half of them are banks, the other half are payment companies, they are super apps. So there's been some shift that way. Payments have become unbundled. There are some fintechs that are offering to serve the underserved and also reduce cost of finance. But by and large, we are still in the 20th century when it comes to the architecture of finance and banking.

Well, there are opportunities lost for sure. There is a vulnerability if the rest of the world moves ahead vis-a-vis the U.S. and we count a lot on the dollar being the standard and, for that matter, a reserve currency. But the most important aspect of this is that every other industry has moved ahead with digitally native models, and here we are trying to modernize a paper-based physical banking system.

Well, I think one of the things that we've seen here, unfortunately in this pandemic, is our second stress test in the first two decades of the 21st century. And it's actually created this sense of reality, not only with bankers and banking but also with every other business: what does it take? We focus so hard on efficiency. How do we think about resilience? And if there is that lesson, I think it's an important lesson for all businesses, including banking. And there are aspects of that that banks are thinking about. And resilience to some extent does somehow use digitization as a concept. It's about data structures, having enough information, having analytics, artificial intelligence, everything talking about what's happening with customers, where things are going. It's about connectivity, making sure your customers are connected correctly. It's about making sure you think about your engineering correctly. It's clouds, etc., that kind of stuff. And we have demonstrated, by the way, that people can work from home and that you can think about using gig economy workers. So a lot of that is going into thinking by a lot of the financial institutions. In some ways, they move fast and they're thinking about how these can become endemic to the business model they're going forward with. I think though, again coming back to the theme I started with, we're doing all of that still within a 20th century architecture of finance, which is essentially modernizing a physical banking based model. And the big thing though, I think that's changing, and so much more so with the regulators, central bankers, they're thinking about: are there other digitally native ways of running banking and doing banking? And that, I think, is really terrific for where we might go going forward.

Look, I think all of these decisions are based on context, as you know. But the fact is that when I was on a trading floor, and that's why you have pits sometimes on trading floors as well. So, you know, I think it really comes down to the nature of the business and the nature of the task at hand. And you have to work your way through understanding that. I think there's a broader question. The broader question is, you and I have known each other for a while, and you know, I kind of feel that I sort of know you. And one of the benefits of proximity is you get to know people, you build cultures, you build sort of a way of thinking. And it's on the basis of that that you can work from home or you can work remotely. So these are very complicated issues that have all to be put together. But the reality is, a lot of the tasks that you needed to do at the office can be done from home. People do like to congregate in many ways, but we're going to have to just watch this and see how it evolves.

I think the digital future of finance encompasses what I call digitally native approaches to finance. And on one extreme, you have decentralized finance, where forget about trading floors, you're doing and trading things and conducting transactions with very few intermediaries involved. And on the other hand, I think you have technologically adept... And one of the things that has become apparent to us is, yes, there are different approaches and models out there. And maybe you can have a decentralized floor. It's nice to see Zoom windows, it's nice to see Microsoft Teams windows. And I can see how companies and traders and desks are trying to say, can we experiment with that? Where does that take us? It's going to be part of people's thinking. I think it's too early to jump to conclusions whether we're going to return to where we were before or some other extreme. It's going to be a combination that evolves.

I think there's some truth to the fact that that's the way that banking has grown up. And look, I think bankers have done awfully well working from home. Look at the transactions, look at the M&A deals, look at the IPOs. A lot has happened. But that's happened on a base, and the basis happened on knowing each other, knowing what the culture is that you relied on, how to do work. And so the balance that is going to have to be struck is one of how do you do that at the same time ensuring the flexibility. Flexibility is good. And look, I wouldn't underestimate the impact of technology and the fact that I'm seeing you almost like I would see you in a studio. I would not underestimate the impact of that in how it shapes how we work. But again, I think we need to be cognizant it's not going to be one or the other. It's opened up possibilities for finding the right balance, and that's going to be context specific. There are certain corners of the economy that have embraced the idea that it can be the other. If you like, Silicon Valley, a number of companies in Silicon Valley have said work from home is here to stay. You never have to come back to the office. You can be wherever you like so long as you do your work.

A lot of the Silicon Valley companies are digitally native in terms of their business models. And being a digitally native business model, it's about making sure that those processes work. So the answers literally come down to the business models that companies have and what it takes to implement and run that business model well. Some of that training then transfers into something that can become more efficient online.

Well, others are going to have to answer that very precisely, as I said, based on context. Whether it's digitization, whether it's co-location, I mean all of those kind of things. Look, I think there is certain resilience to cities. There is a certain benefit of getting together. We've spent a lot of time talking about culture and training and other aspects that are required. Could they be done in other ways? Possibly. And could that affect the footprint that banks have? Of course. But I think the bigger thing about banking is about how fast can finance move from modernizing a physical banking system to moving to a digitally native system. And if it can move to a digitally native system, that will be the determinant over time of what banking looks like and what people need physically.

Well, I think you've got to take a global perspective on this. And there are parts of the world where it isn't. And you know, if you go to places like India or China or Kenya, Kenya is a wonderful case study of having cell phone money with M-Pesa. All of us, yeah, even I have this app now where you take a check and take a picture and send it and the money gets deposited in a bank. But it raises the obvious question: why did you have checks? Why did I have to take pictures? Yes, you digitize what is a physical aspect of banking, but isn't there a different way? And we don't need to reinvent it. We just need to walk around the world and watch what is happening. And frankly, there are better ways of doing that now. Through this, may we learn that there is a different approach and a different architecture. Maybe the question of branches is really important. It's really about connection with the customer. And younger and younger people who are sending it in, in one we're saying actually you can have digital coins, a digital currency that's issued by the state, fiat currency. And I don't mean cryptocurrencies, I'm talking about physical currencies. And my god, doesn't that really change the paradigm of banking? I mean, those are the kind of questions that governments around the world and regulators are asking. It's high time for us to get at the forefront of that debate.

Well, I don't think this is about blame assignment. I mean, we come off of a very successful American 20th century where a lot of things worked. But one thing that's very clear, they didn't work for everybody. Banking didn't work for everybody. Inclusion was not the driving theme. Certain central banks have inclusion in their mandate as an example. Lower, low-cost finance wasn't the driving theme. So this isn't about assigning blame. It's a natural result of something that's worked so well. I mean, look at Europe, it was the dominant continent in the 19th century, and it took a while for them to get into the 20th century. Here we are as America, we've got to deal with something similar here. Which is, look beyond that. What does it take? Let me, I think it's absolutely clear: innovation can only move as fast as regulators allow it to move. And so amongst those three constituencies, I think it's important for us to look at the world, look at the possibilities, and say, look, we just don't want to be left behind. And more importantly, can't we use this as an opportunity to redesign our system and be great? I think it's a great opportunity for regulators and central bankers, the Fed in the U.S. and others, to step up and say, there is an inevitability to this. Somehow, how do we think about taking control of that, designing it, transitioning it, and maybe even making it the model that the rest of the world follows?

There's a lot to admire about the U.S. as we know, as well, and many people admire that around the world. And I think I want to be very clear, it's not only about China. There are lots of countries dealing with these issues and moving forward, whether it's Sweden, even Canada to some extent. And so there are multiple models that are out there. The point is, they are embracing the idea of going from a physical asset, physical banking system to a much more digitally native system. And they are embracing that. They are putting in place systems such as the WePay, WeChat, Alipay system or central bank digital currency system, and they're running those parallelly, knowing that the architecture of the future is going to have some aspects of that in reality. And let's get ahead of it. Let's understand how to think about transitions from here to there. Let's think about how that would work. Let's think about how that would drive innovation. So it's not so much one country. It's not so much that things aren't possible. The rest of the world, they are embracing those possibilities, and they can turn out to be very important ones for inclusion, for efficiency, for driving innovation, for safety. These are all the things that I think we can look at and learn from around the world.

We have a wonderful reserve currency that serves the world and serves us well. As you look forward, I would like to be the one setting the rules. I'd like to be the one setting the standards. I'd like to be the one that the rest of the world looks at and says, gee, that's really interesting, let's follow that lead. And I'd like to be the one that preserves the primary nature of the U.S. dollar as the global reserve currency. I really think it's an opportunity for leadership for the U.S. regulatory community and the Federal Reserve to step up and see how can we get to this digitally native future of the 21st century financial architecture.

The Brazil example is very interesting, it's an important one. And Eric, if you look around the world, there are many such examples that are out there as well. And you know, that's what happens. I mean, you know, you go from landlines to cell phones in certain countries, you miss the landline phase. So it is natural for innovation to skip a generation, skip a step. The wonderful thing about the U.S. is the last generation was great. And the question is, what can we do to spur ourselves to embrace the next generation? And how do we do that? I can tell you, this is not part of the popular narrative. You don't hear it on news shows. I don't hear about this often on Bloomberg, for that matter, or any of your competitors. It needs to become a priority and make sure it turns from 'gee, do I have to do this? Could work so well' into 'my god, what an opportunity to make it work even better, to make it work for all Americans, and to make it work in an inexpensive, very safe way and drive innovation.' That transition is something that comes not only from all the activities that are going on at the Fed and or the regulators, but it has to become part of the popular narrative. Look, we've got examples. Look at Silicon Valley, look at the companies that are trillion dollars worth today as an example. You know, they reimagined their business models, they went digitally native, and look at the impact they're having. That architecture can only be changed working hand in hand with the regulators and central bankers. This is not something you can innovate your way around. It doesn't work that way. It needs a public-private partnership to reimagine that future. A lot of it is happening. Look, I don't think we should be unfair to anybody, and we should applaud the regulators and the Fed all thinking about it. It just has to take on a level of priority if you want to beat that 2022 deadline, or if you want to make sure that the standards are not set by the rest of the world. It's a great opportunity for us as a country.

I think one thing I can say about all of them is they're very, very attuned to their business models, and they're always thinking about, hey, can this business model be better? And there's no question that having that kind of sentiment and that kind of framework leads to the right discussions. And so, yes, are some of their business models based on, yeah, you take a deposit and you lend it out, and therefore you have a bundled system by regulation? Yes. Do they know how to deal with an alternative business model where you have wallets on one hand and lending on the other? They're thinking about it. How do we get there? What's the transition? It's not going to happen overnight. There will be coexisting architectures for a period of time, and maybe those coexisting architectures remain for a period of time. That's the kind of discussion that the regulators are trying to have. It's a good discussion to involve every CEO.

For the world of finance, it used to be if IBM or GE needed a loan, you went to J.P. Morgan or Citi or somewhere, and that went into capital markets. You went into electronic trading. I mean, we went into creation of entities that could take on more risks. Disintermediation is not a new thing for Wall Street. And every time it's happened, yes, it's affected margins and it has affected profitability. Now, is there a shareholder investor concerned saying, hey, let's ride those profits as long as possible? Well, that's human nature, by all means. But the best institutions and the institutions that have survived are the ones that say, how do I make that transition in the right way? There's a lot of that in America, and there are a lot of companies and banks who want to think that way, and some do.

I think the notion of decentralized finance is very interesting. Think about how strong it could be if it were supported by a digital dollar. And think about how strong it could be if you actually had the rules and regulations that say, gee, you know that asset that underlies that token, you actually have a legal right to that, and that it'll stand up in court. So I think what's wonderful about decentralized finance is the innovation and creativity here and around the world has shown the art of the possible. It's too early. It's still at the fringes of the economy. In order to get it out of the fringes, it has to be scalable, and scalability is dependent on technology. There are still some technological issues. It's not about cryptocurrencies, it's about the online architecture that says you don't need a centralized system that's based on physical banking, which we just talked about, but you can have a very alternate, very different alternative system that can really change the online processes dramatically and drive those efficiencies towards the consumer. There is some truth to that. Those particular systems need to be part of this mainstream discussion on what does 21st century finance look like, what does the 21st century architecture look like. And a big part of that is going to have to get into analysis with the central banks. And by the way, the BIS in Basel is doing it already.

Well, if this currency is issued by the central bank and it's a coin, and it's encrypted, and it is in your wallet just like your dollar bill is, and it's backed by the Federal Reserve, well, that's trust. So that's a very straightforward, simple way. It's no different than owning a dollar bill. If I have a digital coin in my digital wallet rather than a physical dollar bill in my physical wallet, it should be the same thing. And it is, or at least it's part of the model for every... that's trusted right away. When you get to tokenization, that's a different question. And there in lies the concern about the rules and regulations and the laws that are required that say a couple of things: one, there is a finality to the fact that if you own it, you actually own what is below. And the second thing is that there is a link between the token and the asset that grants you legal right to the underlying asset. Those things need to happen with regulatory involvement, government involvement, which is why I keep coming back to saying, to move to the 21st century, this is a public-private partnership where you need to have not only the movement of digital currencies but a legal movement that understands those aspects.

If you do go to a digital currency and if you do go to digital wallets, somebody has to house them, somebody has to link them, somebody has to keep them safe. There's no reason it has to be a bank. It could be a technology company. Does that technology company, or will that technology company need to follow some regulations around that? Of course. They can't. But there is a role. In a way, I do think that we've had a lot of innovation so far, but as I said, it's within the architecture of the current system, and innovation's been limited by that. If you open up this concept of digitally native finance or central bank issued digital currencies, I can see another round of innovation. You can see all kinds of wonderful ways in which we can serve customers and small businesses, particularly large businesses. I mean, we found through this crisis that really getting to that customer with $30,000 in income or less, or getting to those small businesses, has been the Achilles' heel of our economy. I think you can get at a lot of those things if you unlock some of this innovation.

Well, I think that's a topic that everybody's talking about. And what is the role of the government? What is the role of the bank? And yes, in a crisis, you have no choice, you need to step up. The question is, how many times can you step up? And the point is that this is our second crisis, and we're only in the second decade of the 21st century. Is there a different architecture for the future? Do we always need that to happen? Is there an insurance plan of a different kind? Can you make these businesses more resilient? All of those are questions that I think we're going to have to deal with. But in the midst of what we're going through, we should be thankful.

Look, at the end of the day, real value comes from growing economies. You need earnings to grow, you need businesses to grow, you need people to consume. And by the way, having low interest rates somehow indicates there is not demand for investment capital. What is that saying about growth? So to me, yes, the Federal Reserve and the government had to do what they had to do. But the growth that I think can be unleashed by embracing the digital future we have in finance, part of it can be embraced.

I think we need to get to the other side of this pandemic, and that's really important. We don't know what is pent up, what's in the system, how have people's perspectives changed. There'll be a lot of ideas, no shortage. You'll have ideas, I'll have ideas. But let's get through this first.

I'm glad you said I'm not an economist, which I'm not for sure. And I'm not in the business of making predictions. But I think the key is to get out of this pandemic. And by the way, a lot of people have been trying to pace themselves with their spending, with their money, and with keeping businesses open to say, can we get to the other side? In some ways, we are still going to have to deal with that and see how that happens. And by the way, you can't answer that question without knowing what else can the government do to get us through this particular pandemic. What I can tell you is that the challenges are still ahead of us. I am pleased in seeing how many people are getting back to work, particularly workers that are $60,000 and above seem to be getting back to work sooner than anticipated. There are some positive signs that are out there.

I don't think we can say globalization is dead given the facts at hand, which is how interconnected the world is still. And it's even more interconnected when you get to the digital economy in many ways. Now, does the model of globalization need to be more sustainable? Yes, definitely. And sustainability means it's not about one side winning and the other side losing. But the promise of globalization was always about everybody doing better. And that actually makes all economies do better, people do better around the world. And I think we're seeing lots of conversations and some movements towards that.

So again, you brought up a wonderful debate. It is a debate. And there are others who say that, look, I think corporations have a role to play in that. Look, the fact of the matter is, it's a collective problem at this point. There's no business, no individual that can hide from the need for sustainability. And it's not about, gee, you just go make profits. But no, it's not about that. It's about how do we create the architecture where we all can come together and march in the same direction. And if you do have some model of that sort, yes, corporations are going to have a role to play, individuals are going to have a role to play, and there is going to be a role for regulation, and there's going to be a role for governments to help that along. It's going to have to happen at a country level. And the real challenge, if it does happen, is can we do it at a global level? So look, again, so much has been written on this, and there are so many people who have thought about this in quite depth. And the fact of the matter is, capitalism does a lot of things really well, and there are a lot of things that capitalism cannot handle. Capitalism cannot handle market failures. Capitalism cannot handle the issue of ESG necessarily. And so the right construct is a construct that includes both the right elements of capitalism with the right amount of regulation and market architecture to make sure that when the system works, it's truly working in the Adam Smith way, which is in favor of the communities, in favor of individuals. We've learned some very expensive lessons as to what the limits of capitalism can be. And finding that balance, isn't that the art of what we all have to do in everything? Find that balance to make sure that we can move towards that world we want.

Well, I am most excited about the fact that at our hand and at our behest, we have technologies we could only have dreamed about 20 years ago. The possibilities offered by the creativity in Silicon Valley and elsewhere are enormous. And the opportunity for us is to re-examine business models, and the opportunity for us to re-examine the world given those technologies. And we are at such early stages of that. And in finance, we are in very, very, very early days. We're nowhere close to the Amazon moment. And the wonderful thing about finance is that it's not a winner-take-all business. There are not too many Googles in finance. And so it's available for a lot of people to drive innovation. I'm really excited about the next stage of innovation in finance that can come out of all of these technologies.

Eric, thank you.