Chairman of The Orogen Group, The Orogen Group
The Year Ahead Revisited: Vikram Pandit Presents The Road To Resilience
Bloomberg TV Editor-at-Large Erik Schatzker sits down with former Citigroup CEO and current CEO and Chairman of The Orogen ...
About Vikram Pandit
Vikram Pandit, chairman and CEO of The Orogen Group, has spoken about the need for a fundamental shift in the architecture of finance, describing the current system as still rooted in the 20th century. He has expressed excitement about Web 3.0, calling it a "huge paradigm shift" that can allow the value of finance to accrue more to the end user than to middlemen. Pandit has also advocated for the U.S. to take a leadership role in developing a central bank digital currency, stating that he would like the U.S. to be "the one setting the rules" and preserving the dollar's status as the global reserve currency. Pandit has discussed the impact of the COVID-19 pandemic on business models, noting that companies need to improve operational resilience and that the crisis demonstrated the value of agile, digitally native approaches. He has said that the banking system has benefited from lessons learned during the 2008 financial crisis, including stress tests and more resilient management practices. However, he has also stated that the architecture of banking has not changed much and that half of the top financial institutions are now payment companies or "super apps." He has emphasized the importance of modernization, including focusing on the customer and rethinking back-office supply chains, and has said that technology adoption is an "existential issue" for financial services.
Transcript (62 segments)
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Eric Schatzker9:51
Good morning everyone. I'm Eric Schatzker, an editor at large with Bloomberg News. It's great to see you all. I'm delighted to be hosting The Year Ahead Revisited: Vikram Pandit Presents The Road to Resilience. Of course, we all know how COVID-19 wreaked havoc on the global economy and how companies had to adjust, in most cases overnight. The same thing happened on Wall Street, where until recently 95 percent of employees were working from home. How will the pandemic change the financial industry, and what of those changes will be permanent? Which ones won't? We're going to answer those questions and more in this conversation with Vikram Pandit. Now, before we get to the program, I have a few housekeeping notes. This is, of course, a virtual event. If you're experiencing problems either with the video or the audio, anything of a technical nature, the best thing to do first is to refresh your browser. If that doesn't work, go to the event chat box you'll find in the bottom right-hand corner of your screen, and our support team will assist you. This is an interactive event. I encourage you to engage with us. We certainly welcome it. Go to Twitter, use the hashtag #TheYearAhead. I also want to thank our sponsor, IBM, for making this virtual briefing possible today. Before we get started, I'd like to introduce Bridget van Kralingen, IBM Senior Vice President Global Markets, to say a few words.
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Bridget van Kralingen11:22
Hello everyone. With the coronavirus pandemic, it's increasingly clear that the recovery will be slow and progressive. The outlook is challenging as we move into a recessionary environment, prolonged low interest rates, rising loan defaults. The challenge is to lead our people with empathy while taking the bold steps we need to emerge smarter and stronger in the future. As I speak with leaders across industries around the world, one thing is clear: the transformation to digital is accelerating massively, in particular when it comes to financial institutions. The mantra to embrace is this: invest in preparation, anticipate failure, and provide for recovery. With that as context, what are the three major actions that business leaders should be taking right now? First, improve the client experience by engaging your customers in new ways. This means rethinking business processes and business models much more deeply around customers and citizens. The State Bank of India had already started to create fully digital products. Their customers were worried about the potential health risks of having to touch ATM keypads, so they enabled a touchless ability to withdraw cash using a mobile phone connection to the ATM. We've also seen the acceleration of intelligent contact centers. These helped organizations like NatWest Bank and Generali Insurance handle rapid growth in call volumes without increasing staff or impacting customer satisfaction. Second, ensure you have an open business and technical architecture that's adapted to your industry. Banks such as Bank of America know that their customers must trust them with their data. When we apply for a mortgage, we give details of our salaries, savings, and assets. Putting applications and data on the public cloud demands safeguards and controls. IBM is proud to deliver the first regulatory compliant public cloud for financial services, working with Bank of America, BNP Paribas, MUFG, and other global banks, independent software providers, and fintechs. We have a public cloud that is open, compliant, and secure, with security engineered into the cloud. Third and finally, as you build business resiliency and agility at scale, keep an entrepreneurial mindset. The economic environment is precisely why now is the time for bold moves: to build IT resiliency and business continuity, to focus on agility and efficiency with the cloud, to take on cybersecurity risk, reduce operational costs, and ensure supply chain continuity. But to do all these things at scale, above all, build an entrepreneurial mindset in your workforce to think and act with purpose and urgency. At IBM, we are confident that leaders who leverage this crisis can and will emerge smarter and stronger, even though it might not feel like that now. You can trust as well that IBM will be with our clients every step of the way, because that's what we stand for. Thank you.
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Eric Schatzker14:56
That was IBM's Bridget van Kralingen. It is time to get started with our program, everybody. For answers to some of the most pressing questions facing the global economy and the financial industry, I'd like to introduce Vikram Pandit. You'll recognize him as the former CEO of Citigroup. He's now the Chairman and CEO of The Orogen Group. Vikram, as CEO of Citigroup, you ran one of the largest and most global companies. You steered the bank through the 2008 financial crisis, and you saw firsthand how fragile the financial system was at the time. How would you describe the state of the financial system today?
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Vikram Pandit15:41
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 and measurements and other methods to handle what might be thrown at it, and you're seeing some of that today. I think the larger question to me, though, is that the architecture of the banking system really hasn't changed much. The banks look very much like what they were back in the day. 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. 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, and that's an important consideration as we traverse the 21st century.
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Eric Schatzker17:14
Why is that a problem?
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Vikram Pandit17:21
Well, I think you've got to go back and think about how we created a wonderful banking system in the US. The 20th century banking system goes back to the days of physical assets. You literally had to go somewhere to deposit currency and notes in a vault, and then you'd say, 'Okay, let me start lending.' That's how the bank started. Then we surrounded that with deposit insurance, surrounded that with identity, and surrounded that with a lot of rules. That architecture hasn't changed. So today, even as finance is trying to modernize itself, it is still modernizing within that particular architecture, and it's reinforced by the regulators. I mean, all you've got to see is what happened unfortunately with a really good plan, the PPP plan, very well intentioned, and money couldn't find its way to the right people in the right place in what is possibly technologically the most advanced country in the world. The banking system couldn't handle it.
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Eric Schatzker18:26
Would you say that this 20th century architecture in the financial system we know, at least in this country today, represents a vulnerability akin to that which the banking system faced heading into the 2008 crisis, or something different perhaps?
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Vikram Pandit18:46
Well, there are opportunities lost for sure. There is a vulnerability if the rest of the world moves ahead vis-a-vis the US 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. It does leave a lot of people not included. It creates expensive access to the system, and more importantly, there is a better way.
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Eric Schatzker19:28
Vikram, it is still too early to say when the pandemic will be over, but the future is little by little starting to take shape. I have to tell you, this is what dominates my conversations with CEOs: what is the future going to look like? Do you expect to see lasting change on Wall Street, and if so, what? Or will it simply return to business as usual?
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Vikram Pandit19:55
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. It's actually created a sense of reality, not only with bankers and banking but also with every other business: what does it take to run a business that can have business continuity? In many ways, it's guiding people towards thinking about their business models. Shouldn't those business models be more resilient? We focus so hard on efficiency. How do we think about resilience? If there is that lesson, I think it's an important lesson for all businesses, including banking. There are aspects of that that banks are thinking about. Resilience, to some extent, uses 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, clouds, that kind of stuff. We have demonstrated, by the way, that people can work from home, and that is an opportunity. Not only because they can work from home, but imagine how it opens up access to a talent base of seven and a half billion people. You can use them around the world. 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, 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. The big thing that's changing, and so much more so with the regulators and central bankers, is they're thinking about whether there are other digitally native ways of running banking and doing banking. There are plenty of examples around the world today of that kind of approach being implemented in bits and pieces, some large, some smaller. That particular conversation taking on a prominent position is really terrific for where we might go going forward.
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Eric Schatzker22:38
Work from home is the reality for so many people. You've heard CEOs say that 80, 85, 90, even 95 percent of their employees are working from home. JPMorgan and Goldman Sachs are among the financial firms trying to repopulate their buildings, and they've been criticized for ordering traders back to the office. Vikram, what do you think? Was that a mistake?
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Vikram Pandit23:08
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, that was a different time, a different system. Yes, I enjoyed the ability to transfer information instantaneously to somebody sitting next to you, and it didn't make sense at that point. That's why you have pits sometimes on trading floors as well. So 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 I kind of feel that I sort of know you. One of the benefits of proximity is you get to know people, you build cultures, you build a way of thinking. It's on the basis of that that you can work from home or work remotely. So these are very complicated issues that all have to be put together. But the reality is, a lot of the tasks that you needed to do at the office you can do from home. You can tap into a 7.5 billion person talent base, you can use gig economies. That is going to have an impact. I think human nature is such that people do like to congregate in many ways, but we're going to have to just watch this and see how it evolves.
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Eric Schatzker24:36
Does the digital future of finance include a decentralized trading floor?
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Vikram Pandit24:44
I think the digital future of finance encompasses what I call digitally native approaches to finance. On one extreme, you have decentralized finance where, forget about trading floors, you're doing trading and conducting transactions with very few intermediaries involved. On the other hand, I think you have technologically adept trading algorithms and other approaches. My sense on this is we're going to find an approach that encompasses both of those capabilities in place. I don't think this is about one or the other. There are going to be different models that coexist. One of the things that has become apparent to us is yes, there are different approaches and models out there. Maybe you can have a decentralized floor. It's nice to see Zoom windows, it's nice to see Microsoft Teams windows. I can see how companies and traders and desks are trying to 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 about whether we're going to return to where we were before or some other extreme. It's going to be a combination that evolves.
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Eric Schatzker26:01
Everyone on Wall Street wants to know whether work from home becomes a permanent fixture of the workplace, so to speak, the virtual workplace if you like. In a conversation I had not long ago with your successor at Citigroup, Mike Corbat, he told me banking is an apprenticeship culture that can't be recreated on Zoom or on Teams or on Webex or whatever platform you might happen to be using. How important in your mind is having people in the same physical location?
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Vikram Pandit26:39
I think there's some truth to the fact that that's the way banking has grown up. 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 base is knowing each other, knowing what the culture is that you relied on, how to do work. So the balance that is going to have to be struck is one of how do you do that at the same time ensuring flexibility. Flexibility is good. Mike, I don't know about you, Eric, but I've been working more productively from home than I was at the office. In some ways, the productivity gains are interesting, and we're just going to have to work our way through it. 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.
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Eric Schatzker27:53
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 have a broadband connection. You can interoperate, collaborate, discuss, hold conversations with other people in the company, people outside the company. The point is this, or I guess the question is this: what happens in your mind to those things that can't be recreated on Zoom, whether it's apprenticeship in banking, whether it's acculturation of new employees or lateral hires or people moving from one department to another? Is this something in your mind Silicon Valley doesn't understand or fully grasp?
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Vikram Pandit28:50
A lot of the Silicon Valley companies are digitally native in terms of their business models. 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 them can be digitally native, and some of them may require people coming together, if not every day in the office, at least through events and programs that allow for that assimilation and that training to then transfer into something that can become more efficient online.
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Eric Schatzker29:35
Vikram, I remember well coming to visit you when you were the CEO of Citigroup at 399 Park Avenue. Citigroup has since exited that space, consolidated downtown in Tribeca. The reality is for Citigroup and every other financial institution in this country and everywhere else, real estate is one of the largest operating costs. Do you think banks will need as much square footage as they did heading into the pandemic?
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Vikram Pandit30:09
Well, others are going to have to answer that very precisely based on context. As well, look, the general tendency towards a smaller footprint was in place anyway even prior to the pandemic. I think all of us have heard this again and again: the pandemic has actually just amplified some of the trends that were in place before all of this started, whether it's digitization, whether it's co-location. I think there is a 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. 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. If it can move to a digitally native system, then that really throws open what you actually need. You've talked about Silicon Valley just a few minutes back, and digitally native processes need less physicality. The value has shown that that is going to be a bigger determinant over time of what banking looks like and what people need physically.
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Eric Schatzker31:37
There are still some 75,000 bank branches in this country alone. We still get checks by snail mail. Cash is still the most used method of payment. Why is this financial system so resistant to change?
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Vikram Pandit31:52
Well, I think you've got to take a global perspective on this. There are parts of the world where it isn't. If you go to places like India or China or Kenya, Kenya is a wonderful case study of having cell phone money, M-Pesa. So it may be something that is a result of the fact we're so good at the 20th century banking architecture. We're so good at that that it's always hard to change a paradigm. But look, the pandemic has forced all of us. Even I have this app now where you take a check, 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? We don't need to reinvent it; we just need to look around the world as to what is happening. 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. Younger and younger people who avail themselves of the banking system feel very well connected with some of the opportunities and apps and other things that are provided there. So this transition from calling digitization the process of taking a picture of your check and sending it in, to one where we say 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. 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.
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Eric Schatzker33:54
Well, there seem to me to be at least three constituencies that contribute to this resistance to change. On the one hand, you have the financial institutions themselves. On the others, you might have the customers; they might want to continue writing checks and depositing checks, for example. And you also have the regulators. Of those three groups, where would you assign, let's call it, the blame? And that's not to pick fights with any of those three groups, but to try and give people a sense for what's holding progress back.
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Vikram Pandit34:27
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 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 a 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 that the cost of success is a system that is so well reinforced by the regulators and so well reinforced by the architecture of banking and finance here. The question is one of saying, can we look beyond that? What does it take? Let me just say, I think it's absolutely clear innovation can only move as fast as regulators allow it to move. 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 US 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, versus following a model from somewhere else?
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Eric Schatzker36:17
Vikram, I want you to help people imagine a Wall Street for the 21st century. How would it be different from what we know today?
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Vikram Pandit36:30
Well, I don't mind using my imagination, but frankly, there are examples around the world. Look at China as an example. It has a multi-tier system. It has your traditional 20th century banking system, being modernized, yes. You can take that picture of your check and send it. Then there is the mobile phone WeChat, Alipay system. By the way, China has a highly digitized economy. By some estimates, their mobile payments and mobile money aspects are 10 to 20 times the US volumes, as an example. Here is an architecture where you have a wallet, a digital wallet. You store your money on it, and you make all your payments, all your transactions, and all your daily routine aspects of your life through that particular wallet. You don't need a debit card, you don't need a credit card, you don't need any of that. But there is a third system as well, which is the Chinese are looking at a central bank issued digital currency, and they're actually experimenting in a number of cities in China to see how that works. That's the concept I think is really important for people to understand. Today, we carry notes; it has a serial number. You deposit it in banks, and then you go through the physical banking system. Tomorrow, instead of having that serial number on a note, you can have that serial number on a digital coin that you can store in a digital wallet. You will be linked to all the payment systems, all the banking systems, and you can go through life making your payments, writing checks. It's really your checking account. That's a digitally native solution. A digital currency issued by the government in a digital coin is something that's very digitally native. When you print a note, it's back in the physical banking system.
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Eric Schatzker38:29
Vikram, there's a reluctance, perhaps an understandable reluctance, in this country and the West more broadly, to admire what the Chinese have done, whether it's in finance or in manufacturing or in technology or in other aspects of the economy and social life. What about their financial system is worth admiring, is worth modeling upon?
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Vikram Pandit38:55
There's a lot to admire by the US, as we know as well, and many people admire that around the world. 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. So there are multiple models that are out there. What is interesting about these countries, and I'd put China in that, is they're embracing the 21st century with vigor. I think they have established and understand the inevitability 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. 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 working pretty well in the US of the 20th century banking system. But if you don't have that legacy of 20th century success, in some ways you're open to embracing the possibilities. I think what we should admire about the rest of the world is 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.
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Eric Schatzker40:49
What's at stake if the US financial establishment and the US regulatory establishment, the Federal Reserve, the Treasury Department, the Office of the Comptroller of the Currency, doesn't embrace progress and the transition to a digitally native financial future? What's at stake?
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Vikram Pandit41:08
Look, I think what's at stake to me is something very simple. We happen to be in an enviable position as a country with a very strong financial system where we set our own rules. In the 20th century, the rest of the world followed them. 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.' I'd like to be the one that preserves the primary nature of the US dollar as the global reserve currency. I really think it's an opportunity for leadership for the US 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.
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Eric Schatzker42:12
Vikram, you've written about the need for a central bank issued digital currency. Is a CBDC one of the steps the Fed and other US regulators need to take in order to preserve the US dollar as the world's reserve currency?
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Vikram Pandit42:32
It is. We are at a point in time where actually no government has adopted a central bank issued digital currency yet. Everybody is experimenting. But everybody, even if their economies are strong, are thinking about this and saying, 'Look, I need to be in an interoperable world. How am I going to have a digital currency internally and have an interoperable system?' Hence, you have a multi-tier system. Hence, you have two or three different rails people are thinking about. But there is an inevitability somehow to a digital currency. There is an inevitability that most digitally native architectures of finance need a digital currency. To get there, I think requires a few things, by the way. You also need digitally native customers. What does that mean? You need identity. We don't have that. The rest of the world, lots of people have biometric identity or a universal identifier that can tell that's Eric and that's me. So that's part of it. A digitally native customer: it's identity, it's a digital wallet, it's connectivity of the digital wallet with a variety of different systems. That's the base. What goes in that digital wallet? Yeah, I suppose you could think about a photograph of a dollar bill going into that. That's a possibility, right, if you wanted to. But the easier and the better way, the more inevitable way, is you're going to have a digital currency, a digital coin that goes in there. But you know, it not only gets to all the issues of inclusion, efficiency, cost, safety, etc., but doing that can really unleash another round of innovation which can make finance more accessible to the world. Every time you do that, it raises productivity, it adds to GDP, it does a lot of wonderful things.
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Eric Schatzker44:37
Vikram, not long ago I spoke to the governor of the central bank of Brazil, and he told me that he hopes to have a digital currency in two years' time. I'm not sure whether that timetable is realistic, but he's talking about it. He also boasted about being able to deliver stimulus, consumer stimulus if you like, to 40 million people affected by the pandemic in Brazil, and mocked the United States for having to mail out checks. Why is it that he's talking about those things, and it appears to me anyway that not many people are talking about those things here today in this country right now?
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Vikram Pandit45:17
Well, look, I think the Brazilian example is very interesting. It's an important one. Eric, if you look around the world, there are many such examples that are out there as well. That's what happens. 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 US is the last generation was great. 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. Not that I'm saying you have competitors. But the point is that you don't hear it in popular narrative. But there is work going on. The question on that is, how do we make that rise in 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 way, 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 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. They reimagined their business models. They went digitally native, and look at the impact they're having. Here we are with the financial system that's working very hard to digitize, but it is within an architecture that doesn't fit with where the world is going in the future. 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 for 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.
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Eric Schatzker48:09
Vikram, you know the people who run America's largest financial institutions well. You knew some of them when you were the CEO of Citigroup. I'm sure you have built other relationships with them since then. Are they resistant to change, or would they change faster if the regulatory system allowed them to?
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Vikram Pandit48:30
I think one thing I can say about all of them is they are very, very attuned to their business models, and they're always thinking about, 'Hey, can this business model be better?' There's no question that having that kind of sentiment and that kind of framework leads to the right discussions. 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 one hand? I would have thought so. So I think this is the kind of discussion that's not about the inevitability of where we're going with digital currencies of some form and a digitally native financial architecture. The conversation really has to be, 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.
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Eric Schatzker49:48
You know what the critics would say. Of course, they'd say that Wall Street loves its profit margins. Wall Street loves the fact that it creates friction acting as an intermediary between parties in a transaction. If you reduce that friction too quickly, you lose your profit margin. Is that criticism, and because of the threat of losing your profit margin you're not incentivized to make that digital transition? Is that criticism fair?
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Vikram Pandit50:18
Look, we've had the 20th century. Look at and see all the lessons from there. This intermediation is not new for the world of finance. It used to be if IBM or GE needed a loan, you went to JPMorgan or Citi or something, and that went into capital markets. You went into electronic trading. I mean, we went into creation of entities that could take on more risk. Disintermediation is not a new thing for Wall Street. Every time it's happened, yes, it's affected margins and it has affected profitability. Now, is there a shareholder investor concern 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 and are strong today and can remain strong, are those that embrace change and said, 'Can I embrace this? Can I get ahead of it? Can I become part of that dialogue? Can I become part of that rule setting so that 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.
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Eric Schatzker51:36
There is a corner of enthusiasts in the financial world who embrace the idea of decentralized finance. They are colloquially the Bitcoin crowd. These are the people who say that yes, there is a future for decentralized finance, but it needs to be built on tokenization, it needs to be built on a cryptocurrency that employs the blockchain. Does that technology hold any appeal to you?
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Vikram Pandit52:11
I think the notion of decentralized finance has a clear role of some sort in a 21st century digitally native architecture. The decentralized finance concept is a digitally native concept, as an example. It's appealing. Think about how strong it could be if it were supported by a digital dollar. 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 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; we're still not there. But it depends on trust, and that trust has been a part of a lot of the conversations in media about can you really trust the system? Where can that go? What about Bitcoin? This isn't about Bitcoin. It isn't 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. 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. A big part of that is going to have to get into analysis with the central banks. By the way, the BIS in Basel is doing it already. What does it take to have a lot of those capabilities become more mainstream? That's going to take some time, but it is a discussion that's parallel to the central bank digital currency discussion.
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Eric Schatzker54:32
What is the mechanism to establish trust in a digitally native financial system?
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Vikram Pandit54:38
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 that, trusted right away. When you get to saying, 'Look, you have this particular asset that you own, but you own it as something that is behind a token, and the token is created by a third-party system,' that's a different question. Therein 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. That's 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 how the nature of trust can be embedded in certain aspects of decentralized finance. Maybe it's not something that goes into every aspect of digital finance, but you can see large swaths of things where you can embed that trust into those aspects.
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Eric Schatzker56:32
Would it help if the most digitally advanced companies in this country, and I'm thinking of the likes of Google perhaps, or Facebook, or Apple, were able to participate more directly in our financial system?
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Vikram Pandit56:50
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. But there is a role. In a way, it seems to me that if we were to allow companies of that nature to participate in that kind of a system, the competition would drive innovation that much faster.
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Eric Schatzker57:26
Would you agree?
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Vikram Pandit57:28
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 has 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 key to the health of our economy. I think you can get at a lot of those things if you unlock some of this innovation. That's good for everybody. It's good for America. It's good for the economy. It can drive GDP.
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Eric Schatzker58:21
Vikram, in one of your op-eds, you said the pandemic has made clear that the Federal Reserve is the only bank that matters and that the US government is effectively insurer to the world. Is that a sustainable situation?
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Vikram Pandit58:34
Well, I think that's a topic that everybody's talking about. What is the role of the government? What is the role of the bank? Yes, in a crisis you have no choice; you need to step up. The question is, how many times can you step up? 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 that both the Federal Reserve and the government stepped up when needed. We're not through it, and so we hope that we can count on their continued assistance to get us to the other side.
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Eric Schatzker59:28
With so many large companies and so many investors benefiting so much from all the central bank liquidity, what's the incentive to go back to a world where the risk-free rate isn't zero and the US government isn't backstop to everybody?
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Vikram Pandit59:47
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. 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 in a crisis. But on a longer term basis, we need to reignite growth. We need to get that demand for investment up. We need to get demand for loans going up. That should be our objective. Part of that, I think, can be unleashed by embracing the digital future we have in finance.
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Eric Schatzker1:00:37
I know you're not an economist, and you're certainly not a policy maker, and I'm quite sure, Vikram, that you have no desire to be either. But give me some other ideas for how we might get there. A digitally native financial system, what else does this country and, for that matter, the rest of the world need to do to reignite growth, to create inflation, to force interest rates up, to end this era of financial repression?
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Vikram Pandit1:01:06
I think we need to get to the other side of the 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. Maybe there have been ideas and innovation aspects that are already germinating as a result of this. So perhaps the biggest boost we can have is to get to the other side of this pandemic. Once we know what that is, I'm sure there'll be a lot of ideas. No shortage. You'll have ideas, I'll have ideas. But let's get through this first.
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Eric Schatzker1:01:35
Well, I think you and I both are most eager to get to the other side of this pandemic, as is everybody else. Vikram, I want to pose to you some questions from our audience, and I think you'll see that they very much reflect the anxiety of these times, this pandemic, this period we're living in. Here's the first one: what in your mind, Vikram, is the likelihood of a recession in 2021, which would of course be a double dip?
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Vikram Pandit1:02:08
I'm glad you said I'm not an economist, which I'm not for sure. I'm not in the business of forecasting recessions. Let me just say that we still are not out of the economic issues that we're dealing with. The reason for that is that it's taken longer to get out of this pandemic. 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. 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 a recession is a given. On the other hand, I think we could have some continually challenging times till we get to some finality on a vaccine or some understanding of how the government might help us to get through to the other side.
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Eric Schatzker1:03:27
Joblessness is clearly one of the economic issues we're wrestling with. So is inequality. So is economic security. You raised the point about globalization. Is globalization dead?
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Vikram Pandit1:03:39
I don't think we can say globalization is dead given the facts at hand, which is how interconnected the world is still. 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. Sustainability means it's not about one side winning and the other side losing. The promise of globalization was always about everybody doing better as a result of that. There have been examples of that, and there have been examples where that's not been true. So it's not about globalization being over. It's about finding the right approaches to sustainable globalization that actually makes all economies do better, people do better around the world. I think we're seeing lots of conversations and some movements towards that.
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Eric Schatzker1:04:41
It is, as you know, fashionable to talk about sustainability, the need for sustainability or for ESG as a key part of innovation and of investment decisions. The question is, is that something best left to government, to policymakers, or is that something corporations need to embrace and make part of their process?
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Vikram Pandit1:05:07
So again, you brought up a wonderful debate. It is a debate that's going on. You've got people on one hand very stridently saying, 'Let businesses do what they're good at, and let's work with the government to figure out how to make sure it works for everybody.' There are others who say that 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. It's not about just go make profits. 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. 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 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 at a country level, is how do you make that happen on a global level?
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Eric Schatzker1:06:16
Vikram, the last question from our audience: do we need to re-examine market capitalism as the right economic model?
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Vikram Pandit1:06:27
So look, again, so much has been written on this, and there are so many people who have thought about this in quite depth. The fact of the matter is capitalism does do 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. 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, and in favor of the kind of world we want to leave behind to our kids and future generations. It's not about the complete left-hand side, let the government tell you. It's not about capitalism. But we have learned along the way some very expensive lessons as to what the limits of capitalism can be. 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.
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Eric Schatzker1:07:46
Vikram, I want to bring the conversation back around to more or less where we started, talking about the future of the financial system. The company you now run, The Orogen Group, is an investor deeply involved in financial technology, as an investor in a number of companies doing cutting edge work in fintech. What are you most excited about? Tell me.
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Vikram Pandit1:08:04
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, 30 years ago. The fact that we can use the cloud, the fact that we have artificial intelligence, the fact that we even have technologies like blockchain, my God, the kind of tools that have been thrown at us by the creativity in Silicon Valley and elsewhere are enormous. The opportunity for us is to re-examine business models and the opportunity for us to re-examine the world given those technologies. We are at such early stages of that in finance. We are in very, very, very early days. We're nowhere close to the Amazon moment. The wonderful thing about finance is that it's not a winner take all business. There are not too many Googles in finance. 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 these technologies.