Featured Guest: Jo Ann Barefoot

Jo Ann Barefoot is CEO & Cofounder of AIR – the Alliance for Innovative Regulation – and host of the global podcast show Barefoot Innovation. A noted advocate of “regulation innovation,” Jo Ann is Senior Fellow Emerita at the Harvard Kennedy School Center for Business & Government. She has been Deputy Comptroller of the Currency, partner at KPMG, Co-Chair of Treliant Risk Advisors, and staff member at the U.S. Senate Banking Committee. She serves on the board of Oportun; on the fintech advisory committee of FINRA; on the Milken Institute U.S. FinTech Advisory Committee; and on the California Blockchain Working Group Advisory Board. Jo Ann previously chaired the boards of directors of the Financial Health Network and FinRegLab and served on the CFPB’s Consumer Advisory Board. She currently serves on the boards of FinRegLab and the National Foundation for Credit Counseling. Jo Ann cofounded Hummingbird Regtech and, in 2020, was named to the Fintech All of Fame by CB Insights. AIR was honored in Fast Company’s 2021 awards on World-Changing Ideas.

Episode Transcript

David Reiling: [00:00:35] Welcome to the NextGen Banker podcast, where we explore what’s next in banking and talk to the innovators responsible for creating positive change in the financial sector. I’m your host, David Reiling, and I’m very excited to welcome Jo Ann Barefoot as our guest today.

Jo Ann, thanks for being a guest on the next NextGen Banker.

Jo Ann Barefoot: [00:00:53] Yeah, thank you for having me, David.

David Reiling: [00:00:56] So Joanne, I want to have a little fun with your intro today because I think there’s really two sides into this intro. One being you are known certainly in the United States and in North America very well and globally to that effect.

But for those who don’t know, maybe I’ll start out with a little more traditional and give some highlights of your background. Um, you were the co-founder of air, the Alliance for Innovative Regulation, a nonprofit dedicated to digitizing the financial regulatory system to advance fair finance and to foster an innovative and resilient financial sector and to combat financial crimes like human trafficking.

You are the former deputy comptroller of the currency and staff member to the U.S. Senate banking committee, a fellow emerita at the Harvard Kennedy School Center for Business and Government. You host a global podcast called Barefoot Innovation. You wrote a seminal paper, a regtech manifesto.

You advise numerous regulatory bodies and speak annually to thousands of people throughout the world. And in 2020, you were inducted into the fintech hall of fame by CB insights. So very impressive, illustrious career.

But the thing that I’m really interested in and amazed by to learn about you is you’re an adventurer, a lover of a good challenge and people and things that are maybe a little unusual or different and that to me is fascinating because I think I want the world to know that being in compliance and regulation  in an industry like that has tons of adventure has tons of entrepreneurship and innovation that can be had.

And so the other part of Joanne is you’ve raised three amazing kids. You’ve fly fished on five continents. You’ve searched for wolves in the Arctic, crisscrossed Alaska in small planes. You’ve been on leprosy colonies in India. You’ve started several businesses as an entrepreneur. You’ve written two novels, which have won national recognition.

This one to me is you’ve solo camped on a mountain, no tent while fasting. Now that internal challenge just fascinates me. You have a passion for artists and rebels and inventors and unconventional people. You’ve beaten health challenges. You’re a fearless adopter of technology. So Jo Ann, tell us a little bit about the adventurous side of you.

Where does that come from?

Jo Ann Barefoot: [00:03:27] Well first, thank you so much for having me on your fantastic show. And, I have also had you as a guest on my show and which was wonderful.  I think maybe some of my risk-taking nature comes in the DNA. Both of my grandparents, grandfathers were entrepreneurs and my father was a real pioneer in both the helicopter and the wind industry.

My great, great uncle invented the player piano and so on. So you know that I came by all that, but honestly, I’ve just learned in my life that if you want to do work that’s meaningful and high impact you just need to break out of the silos and the regular, you know, linear pathways that people stay on and do things that are different and develop both your right and your left brain.

And, I do like to challenge myself. So, thank you for sharing some of those, some of those adventures.

David Reiling: [00:04:27] Absolutely. And, you know, I think you bring up a really valuable lesson here for the next generation of bankers and what’s needed and, and really for people in any career. And that’s the ability to know yourself and know your limitations or test them.

And again, development of that whole person, if you will.  Of the right and the left brain of both the technical and the analytical as well as the artistic and creative side.  I think that is one thing that allows people to innovate and adapt to the multitude of changes that we, that we face today.

Jo Ann Barefoot: [00:05:00] Don’t you think it’s even become essential today that you can’t move fast enough if you stay in a straight line. You just have to be talking with people who are doing different things and it accelerates your learning.

David Reiling: [00:05:13] Absolutely. And I think, you know, I like you, I think in this, in the seeking adventure is a really, it’s a learning adventure.

Every time you do one of these types of things. And, I have a saying about volunteering  , I volunteer to go help somebody else, but I end up learning more about myself in the process. And so, I would agree if you’re younger in your career, try different things, stretch that brain. Both, you know, as well as the mental and the physical and almost the spiritual side of it, when you do some of these.

Jo Ann Barefoot: [00:05:42] Exactly.

David Reiling: [00:05:44] So Jo Ann, as we talk about banking and financial services and a change in the ability to adapt, digitizing regulation, a big part of what you talk about. And, I think our mutual friend or colleague Brett King from Breaking Banks, in his book, Banking 4.0, you know, he’ll talk about, banking or finance being embedded into products and services.

That there’s almost just real time, it’s in engaged in the products and services we buy. So what has to happen from a regulatory standpoint or regulation to kind of meet this instant and transparent financial services delivery? How do you kind of envision that?

Jo Ann Barefoot: [00:06:25] Yeah. Well as you mentioned, I’m a former regulator myself and it’s no one’s fault, but it’s nevertheless true that the regulatory system and agencies are built to be deliberative, thorough, careful, slow, we want all that, but it does make them slow. And they’re going to have to speed up in this environment. Culturally, it’s going to be a big challenge, although they’re well on their way, all of them are really, really in motion on changing how they use technology. But I do think that the, the foundational layer that’s going to be needed is that we’re going to have to digitize the information that both the industry and the regulators are using. Right now, everything we do in both finance and financial regulation was originally designed on paper. It’s linear. You know, it’s been sped up through some automation, but it’s still got that same design.

And it’s because there didn’t use to be enough information or computing power to do more than what we’ve been doing. But today we’ve got abundant data and computing power. So we need to position the regulators and the risk managers and leaders in the institutions to be able to have all the information they need, with the appropriate limits and governance obviously, but they should have complete data sets, not little samples.

They should have access to the big pools of data and not just summary reports. They should have immediate information, not quarterly call reports or annual, you know, under reports or whatever. And, uh, so that is the work that we see and the regulators need to do this for two reasons. One is to keep up with the change in the industry because it’s changing as we know at an exponential pace and also just to do better on the old tough intractable problems that we’ve never been able to solve in financial inclusion, inclusion, in fairness, in catching crimes like human trafficking, you know, the, the technology and the data are going to enable us to do better than we’ve ever done before. You know, even if the industry held still, which it won’t.

David Reiling: [00:08:52] Yeah. So, if I had to interpret what you’re saying is can you see a time where a bank actually its data stream, is fed into the regulators in a real time or packaged up in a, in a data set in which gets pushed to a regulator in which they can run analysis on. And again, it’s, it’s instant or real time to almost a certain degree that these programs and AI are, are analyzing and running and both the bank and the regulator are almost in lockstep in terms of alerts or things to be aware of.

Is it that fast?

Jo Ann Barefoot: [00:09:28] That is it. That’s the future and people all over the world are already working on this. The people use the word digital regulatory reporting. The financial conduct authority in the UK has taken the lead. The FDIC has a project to modernize the call report. I was a judge in the G20 tech sprint on digital regulatory reporting last year.

And it’s got the ability to enable both the government and the private sector risk managers to see risks as soon as they’re emerging. And then it also has the benefit to the industry of driving down costs. The FCA in the UK has estimated that if they move to full digital regulatory reporting for appropriate types of activities, that would save billions of pounds for the UK banks.

So, it’s really a win win and it’s not easy to get there from here, but the tech already exists. We just have to figure out how to convert to it.

David Reiling: [00:10:26] Got it. And so in that scenario, envision it, I mean, the world of having an onsite regulatory exam seems irrelevant or unnecessary.  Would that be the case as well?

Jo Ann Barefoot: [00:10:38] Well, we would go more there. I mean, most of the regulators will tell you they really like to look people in the eye from time to time and they learn by just, you know, kind of picking up the environment when they’re there, but we even need way less of that. And the regulators would have the ability to really be homing in on the issues that they need to pay attention to.

Because as you just said, they’ll have all this data. They’ll run AI on it and they’ll know where the likely risks are. If we had had a system like this before the great recession and the financial crisis, we might’ve been able to see those trends. The regulators, they have blind spots. They can’t see most of what’s going on, so they didn’t see the contagion until it was too late.

So, you know, just tremendous opportunity to do that. And one more benefit for the industry. Think about how much of the compliance costs and difficulty for banks comes from the accumulation of non-compliance or risk that isn’t being found enough early enough. And then the bank has to undertake a big project to go back.

They have to pay fines. If we have a system where you can nip that, right in the very first instance, find the mistakes. Find the non-compliance. Catch the risk trends early it’s transformative for the, just operating a bank in a smart way.

David Reiling: [00:12:09] Yeah, absolutely. And well, it may be baby steps given the pandemic, I mean, we, have had our first exam fully digital and remote. So we’re warming up for this transition and hopefully we can accelerate it and move it forward. Now, if I could take you a little bit, down the road you, you had, mentioned, one of your relatives or your grandfather in wind and wind energy. So I I’m maybe not a closet tree hugger, but I’m a tree hugger banker when it comes to climate change and carbon.

And so do you see anything in the regulatory schemes or conversations being had around climate, on how finance and banking, if you will, fits into maybe, a greener, but a more renewable, energy and environment, regimen.

Jo Ann Barefoot: [00:12:56] Yeah, that was my father. I actually have a podcast with him. He was an amazing inventor and innovator.

So the new administration and the new Congress are very much prioritizing climate,  issues and green energy. And the agencies, as you know, the White House, the Treasury Department are appointing climate leaders and so on. So we’re going to see a great deal of this. There are three issues that the bank regulators or the financial regulators broadly are looking at. The first one is what are the potential risks to the system arising from climate risk? Are there geographic areas, are there industry sectors and so on that may become more risky to lend to, or invest in. As we tackle that one, there’s a lot of concern about making sure that  we don’t repeat some of the de-risking strategy that we’ve seen and anti money laundering, where as the, the big U.S. Banks in particular pulled back from potential AML exposure. They cut off a lot of innocent people that were not money launderers right. Like in some cases, whole countries, our whole industries have been impacted by that.

So there’s a lot of concern about how to do this, in a way that will not be worsening the problem that many people already have with getting access to credit. The second area is, a lot of interest in how to be sure that the market works well as companies increasingly make claims to be green.

There’s a lot of evidence that millennials in particular, our largest generation ever, are very  interested in making purchasing and pan employment decisions based on factors like that. And so I think we are working at AIR on a number of initiatives that would be helping with this question of how do you be sure that people aren’t, you know, you’ve heard the term greenwashing, if people just claiming that they’re very green, but how do you measure it?

How do you prove it? Should there be standards? So there’s a tremendous amount globally on that. The last one is the fact that cryptocurrency is going mainstream, which I myself think is a very good thing if properly done and regulated. We do know that some of the mining, the, the so-called mining of some of these currencies is incredibly energy intensive.

So there are efforts underway there to, to figure out  how to offset that, offset it, or change it more, basically.

David Reiling: [00:15:38] You know, there’s one other thing that we’ve been involved in, and that’s called PCAF , the partnership for carbon accounting and finance, essentially. And so just another resource, um, for our listeners to take a look at, if they’re interested as to how, how the actual counting, if you will, for carbon in a loan portfolio, if you will, or in a financial institution is starting to take shape.

So as we think about climate and its effects, and maybe we’ve seen, you know, some of the more extreme weather conditions that we think of Texas, if you will. The impact of those are really most effected by those individuals and people who are the least resilient in a lot of cases that is folks who are in the low and moderate income spectrum.

So as we think about kind of a fair banking system, how do we think of that from you know, I’ll say the, the regulatory scheme, but also the digital regulatory scheme. What do we have to be aware of there to have a fair and inclusive financial system?

Jo Ann Barefoot: [00:16:35] Yeah, so I am a tech optimist. I’m clear-eyed about all of the many problems that tech brings us all the time and all the risks ahead.

But nevertheless, The reason I’m doing what I’m doing is that in about 2014 or so, I began really immersing in technology. And while I was at my fellowship at Harvard researching the  innovation in the financial sector I really had an epiphany that these technologies can accomplish the dream that so many of us have had for our whole careers of truly fair and inclusive financial systems that can be that everyone can use.

And, where products are understandable and where they’re as affordable as possible and where people can qualify easily even if they have a complicated situation or don’t have a credit score because the data will be there. So we don’t have time in the show to kind of go through that. But if we talked about all the things that cause problems for people in the financial system, I’ve got a technology solution for every one of them that I could list.

So then the question becomes, how do we make that happen?   How do we accelerate it and how do we regulate it to guide it? I mean, one area I would point to that I think is so promising. And I know, you know, my colleague Melissa Koide at Finreglab, I was the chair of that board.  I’m still on the board and, so they are doing research on how can we use alternative kinds of data in credit underwriting to, to help people who are so-called credit invisibles, and don’t have a credit history and a credit score, help them qualify if, if they really can repay the loan. And it’s an area that needs research. Yeah. So Finreglab has been doing objective research first on cash flow underwriting, and now on AI based underwriting.

And you know, the early findings are so promising that it’s both equally to, or even more predictive of risk to use these additional data, especially combined, but, but also much, much more inclusive. So it’s methods like that. And it’s also just delivering services through the mobile phone, globally, people who are working in emerging markets have built their whole strategies for financial inclusion around the fact that the mobile phone is in the process of reaching everyone. And once you’ve got it, you’ve got a bank branch in your hand. And, it becomes possible to have a low cost, but profitable distribution system. So bankers who are listening to this, you know, I think they need to be really thinking hard about mobile first strategies that are gonna appeal to younger people and to, you know, people like me, who I’m not young anymore, but I’m digitally first on everything.

And that’s the future for sure.

David Reiling: [00:19:40] Well, we share the same promise of FinTech and FinTech for good if you will.  And also power of data to make things inclusive and make financial services accessible and convenient and easy to use. And at a fair price, I think, you know, that the effective and efficiency of, of using data and FinTech and technology really  to make a system that is delivered on your phone is, is the promise of an inclusive financial system.

So very cool.

Jo Ann Barefoot: [00:20:08] Can I say one last thing? Are you getting ready to wrap us up?

David Reiling: [00:20:11] I have one more thing, but yeah, go ahead. You can say one last thing.

Jo Ann Barefoot: [00:20:15] Well, I was just going to say if I had one message for bankers and especially community bankers, who I’m very worried about being disadvantaged in this technology environment, we’re going to have to solve that.

And we’re doing some work on that in there, but you know, the main thing I hope that listeners to your show think about in terms of the next gen banker, is that you have to go faster. Don’t spend three years trying to figure out. You know what to do, start doing it. The technology change, as we said, moves exponentially, it has, you know, COVID has taught us this harsh lesson of what an exponential curve looks like with that big hockey stick shape to it.

And I worry about the institutions that get caught underneath that curve when it starts to turn vertical. Whether they’ll ever be able to catch up, you have to be doing this now. It’s the most urgent issue for every bank, in my opinion, and for the regulators.

David Reiling: [00:21:18] Yeah. And, uh, I would put an exclamation point on that as well. I think inaction is the inability to adapt. And if there’s anything that I think community bankers need to take into account is exactly what you just said. It’s the ability to adapt and you are going to have to go to action right away with imperfect information and you cannot hesitate. It is the one thing when I have conversations with particularly the OCC around their, you know, their innovation group it’s we all are so amazed on how fast it is moving.

You just got to get in the stream and start swimming with it.  You’re going to make some mistakes. You’re going to learn, but you’ve got to engage in it. And there’s no time like the present.

Jo Ann before we let you go, I’m just gonna, as my daughter would say, I’m trying to find out what’s the tea or spill the tea as she would say.

How do you see that what’s the gossip, or how do you view the Biden Administration and  the tone at the top in terms of the regulatory agencies coming our way?

Jo Ann Barefoot: [00:22:18] Yeah, that’s a great question. The Biden Administration and also the new Congress, particularly with Democrats in the lead in the Senate and our new chairman of the Senate banking committee, Sherrod Brown of Ohio, is very active in this space, you know, the biggest piece of the tone at the top, I think is consumer protection and financial fairness and inclusion.

I am sure we’ll see very active enforcement and active regulation as well. I think something to be paying attention to is that in, in the new leadership, it’s not taken at all for granted that FinTech is doing more good than harm. Despite what I said earlier about my being optimistic about what it can do.

I think that there’s a lot of thinking that the jury is out on this. We at AIR are asking people to share with us research that they may have on impacts of FinTech, to try to sort through what, you know, what’s the record so far, but I think everyone working in the space should be thinking about how do you, my podcast with you, we called it FinTech for good. You wrote a book on FinTech for good and, you know, how do we make sure that this will all be FinTech for good? And the regulators are open-minded on it, but they are going to be holding people to a high standard.

David Reiling: [00:23:45] Yeah, as well as they should. And so again, authenticity will be the end.

And so well, Jo Ann, thank you so much for being a guest today on the NextGen Banker. Your insights into the regulatory schemes and the technology side, as well as the climate and, and the fairness issue, the inclusion have been fantastic. And again, I think one key takeaway that I would just reiterate of what you mentioned. If you’re in the banking space, your ability to change and learn and adapt quickly, you’ve got to be tech forward and do it. So action is required. So Jo Ann, thanks so much for being with us today. Always a pleasure to be with you.

Jo Ann Barefoot: [00:24:21] Thank you for having me, David. I really enjoyed it.

David Reiling: For this episode’s musical feature, we’re showcasing Ben Kyle.

Ben is a Minneapolis-based singer/songwriter who has been described by the Huffington Post as a “Sleeping Giant.” He is an award-winning songwriter who has worked with Ringo Starr, Ryan Adams and Lucinda Williams, among others.

Here is Ben’s song, “Thank You,” from his 2017 self-titled album.

That was “Thank You,” by Ben Kyle. Hear more of Ben’s music at benkyle.com. If you would like your music featured on the NextGen Banker podcast, email Nextgenbankerpodcast@gmail.com with a link to your music and website.

Thanks for listening to the NextGen Banker podcast. We’ll see you next time.