As Prepared for Delivery on November 21, 2021
Thank you very much for having me today. This is my first opportunity for an international trip since the start of the pandemic last year, and it’s my great pleasure that I was able to make the journey to a place with so much natural beauty and history and be greeted with such a warm welcome.
As was noted in the introduction, I serve on the board of a financial regulatory agency in Washington D.C., that oversees the U.S. credit union system, which comprises some 5,000 financial institutions. So, as you might imagine, I spend a lot of time following financial industry news and trends. Recently, I came across the latest report about a financial scandal at the Swiss banking leader Credit Suisse (opens new window), stemming from charges of bribery and fraud related to a bond offering in Africa. The bank faces $475 million in fines after three employees pled guilty in a money laundering and corruption case after defrauding investors.
We see these types of stories, misconduct at financial services companies on a regular basis, right? In recent months alone, we’ve seen reports of misconduct at established industry leaders like Deutsche Bank, Barclays, Wells Fargo, and the list goes on. Of course, the reality is that these are outliers — they receive substantial attention because they’re outside the norm. And in this case, justice was done.
But I’m someone who has worked in or around the financial services industry, either in the private sector or on the regulatory side, for my entire career. As I look around the room, I realize now with some shock that I’m talking about a time that extends to before most of you here were even born. And the fact is that even to this today, I am troubled, dismayed, and even angered to see a report about a financial institution betraying its customers, or taking advantage of investors, or failing in its fiduciary duty to its clients. There is simply no excuse for such behaviors.
These reports trouble me, especially because I have always believed the financial industry, at its best, can and should be a creative force that solves problems. I’ve seen that proven over and over again:
- Financial services firms help people save and invest for retirement.
- They help young families buy their first homes and achieve financial freedom by building generational wealth.
- They help entrepreneurs get their small businesses off the ground, and they help to create jobs and strengthen communities.
- Even with its flaws, I believe the free market remains the most effective mechanism to steer capital and credit to the best, most innovative ideas. When we think about the advances we’ve made in technology, medicine, education, and a host of other areas, that’s at least partly owing to capital markets steering investment where it’s needed. A healthy, vibrant financial sector is critical for the functioning of our society.
I’ve also long understood that the financial industry runs on trust. We should think about trust as an asset. And like any asset, trust takes a lot of time and hard work to earn. Like any asset, trust requires careful stewardship, and trust can be squandered and lost all too easily.
So, when we see evidence of misconduct or scandal at a financial firm, even though it’s outside the norm, it affects not only how people view that firm but how they view the larger financial system, as well. It sows the seeds of mistrust and cynicism about the industry, which has significant ramifications for both the industry and society.
To begin with, it means that many people who would benefit from greater access to financial services are mistrustful of the financial industry. Many of them choose to remain unbanked, outside the legitimate financial system. Then they often are forced to turn to exploitative predatory lenders to meet their needs for credit, where they pay more for lower quality services. We’re talking here about working people and those at the lower end of the income scale, who often find themselves trapped in a cycle of debt and unable to climb the ladder to achieve financial independence. That cycle heightens inequality, which brings serious challenges for societal health and stability.
Meanwhile, that loss of trust also does tremendous harm to the financial industry’s prospects for recruiting and retaining the most talented young workers — the people who should be charting the industry’s future. I fear that many of the best and brightest young people might now turn away from careers in financial services if they believe they’ll have an opportunity to make a greater positive social impact in another field. And so those young people self-select out of finance in favor of, say, the tech industry or the NGO world. And it saddens me to say it, but frankly, I understand why they might do so. If I were in college today or just starting in my career, I very well might decide the same.
However, since I am talking to a group of young people who will soon be entering the workforce, I want to offer an alternative to that line of thinking. I will make the case that the financial industry is a field where one can, in fact, make a significant positive social impact.
In so doing, my great hope is that I can change the way you think about financial services and perhaps even influence at least a few of the talented, energetic, ambitious young people here today to consider opportunities in the financial industry because that industry needs you and what you have to offer.
The Promise of Cooperative Finance
First, I’d like to share with you a few stories about some interesting things that a few select financial services leaders have been working on:
- In Peru and Ecuador (opens new window), financial institutions launched an Economic Inclusion Project to help Venezuelan migrants and refugees get access to financial services and employment assistance in their host countries after fleeing from the oppressive Venezuelan regime.
- In Haiti (opens new window), a cooperative public-private partnership of financial institutions, non-profit organizations, private developers, and government agencies teamed up to address the need for affordable housing after a devastating earthquake left that poverty-stricken country with a serious housing shortage.
- In West Africa (opens new window), a network of financial institutions is working together on a gender-finance initiative to promote entrepreneurship and economic empowerment for women in Senegal.
Those might not be the type of investments you think about when you think about the financial industry. But what these particular projects all have in common is that they are rooted in the world of cooperative finance. I’ve taken these examples from the World Council of Credit Unions (opens new window), and if you look at their website, you’ll find many others.
I’ll pause here to define my terms. In the U.S. and some other countries, these cooperatively owned financial institutions are known as “credit unions.” In India, they’re called “cooperative banks”; in Latin America, they’re known as “bancos cooperativos”;” here in the U.K. you might have heard them referred to as “building societies.” Regardless of the name, they’re similar to banks, in many respects, in terms of the services they offer: accepting deposits, offering checking and savings accounts, extending credit for homeowners and entrepreneurs, and providing other essential financial services.
Where they differ from other financial providers is that these cooperative credit institutions are non-profit entities that their members own. That is, if you have a checking account with a credit union or cooperative financial institution, you are not a “customer,” you are a partial owner of that institution with a say in how the institution is run. Any profits that are realized are generally reinvested on behalf of the members, perhaps in the form of lower fees or higher rates on savings accounts.
In most cases, these institutions are subject to certain service limitations. They might be restricted to a particular geographic area or limited to a particular membership class, like firefighters or government employees or agricultural workers. Such limitations are intended to ensure that these entities remain responsive to the needs of their members and their local communities.
That does place some limitations on how large cooperative credit institutions can grow. However, that may be a strength rather than a weakness. We should recognize that when it comes to financial institutions, bigger is not always better. If bigger opens the door to misconduct and scandal, that’s not better. If bigger leads to neglecting the needs of an institution’s customers, that’s not better. If bigger leads to a financial industry that is unaccountable and unresponsive to the needs of society, that is definitely not better.
There are tremendous benefits in a financial services model that is more localized in its outlook. Now, in saying that, I’m placing myself at odds with the established trends toward global expansion in much of the financial services industry over the last several decades. But at the very least, we need to consider the possibility that the scaling up of financial services to global levels will at some point show declining marginal returns. The more promising future, I contend, is to be found in rediscovering what we can achieve at a more local level.
And cooperative credit institutions have a significant global impact. We’re talking about a system of 86,451 institutions in 118 countries serving 375 million households worldwide, with an estimated $2.7 trillion (U.S. Dollars) in savings. So even though the individual institutions may be smaller and more local, the cooperative finance model is, in fact, providing access to quality financial services to a significant number of members worldwide. I believe there are tremendous opportunities to continue to grow those numbers.
In fact, most survey results I’ve seen reveal that members of cooperative finance institutions have substantially higher levels of confidence that their financial institution is working on their behalf. That is to say: cooperative institutions enjoy a higher level of trust from their members.
That trust is especially crucial if we want to address one of the central challenges of our world today, which is the need for greater financial inclusion, which I believe strongly is the civil rights issue of our time. Financial inclusion means working to address inequities in society by expanding access to quality, affordable financial services for traditionally underserved communities. A successful financial inclusion strategy can create conditions where people can break the cycle of debt and dependency, obtain capital, and achieve financial security for themselves and their families. These goals are vital to addressing many of our most urgent social challenges.
Financial inclusion is not a new commitment for me; it’s something I’ve been working on since I began my career in finance. I started my career working on community investment issues in the banking industry in my home state of North Carolina, a largely rural state located along the Atlantic Coast in the U.S. That early experience shaped the direction of my life: Over the years, and in various ways, that commitment has continued in my public service career, so it’s something I’ve spent a tremendous amount of time working on and thinking about.
I’ve carried that commitment forward to my current position as a regulator, where I’ve been making a case for greater financial inclusion with particular force over the last couple of years since the pandemic and other events in the U.S. laid bare the inequities that continue to plague our society.
Today’s rising generations did not create those inequities – but you have a strong sense of engagement and idealism that can be harnessed to address them. And I believe that if more young people were aware of what we can achieve through the financial services industry, especially through cooperative finance, they might take a deeper look at that career path.
For example, here are three areas where rising young professionals are poised to make a tremendous difference in the financial services industry:
First, you can help to ensure that the financial services sector is diverse and inclusive because we know these values are important in terms of ensuring the industry is responsive to the needs of diverse communities. We’ve made great strides on this front, but there’s still much work to do.
I’m not talking about just counting how many pictures of women and people of color you have in your annual report. It’s great if a bank has a diverse board of directors. Still, I’m not especially impressed by the board’s diversity if the institution isn’t doing everything it can to help to lift people up and to strengthen underserved communities of all kinds. So, a true commitment to diversity and inclusion is essential, and I believe that today’s younger generations are poised to lead the way on that front.
Secondly, I am a strong advocate for financial technology, or fintech, as it’s known in the industry, which is a promising tool for expanding access to financial services to underserved communities. Here we’re talking about innovations like mobile banking, digital wallets, cryptocurrencies, financial data aggregation, and other services that help expand finance’s reach.
One thing I’ve pointed out is that we need to put this technology to work in terms of financial inclusion. I’m often concerned by what seems like a relentless effort on the part of corporate leaders to compete for the same group of affluent consumers and demographics while ignoring those who have been overlooked or passed by. Fintech may be an excellent avenue for reaching those underserved communities, and this is an area where a younger generation of digital natives can supply fresh thinking.
Third, we need greater innovation in financial products to promote greater inclusion and to better serve societal needs. The financial services industry has shown great creativity in developing new types of products but we haven’t always directed those creative energies toward helping the people and communities who need help the most. That seems to be changing for the better, and social impact investing is an excellent example of that change.
I’m interested in other types of social impact investing that could help support underserved urban populations or encourage investment in distressed rural areas. We need those kinds of innovations put to work on behalf of microfinance projects or alternative lending products to help other unbanked or underserved populations to start climbing the ladder toward financial independence.
We don’t necessarily know in advance which tools will be the most effective. But we should encourage some prudent experimentation, within reasonable limits and with appropriate regulatory oversight, to allow the best solutions to emerge. Because we never know what types of innovations are going to be transformative.
I want to emphasize that cooperative institutions are not perfect, nor are they immune from scandal and misconduct. In my job as a regulator overseeing federally insured credit unions in the U.S., we deal with those issues on a regular basis. Smaller does not necessarily mean “more virtuous,” “local” does not necessarily lead to “better,” and “non-profit” is no guarantee of good behavior. Credit unions and cooperative finance institutions still require oversight and accountability. They are subject to all the same vulnerabilities of any other social institution.
But one strength of the cooperative finance model is that these institutions are accountable to their members and their local communities, rather than stockholders or remote hedge fund managers. As a result, they are often very good at addressing those vulnerabilities and self-correcting. At their best, cooperative institutions have retained a strong commitment to relationships rooted in the values of local communities. We may live in a globalized world, but those kinds of relationships and values still matter a great deal.
If I’m correct in suggesting the future is local, that bodes very well for the cooperative finance model. In the U.S., credit unions have a longstanding mantra to describe their mission: they say that it’s about “people helping people.” These institutions all share a common DNA in that they’re based on principles of community, shared ownership, and local impact. If you are an engaged and intelligent young person seeking to make an impact in the world, I urge you to consider a career path in the cooperative finance realm. In many respects, such a career combines the best aspects of private-sector enterprise with a strong sense of community and social engagement.
Conclusion: A Transformative Vision of Financial Services
I know my remarks today could be taken as a somewhat pointed critique of the existing financial industry. And in offering such a critique, I might run the risk of alienating some of my peers in that industry.
But I’m far less concerned about that possibility than I am about making the financial industry live up to its highest ideals. And to achieve that goal, we need your generation to bring the energy and ideas needed to transform financial services for this new era. Your generation has the power to bring the renewed sense of social engagement needed to make finance live up to its best impulses to meet the needs of our changing world in these turbulent times.
I mentioned earlier that most of my career has been dedicated to the financial services field. What I did not say was that banking was not my first career choice. My initial plan, when I was around your age, was to enter the ministry. I had worked as a missionary in Africa, and I believed then that my calling was to serve others through the church.
As it happened, my plans changed, as plans often do. But what did not change that that I was always motivated by service to others and making an impact. I carried that impulse with me as I took up my career in financial services. I was still oriented toward service and impact. I’m proud of my work on behalf of under-served communities, and I only wish I had been able to achieve more. But that experience taught me that the industry needs a fuller commitment to such service, and I know that we need young people like yourselves — “inspiring change-makers,” as the UWC Atlantic has rightly described you — to take up the challenge.
If we’re going to restore trust and confidence, we need to write a new narrative about the financial service industry’s contributions to society. And, just to be clear, I’m not suggesting another shiny marketing or public relations campaign. Instead, I’m talking about taking action to realize what’s best in this industry through service to the public, to stakeholders, and to local communities. That story and action must focus on the values of financial inclusion — bringing more people into the mainstream financial system.
I thought it would be appropriate, as a visitor to the UK, to close my remarks today with a few words from Her Majesty, Queen Elizabeth II, who once noted that there is “no single formula for success. But over the years I have observed that some attributes of leadership are universal and are often about finding ways of encouraging people to combine their efforts, their talents, their insights, their enthusiasm, and their inspiration to work together.”
Encouraging people to combine their efforts, their talents, their insights, their enthusiasm, and their inspiration to work together: I appreciate that sentiment because it nicely reflects my theme today about what we can achieve in the world through cooperative finance. It’s a theme I hope you’ll consider more deeply as you chart your path toward the future.
Thank you very much for your time today.