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Evergreen Policy Lessons from Kaitlin Asrow & John Pitts
This weeks episode was recorded last October in Las Vegas at Money20/20. It was my first show as Content Director and I was a bit busy so I handed the keys to the Pod to Ally McCloskey.
Ally was the Host of The Wharton Fintech Podcast while she was getting her MBA. I’m pretty sure I listened to every episode she hosted - she’s damn good as you will hear. She was moving into venture at Clocktower so I reached out to tell her not to stop podcasting and we ended up with this lovely outcome. Don’t stop podcasting, Ally!
Color me jealous on this one because she got to sit down with the two of the best Policy and Regulatory minds in the space; Kaitlin Asrow of the New York Department of Financial Services and John Pitts who leads Policy at Plaid.
It struck me as I was listening back to the MoneyPot episode how pertinent this conversation was and is to what we’re going through as an Industry right now.
In many ways it expanded beyond right now into some Mental Models that I found helpful to try to wrap my brain around today’s events.
Here’s what stood out to me…
1. Regulatory Game Theory
Incentives make the world go ‘round.
Incentives at a startup, bank, or really any standard capitalistic entity are pretty straightforward: earn a profit.
Depending on where you are in that system your personal incentives will vary, but one can assume all incentive structures in the company ladder back up to capitalist KPIs.
But, are Regulators incentivized?
John Pitts explains that, “Regulators have almost an inverse incentive system. No one has ever gotten a bonus at a regulator for the success of a regulated entity under their jurisdiction…their number one mandate is to ensure that nothing goes wrong.”
It’s the same dynamic that created the trope that, “no one gets fired for buying IBM.” Fair enough. It’s not a job where you’re rewarded for taking risks, but isn’t that kind of the idea?
As much as we love to Monday morning quarterback, it’s worth remembering the incentives (or lack there-of) that are driving the different stakeholders. Many of the same people spewing the rhetoric about the actions of Regulators don’t seem to understand the job that they’re put in place to do.
2. The Job of a Regulator
Before we get to the job, let’s start with the mission. The FDIC’s mission, as a timely example is, “to maintain stability and public confidence in the nation's financial system.”
How does the FDIC accomplish that goal? They insure deposits, examine and supervise Financial Institutions, manage receiverships and generally resolve issues in the banking system. That’s overly simplistic, but it gives you an idea.
Notice, “advise on strategy,” isn’t one of the jobs to be done. The job of a Regulator is NOT picking winners and losers or telling anyone how to run their company.
It’s a tightrope walk.
Kaitlin Asrow explains that, “we have to be very deliberative in the Regulatory space. We can't move fast for a number of reasons. You think it's because of bureaucracy and layers that exist, but really that's not the driver. I spend a lot of time thinking about what is the third degree of what's gonna happen if I take action.”
The potential impacts of every action have to be calculated and calculated again.
Kaitlin continues on to explain that she, “can't put a vendor on a pedestal or that will change the market for that vendor. I can't pick business models that are going to win or lose.” That’s for the market to decide.
On top of all of that, here’s an article that gives you a sense of what the Chair of the FDIC is having to answer for. Much of it is not what we’re discussing on twitter regularly.
It’s not an easy job, especially in times like these.
3. Looking Around Corners
Regulators spend an inordinate amount of time considering all the potential outcomes of a single decision. Not just the potentially market-moving decisions - all of them.
“We (Regulators) play things out over and over again. Probably too far down the road, but it means we take a long time,” according to Asrow.
Sometimes the pace seems painfully slow, but I like to believe there’s good reason. Every Regulator I’ve ever spoken to has considered their job a mission. They’re performing a public service and they aren’t making willy nilly decisions.
The pace may be frustrating at times, but it seems like much more of a feature than a bug on the whole. Consensus has to be built, clarity must be achieved, and the plan must be clear.
It’s a political process.
4. Politics Matter
Ugh, I “hate, hate, hate…double hate…loathe entirely,” this lesson to quote the Grinch.
There are a multitude of references in this conversation about the impact of different publicly elected bodies and countless political asides that I still barely understand.
I have a rudimentary understanding, but I don’t actually grock how what happens in Washington publicly and behind closed doors directly drives outcomes in our industry. Nonetheless, we all know they do.
Politics is complicated and maybe the only place in the world with more acronyms than finance.
Despite my deep despair in hammering this point home, politics do matter. Who we vote for matters. Talking to our Representatives and Regulators matters. Engaging matters and understanding matters.
Most of all, building relationships matters.
5. Learn The Language & Build Relationships
Sometimes it seems like Regulators are speaking a language of their own, but the exact same can be said of the technologists.
In my humble opinion, both sides are so damn smart that they have a hard-time communicating what they’re actually intending to. I watch a lot of people talk past each other and wonder if either of the parties realize it.
Sometimes the most important part of bringing a new technology or business model to market is being able to communicate clearly and articulate the utility.
Kaitlin brought up another important point that might trump the former.
A lack of a shared language.
“They're saying the same thing and they're using different words for it. My team comes back and they say, “they're not responsive.” They're not responding to us? I'm like, wait, wait, wait. Like they're not not responding to you? They are saying something. What are they saying?”
The same questions need to be coming from the other side of the table. We must do our part.
We have a communication problem, but it’s important to remember where the burden lies at the end of the day.
6. The Responsibility To Communicate is On the Private Market First
Speaking of communication, it’s worth discussing where the responsibility lies for a Regulator in understanding a new technology or business model.
The answer is debatable, I suppose, but in the long-run, I think John Pitts had the right answer when he said that, “if the government doesn’t understand Plaid, that’s my fault…it is my job to transparently explain what we are doing to the Regulators to make sure they deeply understand it.”
At the end of the day, if you’re doing something novel, it is in your best interest to make sure your product is broadly understood by the Regulatory bodies that matter to you (see the Regulatory Perimeter Explainer below) and maintain an open dialogue.
John brought up that it is, however, a two-way street. “On the other side it is the Regulator's responsibility to be able to do that same outreach and say, it is our responsibility to explain our mandate and our regulations to these entities even if they are new and even if we don't fully understand what they do.”
Kaitlin chimed in with a bit on what not to do. “If you're going in for your first meeting with a Regulator, meeting with someone who might be bringing an enforcement action against you can be very scary and very intimidating, and can cause you to make what I think is the wrong strategic choice, which is, “I'm just not going to engage.””
Time and time again I’ve heard Regulators say, “I wish they had come to talk to us earlier.” Another thing John said was to “assume positive intent.” That’s not exactly in the air right now, but it’s an important reminder.
Concept Worth Understanding: Regulatory Perimeter
My basic attempt to boil down the idea of the Regulatory Perimeter is simply the umbrella under which a financial company is Regulated. The umbrella representing the different Regulatory bodies that might have some say in future enforcement actions, etc..
The broader theme to understand is that this Regulatory Perimeter is constantly shifting.
There are two major reasons why:
It’s ebbing and flowing as you add new regulated products and remove others. If you were offering a checking account then your Regulatory Perimeter would expand if you added stock trading, for example.
The Perimeter is also impacted by the outside force of Washington. If Regulations change, your company may all of a sudden bear a whole new set of Regulatory responsibilities that you did not count on.
“Assume you’re going to be regulated” - Kaitlin Asrow
“Understand that you will one day be in the regulatory perimeter.” - John Pitts
Skate to where the puck is going to be and start having those conversations. Build those relationships you need before you need them they say.
Listen to the full episode. These are high level take aways. The magic of understanding is in the nuance.
Talk soon 👋
Zach Anderson Pettet