Confessions of a former trader: Incentives at banks are misaligned
- Banks have investment millions in fintech, but implementing it is a long-term project since they're still plagued with legacy infrastructure
- Goldman Sachs' Marcus is "probably able" to win in the short term but might stumble 10 years out if its targeted millennials don't grow their wealth
Banks like to call themselves technology companies. And most large ones are currently focused on fighting — and winning — the war for talent against Silicon Valley.
The problem is, they have issues when it comes to incentivizing their many tech employees to create great products.
Banks’ digital transformation seems to have slowed over the past year. M&A isn’t as much or as frequent as many observers of the space had anticipated. Banks have put millions of investment dollars in technology companies and fintech startups, but since they’re still plagued with legacy technology and systems, implementing new digital processes and features is a long-term project.
In this installment of Confessions, in which we trade anonymity in exchange for honesty, we spoke with a fintech CEO who spent 15 years as a trader in a handful of major Wall Street firms about how banks are shaping up in the innovation race with fintech startups and other competitors, why having a mission is central to incentivizing strong bank engineers to do good work and how not having one can make “waiting for the future boring.” Edited highlights below.
Banks are investing in technology and fintech startups. Are they innovating?
If they were going to do it, it would have happened already. They’ve proven such massive inertia in that legacy technology it’s just impossible for them — and they can even get a three-year head start.
What would it take to move the needle?
Incentives are misaligned. Giving someone equity, a pretty good salary and a small mission will supersede any big bank where you’re part of a team of of 150,000 to 250,000 but don’t know who reports to who. There are a million product developers in banks, but you don’t really know who makes decisions, you don’t really know what the mission is.
What was the mission at the bank where you worked?
Something along the lines of “we promise to make money for the shareholders.” And it was like, wow, that’s it? You just intend to just take as much money as possible and give it to shareholders. OK, great, that’s a mission, it’s just not very inspiring to every single person that works here — unless you have equity. So they were unable to incentivize people to build really, really amazing products.
Many large banks are trying to look and act like startups, relaxing dress codes and removing desks.
$50 million for a bunch of people in the room with bean bags and all of them have product experience … and when I speak to those people off the record, they’re like, “We just can’t get anything done. We could have the best idea in the world but when it comes to integration it’s not possible — legacy infrastructure.” Plus, you go up against competing product shelf space: Are you building only for your bank’s customers, or are you building for everyone?
A platform of banking services by different providers. Can any bank do that or just the major ones?
If you’re a big bank, you can go pretty much anywhere you want. You can be transactional; you can stay in the consumer lane. Regionals will have to decide what they want to be. In my mind, they should go transactional and say screw the retail, commercial side. Smaller ones with branches — instead of posing them as channels, like you stuck a straw in the ground and you sell one product that maybe is OK, why not sell all products from everyone, take a little bit of the whole thing, like all their marketing dollars and all their brand. That’s really interesting. I would take everyone’s product and just stick it in my window and everyone would be like, “Oh it’s like a mini bank supermarket, it’s great.”
But they still need the tech and API base.
Yes. There’s FIS and Fiserv; backend things that banks connect to to outsource their technology, which is cheaper when outsourced — now everyone has the same product so they’re just a function of them and the regulatory license. And guess what? Everyone sees them as a commoditized product. The only economic juice is in the backend player.
To what extent should financial services be free to consumers?
Making money isn’t dirty. With tech firms, they’ve typically used “free” as a wedge or a shortcut to growth because then they can get more funding but really most of those tech firms had to go bust if they don’t monetize or are forced to monetize due to new investors. At some point money is just a reflection of value. We did a big survey to customers asking: free, $3, $5, $10 or pay what you think is fair? And the vast majority said $3 per month. They said, “We want to pay for something so we know you’re not selling our data.”
Is crypto the future of banking?
It could be. The future of banking is not a banking license. There will be regulation eventually, but it’s materially changing; how it’s network goes from vertical to horizontal. It’s API based. Obviously, decentralized is a great word — I think there’s a halfway house there somewhere.
What’s in the way?
It’s not really retail. At the moment the only entry everyone has is just through trading. It’s boring — apart from crypto-kitties. People like Barry Silbert and the Winklevoss twins have found sectors that are rebuilding and renetworking the institutional side. Coinbase is still not consumer.
Who’s more dangerous, Amazon or Goldman Sachs?
Goldman will do well. That investment bank cache is translating into retail really well. None of the tech is theirs. They’ve just acquired most of it, and that will continue. They’re probably able to win in the short term, but they’re going to hit up against all sorts of trouble in the long term because they’re providing services almost exclusively to millennials. Hopefully the people they’re banking have some money in 10 years. It may be dangerous then, but not now.