Why Today’s Banking System is Failing Consumers

Jim Marous (00:11):

The biggest threat to consumer financial health is not inflation, stagnant wages or market volatility, but the financial services system itself. Not because it's failing, but because it's been silently optimized to benefit the most educated, wealthiest, and most sophisticated players while being rigged against those that need it the most.

Jim Marous (00:35):

In the new book, Fixed, a harsh truth is revealed from daily savings and borrowing to educational loans, insurance and retirement planning, personal finance is designed to disadvantage the very people it says it wants to help.

Jim Marous (00:51):

Complexity becomes a source of profit, friction turns into a deliberate feature, and billions of people from young families to aging retirees are left making high stake decisions within a system that really is stacked against them.

Jim Marous (01:10):

Today, I'm joined by the co-author of the book Fixed, Tarun Ramadorai. We explore how we got here, why consumers struggle with even the most basic financial choices, and most importantly, what it will take to restore fairness, trust, and transparency. If you care about the future of consumer banking, if you really care about your customers and your community's wellbeing and rebuilding confidence in the system, this is a conversation you can't afford to miss.

Jim Marous (01:45):

So, Tarun, I mentioned in the pre-call that I just got back from the HOPE Global Forum in Atlanta, Georgia, where the whole theme was around how do we serve the underserved or unrecognized consumer in a marketplace, not just for financial services, but for housing, insurance, technology, almost everything.

Jim Marous (02:09):

So, before we start, can you introduce yourself to the audience and tell us just a little bit about your book?

Tarun Ramadorai (02:15):

Sure. So, I'm Tarun Ramadorai, so thank you very much for having me on the show. I am a Professor of Financial Economics at Imperial College in London. I've been here for close to 10 years. Before that, I worked at Oxford for about 13 years. And I had my PhD in the US at Harvard which I got in 2003.

Tarun Ramadorai (02:38):

And I mean, since then I've been working on issues of personal finance for quite some time and I've also done some regulatory and policy work in different countries around the world mainly related to this particular theme.

Jim Marous (02:50):

So, the premise of your book is that personal finance system is basically fixed to benefit the wealthy at the expense of everyone else. Can you describe some basic ways financial institutions take wealth from their least knowledgeable customers?

Tarun Ramadorai (03:05):

Sure. I mean, so I should just say that the book came about because we've been working on these issues in personal finance for … I mean, the academic community has been doing work on this for many years. I mean, I'd say up to close to two decades or even longer. And there are lots of worrying examples of precisely the type of reverse Robinhood redistribution that you talk about for lack of a better way of explaining it.

Tarun Ramadorai (03:31):

So, to give you just two examples, there are high-end credit card rewards that are often financed by the fact that people are paying exorbitant late fees because they don't really understand the terms of their credit cards.

Tarun Ramadorai (03:46):

Mortgage refinancing, which is one of the biggest and most consequential decisions you'll make on one of the biggest and most consequential financial products that most people own. When some people do mortgage refinancing extremely well, they do well but at the same time their average rate is kept lower because of the big mistakes that other people make by not refinancing on time and just passing those profits through to the mortgage provider. So, those are two big examples of the kinds of things that we discuss in our book.

Tarun Ramadorai (04:18):

And I should just mention that this is kind of a worrying issue because it is possible to get good deals in the financial system, but this is a worrying case in which your good deal could be coming from someone else's bad deal, and once that redistribution becomes clear to you, it doesn't sit very well and it's just obvious in many different corners of personal finance.

Jim Marous (04:41):

Well, it's interesting because it's not just the products we develop in the financial services industry. As I mentioned, I've been in banking my whole career, so for a very, very, very long time, and the mentality was always established, we want A and B loans, and we want to avoid risk.

Jim Marous (04:57):

And what happens is more so now than ever before, is risk is associated with the middle class today. When you look at it, many consumers can't make it past the next paycheck if they lose that to make their rent or their mortgage payment, or even be able to put food on the table.

Jim Marous (05:17):

More importantly (and we'll discuss it later) is NSF fees are higher than they've ever been at a time that we're cutting NSF fees. So, there's something going wrong here, and we as an organizational structure, as the financial industry, really make it hard to not make mistakes.

Jim Marous (05:39):

I mentioned at the event I was just at, that it's amazing how we give long-term lessons to people on how to drive, but we don't give lessons to people before they get their first credit card as to how to handle it or at least rebuild it if you get into trouble.

Jim Marous (05:55):

So, how did a system that actually is meant to help people build wealth, which is what banking's supposed to do; transfer and build wealth, become so corrupted to do the opposite. And corrupted is maybe a harsh word, but the reality is it's really is stacked against us.

Tarun Ramadorai (06:13):

I mean, we use the word corruption in the title in a deliberately provocative way. In the title of our chapter three, which is called the Corruption of Finance as you correctly point out. Now, let me try and set the stage for this by agreeing with you that human intuition often fails in finance calculations.

Tarun Ramadorai (06:39):

Finance calculations are complicated calculations that require trading off the future against the present, thinking about and gripping uncertainty, which is a very difficult concept for us to really engage with. And when we make these calculations, we make a lot of very human mistakes.

Tarun Ramadorai (06:56):

I mean, behavioral economics is full of examples of these kinds of mistakes but we extrapolate from our personal experience rather than paying attention to the evidence out there, we don't really understand exponential growth. Learning is very hard because sometimes we do these things so infrequently that we don't get the feedback that we need in order to learn. And so, as a result of all of these problems, we make mistakes in the financial decisions that we actually put out there.

Tarun Ramadorai (07:25):

Now, what does that mean? Back to your original question; if competition is working well in the financial sector, then what competition should do is it should actually sort of cut against all of these issues and give you the best possible products, which is the highest quality at the lowest possible price.

Tarun Ramadorai (07:44):

But I think unfortunately what's happened is because we make these mistakes, the incentives of the financial sector have been perverted. The financial sector is going to respond to the demands we have, however mistaken they may be, rather than the demands we actually should have if we knew what was best for us and made all the right rational finance calculations.

Tarun Ramadorai (08:04):

So, the incentives that the financial sector is responding to is just all of the incentives that we provide the financial sector and so, in some sense, they're competing to give us what we want, which may be very different in many cases from what we actually need.

Jim Marous (08:20):

It's interesting, we sometimes in our heads think that those people that are less credit worthy, those people that maybe aren't reached out to by the financial services system is the person on the street begging or the person that's homeless or the person who's really, really struggling. But your research shows that even smart, capable people struggle with basic financial decisions which you're just referring to.

Jim Marous (08:47):

And heck, I just can take me as an example. My first credit card came from the bank I worked for and the realization that after about a year and a half having it, that the credit line that I extended had been about a third of what I was earning became a stark kick in the butt that said, "Oh my gosh, what has happened?"

Jim Marous (09:09):

What is it about personal finance that makes it so uniquely difficult for everyday consumers and how do you believe that banks can actually assist consumers in this area?

Tarun Ramadorai (09:23):

I mean, absolutely, and in fact, your particular example of your own case sort of illustrates quite vividly something that we talk about in the book which is finance, apart from the difficulties that we've talked about, about these finance calculations, it's also the case that shopping for financial products and shopping is one of the key forces that keeps prices down in markets is generally something that most people consider to be extremely boring and tedious.

Tarun Ramadorai (09:48):

We love to shop for sneakers, we like shopping for consumer electronics, but you asked me to shop for a financial product and people are asleep almost before you finish the question, and it's just really, really difficult for sort of people to get over that.

Tarun Ramadorai (10:01):

Now, what does that do? It creates this room for mistakes to happen and for prices to be put up to levels where they shouldn't be. But because of that lack of shopping and that lack of sort of incentive to kind of really get the best deals out of the financial sector, what happens is people put off the problem.

Tarun Ramadorai (10:20):

Sometimes they will just absolutely delay and delay, and they will just make these decisions super intermittently. And so, they will just kind of let the problem pile up, they won't manage the situation, and then when they finally get around to dealing with it to get the kick in the butt that you were talking about earlier, they react emotionally rather than in the cold, rational, calculating trash that you have to.

Tarun Ramadorai (10:41):

So, we characterize this in the book as having an intermittent and emotional decision-making process in finance. And this is really one of the big problems that I think actually, if we were to articulate our vision of a better financial system that actually we could get the financial system working in the right way to solve these problems rather than to make them worse.

Jim Marous (11:00):

It's interesting, it's a participatory situation. You mentioned about behavioral economics and the reality is when you realize you are in trouble is sometimes, I'm not going to say too late, but it's at a really difficult time — it hits you emotionally.

Jim Marous (11:17):

When it hits you emotionally, it impacts your family, which we all know that the primary reason for divorce or separation of a relationship usually deals with money, and it's not because you have too much, it's just not that.

Jim Marous (11:32):

In addition, there's the ripple effect. It impacts your community. You can't shop in the community the way that would make the community prosper. It impacts your work because what happens is that stress of that next phone call to work may be that bill collector impacts the way you work.

Jim Marous (11:48):

So, the ripple effect throughout the entire economy is dramatic and it has to be participatory, obviously, the consumer has to help. But I think it's incumbent upon financial institutions to not only say they're going to provide some financial wellness education and tools, but make it easily accessible.

Jim Marous (12:11):

Again, I represented a company by the name of Credit One at this event, and they go out of their way to set up YouTube pages and everything they're based on is trying to help people get out of financial challenges, not to make it easier to get into them.

Jim Marous (12:27):

And not that we intentionally try to, but humans are humans. You only have to go out to a restaurant on a Friday night to see people that you look at and you're going, "Holy crap, look at the cars they're driving, look at the money they're spending on cocktails, whatever it is, what do they do for a living?"

Jim Marous (12:41):

And the reality is they may not do anything really dramatically great for a living, but they're spending as if they are. It's still a way that people perform, a performative economy.

Jim Marous (12:54):

So, you write about people managing day-to-day financial ups and downs. Banks have data more than ever to see when consumers are struggling, yet the system seems to be designed to profit from those moments as opposed to really helping people.

Jim Marous (13:12):

Given the amazing amount of data we have, given the products that we can structure, what should banks do differently today with the data to almost personalize those experiences to the benefit of the consumer, to show some empathy as opposed to maybe a one-way dynamic with regard to the bank benefiting the consumer or maybe not?

Tarun Ramadorai (13:39):

Look, I mean I think this is exposing one of the bigger themes in our book. In chapter eight, we talk about technology, about the fact that we have all this data available right now. We have the ability to, as you say, process that data using all of these new tools that we have at our disposal. People are talking about the AI revolution and it is of course, real and there's many things that one could possibly do with that technology.

Tarun Ramadorai (14:02):

But one of the things that we discuss in that chapter which is called the Promise and Peril of Technology, is that we have to be really careful. And so, let me try and offer an analogy that has been … something that we've had in our book for a while, which is take a really old car, one that has a chassis that isn't really operating as well as it ought to.

Tarun Ramadorai (14:22):

And then now you've got this new turbo engine and you retrofit the car with this wonderful, turbocharged engine. Well, what's going to happen if you don't have the structural integrity of the car chassis operating in the way it should, you're going to get a really terrible outcome. So, before you retrofit that car with a turbocharger, what you absolutely have to do is strengthen the chassis, make sure that it can handle the load that is going through it.

Tarun Ramadorai (14:48):

And similarly, we feel like technology has the great potential to really bring down the price and increase the quality and make shopping easier and make personalization a reality and so on and so forth, but there's also the possibility of harm. So, if the financial sector continues to respond to the incentives, you can do all kinds of pretty terrible things with that data as well.

Tarun Ramadorai (15:08):

I mean, just to give you two or three simple examples of what you could do with that, you could gamify stock trading to sort of make it more attractive for people to just squander money on commissions that they shouldn't necessarily be earning, you could have people targeting you with all kinds of crypto scams.

Tarun Ramadorai (15:24):

After we put our book out, just to give you an example, we've had three different AI sort of scam people sending us emails saying, "We can help you publicize your book." I mean, people just target you with these kinds of things all the time.

Tarun Ramadorai (15:38):

People can learn a lot about you from your personal data, but they might even be able to learn who is likely to shop and who's not likely to shop, and then they just give the bad offers to the people who are not likely to shop so there’s price discrimination that can happen in a negative way. You can end around regulation, you could have algorithmic discrimination. I mean, there's many things that could be done with tech that are actually kind of bad.

Tarun Ramadorai (16:00):

Now, what's the solution to all of this? We think that part of the answer has got to be back to the analogy of the car to really strengthen the chassis, which means putting in really good guardrails within which the engine can run, financial innovation can flourish and we can really get the best outcomes we need. So, we need to have the regulatory system come in to fix some of these problems so that we can really get a better financial system out of it.

Jim Marous (16:30):

It's interesting, it's not that there's continuous bad intent by the financial services industry, it just runs a bit counter to the way banking has always been done from a standpoint of rates and fees and everything else. And it's difficult because financial institutions tend to offer a lot for free, but only to a narrow marketplace, and they continue to remove fees with some and not with others.

Jim Marous (16:56):

In fact, there's a real credit disparity, a credit access disparity gap that especially with consumers that have thin or volatile credit profiles. How do you see that banks should rethink their data, their underwriting, and maybe product design to expand credit access without increasing risk in the traditional sense?

Tarun Ramadorai (17:21):

I mean, absolutely. Look, this is something that I've personally done some work on myself in my academic work, which is, so when I was in graduate school, I mean, I remember sort of or even in college, the only company that would give me a credit card offer, they had a sort of a good model at the time of sort of distinguishing the good credits from the bad, they sort of went out there, they did a little bit more sifting through the data, and now, as you correctly point out, you can really do great things with this.

Tarun Ramadorai (17:45):

You can use digital footprints to sort of figure out who pays their loans off on time, you can use very detailed transactions data to figure out exactly what people's patterns of expenditure are, you can maybe condition credit offers based on that kind of stuff. And so, you can kind of supplement a thin credit file with vast data on the behavior of people to really tell you more about who's a good credit risk and who's a bad credit risk.

Tarun Ramadorai (18:11):

So, again, there's lots of great potential here and there's many different things that could be done. But now, I don't think, and I think it would be a little bit sort of in some ways too optimistic to believe that the banking sector and the financial sector is going to get there by itself.

Tarun Ramadorai (18:31):

I mean, the logic is that you respond to the incentives that are in front of you, and if the incentives are pushing in the direction of mis-selling products or giving people things at higher markups than they should have, then that's what's going to happen. That's the logic of the market.

Tarun Ramadorai (18:46):

But, so essentially, we've got to fix those incentives because if we do, then I think we can get the right outcomes, and hence the reform program that we propose at the third part of our book at the end.

Jim Marous (18:58):

Let's take a short break here and recognize the sponsor of this podcast.

[Music Playing]

Jim Marous (19:06):

So, it's interesting that when you look at what the impact has been, and we call it silent attrition at least within my circle that organizations think they have loyalty because they have the accounts they've had without realizing when they look at the flow of funds that consumers are continually expanding their realm of organization they work with that continue to answer challenges that they have, that the system's met.

Jim Marous (19:36):

So many consumers should choose not to use the banking system or certainly not the traditional banking system. Based on your research, what are the main reasons for this distrust and what should banks maybe do differently from the way that they deal with the consumer to help rebuild some of that trust. And maybe, it gets to your references in the book on the way that the banking system should maybe re-look at the consumer business model.

Tarun Ramadorai (20:05):

I mean, one of the things is people can be extremely naive about the fact that there are conflicts of interest. I mean, I think that's one of the areas which can be improved very importantly, which is for example, sometimes when you're being sold something, you don't really understand what the compensation system is for that particular product.

Tarun Ramadorai (20:23):

Which is, it could well be the case that that's a great product for you if you are paying the intermediary or the agent to sort of sell you the product, but it could also be that the case that they're being compensated to sell you the highest commission product that they can possibly sell you, and that's in the markup of the product.

Tarun Ramadorai (20:39):

And so, sometimes what happens is people will just naively trust people that they've been interacting with for years without realizing that there's an embedded conflict of interest in the incentive system that they have. And so, eliminating some of those conflicts of interest is super important.

Tarun Ramadorai (20:55):

The problem you have just alluded to is that when people sometimes realize that there's a conflict of interest or they've been cheated out of something or they've been given a deal that they really shouldn't be participating in, what ends up happening is that they completely lose trust, and in some cases they'll exit the form of financial system altogether, money under the mattress, family and friends, crypto and so on and so forth.

Tarun Ramadorai (21:20):

And we call that in our book out of the frying pan and into the fire because the outcomes that they're going to get in those places are going to be far worse than they could get within the formal financial system if it were working in a way that kept their trust.

Jim Marous (21:34):

It's interesting, we've seen that in South America, we've seen that in Africa, and that has resulted in some very powerful digital banking organizations that actually are listening to what the consumer wants, offering services that the consumer now trusts more than their traditional financial institutions or in some cases, their governments.

Jim Marous (21:57):

Digital banking has made access to information easier, but it maybe hasn't necessarily clarified decision-making as you mentioned that how do you avoid the biases, how do you avoid the things that are meant to tease you into things?

Jim Marous (22:12):

How can financial institutions leverage digital tools, digital learning access to simplify choices in a way that a consumer can actually understand them better, and what are some missed opportunities that you see?

Jim Marous (22:27):

Again, trying to get not just railing against the way it's built today, but where should we take the financial services industry, let's say if you have a financial institution that rethinks their business model and realizes there's such a broad audience of people that are not bad credit risk but are marginal.

Jim Marous (22:50):

I look at WeBank in China, and they've made a huge business on financing phones, basically lower credit amounts but to the masses in such a way that they can actually look at phone activity to determine maybe not how good a customer's going to be, but which ones will be the bad ones.

Jim Marous (23:10):

So, that they can eliminate the ones that they know are going to be bad based on activity, but they're willing to take the risk on the other things. What other things can be done from maybe an educational basis, maybe from a better shopping access basis? What do you recommend?

Tarun Ramadorai (23:25):

So, I mean, look, we think that financial education is definitely a great thing and being educators, we really believe in financial education, but we don't think it's the complete solution to the problem. Unfortunately, it's sort of like … I have sort of two ways of explaining this.

Tarun Ramadorai (23:44):

The first one is how much time are you spending in your average day trying to think about your financial situation? And the answer is probably a small fraction of your day, given all of the other considerations that you have. What fraction of their day is the financial industry thinking about your decisions a hundred percent of the time? And they're a large industrial organization.

Tarun Ramadorai (24:03):

And so, the asymmetry is just very large, which is to say, it seems very glib to then say, "Oh, well, you just need to be financially educated and then everything is going to be fine." You just chuck all the burden of responsibility back onto people.

Tarun Ramadorai (24:15):

Now, of course, the other thing is you started with this driver's ed example, and I think that's a great example, which is if financial education can also often feel a little bit like saying to people, “I'm going to give you the sort of theory driving test, I'm going to get you to sort of take the theory test, and then I'm going to send you out there and I'm going to make you drive a car.”

Tarun Ramadorai (24:38):

Because when the time comes, when the context comes to make the decision, it's really a practical decision. And it's sort of you're faced with all kinds of things that you can't write down in a book or you can't sort of take an exam to understand what that situation is going to be like.

Tarun Ramadorai (24:52):

And then the third problem, of course, is you learn something maybe in high school, and then the time you're going to take a mortgage is maybe 15 years after that class you took back in high school. And so, I mean, the knowledge is obsolete, it's been 15 years, there's probably been a ton of product innovation in the mortgage market, and it just looks very different from the way that it should. So, then the question is we've talked about what doesn't work and we've as you've said, railed against the system, so what could work?

Tarun Ramadorai (25:19):

And I think what we're trying to say is there's a couple of things that could be done. Now, these things range across a couple of different dimensions, so I'll sort of start with what we can do with the system today, and then I can tell you a little bit about the system of the future that we really would like to see, and how we think we should get there.

Tarun Ramadorai (25:36):

So, in terms of what we can do today, there's a couple of different solutions. I mean, the first thing is I think we can do much more on the basics. We can provide better financial infrastructure, we could improve the quality of disclosures so that they're in plain English, explaining in dollar terms rather than in percentages what people should be paying attention to, we should pay a lot of attention to the complaints that people make to simplify processes.

Tarun Ramadorai (26:02):

I mean, if you look at the CFBs complaint database, the largest source of complaints is credit actually in the United States. And it's been ballooning as a share of all complaints that people are making about financial products.

Tarun Ramadorai (26:14):

Now, how can you use technology to make these things better in terms of financial infrastructure? You could provide digital IDs, you could really ramp up the payment system. I mean, you're talking about Africa but also in India and in China and all of these places, don't have legacy systems, have terrific payment systems that are state of the art in terms of technology, and you would say that they've leapfrogged well over what used to be considered sort of more developed countries.

Tarun Ramadorai (26:39):

I mean, if you just look at the payment systems, they're better in these places than they are over here. So, you can absolutely improve that infrastructure. And then ownership registries, you can have electronic records of ownership, make titles much easier.

Tarun Ramadorai (26:54):

I mean, it still baffles me that to do a title search in the US takes like forever, I mean, before you buy, and you could just simplify that process so enormously for one of the biggest financial decisions that people are going to make. So, that's kind of one aspect of things, we can go on and talk about more, but that's certainly one big thing that the government-

Jim Marous (27:14):

Tell you what, give me another one because I think the key of this podcast is actually not to rail against the financial institutions, but to basically say, you know what, if you want a mission of making it better, and I do believe there's organizations out there — as I said, I'm speaking on behalf of one recently, and there's others out there that … there's organizations that provide wellness education, there's organizations that go to schools and actually provide children with education that they go back and tell their parents about. But what are some other ideas you have?

Jim Marous (27:50):

Because I think my mission personally is to try to make banking better and not just to criticize them all. Sometimes in my sessions, I'll criticize the banking industry. I talk about like, I'm like a doctor that wants to make you sick before I make you well, so what are some other ideas?

Tarun Ramadorai (28:07):

So, a couple of other ideas are, for example, I think regulators should be unafraid of intervening in some cases. But if they're going to do the intervention, they should do it in a clean, coordinated fashion.

Tarun Ramadorai (28:17):

So, for example, there's so many different insurance regulators across the country. I mean, but the thing that we should be trying to do is to maybe harmonize some of the interventions that they make across different states because you don't want people jurisdiction shopping to actually be able to go to the jurisdiction that allows you to do that.

Tarun Ramadorai (28:34):

So, if you're going to do coordinated intervention, if you're going to shut down bad products and be willing to do that, which we advocate, we call it a shove as opposed to a nudge, which is what Carson Stein and Richard Taylor were talking about, then you should be doing it in a smart way.

Tarun Ramadorai (28:50):

You should not be unafraid of using tools such as taxes and subsidies to actually make people take up products that we think of as good products, but at the same time, we should reduce cost to providers on products that we think are really good for them to have.

Tarun Ramadorai (29:06):

So, for example, litigation safe harbors are just really helpful by saying if you have the template that looks like this and this is the design that you have for the product and we approve it upfront, we're going to basically give you a safe harbor from future litigation about that product. And that can really help the financial sector and has in some cases, and then you really want to take action on complaints.

Tarun Ramadorai (29:29):

I mean, as I mentioned, credit report concerns have really been the dominant thing at the CFPB. And so, you should just take some of those complaints super seriously and really clamp down on corners of the market where there's abuse. I mean, there’s also templates and we can talk more about that.

Tarun Ramadorai (29:43):

But then when you're doing these kinds of interventions, we believe that there's a smart way to do those interventions, that you can really sort of take advantage of the fact that you can do some judo, which is you can fight biases with biases, you can make people safe by appealing to their love of gambling by giving them price link savings.

Tarun Ramadorai (30:01):

I mean, that's a great example of a kind of product that could work very well. You could have mental accounts which people have, which is you say, okay, you want to save for education, this is your educational savings account.

Tarun Ramadorai (30:12):

Of course, money is fungible, but then people have this mental structure that I can't take it out of that educational savings account and break that for other purposes. And so, that really helps them actually save for the purpose that they intend. So, there's lots of tools I think that regulators can use in a smart way to really improve outcomes.

Jim Marous (30:32):

And we're saying this as the government is trying to shut down and has shut down to a degree, the CFPB, and we play against each other. And another thing that I would love to see is, again, we have so much data and in a digital world, it's instantaneous.

Jim Marous (30:51):

And so, we know as financial institutions when a consumer is starting to struggle. We may not see it on the account they have with us, but we have credit bureaus that continually monitor if this person's actually taken from here and given it to there and juggling things as most of us who get into financial challenges do.

Jim Marous (31:11):

We know when a person is starting to go down a path that does not look good, and we won't be wrong if we give them tools and say, “We're starting to see some activity that we've seen with others that in some cases, creates financial stress down the road, here's some ideas.”

Jim Marous (31:30):

We can't put our head in the sand and say, “We don't know this,” we do know this. But unfortunately, in most cases, the financial institution benefits from things that I don't get smart about.

Jim Marous (31:42):

I mean, that gets back to (and some people have heard this story before) my mortgage that I didn't refinance when I should have, when the rates went down to a very small percentage compared to where I was. I eventually did it by consolidating and taking out a new loan. And the financial institution that never helped me realized, "Oh, by the way, you should do this. This is what it'll save you," ended up losing the business.

Jim Marous (32:06):

So, there is a ramification down the road for almost every financial institution and it's very challenging because at a time when data is available to all of us, we should partner with our customers, partner with our small businesses, partner with our corporations, everyone else to say, “We have data that you may not be aware of, and we'd like to partner with you in an empathetic way to say, we realize that overall you'll probably benefit and we'll probably benefit if we lift a tie.”

Tarun Ramadorai (32:43):

I mean, your example about mortgages is an excellent one, about refinancing your mortgage, and it sort of ties in very well with your idea about using data. So, just to give you an example, I mean, right now, we are developing self-driving cars, the technology exists.

Tarun Ramadorai (32:59):

And so, the thing that we find remarkable is if you can have self-driving cars, you could easily have self-refinancing mortgages. There's no reason why you shouldn't have an automatically refinancing mortgage.

Tarun Ramadorai (33:09):

I mean, it's just an obvious thing. You just get the data on what people's mortgage contracts are, you know what the maturity looks like, you know what interest rates out there in the market look like, and you could have a situation where you just have a trigger where every time there's a rational calculation about when the right time is to refinance the mortgage, the mortgage ratchets down to the new rate and off we go.

Tarun Ramadorai (33:29):

I mean, there's no reason why we shouldn't be able to do that, to use the power of technology to have a mortgage like that. Another example of this kind, which is not on the liability side, but on the saving side is a target date fund.

Tarun Ramadorai (33:42):

We all like these things. You sort of invest in a target date fund, it automatically adjusts your asset allocation over time. You take more equity when you're younger and you take less equity as you get older and closer to retirement, you move it into bonds.

Tarun Ramadorai (33:55):

But also, we know from finance theory that we should be actually doing the same thing with your level of wealth, which is, as the level of wealth increases, you should be moving away from stocks and towards less risky bonds. And you could easily have the same thing happen where you have the data, it tracks your level of wealth, and then it automatically adjusts your asset allocation. And this is not beyond the wit of mankind to be able to do at this stage, these are pretty simple products.

Jim Marous (34:20):

Those products exist if you look for them and it's interesting, you mentioned the mortgage example, and immediately my banker head says, "Are there investment tools for the bank to take that can be matched against it?" Yes, there are.

Tarun Ramadorai (34:32):

Yes, of course. Absolutely. Yes, you're right, you can manage the risk.

Jim Marous (34:38):

Actually, in a way, reduce the risk to the financial institution, but they avoid, they don't get those big spiffs when things go out of whack. On your retirement thing, some people know this, but I'm now at a point where I said to my financial person, I said, "I don't mind not participating in all the gains, I can't afford a loss right now. I can't afford a 50% drop in the market, that's not a comfortable place for me.”

Jim Marous (35:06):

So, we have bought insurance, an annuity against the rise to say, “I'm going to be limited to my rise to this, which is still good, but I'm completely cushioned against any loss.” Those financial products exist, but you almost got to dig to find them because everybody wants to go for that, "Geez, I want to participate in the Bitcoin rise."

Jim Marous (35:31):

And we get caught in our own web of human nature that sometimes, we need to be protected from because it will happen. It's not a matter of if, it's a matter of when, and it's those dynamics. And I smile because as you're telling the stories, I'm going, "Oh, geez, didn't put in that context but I do it now for myself."

Tarun Ramadorai (35:53):

I mean, you know you're absolutely right, the annuity is a really good example of the kind of product that's a terrific product, but most people find it extremely hard given our human psychology to sort of understand, which is it sort of feels like insurance.

Tarun Ramadorai (36:08):

I mean, and this is one of an article of faith in the insurance industry, which is that insurance is a product, but it's very difficult to sell people because when you sell people insurance products, you're going to pay the premium and then they go, "Okay, wait, hang on, so I just pay the premium, right?" And they go, "Yeah, you pay the premium."

Tarun Ramadorai (36:23):

“And so, what happens?” “Well, hopefully nothing bad happens to you.” "Okay, what happens if nothing bad happens to me?" "Nothing. You just pay the premium and nothing." And they're like, "What? I'm just going to pay the premium for nothing."

Tarun Ramadorai (36:35):

But the point is, you're insuring people, so when the bad outcome happens, if the bad outcome happens (heaven forbid that it does happen) you're going to have the payout that's going to help you in those situations.

Tarun Ramadorai (36:46):

And an annuity is just like that because most people focus on the fact that, “Oh no, I'm going to give this money away and what happens if I die, I've given a big lump sum away.” No, an annuity is insurance against living too long to outlive the resources that you have.

Tarun Ramadorai (37:07):

And that's really important insurance because we're living longer, longevity has been increasing, and to be in a situation where you don't have the resources in your old age, that's the bad outcome that we need to insure against, and that's the kind of product that people should be getting, I mean, very, very automatically.

Jim Marous (37:26):

And it's interesting because as you get older, you realize, geez, while stocks and real estate have always traditionally done well over a period of time, you do this reflection going, well, that works really well if you're going to live 15 more years, but I think I'm going to, but I have less of a guarantee of it now than I certainly did at my 30s.

Jim Marous (37:51):

And why is a 401(k) or any kind of investment account where they take out money automatically … it's all these dynamics. It's easy to talk about, but it also works against common sense from a financial institution, from an investment broker, from a wealth manager at the point where they're trying to sell products, and we as humans, what I want, I want to get the highest on the upside, and I want to be able to think in my mind, I'm going to get out in time on the downside.

Jim Marous (38:20):

Well, look at the volatility of the marketplace to realize, you know what, that's less guaranteed now than it ever was when I was in my 30s and 40s. So, it's an interesting dynamic.

Jim Marous (38:29):

So, Tarun, I'm a regional bank CEO with 2 million customers who just read your book, what are three actions that I should take Monday morning, next Monday to improve my personal finances for my customers, and of the sustaining system and why may I be unlikely to do any of them?

Tarun Ramadorai (38:53):

So, I mean, three things that you should absolutely do. The first thing is you should look at the conflicts of interest that exist within your organization. When people are being sold products, you need to make sure that those people are very, very aware of the fact that there may be some commissions motivated decisions going in there that may or may not be in their best interest.

Tarun Ramadorai (39:12):

And that's an obvious thing, and it sounds obvious when we talk about it, but it's actually one of the biggest causes of a lack of trust in the financial system because people, when they find out about these conflicts of interest, they just get absolutely crushed by them. So, that's kind of thing number one that they should be doing.

Tarun Ramadorai (39:27):

The second thing that is really important is to encourage people to shop, and that's really hard to get banks to do, which is to say, “Look, I'm offering you this product and it's almost against the best interest of the bank, but it really is important to build trust,” which is to say, listen, "Why don't you go out there and see what's out there, and I promise you that I'm giving you the best possible quality at the lowest possible price, and I'm really here to compete for your business, but in order for me to assure you of that, you need to go out there and shop." And I think that's the second thing.

Tarun Ramadorai (39:58):

And the third thing is you kind of want to lean against the biases that people have rather than leaning into the biases that people have. Often what happens is someone will come to you and they'll say I really want this product. And everything inside of you is screaming, you shouldn't really have this product, but of course, you're not going to say that as a sales person.

Jim Marous (40:15):

I'm going to send a sale to you.

Tarun Ramadorai (40:18):

Exactly. No, I mean, so those are two of them. And then the third thing is when people complain, you should act on those things immediately. Which is to say if you're getting a whole bunch of complaints about a similar kind of situation, at some stage, you understand that it's not about the people that are coming to you, there's something systematic, it's not just an idiosyncratic problem.

Jim Marous (40:42):

I'm going to give two more. One will be how easy is it to find your tools that help a person make a good decision? How easy is it? I mean, the fact that you have it on your website is not good enough. Is it on my mobile phone? Is it going to pop up when you see I'm getting close to maybe having an NSF?

Jim Marous (41:03):

Bottom line is I no longer as a consumer because I'm getting better activity with Uber, I'm getting better activity with Amazon, I'm getting better activity with Google, I don't want the rear view mirror view of what I've done wrong, I want the windshield, the GPS of financial services people know I refer to quite a bit that tells me based on the data we have, you may want to (I may be wrong) look at things a little differently.

Jim Marous (41:32):

And it may even get down to, with those organizations that serve the younger consumer, by the way, you’re going nuts on weekends if you wanted to cut back a little bit, this is what you could have in return. You could take that trip you've been talking about that you'll probably put on a credit card anyway, and do it differently.

Jim Marous (41:50):

And finally, it goes without saying that you're reading your book wouldn't be a bad first start either. I know that you're biased, but I'm going to say that this has hit me at the right time and for those who listen to the podcasts, I really urge you, we have a number of podcasts that talk to organizations that provide financial wellness tools. We talked to a number of organizations that are non-traditional, that are doing banking differently, and oh, traditional bankers pay attention to those because consumers are finding that.

Jim Marous (42:22):

I have an Acorns account, which is an automatic savings account and no financial institutions ever come to me and say, “We can replicate that in a traditional bank.” Why? You know I'm doing it, certainly, my personal and my business bank know because I have money taken out all the time.

Jim Marous (42:37):

Look at flow of funds. And again, when you're listening to these podcasts, indulge in what's being said there and realize there's money to be made in doing good and making people more financially well.

Jim Marous (42:53):

It may not be immediate, it may not be that fee that you could have collected, but at the end of the day, you're going to do better by your customers and at a time when the consumer now doesn't have to close your account, but can easily push a button and move someplace else in a nanosecond, which by the way, you don't even offer the opening tools to do that anywhere else, they’re going to make that move.

Jim Marous (43:15):

It doesn't matter where you are. It doesn't matter if you're in India, Africa, the UK, United States, Canada, South America. All over the world today, there are financial options being developed for those people that are being left to the wayside.

Jim Marous (43:30):

We talked about way back the financial payment tools made in Africa that used a flip phone. We made fun of them at the time, and at the end of the day, the simplicity of that tool is what we all ended up with in our Apple phones nowadays, so pay attention to what's going on around you.

[Music Playing]

Jim Marous (43:48):

Tarun, I'm going to have you back because you're obviously extraordinarily passionate about the message you're trying to get out. I'm extraordinarily passionate about making financial institutions do better at what they're doing instead of saying, we're going to do it the same way we've always done because your consumers are leaving you right now silently.

Jim Marous (44:12):

It's not going to be silent forever because what used to be a minority is becoming a majority, and look for those organizations that are going to work on your behalf, look for those organizations that will help you get out of financial stressful situations. Because right now, your traditional financial institution really has little incentive unless you go bad on them.

Jim Marous (44:33):

If you're continually paying them, but you can't make the payments without flipping money from one place to another, they have very little concern in many cases, except the risk to ask you. They don't want to lose you, but on the other hand, they don't necessarily want to help you, and that's a harsh reality.

Jim Marous (44:53):

Tarun, thank you so much for your time.

Tarun Ramadorai (44:54):

Thank you. My pleasure. It was really great to be on the podcast. Thanks, again.

Jim Marous (45:00):

Thanks for listening to Banking Transformed, the winner of three international awards for podcast excellence. If you enjoy what we’re doing, we would really enjoy a positive review. Also, check out my recent articles on The Financial Brand and the research we’re doing for the Digital Banking Report.

Jim Marous (45:15):

This has been a production of Evergreen Podcasts. A special thank you to our senior producer, Leah Haslage; audio engineer, Chris Fafalios, and video producer, Will Pritts.