The COVID-19 pandemic is confronting us at every level of the global economy. We have never seen the economy shutdown at this scale and duration, and bring us into such completely uncharted territory. In the United States, we are seeing the Federal Government mounting a very ambitious economic response. Its role and attempts to ease the economic burden could last for years. Recently, Democratic presidential candidate, Joe Biden was quoted as saying “the next few years will look like the beginning of the presidency of Franklin Delano Roosevelt [FDR],” the president who was famous for taking America out of the Great Depression and putting a large portion of the unemployed back to work.
FDR’s approach was a complete paradigm shift from how the U.S. Government has functioned in the preceding 162 years before his election. The nation’s budget was split into a small group of silos -Defense (then referred to as War), Treasury, Postal Service, Interior, and Foreign Affairs. At that point, the U.S. was a growing global power, and had not yet earned the super-power status it attained after World War II. So FDR’s approach focused on bringing the country out of the Depression by reshuffling how a reduced tax base was distributed. The New Deal as it was called, was the largest-ever public works program. It saw the creation of many new departments of the federal government, most notably The Department of Labor, addressing an area where the U.S. had a surplus. This new department was the first tangible example of disruption in the last century. To deploy the unemployed masses, it launched a series of initiatives that laid the foundation for the nation today. The Department of Labor’s programs built new roads, parks, rail lines, airports, and more, all of which are critical to the nation’s infrastructure. Fast-forward to today, most of that physical infrastructure, and it’s digital counterpart are in serious need of updating; if Biden is correct, we may see the United States go through a process of significant upgrading.
Today, the impacts of COVID-19 and the social distancing and shelter in place orders have just begun to decimate the U.S. economy. There is no doubt that we are only in the early stages and are just scratching the surface of what could possibly face us. While economists disagree about the level of impact we will see in the near future, they all agree the effects will be dire, some believing that the U.S. economy will shrink by as much as 40%. Some share the same view as current U.S. President that the “cure may be worse than the cause.” Even the most conservative estimates project the recovery program will cost trillions of dollars more over the next few years, on top of trillions in relief measures already approved by the Congress and President to date. The harmful effects of this pandemic are not equally distributed. Children will be the largest victim, physically and economically, because the financial decisions made today will impact the nation for years to come.
As we navigate this storm, the United States Department of Homeland Security has identified 16 critical infrastructure sectors whose assets, systems, and networks, whether physical or virtual, are considered so vital to the United States. Their potential incapacitation would have a debilitating effect on security, economic security, national public health or safety, or any combination thereof. The Financial Services Sector, one of the 16 includes global corporate and investment banks, insurance companies, thousands of smaller depository institutions, credit card providers, financial technology companies, and more. Despite any qualms the general public may have with this sector, it’s arguably the most critical piece of the U.S.’s infrastructure. It serves as the fuel and backbone for every other sector of the economy and is an industry that is at a crossroads. The sector can choose business as usual or business with purpose. So far, all signs point to the former.
It’s shocking to see a lack of altruistic action coming from the large banks. Instead, as claims made in several class-action lawsuits state, the largest banks have used this as an opportunity to profit. They have been quick to prioritize their largest customers and the substantial origination fees they represent, while doing little to provide relief for the individuals that need it most. The crisis is their opportunity to lead, and help the nation pick-up where FDR’s new deal left off. Banks could, for example, offer low-interest loans to state and local governments to address the physical infrastructure issues plaguing the United States, they could also use their superior resources to create simple and easy routes for individuals to find financial relief, both would ease the financial burden on the average American by offering opportunities for them to work. Finally, a term often used in business is “money is cheap,” meaning the costs of financing are at all-time lows. Financing in banks used to be what provided customers with an average 8% interest on their savings. Instead, banks began taking nearly 90% of that interest away from customers to make “money cheap” for their corporate clients. It’s business as usual and all the typical business issues that come with it.
As the CEO of Cogni, our banking priority is to ensure the critical needs of our customers are met in a timely and efficient manner. We will continue to innovate and develop new financial products that support the financial needs of the Americans who can and cannot work from home. I founded Cogni to change the way people bank and their relationship with their financial institutions. We saw many issues with the banking system, when the economy was thriving, and are now seeing even worse issues during a crisis. I’m encouraged by the fact that our company is in business, and we are a part of a growing group of cohorts that customers are quickly turning to for their financial needs. When the big banks were turning people away from their Pay Check Protection loan applications, Fintechs like BlueVine and Grasshopper Bank were there to offer a simple route to this critical relief. These are two examples of the next generation of financial services, one being a provider of capital the other is a growing business bank. Seeing this creates excitement for what’s coming next.
In the past 20 years, the industries that have been disrupted haven’t been those that stood still and practiced business as usual regardless of external factors. When the writing was on the wall that Americans wanted smaller, more fuel-efficient cars, Ford, Chrysler, and G.M. ignored the signs and continued to make the same cars they always made. This blindness opened the door for Japanese and Korean vehicles to quickly gain popularity, and bring these stalwart American institutions to near bankruptcy. We’ve seen the same story play out with retail, food and beverage, agriculture, energy, and several other sectors. The only one remaining somewhat immune has been Financial Services; but with Fintech emerging as the champion in the early stages of the economic downturn, I believe this is proof of the next wave of disruption and, in 10 years, will be focused on changing this critical industry. The leaders of today will be telling a very similar story about the near-defeat of the American banking industry and the “New Deal” that Fintechs offered to evolve a slow-moving sector.