As 2022 winds down, this year has certainly been interesting for the financial markets. Inflation has forced the most significant Fed interest rate hikes in years, a bear market has resulted in a roughly 20% dip in equities, and while a soft landing remains possible, fears of a recession continue.
For banks and investment firms, these events alone make it that much more important to be sensitive to client needs and perceptions. There’s good reason for this. Since the meltdown of 2008, the financial system has been on high alert to ensure the health of both Wall Street and Main Street. With banks playing a central role in the crisis, they are now complying with capital requirements to limit the risk and leverage they can take. They are also focused on digital technologies to meet evolving customer demands and compete with FinTechs and other "anit-establshment" dis-intermediaries that are transforming the financial marketplace.
Operational integrity also has been an issue since 2008, when the collapse of the financial markets revealed a number of Ponzi schemes. The largest and most significant of these crimes was that of Bernie Madoff, whose “investment wizardry” turned out to be nothing more than a sham that ruined the fortunes of both sophisticated and mainstream investors alike.
This is why the events of last week have been so confounding.
On one hand, market signals improved. The Consumer Price Index (CPI) came in slightly lower than expected, raising hopes that inflation might finally be getting under control. In turn, stocks responded, with the S&P posting its best week since June. And yes, the banks are just fine. Back in June, they passed the very stress tests imposed after the 2008 debacle to ensure capitalization requirements. All good news.
However, on the heels of the good came the bad. We witnessed the collapse of FTX, a cryptocurrency exchange and an example of the new type of financial player challenging old traditions. A myriad of reasons can explain its demise, but a lack of guard-rails and straight-out malfeasance appear to top the list. To wit, CEO Sam Bankman-Fried used customer money for his own account and apparently held just $900 million in liquid assets against $9 billion of liabilities.
With the latest reports indicating that FTX could owe money to more than one million creditors, the credibility of the financial system has once again been called into question for the everyday consumer. Here's information from Bloomberg’s e-newsletter on Saturday, Nov 12, which offers a clear overview:
What?? Why was proper oversight overlooked at FTX? And when did personality get bigger than fundamentals?
And yet it was, and regrettably, this has been a common theme of late. Recent dramas like Inventing Anna and WeCrashed reveal how some of Wall Street’s elite have been bedazzled by the charms of so-called visionaries and scam artists. No doubt, SBF has a pedigreed background, with Stanford Law School professor parents and a degree from MIT. But this does not render him immune from business scrutiny. There's little doubt that SBF is smarter than the average person but that doesn’t give him license to game the system and get away with it. Turns out, he didn’t.
Integrity should reside at the core of any financial firm: from the people in charge, to the infrastructures built, to the very development of digital products customers are looking for, all delivered with a commitment to transparency. This is the great differentiator and the only way to engender trust and ensure that Main Street remains confident in the financial system.
I would be remiss if I did not credit those FTX competitors who in the face of the meltdown pro-actively communicated to customers. For example, Coinbase immediately put out an email focusing on its commitment to "a more transparent and secure crypto exchange" and detailed key attributes including healthy financials, holding customer assets, risk management and industry-leading security.
On that note, let me end with another positive. Amidst the cacophony of last week, I attended a NY PAY webinar, where the issues around digital transformation, were discussed. NY PAY is a non-profit that connects innovators and leaders from the payments industry and all it touches: issuers, merchants, networks, FinTech startups, regulators, and others.
The speakers engaged in a no-holds barred discussion, candid and forthright, identifying the digital transformation approach financial institutions, and largely banks, must take to be truly competitive. Their bottom-line takeaways: no cutting of corners, sufficient due diligence in choosing partners, and committing to serious investments to truly deliver the solutions consumers want and deserve.
Yup, that’s the right answer. It is the integrity of which I speak. From a marketing, communications and reputational perspective, this is the way that financial players and the industry overall must operate to quell naysayers and address customer needs.
