[00:00:00] Becky Reed: I wanna talk about the future of lending end to end, and how you can utilize distributed ledger technology, including stablecoin and including, uh, smart contracts.

[00:00:13] Vince Passione: Welcome back to 22 Minutes in Lending. I’m your host, Vince Passione.

[00:00:20] Vince Passione: We’re back for part two of our conversation with Becky Reed, COO of Bank Social.

[00:00:25] Vince Passione: In part one, we explored the collaborative power of credit unions and the evolution of the QSO model. In part two, we’re diving deeper into the future of lending and payments. Let’s dive into the episode.

[00:00:39] Narrator: Welcome to 22 Minutes in Lending your Go-to podcast for insights on all things lending from lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends. And happenings around the lending industry. Let’s dive in to the latest in lending.

[00:00:58] Vince Passione:  So let’s talk about practical example. ’cause I always talk to my staff about this. So obviously link key, we service loans, right? We’re, we’re dealing with millions of dollars of money movement every single evening. And, and think about what we’re doing right? We’re we’re, we’re moving money between members and the credit unions.

[00:01:19] Vince Passione: So is the entry point that it’s fiat currency and now I need to then turn around and turn it into stable coins so they can ride those rails? Or is it. Even the loans themselves have to be converted into stablecoin. So is it, is it, is there this conversion that happens and then we ride the rails and everyone’s happy?

[00:01:39] Vince Passione: Or does it have to be set up as these are digital contracts? You know, when I listen to people like Mike Cagney talk about figure, right? And mm-hmm. You know, he uses hash, right? That’s their, mm-hmm. That’s their currency, that’s their token. Help me understand that practical example, Becky.

[00:01:50] Becky Reed: I wanna talk about the future of lending end to end and how you can utilize distributed ledger technology, including stablecoin and including, uh, smart contracts.

[00:02:07] Vince Passione: Okay, great.

So let’s talk about a member who wants to buy a car. Then I can even take it, um, bundling it up into a loan participation. So let’s do origination first. So a member wants to buy a car. They come in, they do an online loan application, which can all be on chain using their digital identity. We go in, we underwrite that.

[00:02:31] Becky Reed: We can actually stamp that, hash that on chain as well, that loan decision. And now, um, the, they agree to the terms they’re gonna do the loan, right? So now we write a smart contract. And we bundle the stable coin into that smart contract. Now that smart contract goes to the digital wallet of the dealership, and the dealership gets their money right away instead of waiting for a wire and doing all this title. Muck Kitty Muck. The smart contract actually does all the title work, does everything sets up the, the automatic payments from the member’s digital wallet, I mean the whole thing. The smart contract handles all of the, the management and automates all of those processes behind the scenes if the member is ever in default.

[00:03:19] Becky Reed: Now they’ve broken the contract and now there are things that are already written in code about the contract that start happening. Um, so it can even, uh, initiate a repossession. For example. So it can automate, you know, reaching out to the member. It can automate putting a hold on their account. I mean, there’s all thing, all these things can be done.

[00:03:39] Becky Reed: Remember with programmable money, so the dealership they’re taking care of, right? The smart contract, uh, gave them the money. They, uh, put the lien on the title. The title got issued, uh, digitally. All of that stuff happened in seconds. And then it manages itself, uh, moving forward. So now that loan is on the books at the credit union, and let’s say that they want to bundle that auto loan up with $10 million of other auto loans that look very similar.

[00:04:09] Becky Reed: And now they’re going to put that out on a marketplace. Well, right now, in order for it to make economic sense, most credit unions in order to purchase the loan participation doesn’t make a lot of economic sense because of all the due diligence that has to take place. They have to look at all the loans, they have to look at all the underwriting, they have to look at all the paperwork they, with everything signed, yada, yada, yada y.

[00:04:29] Becky Reed: They have to prove that they did that every single time. A million dollars doesn’t make a lot of sense to buy out of a $10 million. I probably wanna buy $5 million. I probably even wanna buy all 10 right at the same time.

[00:04:37] Vince Passione: Right.

[00:04:38] Becky Reed: Now that freezes small credit unions out of the market. A small credit union, a $25 million credit union, or even a hundred million dollars credit union.

[00:04:50] Becky Reed: I don’t need $10 million in loans. I maybe don’t even need five. I might need one. It doesn’t make economic sense for me to do that because of all the work involved and all the paperwork and it’s just a pain. So now we tokenize that $10 million portfolio, and now let’s say each token is worth a hundred dollars, okay?

[00:05:11] Becky Reed: Each token has all that due diligence wrapped into it, right? So now a a $10 million credit union can buy $500,000 worth. Or a million dollars or whatever. And so now that $10 million portfolio can be farmed out to a hundred different credit unions. And now if I decide that I don’t wanna hold it anymore, I need liquidity.

[00:05:33] Becky Reed: Now I have a secondary market by which to sell it. That’s something that’s not possible today either.

[00:05:32] Vince Passione: See, we solve that problem by getting the degree to the common, common underwriting, common pricing, so they can, they can buy these loans in real time. And that’s how we solve the problem for the small credit unions.

[00:05:49] Vince Passione: But you are absolutely spot on that it, it, the tokenizing it. Would make this so much simpler and Right. And placing, yeah, placing Defy would would really work. It really does work here. Perfect. Because that’s what, that’s what’s heading. I wanted to understand the ecosystem and make sure that our, our listeners understand the ecosystem as well.

[00:06:07] Vince Passione: So for someone like LendKey, we would partner, we could partner with someone like Bank Social. Yep. We would then turn around, you’d be our arm ramp. We would benefit from speed, right? Yeah. And accessibility. And then later on as we think about the edges of the network. And we start looking at things like, like digital contracts and using immutability.

[00:06:27] Vince Passione: And there’s a famous quote, I think it was Cagney, Mike Cagney said, oh, all we’re doing at figure. And I think that’s true of bank social, right? And you’re, you tell me if I’m wrong, is we are just replacing. Trust with truth and the people who supply trust in the network take rent out, right? Because you know, whether you’re doing a securitization right, they don’t call them custodians for nothing.

[00:06:48] Vince Passione: Um, is that, is that true when you think of, about bank social’s role as well as you think about what it can do for the credit unions in it, in its current, current state and future state?

[00:06:51] Becky Reed: So when we talk about trust and truth that it has a lot to do with the transparency of. Of transactions that happen on chain because you can see, uh, the transactions, if you have the, uh, wallet addresses mm-hmm.

[00:07:14] Becky Reed: And the transaction hash, you can go back and you can see those transactions. Remember I talked about those transactions are recorded in a block? In the blockchain example, so transactions are recorded. If you have the transaction hash, then you can go and you can look at that transaction. If you have the wallet address or the account number of where the transaction occurred, then you can go in and you can see all the transactions that that, that have happened in that wallet.

[00:07:39] Becky Reed: So that does replace truth with trust and because of the decentralized nature of the network, the nodes that are consenting. To record that transaction, have to all agree. And they are decentralized. They’re not all owned by one central authority, which is quite different than a core database. For example, at a credit union that is owned by the credit union, one particular entity, uh, or a social, uh, network, uh, like, uh, x that is owned by one particular entity.

[00:08:10] Becky Reed: And so when you have a decentralized network, it’s, it’s more diff difficult. To put erroneous information out there or nefarious information out there, or untrue information out there because of the decentralized, uh, nature of, of the, the network. Now, I’m gonna address custodianship here in a minute because, uh, custodianship is a, I’m gonna call it a legacy or an antiquated mechanism of how transactions have happened on chain. People have bought cryptocurrency in a custodial environment. Coinbase is an example. They hold the digital asset on your behalf. So whenever you buy it, they’re holding it, uh, for you. But you don’t really own it.

[00:08:59] Becky Reed:So the decentralized finance world or the defi world. Uh, believes in self custody. So that gets back to why credit unions should be das and, and, you know, own your own money and financial inclusion and all of that. Um, and so bank social. What makes us a little bit different from a digital asset exchange perspective is that we are noncustodial.

[00:09:21] Becky Reed: So what that means is we have a inventory of of digital assets that we sell to our customers. So when you come in or your member comes in and buys the digital asset from the, the bank social exchange, it’s transferred to their wallet and they own it and they can do whatever they want with it. After that, we have nothing.

[00:09:40] Becky Reed: We’re not holding it on anyone’s behalf. So the risk there is if bank, Bank Social goes away tomorrow, which we won’t, but if we did, then um, then you would own your digital assets. That would not be the case with a Coinbase, for example.

[00:10:00] Vince Passione: Got it. So talk about some of the other players. So we’ve had, um, the CEO from Bloom, Crediton, Christian Helm.

[00:10:02] Vince Passione: Uh, we had the CEO from Nova Crediton. These are data furnishers in the world of, of credit, right? And, and that’s the world I live in. And, and you had mentioned this in one of your other podcasts, right? You know, look, lending is about moving money around. It’s all about moving money. So what about. What, what happens in the world if, if, if the adoption of stablecoin were to happen and let’s dispel disbelief?

[00:10:23] Vince Passione: It all happens now. Credit unions are all using it. Right? They all become DAOs. Right. It all sounds great. What happens to players like data furnishers, like a Bloom, like Inova?

[00:10:28] Becky Reed: Well, I think that a, a lot of things that we think about in our space will just transition to doing it maybe in a different way, but I still think that underwriting.

[00:10:46] Becky Reed: Is important and you, you know, you have to have some way to evaluate risk, right? Regardless of if it is a, a business that you’re lending money to, and lending doesn’t go away, right? But it might change a little bit. So, for example, in the DAO example, let’s say that back old, old, old school, remember when there were credit committees? At the credit union. Right. So the credit committee,

[00:11:07] Vince Passione: I think they still, I think they’re still there. Wait a minute.

[00:11:11] Becky Reed: Some, some are still out there. So what, you know, let’s say their rule is all real estate loans have to go to a credit committee. Right? Right. Well now you think about if, if it’s a DAO and the, now the credit committee is looking at these loans and now they can vote with their token on whether to make the loan or not.

[00:11:34] Becky Reed: Well, it’s not too far of a leap to say that. The members themselves, right? It’s the members’ money that’s being lent out. So now the members themselves can vote on particular, uh, loan with their tokens to approve or deny. And the token holders, the members might wanna understand the risk they’re taking.

[00:11:58] Becky Reed: How is this person paid back? Other loans? What is their their, see, there’s other kind kinds of data. I think that is important now as well. I might, maybe, if they give me permission, wanna kind of see their social media accounts. Are they driving around showing everybody their Lamborghini that you know, that they got yesterday and, but they’re telling me that their job is, you know, a postal worker and they’ve been there for two years.

[00:12:26] Becky Reed: How are they affording a Lamborghini? I mean, there’s things like that. I think that these data furnishers. Can assist us in providing that goes well beyond just a credit check or a credit score. You know, I, I know that there are additional data that is coming into, um, these, the, the capabilities of underwriting, for example, rent.

[00:12:49] Becky Reed: You know, how do, how do they pay their rent? How do they pay their utilities? Um, you know, maybe that social aspect of it is, would somebody vouch for me? Remember when we would put references. On the loan application. So all of those things I think are still necessary. It’s just we’re doing them in a, in a different way. And all those data, furniture, they can be digitally native too.

[00:13:17] Jim Merrill: This is Jim Merrill, president and CEO of Inspire Federal Credit. For the last 13 years, we’ve partnered with LendKey to elevate our lending services and strengthen our commitment to providing the best financial solutions for our members. The team at LendKey is not only knowledgeable and responsive, but also genuinely committed to our success. They have empowered us to better serve our members. And have been a true partner, not just another vendor.

[00:13:47] Vince Passione: So innovation, I was at a Leverage conference, uh, in Florida and there was a, there’s been a lot of discussion about the impact of the current structure of credit union board members. The, the boards themselves, uh, do they limit terms? Um, you know, how, how do the credit union CEOs and the executive teams interact with their boards?

[00:14:10] Vince Passione: And I’ve presented to some of them, right? Some of them are the, I was, I, I presented to the, the board of Merck Credit Union, right? These are senior executives at Merck. These folks are in, in the environment every day. Cryptocurrency, stablecoin, all things you just discussed, Becky. They, they’re living it in their own business today.

[00:14:30] Vince Passione: Then there are other credit unions that are much more traditional, where those, those credit union board members, they’re, they’ve been board members for life. Um, and, and they’re not currently, some of them are retired. They’re not engaged with some of the technology, whether it’s ai, whether it’s stable point.

[00:14:47] Vince Passione: Is that a, how do you get around that challenge? Because I, I’m skeptical, right? I mean, like you, I’m a technologist at heart. You sound like you’re a technologist at heart. You, you wanna see this technology move forward because it is so important and vital for the, for the movement. But how do you get past that?

[00:15:05] Becky Reed: Well, I like yourself, am out talking to boards all the time, and I actually get this question quite often, not from the board members themselves, but from people who are wondering, how in the heck do you explain blockchain to a board member? And first of all, I would ask you, do any of your board members, regardless of their age or their tenure on the board, can any of them describe how an A CH works today?

[00:15:31] Vince Passione: No. No, probably not.

[00:15:27] Becky Reed: No, they can’t. Most of your staff probably can’t, right? So to try to come at a board from a, I’m gonna explain to you about how this works so that you’ll see the benefit is the wrong way to go about it. Every board on the face of this planet, I promise you, understands how payments impact the credit union.

[00:15:57] Becky Reed They all do. They understand that we move money, they get that. And so when you talk about a stable coin as just a new payment rail, just like Visa and MasterCard, then they go, oh, okay, well I understand that. And then you talk about. Making it easy to use. Here’s how you will use it. You’re gonna tap to pay just like you use your Apple pay right now.

[00:16:13] Becky Reed: Right?

[00:16:14] Vince Passione: Right.

[00:16:15] Becky Reed: I mean, what do you care? That’s a stable coin on the other end, it doesn’t matter to you. Do you really care if your mm-hmm. Your money moves on the visa rails or the point of sale MasterCard Rail? No. You don’t care. All you care is that you’re able to pay for the groceries that you’re trying to buy, or you’re able to pay your friend back for the pizza that they bought last night.

[00:16:37] Becky Reed: So it, it is not a hurdle. To go in and, and talk to boards about these things. All of them understand about modernization. All of them understand that technology. They use it every single day. I promise you that many, many board members are streaming TV and not using cable anymore.

[00:16:53] Vince Passione: What would help?

[00:16:54] Becky Reed: Yeah, so if they can do that, if they can do that, they can understand this.

[00:17:03] Vince Passione: Yeah, so, so these, so we’re, we’re, it’s amazing how quickly the year has gone by, right? Credit unions are now anticipating their strategic planning cycle, so, mm-hmm. I know your answer is gonna be, should they put crypto on the agenda? Absolutely. I’m, I’m sure you would say that, but, but how should they approach it in the planning session?

[00:17:20] Vince Passione: What are the questions they should be asking themselves? How do they really get this down into some scenario that’s actually executable?

[00:17:24] Becky Reed: Yeah, I think that education is important, so understand it and you know, bring somebody in to educate them if they haven’t already, or you know, ask them not to pitch my book, but you read my book, or, you know, go online and you know, look up blockchain or whatever.

[00:17:44] Becky Reed: You know, those things I think are important to educate yourself. But from a strategic planning perspective, I think that it is really important. To look at adopting new payment rails and not just blockchain rails, but also RTP and Fed Now Rails, right? So there’s this whole evolution that’s kind of happening, uh, a pre blockchain adoption in stablecoin, but the, you know, the iso, uh, 2022 or 20 au 22.

[00:18:12] Becky Reed: Um, standardization that has happened in payments, and I think all payments will be moving in that direction. I don’t believe that all forms of payments right now, which by the way, are clunky. Mm-hmm. They’re expensive. They’re siloed. They don’t talk to each other, and they’re rife with fraud. All of those things are happening today.

[00:18:31] Becky Reed: Now Stablecoin and DLT Rails and even Fed Now and RTP helps solve some of those things. So payments have got to be on your radar. A hundred percent have to be on the radar. The reason cryptocurrency should be on the radar is because your members, in order to use stablecoin, just like that on-ramp I was talking to you about before and the off-ramp.

[00:18:52] Becky Reed: You have to be connected to DLT Rails in order for your members to use cryptocurrency or stablecoin at all. If you’re not, they can’t use those mechanisms. It’s kind of like your member may wanna use Fed now, but they can’t if you’re not connected to those rails. So you have to be connected to DLT Rails, and I highly recommend that on your strategic plan in the next 12 months, you need to get connected and make sure you’re working with a third party service provider. I don’t expect any crediting to go out there and build this themselves when you’re, uh, connecting with a third party service provider. Please, please make sure that the solution is not just buy, sell, hold.

[00:19:31] Becky Reed: It has to be sent and received to, and there have to be fraud. Sure. Risk mitigation, um, and fraud tools that are available with that because it is another payment rail. So if you’re seeing fraud on a CH, you’re gonna see fraud on the crypto rail too, unless you have the tools to combat that.

[00:19:46] Vince Passione: So how, how do you handle the credit union that says, and the credit union executive says there’s a wild, wild west.

[00:19:55] Vince Passione: Fiserv has just announced their stable coin. FIS will probably follow suit, all cores will do it. MasterCard, visa, there’s gonna be a whole bunch of these and then eventually there’s gonna be some consolidation. Yep. So why don’t I just wait?

[00:20:07] Becky Reed: Well, you can wait if you want to, um, be where you are now beholden to some big behemoth FinTech.

[00:20:17] Vince Passione: And you pay what they, what they tell you to pay and you, it works the way they tell you it works. And so I, I would prefer to, you know, move forward in a way that works better for my financial institution, right? Where I can maybe call the shots and decide how much I wanna pay and what the functionality, uh, is, and not wait for all of those.

[00:20:39] Becky Reed: But you are right. There’s gonna be, there is, and it’s going to make a not lot of noise in the space. There’s gonna be an explosion of all these stable coin. Providers. Exactly. And that’s okay because there’s a thing called interoperability. And again, this happens in the crypto world all the time. People swap one digital asset for another.

[00:20:58] Becky Reed: That’s going to be happening behind the scenes. So JP Morgan is gonna have a stablecoin. Fiserv is gonna have a stable coin, and if your member gets a Fiserv stablecoin, then it’s gonna turn into a, whatever a credit union stablecoin is, and then the credit union’s gonna be able to accept it. So, uh, don’t worry about all of that, but there is gonna be a lot of noise.

[00:21:17] Becky Reed: But, but waiting and just seeing how things shake out, you, it will be too late. It will be too late.

[00:21:21] Vince Passione. Good answer. Alright, last thing, we’ll have some fun looking ahead so you get to play time machine. I know the way you’re gonna answer this. What? It’s 2030. So what does the credit union system look like? I think you covered some of it already, but.

[00:21:36] Becky Reed: Well, this is a little bit of a dream of mine because I would like to reinvigorate the grassroots movement of credit unions and combine that with the grassroots movement of the decentralized finance movement to create a financial res re renaissance of, um, financial cooperatives. And so in 2030, I would hope that there are at least 1000 brand new credit unions that are DAOs. That are serving a very specific niche, digitally native community. For example, like gamers, right? There’s a field of membership. They have a common bond. They all really enjoy paying, playing Roblox, for example, and they’re using cryptocurrency and stable coin to interact amongst themselves to buy things, and they’re using AI assistance to help them manage their finances all on chain.

[00:22:31] Vince Passione: Awesome. Alright, two more fun questions. Maybe just one more. All right. So, you know, you do this all the time, right? You’ve been interview all the time. What’s the best question that you’ve ever been asked? And please, it doesn’t have to be any of the ones that I just asked you, so let’s exclude those. What was the best question you ever asked in one of these podcasts?

[00:22:48] Becky Reed: I think that the best question somebody ever asked me was what I would say to my 25-year-old self now,

[00:22:51] Vince Passione: Ah, you wanna gimme that answer? What? What is that?

[00:22:55] Becky Reed: I. I think that I, I would tell my 25-year-old self that I don’t have to do everything alone. That there’s people out there that, that are willing to help and I should accept their help.

[00:23:13] Vince Passione: Uh, that’s, that’s very good advice. Very good advice. Well, thank you. We’re gonna leave it there. This was pretty awesome. So thank you so much. Thank you. Uh, if you enjoyed today’s episode, subscribe to 22 minutes in lending for some more thought leadership and real world stories at the heart of Lending Innovation.

[00:23:27] Vince Passione: Thanks for listening. See you next time. Becky, thanks so much.

[00:23:27] Becky Reed: Thank you for having me.

[00:23:28] Narrator: Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five star review.