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Tech@Stern | The Future of FinTech - YouTube
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-Hi, I'm Arun Sundararajan.
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Welcome to Tech@Stern.
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I'm here today with Kathleen DeRose,
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one of the directors of our
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newly formed Fubon Center
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and one of the world's experts on
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Fintech. Welcome, Kathleen.
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-Thanks so much.
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-Tell us a little bit more about what
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you do at Stern.
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-I'm a finance professor here at
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Stern, and my mission is to make
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Stern the number one institution
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known for Fintech.
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And that really encompasses three
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different things. Having a winning
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curriculum, being a thought leader
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in Fintech research and building the
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most effective Fintech ecosystem
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here in New York.
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- What exactly is this?
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I hear the term a lot, but there are
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people who tell me I don't
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understand what Fintech is.
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Isn't everything in finance about
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technology?
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So how do you really draw the
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boundaries around it?
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So how would you define the subject
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that you are one of the world's
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experts in?
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- My favorite topic.
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I like to quote Robert Martin,
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famous economist.
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He said, look, from Babylonian times
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we've had the same five financial
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functions in any functioning
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society. It's payments, money
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transfers, insurance markets
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and capital allocation.
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And his key insight was those
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functions don't have to happen
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inside any particular institution,
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that you can decouple the two.
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- Okay.
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- So the world of Fintech is really
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about taking what had historically
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been intermediaries or toll
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takers, and replacing them with
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software, APIs, mobile networks.
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So I'd like to think of Fintech as
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the E-ZPass of finance.
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That really opens up all kinds of
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exciting opportunities to lower
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cost, make things more transparent,
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make financial services more
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Accessible, - and even further, some
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really cool ideas about what does
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the meaning of money and things like
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that.
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- So the way you describe it, it
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sounds like large scale
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disintermediation, using digital
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technologies. Is that a reasonable
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projection?
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Or do you see the intermediaries
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as remaining and vetting the
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technologies within the existing
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system?
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- Yeah. I think that's the open
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question, right? So historically,
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financial services has been pretty
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good at adopting technology like
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many other industries.
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However, along the way, those costs
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of intermediation have never really
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fallen. In fact, for like 100 years,
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they've been stuck at about a 2
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percent level.
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- With IPO 7 percent.
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- Right, in some cases, as you point out, a
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lot higher than that. Right?
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I think there's still plenty of room
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for substantial improvement
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in that cost.
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- So ever since I've been at Stern
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there's been an interest of how
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is technology changing finance?
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And the financial services industry
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has, in fact, been one of the
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pioneers in the adoption of digital
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tech from ATMs in the 70s
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to the digitization of exchanges in
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the 90s. Why do you think there's
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been such a heightened interest
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in Fintech over the last few years?
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I mean, is it blockchain and
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crypto? Is it artificial
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intelligence?
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Is it robo advisors?
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I mean, what's driving the
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heightened interest in Fintech?
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- This is a question of sort of why
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now? And I think a couple of things
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converged around the time of the
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financial crisis.
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So first of all, that crisis itself
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created some dissatisfaction with
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the traditional way of doing things.
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Meanwhile, technology trends
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have been well-established, like
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adoption of mobile technology and
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access to cheap open source software
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have also converged, enabling, for
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the first time, startups to
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start to really invent new ways of
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doing financial services. -Yeah
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- I think we are at a kind of a
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critical point.
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You take a typical bank, something
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like 90 percent of the tech budget goes
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to regulatory compliance
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and kind of maintaining old legacy
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systems. So that really leaves
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little room for innovation and a lot
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of room for upstarts to try to catch
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hold.
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- That's fascinating.
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And so a lot of the innovation
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is being driven not within
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the budgets of the large banks,
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but from the billions of dollars
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that are flowing into companies like
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Alipay.
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- This is a great point.
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You bring up as well, that there's
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substantial capital that's helping
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support the growth in
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these new businesses attacking kind
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of the old incumbents.
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- Stern has always been one of the
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pioneers in Fintech.
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We were the first business school to
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introduce a Fintech major. – Mhm.
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- What should a student expect from
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a Fintech major?
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- We'd like students to walk away
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from our kind of foundational
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courses with some fluency
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in the basic technologies,
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and to be able to consume them.
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So maybe less likely to be a
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producer since we're a business
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school, but to consume those
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technologies effectively.
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Secondly, to have a good
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understanding of the workings of the
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financial system so they understand
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how to help an incumbent adapt or
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launch an upstart Fintech startup.
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The last thing I think is really
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important in this age is Fintech
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citizenship: meaning really
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understanding the implications of
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some of this technology, both good
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and bad. And being prepared
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to kind of help lead that into the
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future.
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- And we train our students to sort of
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have some technological expertise.
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Some of them do come in as experts. -Yeah.
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- We train them with the foundations
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of finance, but we also sort of
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train them at the interface.
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- That's what's changing.
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So you could almost think of us as a
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parallel to what's going on out
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there in the commercial world where
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old silos and tribes are breaking
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down as we start to integrate
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computer science and finance and
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data science and all this stuff in
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kind of one place,.
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- Let's say someone has a Fintech
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major from Stern.
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Are they more likely to go to
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a large bank?
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Are they more likely to go to
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Amazon, Microsoft, Google,
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or are they more likely to go and
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start a new sort of Fintech startup?
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- I think all these things are
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excellent avenues and about a third
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of our MBAs have taken foundational
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course or more than one course, 20
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percent of our undergrads. -Woah!
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- And we're also now reaching Exec
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Eds.
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And lastly, we just launched a pilot
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online program.
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So literally we've got people all
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over the world. Honestly, if I
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wasn't doing this, I would be the
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cult leader of a megachurch.
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- There's still time for that.
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- That's right. Yeah, I'm not sure.
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- Let's chat afterwards...
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- Yeah, exactly.
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- I always thought that if one
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actually did want to pursue sort
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of running the cult of a megachurch,
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that blockchain technology would be
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a very effective way of making that
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happen.
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- Yeah. We have an unbelievably
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popular blockchain course.
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And you know what's interesting and
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I think representative of what's
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happening in Fintech is just how
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much the blockchain world has
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changed. When we started three years
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ago, it was a bit of a crypto
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bubble. And today,
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actually what's really happening is
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things that were sort of pilot
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projects a few years ago are
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actually getting seriously embedded
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in financial market infrastructure. -Yeah.
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- So we've got some emergent platforms
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like R3 Corda.
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We've got successful projects that
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are putting exchanges on the
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blockchain and things like that.
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So we're quite far advanced now from
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where we were even just a few years
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ago.
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- And so how is this sort of hitting
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up against regulation?
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I mean, as these emerging
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technologies start to sort of
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challenge the core of finance,
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I hear a lot about the regulatory
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innovation in Singapore
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and in the UK where they've got
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these regulatory sandboxes in which
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people can sort of like, you know,
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be regulation free for a few
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Months,
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- Yeah.
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- And they pilot their new ideas.
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Financial regulation is always a
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complex topic, there are its advocates,
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there are its opponents,. As you look at
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it through the lens of Fintech
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innovation in the United States,
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do you think regulation is holding
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us back or do you think it's guiding
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us down the right path at the right
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pace?
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- This is a really interesting
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question. And there was kind of an
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attitude that, you know, some
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Fintech startups were like these
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Vikings kind of plundering new
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terrain in finance and ignoring the
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rules. And, you know, we had a
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couple of examples of that, like,
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you know, maybe Lending Club that
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skirted some banking rules and got
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overvalued and was sort of a poster
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child for regulatory arbitrage.
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However, I think what's really
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interesting right now is how much
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the regulatory stance and also the
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political and economic systems
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around the world are influencing how
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Fintech is developing. Take two countries
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that have essentially have state-owned
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banks, India and China.
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They've developed completely
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contrasting approaches to privacy.
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In the case of India, privacy was
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challenged by the Aadhaar
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identification system,
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but then also the court system
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finally intervened to kind of
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curtail the expansion of financial
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surveillance.
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And the opposite has happened in
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China, where there's monolithic tech
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companies on which most banking is
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done today, and there's just no
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consideration of financial
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surveillance at all.
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So around the world, things are
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shaping up really differently.
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You mentioned the advocate
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of financial innovation, you know,
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the UK sandbox, which
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has been really effective at both
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protecting consumers, but also
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helping smart Fintechs
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launch their businesses.
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- So you think we should bring
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something like that to the United
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States?
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- I think it's a great idea.
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And the United States is very large
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and influential and it's a standard
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bearer. So I think there's been some
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rightful concerns among regulators
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about protecting people from buying
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crazy speculative ICOs
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or initial coin offerings on the one
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hand. On the other hand, you know,
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maybe there's some institutional
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turf wars going on about sort of who
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gets to regulate some of these
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really important topics, like who
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gets to issue currency.
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- So it's sort of that mix of making
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sure that innovation isn't too
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unbridled.
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- Yeah.
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- But also making sure that there
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isn't regulatory capture
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and so that the big players
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don't block the innovation.
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- Yeah. I think Regtech is emerging
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as well, not only inside the
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enterprise where you can surf
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around and see kind of who's doing
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what, but also maybe for the
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regulator itself that in some
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instances the technology will give
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them kind of a godlike
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view they might want, for example,
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you know, over in exchange things
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like that.
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- I'm going to ask you to sort of gaze
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into your crystal ball now.
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What are two or three areas in
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Fintech that you feel are
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somewhat important now, but are
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going to be huge in the next five
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years? Where will place your bets?
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- I think all crystal balls deserve
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like big caveats, right.
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So probably we'll look
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back and say the crystal ball was
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maybe cloudy. So I think there's
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three things that I would cite as
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potential areas for a truly
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exciting kind of innovations.
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So first of all, we're starting to
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already integrate unstructured data
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and new methodologies in financial
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decision making. And that's a pretty
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exciting field of opportunity.
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And I think that will lead to maybe
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the first true platforms in
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Fintech, meaning somebody will
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become the Netflix or the Amazon
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or the Facebook of Fintech.
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And I expect to see that in the next
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five to 10 years.
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And that leads to the third
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prognostication, that it's
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likely that some kind of traditional
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business models will be disrupted
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as kind of old solutions to some of
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these problems, like old structures
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and products are no longer relevant.
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So I see some disruption ahead as
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well.
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- And do you think that that sort of
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first Fintech platform
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will be a completely new entity?
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Or do you think it'll be Amazon
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layering something or Facebook
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layering something? Or could it come
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from
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Wechat or Alipay who seem to be
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pretty far ahead in terms of looking
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at the mobile payment systems?
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- Yeah, I would call Ant Financial the
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largest fintech platform already
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today.
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- OK.
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- And in terms of potential rivals to
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that, you're starting to see them
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around the world as kind of nascent
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potential platforms.
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And one I would mention would be
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Transferwise, which is now operating
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globally essentially as a currency
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exchange payment system for
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retail users.
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And I think that could reach
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for platform status, among others.
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- So you've had a fascinating career,
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Kathleen. You've started off
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at Chase. You were an MD at Deutsche
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Bank and right before you made
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the leap to Stern, you headed up
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global investments at Credit Suisse.
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What motivated you to actually make
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the transition to Stern leaving all
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those potential millions behind?
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- So, yeah, I love this question.
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So in your career were you sort of
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lucky or smart, right?
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When I started and asset and wealth
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management, the Dow was 1000
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and it's twenty five thousand today.
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So I guess that answers your
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question. You know more lucky maybe.
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- I've always felt that the smart
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people realize that they're lucky
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and the lucky people think they're
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smart.
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- Well, very good.
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One of the cool things about finance
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is that it's a way of kind of
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understanding how the world works,
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with a lot of space for continued
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kind of curious exploration because
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even the best thinkers in finance
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are never 100 percent right,
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right? -Yeah. – If they're good,
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they're like 60 percent right.
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What's amazing about academia is
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that this is actually like an
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intellectual property factory.
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And what better place to be than an
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intellectual property factory when
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you're right in the middle of like
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a paradigm shift in how business is
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done? So teaching
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folks that will be going out into
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the world and influencing the future
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is, you know, I feel very
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responsible for helping equip
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them for this new world.
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So it's exciting on so many levels.
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- Do you ever feel the draw to sort of
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head back to industry?
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I mean, there are all these startups
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raising all this money.
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You know, you've got deep and unique
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expertise. Where do you think you're
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gonna be in five years?
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- Oh, well, I mean, right now, I'm
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actually super lucky to sit on two
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technology-first kind of Fintechy
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companies, one quite large public
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company and a small private one.
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So, that's really satisfying
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in terms of, you know, commercial
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type of ambitions.
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And in the meantime, I just
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absolutely love what I'm doing here
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at Stern and building our Fintech
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programs. There's so much upside
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left that I want to continue.
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What happens in five years is just
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always more serendipitous than you
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think.
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- Especially in the tech world.
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- Yes, absolutely.
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- So one of the most exciting things
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happening in Fintech at Stern is
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the annual Fintech Conference.
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I know you run this conference as
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part of your role as a director at
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the Fubon Center.
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So could you tell us a bit more
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about what's been happening in this
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conference and where do you see it
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heading?
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- We're in year four of the Fintech
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conference, and it's one of the only
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conferences, certainly in New York
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and maybe the country, that brings
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together both academics interested
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in this topic and industry
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and investors.
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So we get all in one room, all these
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experts with totally different views
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and perspectives on the world.
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So just to give you an example, we
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had one startup demo,
[780]
his chatbot for advice for
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millennials on financial stuff,
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spending and saving.
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And as a result of that
[785]
presentation, he was able to get
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a pilot concept with one of the
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companies in the audience that day.
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So I think that's super exciting.
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So we catalyze that kind of
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connection.
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So it's a super exciting way to
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build a Fintech ecosystem here at
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Stern and it just gets bigger and
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bigger.
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- Thank you, Kathleen.
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- Thanks so much. That was great.
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