Navigating an uncertain future with financial innovation expert Peter Davey of Alloy Labs

Navigating an uncertain future with longtime financial innovation expert Peter Davey

Joe Kornik: Welcome to the VISION by Protiviti interview. I'm Joe Kornik, Editor-in-Chief of VISION by Protiviti, our global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today, we're exploring the future of money, and we're very fortunate to have Peter Davey join us. Peter is a payments, banking, and financial services executive, strategist, innovator, influencer, and former Head of Product Innovation and Labs at The Clearing House. Currently, he is a venture partner at Alloy Labs where he's focused on building out platforms that help community banks and credit unions succeed. I am happy to turn over the interviewing duties today to my Protiviti colleague, Ryan Gullum, Associate Director, Payments Technology consulting for Protiviti. Ryan, I'll turn it over to you to begin.

Ryan Gullum: Great. Thanks, Joe. Really appreciate it. And Peter, thanks for being part of this today. Really appreciate your time.

Peter Davey: Thanks, Ryan.

Gullum: Peter, you have more than three decades in the payments and banking space in all sorts of innovation and strategic roles. Currently, you are the venture partner at Alloy Labs, focusing on building out platforms that help community banks and credit unions succeed in payments and banking. So, first question, what are the big issues that the executives at those financial institutions are facing, and what do you see in that space over the next three to five years?

Davey: Yes, absolutely, Ryan. Yes, we're in a very transformative time. We talked about this a decade or so ago, everybody was going through some type of digital transformation. Now, with financial institutions in general, both community size financial institutions and credit unions, they're really going through an entire banking transformation. A lot of that is spurred on by new technologies, financial technology firms coming into this space, but even more so, by some of the new payment rails that are existing, both with FedNow and RTP. So, as I think about it, and I work with executives at these financial institutions, some of the biggest things that are top of mind is how can they compete in a technology world when they're highly dependent on vendors that are delivering them their functionality? There's not a lot of technology independence within the community banking and credit union space, and even less so in the community banking space, because credit unions have had CUSOs and other types of organizations that have helped them expand on some of the technologies in the past, but what we're really finding is that the flexibility to be able to pivot quickly, to be able to add new capabilities and to be able to service a customer in a holistic way really is lacking at a lot of these financial institutions. They're trying to figure out how they can compete and continue to be relevant for their customer base, which is a really important customer base as we think about the entire banking franchise of the U.S.

Gullum: I mentioned your vast experience in this space, and obviously, I think you're uniquely qualified to talk about some of the big future money topics on the table. So, let's start with cash. Everybody talks about that within the industry. I mean, you and I were just at a conference recently and that's a topic there, right? So, how much longer will we be using it, in your opinion, and do you have any prediction or set of triggers for when cash is going to go away?

Davey: Yes, I don't think cash will ever go away completely. It's been around since the dawn of time as we look at how people have traded value exchange. As you think about cash in general, there are certain reasons people use cash, similar to the way they use credit cards. Everybody talks about credit card interchange arbitrage as well, I'm sure we can talk about that a little bit more deeply. But cash is kind of the same thing, right? Cash is one of those things that's almost a religion for some people, and it's really hard to move people away from there. There are people who are underbanked or there are people who don't want to be banked who deal primarily in cash. Those are the ones you're never really going to convert.

I do think that there is a good opportunity and a good hope that we will reduce our reliance on cash, physical cash, as we start to implement the RTP and FedNow rails, because you actually have a cash equivalent that's moving in real time, that's actually doing final settlement with financial institutions, and then making all the parties whole at the same time. So, I do think that we'll have an opportunity to move away from cash.

We've definitely seen a lot of industries try to bend away from cash as well. It's funny enough, in the Richmond Airport, when you walk into the Richmond Airport, you can actually convert all of your cash into a debit card that you can leverage throughout the terminal. A lot of sporting event places have moved to a cashless society. And I think that's getting people more comfortable, even folks who really want to deal in cash, it's getting them more comfortable with the opportunity that the electronic payments are not a bad thing. So, I do think that we have a good opportunity to continue to reduce cash, but I don't know that we'll ever get rid of it because unless there's some type of legislative capability that Congress holds to get rid of cash, I just don't think that constituency will ever let it go.

Gullum: So, as we move from cash to digital dollars, digital currencies, what does that mean for this space, this industry? Ultimately, how do digital assets fit into the future?

Davey: Yes. So, digital assets can be broken down into a number of different forms, right? I think most everyone loves to talk about the cryptocurrency aspect of things, and honestly, we've seen crypto take huge nose dives. We've seen it not really flourish in the way that it wants, and I think part of that is due to the fact that there are alternatives out there to crypto and other digital currencies. It's hard to get away from fiat money. So, when we talk about fiat money, which is the basis of any country's financial stability, fiat money is tending to move toward digital anyway, with real-time payments systems around the world, including in India, out in Europe, but now in the U.S. We really have moved toward a digital dollar that is exchangeable within seconds with final settlement between people. So, some of the same things that cryptocurrency and other types of digital currency we're trying to solve for, we can now do in the fiat economy.

It doesn't mean that those capabilities are passe though. I still think as we start to look at various different stablecoins, PayPal obviously released a stablecoin within their basis. Stablecoins probably do hold some merit for transactions, but you have to think about why people are employing it. PayPal is not employing a stablecoin in order to actually make that the new U.S. dollar, they're doing it so that they can reduce their reliance on bank accounts in other countries. You have to really look at why, and why and how you would use that capability.

The biggest issue against, I think, things like CBDCs, digital dollars, and other types of digital assets in that space really comes down to the regulatory capabilities within the U.S. We're strangle-held by a quad party system where we actually have both a U.S. Congress, state-level Congress, and then state-level legislation, even down to the county-level legislation. A lot of these capabilities aren't able to be used in some of the biggest opportunities. If you think about real estate, if you think about the ability to do title transfers on cars where digital assets could be extremely helpful. But the age-old legislation that exists in place, there's going to have to be somebody to change that. And then you have to think about all the intermediaries right now that make money on those processes. It's a long row to hoe, and I just don't think that we're going to see people generally move in that direction. But I think as you start to see some of these new real-time and instant payment capabilities adopted, including some of the capabilities like request for payment or request for information, there's a better ability for us to automate processes, which is really what the core of digital assets and other digital properties have been meant to do.

Gullum: Yes, you mentioned the industry and the battles we have in order to get things moving and passed, and let alone about 10,000 financial institutions at play, plus governments, all those things. And I always get asked, “Well, why does this take so long?”

Davey: Yes. I think on top of that, Ryan, just thinking about the reason why it takes so long for these things to happen, especially in the U.S. You look at other countries, and they've had regulatory mandates to move things forward. UPI in India wouldn't be where it is today if they hadn't had some regulatory mandate from the government for businesses to start using it and for more open frameworks. But in the U.S., we've actually had, unfortunately, the benefit and detriment of actually having really robust payments systems over the past couple of decades, most of which I've been part of, some of which were there before I was. But as you look at it, ACH was such a strong capability within the U.S., there wasn't necessarily the need to reinvent it at the time. It takes a lot of people to get away from 40 years of history on a particular payment system to actually get them to engage in the new economy. I do think that there are compelling reasons, but part of the reason why I went to Alloy in the first place is that we need people to actually develop those solutions for the economy, and to be able to help these banks migrate onto the new economy as opposed to just keeping things status quo.

Gullum: Couldn't agree more. So, talking about the disruption to the global monetary system and the impacts that we'll see over the next decade or even beyond that, what or which ones most concern you, and which ones most excite you?

Davey: Yes. So, kind of tying it back to the instant payment space and the fact that this is a trend around the entire globe, the beautiful thing about this is we now have, for the first time in history, multiple countries speaking the same language, if you will, which is the ISO 20022 language and framework. And while there's natural derivations between those things, we know that from a technology perspective, we can actually start to look at cross-border transactions. I think that's one part of it. Moving to a global real-time economy is actually quite exciting. The fact that we can now do it because we actually have a fighting chance at interoperation of some of those capabilities is important.

But I think in terms of some of the more stringent global money supply issues that we have, we have to actually realize that we're now operating in a global economy. I think there's a lot of folks who don't quite grasp that, and part of operating in a global economy is giving people access to being able to do payments in a global economy, to be able to invoice people in whatever native currency they have, and to be able to get paid in the native currency that you have. And as we talked about earlier, there's a lot of intermediaries involved in a lot of things within state and local governments. If you think about the intermediaries that exist within moving money between countries, all of them have had roles to play, and if you start to move money natively between two government agencies across the globe, you start to reduce the reliance on needing some of those intermediaries in there.

That's a good thing, but it's also a bad thing because in many cases, you're paying to take a lot of the risk out of the system. There still isn't a global federated identity capability, so it's really hard to understand that you are paying the person that you expect to be paying. There's also local differences between the way that those payment systems work that then create some conflict in terms of how and what does really final settlement mean, especially when the government might be able to come and get their hooks into the money before the person that you're trying to send the money gets to it.

So, there is a lot of governance issues that I think need to be figured out over time, but the good news is the technology is there. The technology is the easy part. It's going to be more about setting global policy in terms of how money can efficiently move between countries and between individuals in those countries.

Gullum: Excellent. So, we talked a little bit about digital dollar, digital currencies, and you talked a little bit about cash and the U.S. dollar, if you will. So, what about the future of the U.S. dollar? And it's really more kind of in that digital sense, I think. But how will the race for digital dominance impact its status as the world's reserve currency, and will it be relevant still in 10, 20 years, and if it isn't, what replaces it?

Davey: It's a great question. If I had that crystal ball and could really answer that question, I'd be investing a lot of money in where I thought that whole ball would run.

Gullum: Show us the money, right? [Laughter]

Davey: Exactly. I do think that we have been quite fortunate as an economy to have an established basis of pretty much the currency that's universally accepted across multiple geographies. How long that continues to last really is going to come down to policy. It's also going to come down to strength of others. The funny thing about what we just talked about within doing global transfers, that starts to unwind a little bit of the dependency on one currency over another. As you start to make some of those negotiations, as you start to figure out how countries settle with each other as opposed to moving gold bars across the ocean to each other, or out of one vault into another as it is at the Vatican or at the various different forts within the U.S. that hold gold currency, it comes down to the fact that what is the common basis? What is going to be out there? Kind of related back to your cash comment earlier, there's more U.S. currency out of circulation in other countries than there is in circulation in the U.S. today. That should tell you that there are a lot of people doing trading on the U.S. dollar that never actually comes back into this economy. If you look at real estate, the Chinese and other countries, Sauds et cetera, are holding more real estate within the U.S. than almost anybody else, but all of that was paid for in the basis of US dollars.

So, I still think that the US has some predominance in this space, but I think we would be foolish to think that we should always hold that predominance in this space. I do think that we need to look for a way to make it easier for people to operate in a global economy. That might not mean getting rid of the U.S. dollar, but it might mean creating some equivalents across the globe that actually operate in a very similar fashion. That's one of the things that hasn't existed up until this point, and certainly, I think what crypto and other types of digital currencies were pointed at, I don't know that that's the answer either. I think it will actually ultimately be in trying to drive a hybridized, at least fiat exchange, not a hybridized fiat currency.

Gullum: So, finally, last question. Finally, if I asked you to look out 10, 20 years, what do you envision in terms of payments and money?

Davey: Yes. I would say one, and one of the reasons I got involved in this real-time payments journey in the first place, when I went over to The Clearing House, even before that on Project Compass, to actually look at what we should be doing from this country's perspective and the faster payments task force, it has to do with the fact that we have not had a monetary system or a payments system that actually supported a 21st century economy up until the advent of RTP, and then now subsequently, the release of FedNow.

I think that the future of the economy is digital and embedded and automated. In order to do that, we have to adopt the tools that exist within these new payment systems to be able to make that happen. I do believe that truthfully, we can contribute a couple of trillion dollars back to businesses by opening up the aperture of these new payment systems and figuring out how we can actually give the tools to businesses so that they can fully automate their supply chain, their accounts receivable and accounts payable management. And think about the amount of resources that you can then redeploy back into the economy to actually do meaningful work as opposed to post-work, which is what happens today in the majority of payment systems.

So, I still am very, very bullish over the next five years that we will be able to, as an economy, start to figure out how to create those inroads. And then, within the next 10 years, you're going to see people move away from payment types not because they want to, but because their business processes support the automation of those capabilities. It's not to say that any of the payment systems that exist today are bad, ACH or wire or anything else, they're going to continue to exist. Hopefully, we get rid of checks. But I do think that you're going to start to see a good bulk of payments move over into these real-time rails because of the nature and the efficiency that you can get from them.

Gullum: Really appreciate your time, Peter. Always fabulous to see you and chat with you and look forward to future fun with you as we hit the conference circuits and all those fun things. So, really appreciate your time today.

Davey: Thanks so much, Ryan. I appreciate it.

Gullum: You're welcome. And Joe, back to you.

Kornik: Thanks, Ryan. And Peter, we appreciate the time today. And thank you for watching the VISION by Protiviti interview. For Peter and Ryan, I'm Joe Kornik. We'll see you next time.