FDIC partners with Duke engineering to work on the next round of innovation

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In an unlikely sounding pairing, the Federal Deposit Insurance Corporation has formed what it calls a strategic partnership with the engineering school at Duke University. Students will work with the FDIC on innovation in topics like finance and risk management. For more details, the director of Duke’s Master of Engineering in fintech and cybersecurity programs, Jimmie Lenz, spoke to Federal Drive with Tom Temin.

Interview transcript:

Tom Temin: Dr. Lenz, good to have you on.

Jimmie Lenz: Great to be here, Tom, thanks very much for the invitation.

Tom Temin: When I think of engineering school, I think of bridges and girders and rocket ships, but not FDIC. So what is the connection here to begin with?

Jimmie Lenz: Yeah, that’s a great question. We, in the engineering school build things. We build all kinds of things. And one of the things that we’re building probably more often than not, are things that are a little less tangible than the bridges and buildings. And as FinTech continues to grow, the need for people with those skills, as applied skills in building different kinds of things, has just proliferated. And so we’re one of just a couple of engineering schools in the United States that actually has a master of engineering in financial technology. And so the FDIC recognizes the applied value of that versus the theoretical that you might have in other schools, and has partnered with us on this venture.

Tom Temin: And what are some of the engineering aspects of banking and finance, other than, you know, designing bank buildings – which I’m kidding about – but how does engineering apply in finance?

Jimmie Lenz: So if you look at some of the latest advances in finance, and in financial services, you’re going to see FinTech all over it. And I think about some of the dramatic changes that you’ve seen, basically, since the last financial crisis. I mean, the one in 2008, 2009, you see a lot of really monumental changes in the industry. Things like Rocket Mortgage – basically a non-bank – has become the largest mortgage lender in the United States. Well, a lot of that is done through engineering through user interfaces, through different ways that customers interact with a financial institution. You’ve seen some other financial services companies, like Robinhood, that have changed the way that people think about investing with a brokerage firm. Basically, it’s designed to operate from a mobile phone. And you see the tremendous growth that they’ve had. Not only have both of those firms had tremendous growth, but they’ve changed the business models that have been around for literally hundreds of years. In the case of Robinhood, of course, they have almost forced the industry to go to a zero-commission model. Well, for a relative upstart, been around for probably five years, that’s such a monumental change. And you see engineering behind all of those things – engineering that has proliferated throughout the industry. And that has facilitated a different kind of customer interaction in a lot of cases, but also a different kind of business model. So it’s actually very, very dramatic, the change that engineering is making in these different sorts of somewhat staid services. But we’ve basically changed the way that a lot of the products have been delivered.

Tom Temin: So it’s really designing new models of delivery, and then backfilling with the processes and technologies needed to deliver that new model.

Jimmie Lenz: Absolutely, that’s exactly what it is. But I’ll go one step further and quite a bit of what we’re seeing right now on the cusp, things like decentralized finance, which I know you’re familiar with – a lot of that is engineering at its heart. Quite a bit of that is – well, it’s all facilitated through software, and through code. And so when you talk about decentralized finance, and you talk about smart contracts, and things like that, those, of course are pretty much 100% engineering. And that I would say is right now the leading edge or cutting edge, probably between decentralized finance and cryptocurrencies. And those are way out of the realm of most traditional finance related programs in universities.

Tom Temin: Yes, I’ve been reading about cryptocurrency now for a couple of years, and I can’t understand what it is. Maybe it’s just a function of age? But let’s get to you, Duke University and FDIC. By the way, we’re speaking with Dr. Jimmie Lenz. He’s director of Duke’s Master of Engineering in Financial Technology and Cybersecurity programs. What is the FDIC’s interest in these new things? I would imagine they have to figure out the regulatory apparatus that, if they are legally required to, has to apply to these new models?

Jimmie Lenz: Absolutely. I think there are a couple of interests. So the FDIC appointed their very first head of innovation probably three or four months ago: Sultan Meghji. And Sultan has a very different purview, I think, than most people think about in the FDIC, where he is looking at all sorts of innovation that’s taking place in the environment for both financial innovation and in the cybersecurity space. So his purview is quite wide. And in his new role, he was looking for some university to partner with, to kind of help on, I think a lot of these and to give a different perspective to a lot of these areas that he currently sits over. In doing that I think the FDIC is recognizing the couple of different values that a university brings to the table. One, they bring a different perspective, when we’re talking about students and researchers and things like that. They’re not quite as jaded by industry experience. And so they think in sometimes much broader terms, they are also very used to looking at things in an applied manner. So everything’s done in engineering school, of course is applied. As you mentioned at the top, the building of bridges and buildings and things like that – we build things. And so actually, understanding the applied versus the theoretical is very important. But to your question around what the FDIC is looking for, it’s just as you say, they’re looking at these cutting edge technologies. They’re looking at what are the ramifications of some of these things, and what might happen in the near future. So in partnering with an engineering school that has this fintech program, they’re kind of getting the best of all worlds – the finance world through the the “fin” part of fintech and then the understanding of the technology and the implications of the technology, in everything from traditional services, all the way through things like cutting edge that we talked about – decentralized finance (defi) and cryptocurrency.

Tom Temin: And will there be students as well as faculty involved, and will they be working directly with FDIC on projects?

Jimmie Lenz: Absolutely. In fact, Sultan and his team has hit the ground running. We will have three or four internships this summer. So that’s how fast we put this in place. Most people see the FDIC as kind of the staid organization. But remember, the FDIC is the Federal Deposit Insurance Corporation. So they are an insurance company at heart. And they’re thinking in a very progressive way. So even though the partnership’s only about a month old, we’ve already basically architected three or four different internships that students will be working on throughout the summer. They will hit the ground running on May 10, and they will work throughout the summer on these. So it is moving much faster, I think, than most people normally associate with these governmental or quasi governmental-type of partnerships.

Tom Temin: Yeah, so it sounds like risk management would be a big part of this because as you point out, FDIC, when you look at it through the lens of an insurance company, risk management is essential to their functioning.

Jimmie Lenz: Absolutely, it is a core part of any insurance company is that understanding of risk. And a good number of our students are very interested in risk management, and in particular, the quantitative side of risk management. So the idea of being able to do risk management in a much more automated fashion, but in also a fashion that is much more scientific, and maybe a little more science than art, I think in the past. And I’ve had some experience with this, the idea of risk management was often one of reporting what went wrong while trying to manage but a lot of it was around reporting. This is much more oriented towards looking out the curve a little bit, and trying to forecast the probabilities of what may happen, and understanding what the ramifications of that are. And engineers are really well-equipped to do that kind of work.

Tom Temin: And therefore sounds like there’s a large data aspect to this data analytics, artificial intelligence, new tools to understand risk, especially in these cyber realms where so much is happening.

Jimmie Lenz: You are 100% correct in that regard. There is a lot of data, a lot of machine learning and things like that. I still teach in the program. And one of the courses that I teach is machine learning for financial technology. It’s a school of thought, and it’s a number of courses here within the engineering school that are very, very popular with students. And we have a number of different areas that we we apply machine learning and artificial intelligence to. This is certainly one of those. It provides students with a great set of data and new kinds of problems to work on, but also to expand their thinking. And as I said, the one nice thing about students is they’re not jaded by experience. And so they tend to be, I think a little bit freer with their thoughts than people who have been in industry, say, 15 or 20 years and they’re able to think about things and setting up problems, modeling things in a little bit different ways. And say you or I might that have a lot of experience, in the industry and just in the world.

Tom Temin: Yes, they don’t need the memory of past books at your local bank with red ink and black ink and blue ink, do they?

Jimmie Lenz: They do not. They are not constrained by such thinking for sure. The idea of virtual currencies and things like that, which you see written about quite a bit, the central bank digital currencies and some of the cryptocurrencies and things like that – they are much more adaptable. They seem to glean on to those notions in a much different way than people in some of the more traditional sectors. Because of that, I think they have a really unique perspective that they can add to these problems. I’m not gonna say it’s always right, but it causes us to kind of broaden our considerations. And that I think is super important. The idea of having a really, really wide swath of considerations. If we look back, not even too far, I think that a lot of the risk that individual companies and even systemic risks that occurs in the environment is probably due to the fact that people had a very, very narrow view of what risk was or a very narrow purview of what could happen. Students, fortunately, haven’t had those experiences. And so because of that, they tend to have a much broader purview and ask those questions, “Why can’t this happen?”

Tom Temin: All of this then is predicated on the fact that banking itself, the concept of what is a bank, what is savings has so radically altered in the cyber era, that the FDIC senses the need to keep up, basically.

Jimmie Lenz: I think you are hitting the nail right on the head. The FDIC has been very, very successful in their mission over the history of the organization. And we see that kind of time and time again. We’ve seen financial crises, but we haven’t seen some of the issues that we saw, say early in the last century around bank failures and things like that. So they have done, I think an excellent job. But they are also very cognizant that the world is changing. And as you say, I mean – I’ll give you a great example: So I’m often asked at conferences and things like that, “What do I think the future holds for traditional banks for, kind of these legacy banks that are out there?” And I’ll usually pause for a second and say, “What’s a bank?” And I think that kind of goes to the heart of the matter. It’s kind of like I mentioned at the very beginning. You see, the largest mortgage lender in the United States isn’t a bank, right, it’s Rocket. If you look at the company that is No. One in refinancing student loans, SoFi, it’s not a bank. If we look at, some of the things that are happening in the environment, the largest small business lender – boy, to me, small business lending is kind of the core of banking, what I think of banking. So the largest small business lender in America is probably not a bank that you’ve ever heard of before. It’s Live Oak Bank with one branch in Wilmington, North Carolina, but the largest small business lender in America. It’s this kind of notion where banking has changed so dramatically, that the FDIC has keyed in on, and they see the value in staying, kind of ahead of the curve. And maybe being able to architect the curve a little bit, even.

Tom Temin: Dr. Jimmie Lenz is director of the Masters of Engineering in FinTech and Cybersecurity programs at Duke University. Thanks so much for joining me.

Jimmie Lenz: Tom, it’s been a pleasure.

Tom Temin: We’ll post this interview along with a link to more information at FederalNewsNetwork.com/FederalDrive. Subscribe to the Federal Drive at Podcastone or wherever you get your shows.

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