Why Sultan Meghji quit as FDIC innovation chief | American Banker

Transcript below

00;00;03 – 00;00;27
Penny Crosman
Welcome to the American Banker Podcast. I’m Penny Crosman. Sultan Meghji was chief innovation officer at the FDIC for the past year. He quit in late February. He’s here with us to share his experience and the obstacles to innovation in federal banking agencies that he experienced. And we’re also going to talk about innovation in the banking industry itself. Welcome, Sultan.

00;00;27 – 00;00;29
Sultan Meghji
Thank you for having me. Happy to be here.

00;00;30 – 00;00;41
Penny Crosman
Great to great to have you. So what were some of the things that you were doing at the FDIC in this chief innovation officer role, which I think was relatively new?

00;00;42 – 00;01;12
Sultan Meghji
Yeah, the role was just a few years old, and they’d had it open for a while. I was actually the first person to have this role at the agency. And the mandate from then Chair McWilliams was very much to think about two specific areas. One was looking at the agency itself. I think there’s a good appreciation by many that the role that especially federal banking regulators play is evolving as the market itself evolves.

00;01;12 – 00;01;44
Sultan Meghji
And then the second was to look at the overall banking system and make sure that we were aimed in the right direction and that we were guiding the right kind of behaviors. Out of that we created four innovation themes. One focused on inclusion, making sure that the system itself was inclusive and diverse, and equitable. The second was around resilience, not just in terms of the bank’s servers running but a broader concept that initially included things like looking at climate and a variety of other issues.

00;01;45 – 00;02;24
Sultan Meghji
Cybersecurity was a big piece of that. The third was around amplification, really making sure that we amplified people, not having people waste time and be the experts that they are. And then finally, the fourth was focused on looking at the future, you know, strategically, five to ten years out, looking at things like digital assets or what we call Web 3, looking at quantum computing, and looking at artificial intelligence, which was a little closer timed but really designed to begin to alter how the agency operates how the agency interacts with the market, and how the people across all of this can work together in a more transparent way as we’re trying to navigate some of these issues.

00;02;28 – 00;02;35
Penny Crosman
When you think about those four things, where do you feel the most progress is being made? Can you give any examples?

00;02;36 – 00;02;58
Sultan Meghji
Sure. I mean, it’s interesting because, you know, so much of large bureaucracies is based on the consensus that the two areas that I think we had the most success on were the areas where I didn’t have to go around and have 40 meetings a week just to get people to smile or nod. And so the first one was really around looking at these larger-scale future technology issues.

00;02;58 – 00;03;21
Sultan Meghji
I think we made tremendous progress in getting the agency to work with its other federal partners, not just the regulatory bodies, but others around quantum computing, around artificial intelligence, around cybersecurity. These were areas where I had kind of a higher degree of direct control over those discussions. I’ll say like that, and then obviously we did a lot of work in terms of engaging with the community.

00;03;21 – 00;03;44
Sultan Meghji
We created office hours. We ran a series of tech sprints. In fact, there’s one going on right now in partnership with FinCEN that took a rather Herculean amount of effort to get the FDIC and FinCEN to be able to collaborate. So that’s a really exciting one, focused on digital assets. There’s a lot that happened is we talked about resilience in the system that is inappropriate for me to talk about.

00;03;44 – 00;03;51
Sultan Meghji
It just it’s stuff that’s very much behind the curtain. But I’m really proud of a lot of the work that the FDIC did in that space as well.

00;03;51 – 00;03;53
Penny Crosman
Sounds like quite a bit for one year.

00;03;54 – 00;03;54
Sultan Meghji
Yeah.

00;03;58 – 00;04;08
Penny Crosman
So in a recent op-ed, you wrote, “On virtually every front, I found barriers to innovation at the FDIC.” What were some of those barriers?

00;04;08 – 00;04;34
Sultan Meghji
The biggest one, and it was kind of the umbrella in the genesis of writing the op-ed was really around what I call tech hesitancy. So similarly to vaccine hesitancy, you know, everyone feels like they are an expert in vaccine design and have a Ph.D. in medicine. You see the same thing with technology. You see people have really no understanding and no experience and and be hesitant to be using technology fundamentally because they don’t understand it. And be rather hesitant to even engage in conversations. So the example I’d give is cloud computing has been the de facto standard for how people deploy technology for well over a decade. Those are still conversations. And five years ago, people spent a lot of time saying, well, we have to standardize on a single cloud vendor and everyone in technology knows that’s illogical.

00;05;05 – 00;05;30
Sultan Meghji
And you can’t do that. You know you use a CRM that sits on one cloud, use ERP that sits on another cloud. You have 15 fintech partners they sit on a myriad of different clouds. But you still see those kinds of conversations happening inside agencies. And out of that I really didn’t want to just throw the baby out with the bathwater here because we have some amazing people in the regulatory system.

00;05;30 – 00;05;52
Sultan Meghji
It was a really pleasant surprise I had going in was just how thoughtful so many of the people are. Their experience, their understanding. Bank regulation is not just math, but it’s also a bit of art. And there are some beautiful artists, to extend the metaphor, in the agencies. But the culture is highly risk-averse to the point of stasis, which in and of itself is a decision. And so the number of times I heard, oh, we’ll create a five-year research plan or we had a great briefing on this technology, but since no banks are using it, we’ll come back and talk about it in two or three years.

00;06;09 – 00;06;46
Sultan Meghji
And you have people who then are ignorant of technology and who don’t understand the pace of change out there and who think that three- to five-year planning cycle times is appropriate. And so between those three, you see stasis. The challenge that we have in those environments is that it is almost impossible for us to move forward without the people in leadership, the people actually making a lot of these decisions, not in essence say you have to prove it to me first because that takes years.

00;06;46 – 00;07;15
Sultan Meghji
And so that’s why in the article I focused on things like hiring people with STEM backgrounds and building and continuing education. And that doesn’t mean just having a briefing once a month on something. It means actually having people who know how to write Python code, for example and have that on their laptop. And the fact is, is the vast majority of people in the regulatory system are lawyers who are over the age of 50.

00;07;15 – 00;07;38
Sultan Meghji
And, I’m not sure if you saw the OIG report from FDIC, but something like 40% to 60% of different departments at FDIC are retiring eligible. And so their planning horizon as soon-to-be retired individuals is radically different than what we’re talking about. And so we have an entire issue around incentivizing the right kind of people and the right rules to make these kinds of changes.

00;07;39 – 00;08;03
Penny Crosman
Well, short of getting rid of all the lawyers and radically changing the staffing, what do you think could be done to improve that risk-averse culture or modify the risk-averse culture, or to introduce more of an element of urgency or speed to these very slow-moving operations?

00;08;04 – 00;08;32
Sultan Meghji
Yeah, I mean, in a perfect world, this is the kind of thing that there would be an active set of legislative changes in Congress. But I think we all know that the likelihood of Congress acting in these kinds of areas right now is pretty low. And so from that perspective, one of the reasons I wrote the op-ed the way I did is because every single recommendation I put in there, whether it’s continuing education or partnering with others, either inside the government or out or broader education, requires no change to the agency at all.

00;08;32 – 00;08;59
Sultan Meghji
It just requires the people making those decisions and running those programs to actually do something slightly different than what they did 20 years ago. And so to me, the biggest challenge we have to have is we have to have the leaders of these agencies understand that you can’t just ignore these technologies or have a little technology group over on the side that holds meetings or hosts a webinar or something like that.

00;09;00 – 00;09;22
Sultan Meghji
You actually have to internalize it. And so you either have to hire better people who understand these technologies, and it can come in a leadership role, and you then have to educate the people who do were there. And then third, at some point we are going to have to talk about legislative changes because the environments are changing far more rapidly than the agencies themselves can.

00;09;22 – 00;09;41
Sultan Meghji
And sadly, I would hate for a crisis to occur in something. So, for example, a significant series of cyber events against the financial system and then everything goes into crisis mode and then you get a knee-jerk reaction. We should get more proactive about preparing for these changes. And this is how you think about resilience.

00;09;41 – 00;10;00
Sultan Meghji
Resilience is about knowing that you’re going to get punched. And so you plan for it. You assume you’re going to get punched, you practice for it, you prepare for it. I don’t see a lot of that kind of proactive activity in the organization, let alone working for higher efficiency or better or\ kind of on ongoing managing.

00;10;01 – 00;10;07

Penny Crosman
How about in the financial industry itself. Do you see the same sorts of challenges?

00;10;07 – 00;10;31
Sultan Meghji
It’s that’s a huge question. I would say that there are great examples of organizations that have turned the corner and they’re very proactive and they’ve gotten rid of their VPNs and gone to zero-trust architectures. And they have they’ve learned how to manage the change management journey. They’ve learned how to recruit. They’ve learned how to grow their people.

00;10;31 – 00;10;50
Sultan Meghji
There are some great examples of organizations like that. And I’ll wait to see who calls me to say, hey, we’re one of those. I can’t wait to see more examples of that. But I think for every one example of that, there’s probably five to ten that haven’t. And so I do have a sense of concern around this.

00;10;50 – 00;11;14
Sultan Meghji
You look at the leadership teams of a lot of banks, especially midsize and community banks and smaller, and they’re getting older. They’re struggling to recruit people. They’re struggling to retain people. I think it’s one of the reasons why we’ve seen so much energy in the fintech ecosystem. And now in the DeFi or Web 3 or whatever name we’re calling it this week, ecosystem, the energy, the passion.

00;11;14 – 00;11;44
Sultan Meghji
And now we’re seeing very clearly the investment capital is not going into banking. It’s going into non-banking financial services that are looking at exploiting this cultural land out of the existing banking system. A few years ago, it was very clear that most of the really interesting investment capital was going into modifying and upgrading and adjusting banking core systems and kind of bringing them up to speed from the legacy stage most of them are in.

00;11;44 – 00;12;12
Sultan Meghji
And now orders of magnitude more money is being spent on building new payments rails, new systems of record for new currency environments, new customer interfaces, things like that, that are all operating outside of the legacy banking system. So I think the difference between the two if I could draw a comparison, is within the regulatory system, you don’t just get to have a start-up regulator.

00;12;12 – 00;12;32
Sultan Meghji
I think that’s a really cool idea. I wish someone would do something like that. Like, you know, build the FDIC for the 21st century from scratch. That would be a really cool, interesting project. You don’t get to do that. In the private sector side you can absolutely do that. And that’s why we have things like venture capital and incubators and all the other infrastructure there.

00;12;32 – 00;12;57
Sultan Meghji
And we’ve seen so much more money being spent on that, orders of magnitude more than being spent on the legacy banking system. But I do worry quite a bit about that and the way I worry about it is not that it’s just a theoretical view. The outcome of that lack of change management, the outcome of a lack of investment in these areas will be a specific outcome.

00;12;57 – 00;13;18
Sultan Meghji
It will be a resilience issue. It will be you know, somebody puts a backhoe through a street and cuts off the internet of a bank, and all of a sudden the bank is offline for a week for Russian hackers to decide that they don’t like the U.S. being pro-Ukraine and start taking out banks. These are real-world problems.

00;13;18 – 00;13;23
Sultan Meghji
And I worry that that’s how we’re going to see the result of this lack of energy, lack of investment.

00;13;24;11 – 00;13;54
Penny Crosman
Well, yeah, you made a number of interesting points there. But what was going through my mind just now was I think a lot of people would say that the existing regulatory framework that we have was developed over many years and a lot of it with good reason, for instance, anti-money laundering rules to try to catch people doing illicit things and identify them through their transactions.

00;13;54 – 00;14;26
Penny Crosman
And now, trying to monitor or freeze the accounts of sanctioned entities and these are things that cryptocurrency and DeFi organizations may or may not be 100% on board with. Do you know what I mean? Do you think entirely new rules need to be set up for the startups and DeFi organizations and crypto companies?

00;14;26 – 00;14;57
Sultan Meghji
It’s such an interesting question, Penny. So let me tease apart a little bit. So first off is just because we change how we do something, how we analyze financial activity for money laundering as an example, doesn’t mean that the outcome which is stopping bad guys from doing bad things should be thrown away as well. But how you after the fact analyze banking transactions versus how in a Web 3 environment you can just not let the bad guys in because the technology is designed that way, you get the same result.

00;14;57 – 00;15;18
Sultan Meghji
And in fact, in many cases, I think money laundering and capturing transactional activity and things like that in more modern technologies is a heck of a lot easier than on a mainframe from 1987. So I’d call that out as the first part. Second is the rules around a lot of these things and I’ll say in particular are actually really good they’re strong rules.

00;15;18 – 00;15;34
Sultan Meghji
In fact, I think as someone who said in a lot of these discussions I think there’s, there’s a lot of interesting opportunities for us to innovate in that space. One of the reasons why the first time the tech sprint that I set up was with FinCEN specifically for identity because that’s a core component of this discussion.

00;15;35 – 00;16;05
Sultan Meghji
The third is as we mature these technologies, as we mature these new markets, the regulatory system has to wrap around them. But you can’t enforce an assumed good standard of behavior on an old piece of technology, on a new piece of technology. It’s sort of like and I use this parallel a lot, back when we used Windows laptops, everybody installed antivirus software and anti-malware software.

00;16;05 – 00;16;29
Sultan Meghji
If you were on a Mac, you just had a firewall. And I would much prefer to have a firewall stopping bad behavior from entering my computer than just letting it happen and then cleaning up the mess. That’s one of the reasons why I think Apple has done a great job on their infrastructure. And I would make the same argument about the regulatory system is we have a system built to respond to bad behavior, not to stop bad behavior.

00;16;29 – 00;17;11
Sultan Meghji
And I think you could talk about the Swift sanctions as another example of that for a lot of the quote-unquote Web 3 companies out there, they’re not companies. They’re a bunch of guys building technology. And one of the things that I really do hope we see more of in the future is more people who really understand how regulated financial systems work playing in this space and building companies in the space that behave better than the legacy and show a better way of stopping this kind of behavior while still being far more innovative, far faster paced and fundamentally building things that their customers actually want, far more so than many banks do.

00;17;13 – 00;17;15
Penny Crosman
Interesting. Well, it’s a big topic.

00;17;15- 00;17;23
Sultan Meghji
Yeah. I laughed when you asked that question. I’m going to talk for like seven minutes about the TLDR on that.

00;17;23 – 00;17;36
Penny Crosman
Yeah, I think that could be a whole other podcast for sure. So I saw that your title on LinkedIn now says Master Lego Builder, and I wondered, what do you think might be next for you?

00;17;37 – 00;18;04
Sultan Meghji
Your guess is as good as mine. I still do scholarship. I’m still no Bretton Woods. I’m very happy to continue to do those things. I am in a learning mode. When you’re in the government, you’re heads down on the day-to-day, the office politics, who’s in favor, who’s not, what’s Politico or Axios saying today that you lose track.

00;18;04 – 00;18;26
Sultan Meghji
I was sitting on a call yesterday with a friend of mine who’s a pretty senior engineer at a pretty big tech company. And I said, okay, what do I need to install on my personal laptop that that I don’t know about that’s been created in the last year. And it was a 90-minute conversation about a whole bunch of new technology that just allows for incredible activity.

00;18;26 – 00;18;57
Sultan Meghji
So the thing that I’ve learned actually that’s super fascinating that I would encourage anyone listening to this to get in on is five years ago, if you wanted to build an application and to build banking services, you’re talking hundreds of thousands, if not millions of dollars, months and years of work. In 90 minutes yesterday I downloaded four things to my laptop and just with my decent technical skills, I’m not a programmer anymore, I was able to build an entire cryptocurrency in an environment on my laptop. The tooling has gotten so good that I think anyone building anything in the space and I look especially at the Web 3 ecosystem, people can build things in weekends. They used to take organized machines months or years, but so much of that technology is, let’s say, less than three years old.

00;19;22 – 00;19;54
Sultan Meghji
And so the thing that I’m really fascinated with right now and someday I’m spending a lot of energy on is looking at what technology can be built very quickly. And it allows you to ask much bigger questions and try to solve bigger problems. You don’t need to build an entire technical ecosystem and 50 programmers and all this stuff to build something when between my Mac laptop and the stuff I downloaded yesterday, I could in essence rebuild, you know, an entire currency system, which is just fascinating.

00;19;56 – 00;20;02
Sultan Meghji
And so, to be determined. But I’ll let you know when I decide on something.

00;20;02 – 00;20;09
Penny Crosman
Thank you. Please do. Well, thank you so much for joining us. I really found that interesting.

00;20;10 – 00;20;11
Sultan Meghji
Oh, thank you for having me back.

00;20;12 – 00;20;33
Penny Crosman
Thank you for listening to the American Banker podcast. I produced this episode with audio production by Kellie Malone. Special thanks this week to Sultan Meghji, recent chief innovation officer at the FDIC. Read us, review us and subscribe to our content at www.AmericanBanker.com/subscribe. For American Banker, I’m Penny Crosman and thanks for listening.