A market research survey of more than a thousand senior decision makers in the UK, Belgium and the Netherlands — commissioned by Polish banking-as-a-service (BaaS) platform provider Vodeno — found that t. wo-thirds of them said that BaaS is transforming financial services for the better (I find it surprising that a third didn’t, frankly) and, more interestingly, half of them said that it will eventually make “traditional” banking obsolete.
This may seem a radical prediction, but I think it is entirely reasonable. Banking isn’t fun or interesting and most people (me included) don’t really want to spend any of their valuable time or attention on what is essentially a heavily regulated utility service. Most people (me included) would prefer to have their financial services delivered to them at point of need without interrupting their experiences. As Christina Melas-Kyriazi (a partner at the management consultancy Bain) observes, if you want to deliver financial services to a person then in some cases the best way to get to that person can be “via software, where they’re doing their work”.
Europe and the U.S are heading in the same direction here: Bain estimates that all kinds of financial services (not only banking) embedded into software accounted for $2.6 trillion, or nearly 5%, of total US financial transactions in 2021 and will approximately triple to $7 billion in 2026. Note that point: this is about all kinds of financial services and not only banking. While the market is currently dominated by payments and lending services, the upward trajectory will draw in adjacent value-added services as well. Bain suggest insurance, tax, and accounting as obvious candidates.
But what will this mean for fintech? On the one hand, the ability to deliver financial services inside consumer-centric experiences means better customer experiences but on the other hand, it means serious competition from the techfins. As Sophie Guibaud and Scarlett Sieber wrote in their 2022 book Embedded Finance: When payments become an experience, it makes sense for the technology players to move in this direction because they are companies that know their customers, have strong relationships with them and can use their data to predict their needs, offering the right products, at the right price and at the right time.
The techfins are more than happy to have banks, for example, do the boring, expensive and risky work with all of the compliance headaches that come with it. Big Tech does not care about the manufacturing of financial products, what it wants is the distribution side of the business. Given that they have no legacy infrastructure (e.g. branches), their costs are lower and the provision of financial services helps to keep their customers within their ecosystems. It is easy to imagine a future where you use an Apple AAPL checking account (actually provided by JP. Morgan) and an Apple credit card (actually provided by Goldman Sachs) and use an Apple loan (actually provided by Wells Fargo WFC ) to buy your Apple glasses, then Apple will have a very accurate picture of your finances. A very accurate picture indeed.
It’s All About Data, Again
The business model here is clear. As I have written here before, what Big Tech wants isn’t your money, but your data. The margins on money are shrinking, after all. According to McKinsey, “traditional” banks face stagnant or decreased revenue and profits. They report that the average global banking return-on-equity was around 9.5% in 2021. This is a sharp decline from 15% prior to the 2008 crisis and on the way to a projected 7% at the end of the decade.
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One particular segment where this is having quite an impact is small business lending. A Bank for International Settlements working paper (no. 1041, September 2022) notes that fintechs (they look at Funding Circle and Lending Club) lend more than banks in areas where there would appear to be poor credit environment. The paper identifies the competitive threat to banks and concludes that such players can “create a more inclusive financial system, allowing small businesses that were less likely to receive credit through traditional lenders to access credit and to do so at a lower cost.”
Why? Well, as you might expect, this about technology. The fintechs can evaluate credit risk using information beyond basic credit scores to emulate (and enhance) the local knowledge that used to be the domain of local banks. They cite the ability to access customer ratings and reviews as a good example of the “soft” data that can helpfully inform credit decisions. As Jonathan Katz comments about this over at The Financial Brand, banks that access such data stand to benefit from the business insight it provides, but note that it is insight that behemoths such as Amazon AMZN already have access to.
Imagine how much more accurate Big Tech’s decision-making can be when feeding the machine-learning algorithms with their hoards of data. If we want a better financial services sector then we must find ways to create a more competitive sector and that will mean moving on to some form of open data environment that delivers not merely financial services, but financial health, which is one of my favourite topics.
Powering Financial Health
There was a good piece in the Harvard Business Review a couple of years ago where Todd Baker and Corey Stone explored interesting ideas around the transition from individual financial services to integrated financial health. In that article they pointed out that the prevailing paradigm (of markets and choice) created a regulatory system that “largely places responsibility — absent the most egregious abuse — on the individual consumer” and argue for a radically different regulatory structure to more directly connect the success of financial services providers to their customers’ financial health.
(They draw an interesting analogy by comparing this approach with experiments in the American health marketplace that pay providers for improving patients health, “rather than paying them simply for treating patients regardless of the outcome of the medical intervention”.)
The incumbents have a problem here as well. Not only do they not have the data that Big Tech does, but according to findings from the J.D. Power 2022 U.S. Retail Banking Advice Satisfaction Study (based on responses from 5,177 U.S. retail bank customers who received financial advice or guidance from their primary bank in the past 12 months), overall customer satisfaction with the advice and guidance provided by national and regional banks has actually gone down over the last year.
In fact less than half of US customers use any form of financial health tool offered by their bank at all, which is a little disappointing considering how much banks invest in their digital apps, especially since research shows that customer satisfaction with how their bank supports their financial health rises sharply with use of such tools.
Given that financial literacy is generally poor and the financial landscape is complex so you do have wonder whether it makes sense to try and use tools to educate consumers at all, especially when a substantial fraction of those consumers have poor literacy and digital skills, never mind financial literacy and money skills.
Maybe it would be better to instead provide consumers with intelligent agents to act on their behalf! I just spent several hours researching for, applying for and funding a new savings account and I’m still not sure whether I made the best decision or not. I’d much rather have had a bot operating under a regulated duty of care do this sort of thing for me!
Refocusing the sector on delivering financial health, rather than financial services has implications that go way beyond choosing better credit cards or spending less on coffee and more on pensions. In order to do this, financial health providers will need a better picture of individuals and their circumstances. They need the raw data to work with.
(This is where the connection with open banking, open finance and open data comes from.)
When you look at trends in this context it seems fairly clear than when a bot can access the relevant banking services via APIs and do all of the boring banking stuff that virtually no-one actually wants to do for themselves anyway, then the idea that people will access “traditional” banking services does indeed appear quaint.
Bonds See 2023 Recession, Stocks Aren’t So Sure
The yield curve is one of the most robust recession predictors and has signaled a recession may be coming since mid 2022. In contrast, U.S. stocks as measured by the S&P 500 are up materially from the lows of last October and only just below year-to-date highs, seemingly rejecting recession fears. Yet, fixed income markets see the Fed potentially cutting rates by the summer, perhaps reacting to a U.S. recession.
The Evidence From The Bond Markets
The recessionary evidence, at least from fixed income markets, is mounting. The 10 yield Treasury yield has been below the 2 year yield consistently since last July. That is is called an inverted yield curve and has signaled a recession fairly reliably when compared to other leading indicators.
Building on that, fixed income markets see almost a nine in ten chance that the Federal Reserve cuts rates by September of this year. That’s something the Fed has repeatedly said they won’t do on their current forecasts. Yet, a recession could cause it to happen.
The Stock Market
In contrast, the stock market shows some optimism. The S&P 500 is up 7% year-to-date as the market has shrugged off fears of contagion from recent banking issues. In particular, tech stocks have rallied.
In contrast, more defensive sectors such as healthcare, utilities and consumer goods have lagged in 2023. This suggests that the stock market is taking more of a ‘risk on’ position and is perhaps less worried about the economy.
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That said the stock market is a leading indicator of the business cycle, it may be that stocks see a recession, but are now looking past it to growth ahead and are factoring in the lower discount rates that a recession might bring as interest rates decline. Also, the U.S. stock market is relatively global, so the fate of the U.S. economy is a key factor in driving profits, but not the only one.
Monitoring unemployment data will be key. Though the yield curve is a good long-term forecaster of recessions it is less precise in signaling when a recession starts. Unemployment rates can offer more accurate recession timing. Unemployment edged up in February, suggesting a recession may be near, but we’ve also seen monthly noise unemployment. Two similar monthly unemployment spikes during 2022 both proved false alarms.
However, if we see a sustained move up in unemployment from the low levels of 2022 that may be a relatively clear sign that a recession is here. Economist Claudia Sahm estimates that a sustained 0.5% increase in unemployment rate from 12-month lows is sufficient to trigger a recession. Unemployment rose 0.2% from January to February 2023, so maybe we’re on the way there. Of course, the jobs market performed better than expected in 2022 and it could do so again. Still, fixed income markets do suggest a 2023 recession is coming. Stock markets don’t necessarily share that view.
Which States Have The Highest And Lowest Life Expectancies?
There’s a wide variance of life expectancies among the 50 states in the U.S., according to a recent report prepared by Assurance, an insurance technology platform that helps consumers with decisions related to insurance and financial well-being.
Figure 1 below shows the 10 states with the highest life expectancy, starting with Hawaii, the state with the highest life expectancy.
Figure 2 below shows the 10 states with the lowest life expectancy, starting with Mississippi, the state with the lowest life expectancy.
Assurance scoured life expectancy data prepared in January 2023 by the U.S. Centers for Disease Control and Prevention (CDC). With this data, Assurance created several easy-to-understand graphics that offer information about life expectancies.
Life expectancies are a basic measure of well-being
As measured by the CDC, life expectancies are a basic measurement of well-being in a broad population and not a prediction of how long an individual might live. The CDC measures the expected lifespan for a person born in the year of measurement. This measurement is calculated based on the assumption that the individual will live and die according to the rates of death that are prevalent in the measurement year for each age. There’s no assumed improvement or backsliding in the assumed mortality rates in future years for each age in the life expectancy calculation.
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By contrast, an estimated lifespan for an individual would consider their current age, their gender, and some basic lifestyle information. It might also attempt to project future improvements or backsliding in mortality rates based on key factors.
Significant influences on life expectancy calculations
Leading causes of death in the U.S. are heart disease, cancer, and accidents in that order. These immediate causes are significantly influenced by factors in the population such as poverty rates, educational attainment, rates of obesity and smoking, access to healthcare, prevalence of violent crime, and the support people receive from federal, state, and local governments. All these factors can vary widely among different states, which can be a key reason why life expectancies vary by state.
When you think about it, all these factors also have the potential to influence a person’s quality of life. The measured life expectancy rate rolls up all these factors into one objective measurement of well-being that’s based on population data.
In addition to the factors listed above, mortality rates increased and life expectancies decreased in the past few years due to the Covid-19 pandemic. A recent article titled “Live Free And Die” summarized recent research results that show that life expectancies in most countries around the world rebounded after the Covid-19 pandemic but that they continued to decline in the United States. Many of the reasons cited in the article for the continued decline in U.S. life expectancies are the same or similar to the factors listed above.
Why should retirees care about the life expectancies reported here if these measures don’t predict your own lifespan? Life expectancy calculations indicate the general well-being of the entire population in your area. While the living conditions in your area can influence your own lifespan and quality of life, retirees should focus on their remaining life expectancy given their age. They should also consider how the factors listed above that influence life expectancies in the population might apply to them.
You can obtain customized estimates of your remaining life expectancy at the Actuaries Longevity Illustrator. Part of your planning for retirement is understanding how long you an an individual might live, instead of relying on generalized information about larger populations you see in the media.
IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’
Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its “Dirty Dozen” campaign, the IRS has renewed a warning about so-called Offer in Compromise “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collective excessive fees.
The “Dirty Dozen” is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.
Tax Debt Resolution Schemes
“Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt,” said IRS Commissioner Danny Werfel.
“This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don’t qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees.”
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Offers In Compromise
Legitimate is a key word. Offers in Compromise are an important program to help people who can’t pay to settle their federal tax debts. But, as the IRS notes, these “mills” can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don’t meet the qualifications, frequently costing taxpayers thousands of dollars.
An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don’t believe you owe the tax, you can’t pay the tax, or exceptional circumstances exist.
Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.
First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).
You’ll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month’s payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.
The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.
Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don’t, the IRS will return your offer.
Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.
You can probably tell—it’s a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.
By contrast, according to the IRS, an OIC “mill” will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person’s tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.
Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool.
“Pennies On A Dollar”
What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That’s why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.
The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.
While submitting an OIC may keep the IRS from calling you, it doesn’t stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.
You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.
An OIC is a serious effort to resolve tax debt and shouldn’t be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you’re considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.
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