Heather caught up with our friend Atul Varde, to discuss the project he has been developing at the THNK creative leadership program in Vancouver, BC. Atul has been an executive in one of Canada’s largest credit unions for the past 6 years where he has helped develop financial technology that credit union members use daily. At THNK he developed an idea for directing current financial technology towards social problems – and discovers the profit margin that drives it.
I would like to start by asking you to introduce yourself.
My name is Atul Varde. I am an engineer by training. I studied Electrical Biomedical Engineering. And then, a long time ago I went into the nuclear industry and designed information systems. Eventually, I started my own company and somehow ended up in the financial services sector. Most of my clients during that long length of time were financial institutions. We advised them on mergers and built systems, loan processing systems and so on for them. It was a lot of fun. That was a good run. But I sort of wanted to do something different. Paint on a bigger canvas with more colors, if you wish. So for the past 6 years I took on an executive management, CIO role with one of the larger credit unions in Canada, Infinity Credit Union. Which is the role I’m in now. The engineer in me continues to tinker on. In financial services we’ve tried to engage in innovation to the extent that our regulatory structure permits us. And this is a great time to be in Fin-Tech because there’s a lot going on. So that part of my role has been very enjoyable.
What are you currently working on?
We are working on a number of financial technologies right now. I suppose I should look at it from a broader point of view. There are the things that we’ve done in the credit union, retail financial space: mobile payments would be one example. We’ve been tinkering with several approaches to mobile payments for the past couple of years and we are hoping to see some of that come to fruition soon. Prior to that we pioneered the introduction of remote deposit capture technology to the Canadian market about 2 years ago. That was great because we gained some experience in bringing a new technology to a new market, adapting it to the requirements of that particular market, and getting a technical marketing ecosystem of many many participants to work in unison towards a common goal in a reasonably agile manner. So, that worked very well and was well received by the membership. The uptake in the beginning was pretty much a hockey-stick curve, so that was great to see.
In addition to that, I’ve been involved in THNK since the beginning of 2015 and that’s led to down in more of a personal journey of exploration. Our challenge project as part of the THNK journey was something we ended up calling: Social Investment Banking. That was essentially a fusion of 3 proven concepts. We took the Social Impact Bond (SIB) a fairly well-understood construct, and combined that with the idea of community investment co-ops as a very convenient, efficient way of raising funds from retail investors. The whole idea was to essentially bring innovative solutions to government-funded, social problems, matching or combining them with private capital and doing so at a global scale on an exchange. So you could do this in a very efficient manner with a flexible risk allocation between the tax-payer and private capital. Where private capital would have a very attractive financial instrument to get competitive, fixed-income returns from or for innovative solutions that make the delivery of social programs more efficient. And, to essentially recycle these funds. If all goes well, then the money comes back to the investor where they can then re-invest those funds back into another social impact bond and benefit more participants. So that was one thing. We haven’t actually put it into practice.
Provided we can free up enough time, we are keen to see some of this put into action.
What was the original challenge?
The original challenge was a bit different and perhaps a bit more specific. This came under the umbrella of the “future of capitalism.” We were asked, as part of the Vancouver cohorts, Class 1, to leverage digital finance technologies to solve the problem of green, affordable housing. So that might seem quite removed from this solution, but as we sort of dived more and more into that digital finance and alternative currencies and some of the ways of doing something quite difficult, which is to provide green and affordable housing, especially difficult in Vancouver. It was, in the beginning, a number of problems all clustered together. As we stepped back, we realized that affordable housing is just one of many presently government funded social problems. As we started solutioning it, we started looking at social impact bonds and then we sort of realized, “Okay! most of the money coming into these today comes from institutional and accredited investors. How might we democratize this?” And that’s when we looked at existing community investment co-ops as an existing set of rails that you can rideon.
In Canada you can buy shares in these co-ops and they are already qualified for self-directed retirement savings plans. So you don’t have to go through a bond-issuer. So that allowed us to open this up to a whole new class of investors.
Can you explain a bit more about the regulations in Canada?
My understanding is that if you’re looking for capital for a bond of this nature (SIB), you are usually restricted to accredited investors. Or, if you want to open it up to retail investors, you have to go through the expense of a bond issue. That creates some obvious constraints when it comes to what is likely a small issue. That’s why we looked at this option of community investment co-ops. We realized that the shares that one might buy in such a co-op were all really in Canada, qualified investments, under self-directed retirement plans – equivalent to a 401k in the US. You invest this money in a certain year and you get a tax reduction for it. The growth is tax free until you take the money out. So it is a tax-deferral regime, principally. But the fact that this is available and that there is an ecosystem that exists to support this product, told us that this is an existing set of rails that you can write on that might avoid the expense and effort of a bond issue and make this investment available to a whole class of investors who have been excluded until this point. The kind of investor you’re looking at is somebody who is looking for a competitive, fixed-income yeild, but also with a social impact. And I think there is enough of a market for that sort of thing.
Our thought was to combine all of that and apply the crowd-funding model to it. You’re allowed to dream and scale this stuff. So we thought: there might be a catalog of these types of bonds that you could subscribe to. You could do this around the world. At least in theory there seemed to be a way to scale it, as long as you got an innovative solution to an existing social problem that the goverment or tax-payer was funding and where this new solution could solve this problem more efficiently; and the government would realize those savings could be split between the investor taking the risk and the taxpayer who would save what they would have otherwise spent. So in an ideal world, that would be the situation, and of course you can apply it to any problem and affordable housing would be one such problem.
So we took an interesting journey. We went from a very concrete problem. We abstracted it out to what seems like a generic solution.
Was there a sponsor to this project?
Not directly, but THNK had a number of sponsors sponsoring the theme in general, providing input. Of course, we were all over the place in the research. I spent a fair amount of time looking at Bitcoin and the blockchain and alternative/complementary currencies, which led to an academic interest in the idea of money as a technology. As we researched these alternative currencies, it occurred to me that a good chunk of us go through life (including myself), looking at money as if it was something that was handed down on tablets, written in stone. If you stand back and look at it, you realize this is only a technology that we invented a long time ago. And it has gone through several variations and tenders. We went from pottery shells to coins to paper notes to polymer notes to plastic and bitcoin and all sorts of things. But the essential purpose of that technology, to exchange value, is a network technology. So how might we reengineer money as a network technology and how might we re-engineer its relationship to things like work and the environment, which is obviously under substantial threat, and to humans as economic actors, so that the whole, overall ecosystem works in a more sustainable way than it does today.
Now that you’ve explored from so many different angles, what approach do you personally think would be the most effective?
I’m still in the research phase of that right now. I don’t pretend to have any concrete solutions at this point, I’m just sort of looking at this particular piece as a very fascinating problem, because it’s a fascinating piece of technology, in the sense that there’s so much emotion attached to it, unlike other technologies. But, there’s some parts that come to mind; that is, it might be possible to have money at some point, backed not by a central bank gaurantee or gold as used to be the case but might it be backed by some metric reflecting environmental health. Would that lead to better outcomes? Would that lead to a more sustainable overall ecosystem? How might you at some point decouple money and work? If you imagine a future where accellerating our nation leads to or forces people to redefine work and that transition may not be smooth. If you re-engineer money it might give you more tools to manage that in such a way that technological innovation doesn’t face an unprecedented amount of social opposition. To allow that progress to continue. And at the same time, to make sure that you don’t end up with an unsustainable amount of economic inequality, which some might argue is already the case. You can see that accellerating even more. When you look at all of these interconnected pieces, the one piece that seemed like it might have more options for reengineering, seemed to be money. I could be wrong in that, but it’s essentially an exploration on that piece right now.
I actually came from the other direction. I started with community currency and then came around to the other side of the social investment funds, etc. I’m curious, since you work for a credit union, is this something that the credit union would be interested in promoting? Do you think this would work in Canada or Vancouver?
I think, certainly the exploration of that piece is something that would be interesting to just about any credit union. In terms of coming up with a system that promotes a more sustainable economic environment, any support for a particular solution would depend on what the particular solution looks like. We don’t pretend to have any of the answers to any of this. Hopefully, we’re asking the right questions. Should a solution come out of this, then it will be examined based on its own merits, based on what it might do in terms of benefits for the membership at that point in time.
If you go back to the Social Impact Bond piece, some of the earliest SIBs were backed by credit unions. So there certainly is a precedent for that. What I’m not aware of, having been done this far, is combining the SIB with the community investment co-op pieces in a crowdfunding scenario. I’m not aware of that, but things move very fast so something may have happened in the past few months that I’m unaware of. That combination, at first glance, makes sense.
In more detail, how would that combination work?
Essentially, the way it would happen is: You would pick a government-funded social problem. It could be something like affordable housing. It could be juvenile delinquency. Anything where the cost of ongoing remediation is quite high. Let’s suppose that there is a non-profit organization that comes up with a more innovative way of solving the same problem, that is going to lead to cost savings to the government. So then the actors would be brought together. Actor number 1 would be the govt. Actor number 2 would be the non-profit, hired to execute the solution. Number 3, would be the private capital. Traditionally, that private capital would come from foundations, private banks, credit unions, larger investors and institutions. And you could still do that. And I would suspect that in some of the earlier iterations of this you probably want some of that institutional money to give a sufficient baseline critical mass, and then you could have a variable component of retail money on top of that, to democratize the process. That piece could be done through a community investment co-op. So, it could be retail investors buying say shares in that co-op, and that way you gather that capital and that’s your retail component and there’s your institutional component. You combine that capital and contribute it into the bond to solve the Social Impact problem.
The other key piece of the puzzle is that there would have to be a specific contract agreed to between the parties. That would be: the government, the people providing the capital, the intermediary, and the execution arm. And one of the elements of that contract is that they will all have to agree, upfront, on an auditor (for lack of a better term). Such that, in the event of any disputes, it would need a pre-defined or pre-selected audit function. And another thing that this auditor will do is, there will be some clear definition of what success means. So maybe this problem takes 5 years to solve or 3 years to solve and that metric would be valuated at the end of that time and it would be on some scale and all parties would have to agree on what success means. Typically, and this is where I suspect no two contracts are the same, they will vary depending on the problem, but generally speaking, the greater the degree of success, the greater will be the return on the capital to the investor. And if the project does not succeed, then there would be a loss of capital to the private investors. So that’s where this becomes more appealing to the tax-payer, because in the status quo scenario, they’re always on the hook, no matter the outcome. In this way, you can presumably attract more capital, create more efficiency, and then share some of the rewards, which are just the cost savings, between the people taking the risks and the tax-payer who’s been funding this all along. In a very happy path, the investor gets their return and their capital back. An investor of that nature is probably going to be motivated to recycle those funds back into another SIB.
But, again, we haven’t implemented a single one of these. While there are many things to learn still on the way, but based on our research, this seems to be closest in effect. To scale this out, let’s say you’ve done 10-20 of these, there will be patterns that start to emerge and that’s where you would get some efficiency. You can imagine centers of excellence developing where groups specialize in certain social impact problems. So there’s a lot of consulting to this intermediary. It won’t just be an algorithm. There will be a human component to it that makes sure the contracts are appropriately to ensure success. But at scale, we think there will be some clustering happening. And that’s where we see this eventually scaling out globally. Success attracts success, I suppose. So we can see foundations or large companies being interested in this. If you have this balance between institutional and retail money, it just makes for a more diverse ecosystem.
In terms of technology, how were you thinking of implementing this?
We didn’t get quite that far, but it isn’t a huge concern at this point. When we look at the architecture, it’s simply a mashup. Some concepts are more proven than others. SIBs have only been around for a few years, but there’s a few case studies that you can look at. There are some centers in the US at some well-known schools. I believe one at Harvard that has a technical resource center to help people put these bonds together. So there’s a few places in the world to get some technical knowhow. In terms of crowdfunding, there’s all sorts of examples out there of how, from a pure technology point of view, how these are done, to look for inspiration. For community investment co-ops, there is one example in US and one example in Canada. Within the Credit Union system, there is expertise that we could bring to bear. From a pure technology point of view, this seems more of a system integration problem. As opposed to: we are going to build something that no one has ever seen before. Essentially, most of the work is going to be at THNK in terms of picking a few strategic pilots. Some problems that are representative but not so big that they’re not suitable as pilots, that will let us learn from the process and deliver something useful. And then to use the pilot to tweak the process before scaling. That’s what we typically do in development. This would be no different.
Your ideal pilot would be?
We looked at a few. The green, affordable housing problem applied to the city of Vancouver. We haven’t done a full business case yet. We are currently looking into how we will go about implementing it.
All quite interesting.
Yeah. It’s fascinating how that journey went from something very specific to something very abstract and working on both planes at the same time.