The Bankwatch

Morgan Stanley hooks up with one of the largest Japanese banks to compete with Citi and JP Morgan.

Morgan Stanley and MUFG in joint push | FT

Mitsubishi UFJ Financial Group is set to merge its securities subsidiary with Morgan Stanley’s Japanese securities operations, to create one of the top three brokerages in Japan.

The Japanese bank and Morgan Stanley have been in talks since MUFG invested $9bn last year into the then-struggling US broker, for a 21 per cent stake.

Researched by Nobyuo Henderson

Demographics is an interesting science, and one that has real impacts on society over time that are really only apparent after the fact.  Mauldin recounts a conversation with Strauss and Howe on their book, “The Fourth Turning“.  The premise is that the US and the western world move in 80 year cycles, with four ‘seasons’ within each cycle.  As historians, they have looked back in time, and concluded the cycles are quite consistent.

Whether you buy that or not, the four cycles noted do describe the 20th century well, and place us firmly in the latter part of the third, or ‘unravelling’ cycle/ first part of the ‘crisis’ cycle.  We have been/ are in a period of high individualism and discredited institutions.  We are entering a period of tearing down, and re-building.  Following the logic, we will enter a period of renewal, collective optimism and willingness to work together and help each other soon.  We can always hope we do not need the full 20 years for the fourth ‘crisis’ cycle.  What do you think?

Outside the Box | Mauldin

The First Turning is referred to by Howe as a High. As this follows a period of crisis, one of the hallmarks of a First Turning is a heightened sense of community and collective optimism, driven in part by the fact that the society has just come through a difficult and challenging time. Consequently, during First Turnings, societal institutions tend to be strong while individualism is weak. The post-World War II “High” of the mid-1940s through early ’60s is the most recent example of a First Turning.

The Second Turning, called an Awakening, typically starts out feeling like the high tide of a High, with signs of progress and prosperity everywhere. But just as everything seems to be going along swimmingly, large swaths of society begin to chaff under the social conformity of the High, beginning to gravitate to more individualistic pursuits and demanding that their personal interests come first. You may recognize the “Consciousness Revolution” of the mid-1960s through early 1980s, correctly, as the Second Turning.

Next up, the Third Turning, which Howe calls an Unraveling, is much the opposite of a High. To wit, individualism dominates, while institutions are increasingly weak and discredited. Quoting Howe on the Unraveling…

“This is a time when social authority feels inconsequential, the culture feels exhausted, and people feel bewildered by the number of options available to them. It is a time of celebrity circuses and a tremendous amount of freedom and creativity in our personal lives, but very little sense of public purpose.

The most recent Third Turning began in the mid-’80s with Morning in America, and continued through the ’90s. Previous periods of Unraveling in American history were also decades of cynicism and bad manners. Think of the 1920s, the 1850s, the 1760s. And history teaches us that the Third Turnings inevitably end in Fourth Turnings.

Finally, there is the Fourth Turning, called a Crisis. The recent Third Turning appears to be winding down, and we are currently on the cusp of a Fourth Turning. This is a time of great turmoil, when society’s basic institutions are torn down and rebuilt, and seemingly insurmountable problems are addressed. During Fourth Turnings, America engages in a struggle for its very survival and redefines its identity as a nation. Large wars are often a part of this process. The American Revolution, Civil War, Great Depression, and World War II were all features of past Fourth Turnings.

I simply love this post at RWW.  The post is about how FaceBook could turn on the power of their userbase to the benefit of consumer power.  I have long been a fan of VRM and at the same time at something of a loss to see how it could be initiated.  Then I read this post, and new lights went on.

The post is about FaceBook, but it is less about them, than it is about business models for dot.com companies with large userbases who insist on following tradigital advertising models. The whole ‘We have lots of eyeballs so lets monetise’ thing.

[disclaimer]  I have long believed that adwords, adsense, and any such interruptive advertising model has only a limited online lifespan, and represent a termproary interlude that keeps SEO types busy in these formative internet times, until we get to the next level whereby the consumer is truly in charge.  Only then will I accept a Web X.0 increment.

I look at myself and my online behaviours, and maybe I am in the minority, but maybe thats because the tools I use are not well understood.  My online experience sees almost no ads except when I choose to do so, and I do so choose.  I see them in emails I deliberately subscribe to, I see them when I seek them out, but my standard web experience is protected by pop up blockers and AdBlock Plus.  If in doubt how many have PVR’s at home, and skip tv ads?

Its not that I don’t want to lknow about products and services.  I just don’t want to know when I am reading, listening and watching things on the web.  This is the power and the promise of the internet medium;  it has the power to be better.  I listen to Sirius Radio for similar reasons; I want to hear music not ads.

Enter Vendor Relationship Marketing (VRM).  Terrible title, but in essence VRM says you will decide when a merchant (vendor) may contact you, ie advertise to you.  Until then stay away. Here is one of the more provocative catchphrases from “The ClueTrain Manifesto” which forsaw this problem and solution 10 years ago.

The challenge is how to move from an interruptive model in radio, television, phone, mail, and now internet to VRM which would require a seismic and complete shift.

“be prepared to be misunderstood for long periods of time.” – Jeff Besos

Back to the RWW post.  Bernard does a nice job of pointing out that FaceBook is taking too long to develop a business model, and is taking longer than Google did.  He notes that it will take a radical shift in order to do that, and that shift will be misunderstood, but give it time.

I agree with Bernard.  The reason FaceBook and traditional advertising doesn’t work is because no-one wants to hear an ad in the middle of a conversation.  However FaceBook has the other benefit (some say weakness) of being a walled garden and Google cannot see inside.  He notes this is the perfect oportunity to turn that walled garden into a powerful tool on behalf of the consumer.  When they feel the need for a product, service or information on them, FB users could, through an RFP (Request for Purchase) process make it known to vendors, even to the point of naming their price or price range.  Vendors could respond.

This turns the ad model on its head.  The playing field is levelled between the merchant and the consumer.  If the merchant comes on stronger than the consumer wishes, or tries to return to old ways, the consumer can ignore them.

Relevance to Bankwatch:

Consider banking – every day thousands of RFI’s emanating from VRM services, and the banks can compete on them, all electronically.  Clearly this requires formats, standards, and defined processes but it makes an interesting future world view, and one that FaceBook could kick off.

The management of UK banking/ financial system has become highly politicised reflecting the general Browns government style. This from the meeting yesterday between Mervyn King, Governor of the Bank of England and the Commons committee.

Governor in dark on banking regulation | FT

His comments to MPs on the Commons Treasury committee flabbergasted its members. John McFall, the committee chairman, said the lack of communication at the top level between the Bank, Treasury and Financial Services Authority was unbelievable. “The tripartite authorities are a communications black holes, which is worrying.”

It is always interesting to look at the usage of this blog and which items are most popular, then speculate why that might be.  Any comments on this welcome, because I can try to adapt towards items that are needed.  Overall there is some consistency between the all time, and the newer stats.

Comments and observations welcome.

Most popular posts at the moment – June 2009:

• Deloitte report | “The Shift Index: Recession masking long-term competitive challenges”
• America’s largest Credit Unions
• How to web 2.0 your bank
• Japanese online shopping site Rakuten to open eBank
• Building the Bank of the Future – 2
• 6 years is too long for elimination of mag strip debit cards
• Online only Banks (branchless Banks)
• Consumer mindsets in North America have shifted permanently with regard to finances
• A new future based on a different revenue model is needed for banks
• The Great Unwinding | part 1 of 3: 2009 – 2012

Most popular – last three months

• America’s largest Credit Unions
• Online only Banks (branchless Banks)
• How to web 2.0 your bank
• CIBC Today” – CIBC Intranet P
• Wells Fargo mortgage business leaps ahea
• Forrester Research: CRM Market Size And
• Celebrating PayPal’s ‘centenary’ – Paypa
• Building the Bank of the Future – 2
• Can an “Internet only” bank work
• The power of alternative marketing – Starbucks

Most popular – all time

• How to web 2.0 your bank
• Online only Banks (branchless Banks)
• Which banks understand the web lifestyle
• CIBC Today” – CIBC Intranet P
• Building the Bank of the Future – 2
• America’s largest Credit Unions
• Can an “Internet only” bank work
• The power of alternative marketing – Starbucks
• The worlds biggest banks | Economist
• US banks likely to fail as bad loans soa

The OECD today produced a report that is sure to be controversial. They are upgrading all their forecasts both for 2009, and 2010, but that FT headline mask the real underlying situation as it applies to consumers and businesses which I see as relatively no change from other forecasts.

OECD sees strongest outlook since 2007 | FT

The report notes that the unemployment rates and slackness in the world economies will persist at end of 2010.  The optimism reflected in the headline appears centred on the GDP numbers, which are being driven by Government spending, not consumer or business spending.  Recovery is still looking L-shaped.

This chart on housing is illustrative of the depth of the shift.  The Canadian Price to Rent/ Income remains high relative to others.

Here is the link to the report.

OECD June 2009

Here are selected country headlines.

Canada:

The sharp contraction that began in the last quarter of 2008 intensified in the first quarter of 2009, led by collapsing exports, fixed investment and stockbuilding. The pace of contraction appears to be slowing, but recessionary conditions are expected to linger through the third quarter, with only a slow recovery thereafter. Unemployment is projected to keep rising until early 2010 and inflation pressures to stay muted.

US

The US economy is going through a severe and protracted recession which is projected to bottom out later this year, as fiscal and monetary support takes hold and the housing cycle bottoms out. In 2010, even after a recovery gets under way, GDP growth is likely to remain weak because of the slowdown
in capital accumulation, negative wealth effects and still adverse, albeit improving, financial conditions. In this environment, a considerable degree of economic slack, especially in the labourmarket, is likely to persist over the projection period, bringing inflation to very low rates.

Japan

The global crisis triggered a deep recession that is likely to be the most severe in Japan’s post-war history. The contraction in world trade led to a sharp plunge in exports and business investment, while falling employment and wages have reduced private consumption, leading to a projected
output decline of almost 7% in 2009. Fiscal stimulus is expected to lift output growth into positive territory from the second half of 2009, although at a rate that remains below 1% through 2010.

Euro Area

The euro area is in a deep recession, with external demand collapsing and domestic demand being weakened by tight financial conditions, rising unemployment and heightened uncertainty. Activity is expected to contract throughout 2009 and pick up only gradually in 2010, as the tensions in financial markets start to fade and the full effects of policy stimulus are felt. Rapid growth in unemployment and a large negative output gap will continue to dampen inflationary pressures throughout the projection period.

UK

The economy is in a severe recession, with output projected to decline by 4.3% in 2009 and recover only mildly in 2010. The financial crisis has severely impaired the supply of credit and house prices have fallen sharply, thus restraining business and household spending. The depreciation of sterling is mitigating the downturn, but cannot overcome falling foreign demand. The unemployment rate is projected to rise towards 10% in 2010, with inflation well below the 2% target for an extended period.

Deloitte put out some good stuff, but this one is superlative.  The context here is is for planners thinking about the future and wondering how to think about the future.  That context is hard to achive with so much information, and so much new information every day.  For example we have all seen and heard the Iran/ Twitter discussion, and impacts here and here.  We have seen government influence Twitter to keep the ‘people influence’ moving.  We see internet advancing rapidly, Google supposedly taking over advertising, yet Facebook with over 200M users, actively resisting advertising.  We see online banking growing rapidly, yet banks are stuck with expensive branches and staff in them.  We see concerns about bandwidth yet it grows inexorably.  We see PR and Marketing continually trying to force fit old methods into new models with little success.

These are simply examples that point to the understandable confusion both for planners, and for the people they must show their plans to.  Everyone is a participant personally as well as corporately in the 21st Century changes, and we need better mental models to work it through.

In short there are too many data points, and too many of them are seemingly contradictory.  One thing we all agree on is that things are changing, yet what is happening, and how can I make rational projections within these changing times that support planning for the next 2 – 20 years?

Enter this new paper from Deloitte with a well constructed index that looks at three indexes they refer to as waves:

The Shift Index:  Recession masking long-term competitive challenges | Deloitte Center for the Edge [121 page pdf link off this page]

Deloitte’s Shift Index pushes beyond cyclical measurement and looks at the long-term rate of change and its impact on economic performance. The Shift Index is focused on three sets of main indicators:

* Foundations, which set the stage for major change
* Flows of resources, such as knowledge, which allows businesses to enhance productivity
* Impacts, which help gauge progress at an economy-wide level

Index data points – click through for detail.

This paper resonated with me because it offers a simple model that is understandable, yet when I study the detail in behind, it captures the host of data points that provide the confusion and contradictions.  It deals front and centre with the reality that corporations, including banks, are not exploiting the digital infrastructure that is presented not the new capital, talent and knowledge flows that are present.

In simple terms the model has three waves, with the first two being drivers of change, and the third being the corporate outcomes.  The current situation is, understandably that, the impact wave is lagging the first two waves.  In short companies are failing to react and explout the opportunities offerred by the new digital infrastructure and knowledge flows that are available.  The result is more of what they refer to as toppling – companies failing.  They also note the recession is masking the longer term shift that is really happening.  This document screams – plan for the future, not the recession.

After my last post, I thought it better to follow up with some facts to support my contention that this economic recovery is L shaped in Canada and US.  This is not meant to be an economic projection, and I leave that to the professional economists.  However in terms of planning, banks ought to consider the high probability of a scenario where the reduction in economic activity will level off but hardly see growth in the near future.  This will be driven by consumer confidence and frankly their financial circumstances.

If we go back to the root cause of the recession it remains this;   a dramatic drop in consumer asset values resulting in leverage that is too high.  Layer in the concern about job security, and the real increase in unemployment, we must look carefully at ability to manage the debt based on current income, and the effect of that on the business of banking.

Here is the ratio of debt to disposeable income in Canada and US at end of 2008. [source: CGA Association Canada & Federal Reserve Bank of San Francisco]

Canada              US

%                                  136.5%             130%

The first surprise is that Canadians are more highly levered than Americans.  The CGA report makes these points amongst others:

… prospects of improving households’ financial situation in the near future are low. A balanced approach to spending, saving and paying down debt may be a desirable feature of households financial behaviour in the near future.

Hardly earth shattering stuff but the consequences remain that strategies need to account for this new consumer mindset in North America for the next few years.

When thinking about the future and the economic position of countries that banks must consider, I listen far less to politicians and more to IMF and World bank forecasts.

The use (misuse) of the term recovery fails to acknowledge what the circumstances for people and businesses will be on the other side of the recession.

Here is a new report from World Bank that looks to the future with more pragmatism, although they still use the word recovery.  Note their focus is skewed by their mandate for developing countries, however they have to look at the entire economic picture to get there.

Global Development Finance 2009: Charting a Global Recovery | World Bank

The world is transitioning from an extended credit boom and economic overheating to an era of slower growth. Looking to medium-term developments, participants in the international financial system—consumers, investors, traders, and firms—must adapt their behavior to the new realities of tightened credit conditions, a prominent role of the state in financial affairs, large excess capacity in many industrial sectors, and more closely coordinated regulatory policy

The use of the word transition here is important.  Consumers and businesses are moving from one reality (pre 2007) to another over the next 5 years.  That transition affects all bank customers, so its worth considering the impact of those shifts, and how products and services ought to be re-thought.

In simple terms the booms over the last 10 years which banks saw in mutual funds and mortgages with easy product volume crashing through the door will be replaced with thoughtful and careful consumers, who are wary of banks, for multiple reasons.  Banks took a credibility hit over the last 2 years, and that credibility will take time to restore.

Confidence in the international financial system must be restored

On a final note, it is important to recognize how the severity of the current crisis has undermined confidence in the international financial system (annex 3B). Many economic and financial indicators have exhibited unprecedented declines, moving us into uncharted territory in several respects. Uncertainty surrounding the outlook remains at an all-time high, suggesting that a nascent global recovery will be vulnerable to after-shocks of the present crisis and may not survive any marked deterioration in financial conditions.

(Source:  World Bank use both market- and survey-based proxies to gauge investors’ confidence, combining them with measures of consumer confidence in Canada, Germany, Japan, the United Kingdom, and the United States to extract a common global index, using the  well-established method of principal component analysis.)

The report has downgraded the view on growth for 2010, and as important speaks at length about the risk associated with the projection still being too optimistic.  The graph does suggest that investor confidence is ahead of consumer confidence.

The report calls for an increase in breadth and depth of financial services regulation.  The association of government with banks through increased balance sheet support, and regulation could be a double edged sword.  Government influence suggests increased safety, but it also implies more costly services.  Customers will watch this influence carefully, and look for those banks that match their expectations and needs.

We were just hit today with a case of fraud that affected my family personally, and it just validates my view that the security of our payments networks is a problem being swept under the carpet.  Every day, all banks contact thousands of customers to cancel their debit card because it was or may have been compromised.  This is a well kept secret, and has not made mainstream press yet.

In our situation we actually were the card compromised, and I know enough about the card usage to narrow down the location of the compromise which is why this one worrys me.  The compromise took place at a merchant, either a restaurant or a sporting goods store.  No ATM was involved so the compromise had to be a parasite POS terminal.

In our case the criminals used an ATM to withdraw cash shortly afterwards.  Incidentally thanks to our Bank for picking up on this event within a few hours and dealing with it.

Chip migration offers hope but only after mag stripe is eliminated, and that is another 6 years off, even though chip cards are now being isued in 2009.  The entire POS terminal fleet in Canada could be replaced quickly if their was a will to do so.

Chip Migration plans | EMV Canada

Interac Association has established migration dates for cards and terminals. Complete card and ABM conversion is required by the end of 2012; complete point of sale (POS) conversion is required by the end of 2015. After 2015, Interac debit magnetic stripe transactions will no longer be accepted at devices in Canada.

and this from Interac

The chip transition timeline

Every Acquirer (or payment service provider) has its own timetable in place for providing chip terminals. In order to ensure a smooth transition, Interac Association has implemented final conversion deadlines that work within merchants’ normal business cycles, so that merchants will be able to transition to chip within the set timeline and with minimum impact.

• Interac chip cards and terminals are already being rolled out across Canada.
• Complete migration to chip technology will take several years and the timetable for the introduction of chip will vary from one financial institution, and one service provider to another.
• All Automated Banking Machines (ABM), point-of-sale (POS) terminals and banking cards across Canada will be upgraded.
• Magnetic stripe debit card transactions will no longer be accepted at ABMs after December 31, 2012.
• Magnetic stripe transactions will no longer be accepted at POS after December 31, 2015.
• Chip cards will continue to carry the magnetic stripe, not only to facilitate the chip transition period, but also to allow cardholders to use their debit cards in other countries that do not use chip technology.

Relevance to Bankwatch:

Chip cards are coming, but the timeline is unacceptably long, out of desire to keep merchants, acquirors and issuers costs down.

In Japan, debit has never taken off.  On the other hand Suica and Pasmo are very popular, and gaining outside the original use of train service only into convenience stores and other small purchase locations.  That includes beer, other alcohol, magazines and movie rentals.

The idea of leaving thousands of dollars in full view with a 4 digit number as the only key is insanity.

Suica is successful because its handy being a wireless swipe,  and low risk with small amounts stored.

Chip will introduce the security of a non copyable card (we hope), but the 6 year wait in Canada is going to be an unfortunate inconvenience for the thousands that are compromised and have to replace their cards.

Reaearch by Nobuyo Henderson