The Bankwatch

John Greenwood wrote about CommunityLend on the front page of the Financial Post (National Post) today.

In what will be a boost for payments, UK is eliminating cheques by 2018.

Finextra

The UK’s major banks have voted to stop clearing cheques by 31 October 2018, bringing to an end the 350 year old payment method.

Every once in a while I feel have to take the San Francisco echo chamber to task. It often happens around Le Web oddly enough. I have pasted a few comments from Roberts post below and you will get the idea. The premise is founded on the internet world being centred in California and the tools that are built there, including Twitter and Facebook.

World-brand-building mistakes France’s entrepreneurs make | Scobleizer

So, since you were meeting with us and since we’ve spent precious resources getting there and had sizeable opportunity costs, I figure entrepreneurs should be better prepared. In this case you get to learn from their mistakes.

Four CEOs told me their companies weren’t on Twitter and that they didn’t have enough time to join Twitter. That got me quite angry.

Luckily I’ve found 500 tech company founders who ARE clued in and found Twitter to be important. Why is Twitter important? Well, it might have to do with the 422 venture capitalists and angel investors who are on Twitter or the hundreds of tech company executives (these are your exit possibilities!!!) who also are on Twitter. If you know of people who should be on this list that I don’t know about, please leave a comment here. By the way, when I told off the entrepreneurs sitting next to me a CEO whispered in my ear “I agree.” Who was that CEO? Kamel Zeroual, CEO of Stribe. Who is Stribe? The French company that won best of show at LeWeb, the world’s biggest independent web conference. He and his company are one of the few that were on Twitter.

In North America in particular Twitter, FaceBook, and Foursquare are considered de rigeur and in fact may well turn out to be pervasive global brands. Simple fact – at nearly 400 million users FaceBook is getting close to pervasive, but the others – time will tell. Twitter has an audience of 2 million in France against a population of 62 million. Not a bad start, however they speak French. The VC’s Robert speaks of and the others he suggests that French startups are missing speak English, not French. Robert goes on to berate French for using French in Twitter.

I should have answered back “no, it’s because your Twitter feed is French.”

I could go on. The point I would like to make is that the world is not centred on San Francisco and the Valley. I think Robert makes valid points if you want to get noticed by the people he feels are important to be noticed by, but there are additional subtleties that are being missed by him.

Whack-a-Banker

“I keep having to replace worn-out mallets,” he said. “The bankers are bald and all look the same because that’s how I think people see bankers, as faceless.”

Steve Rubel sums up his observations from the always insightful Le Web conference in Paris this week. His second observation caught my attention and reflects how both I and my friends see the web.

Three Observations from Le Web

Second, nowadays no two people see the same Internet. This was a key point that Facebook made, saying that we increasingly discover online content not just by algorithms but via the "lens of friends." Microsoft researcher Danah Boyd brought this to life through rich, moving stories. Google’s Marissa Mayer went a step further saying that the future of news is a "personalized news stream." This trend has major implications for marketers and PR pros who are accustomed to reaching everyone the same way – it’s simply not possible anymore.

It may seem obvious but it is also subtle. The net is not a series of ‘web pages’. Rather it is a stream of information that is viewed by people just as conversations are ‘heard’. What I hear is not what you hear. Online information comes to you as you design your experience. We all use variations of email, facebook, twitter, rss, and a host of other services to obtain knowledge.

A fascinating development in the US as a new regulator for peer-to-peer lending appears following vigorous efforts from Prosper to promote an even handed regulatory regime for both borrowers and lenders. Currently the Securities and Exchange Commission (SEC) is the prime regulator, and a similar situation exists in Canada. The creation of the Consumer Financial Protection Agency (CFPA) is apparently designed to protect consumers in a host of financial services from p2p lending to reverse mortgages. Certainly more to come on that, but interesting for peer-to-peer lending.

Prosper Hails House Passage of Landmark Peer-to-Peer Lending Reforms

“Once again, Representative Jackie Speier and Chairman Barney Frank are doing the right thing by putting consumers’ and investors’ interests first,” said Chris Larsen, Prosper Chief Executive Officer and Founder of the Coalition for New Credit Models. “In terms of how the Bill relates to peer-to-peer lending, we’ve always believed that the industry should be regulated as a bank-like sector by a strong, holistic regulator focused on providing robust protections for both lenders and borrowers. The Obama Administration and other leading policy makers have been calling for the nurturing of alternative, transparent, and durable credit markets that will benefit consumers and small businesses; this landmark Bill heeds that call.” Prosper, together with the Coalition for New Credit Models, has advocated that America’s economic future depends on new and alternative credit models being embraced in the same way green technologies are being nurtured by policy leaders to help solve the energy and environmental crises.

Despite the general view that Canada and its banks is in relatively better condition that international peers, down side risks remain, and are relatively unchanged since Jun 2009. This statement sums that up, and introduces a key point about this crisis and how little has been done to prevent re-occurrence.

Bank of Canada Financial System Review

Despite notable improvement in funding markets, funding and liquidity constraints remain an important area of vulnerability. Should a negative shock occur, such as a renewed downturn in the global economy or a loss of investor confidence, funding and liquidity pressures would likely reappear relatively quickly. Improvements in central bank liquidity facilities since the onset of the crisis and ongoing initiatives to support the resilience of core funding markets should help to limit the impact on the overall financial system. “Improving the Resilience of Core Funding Markets” (p. 41) discusses such issues

The Review confirms bank balance sheets have improved modestly, but that consumers have worsened. The concern for consumers is the underlying concern in this report, and their increased debt loads.

On Banks:

The leverage of Canadian banks, already low relative to that of their international peers, has fallen further since June, owing largely to an increase in their capital base from retained earnings. Nonetheless, given their key role as intermediaries between savers and borrowers, Canadian banks remain exposed to the risk of a marked deterioration in economic conditions.

On Consumers:

In the June 2009 FSR, the Bank judged that, since the onset of the recession, the risk that substantial credit losses on Canadian household loan portfolios could be a source of stress for the broader financial system had increased, although it remained a low-probability risk. This was illustrated by a stress-testing exercise to assess the effect of a hypothetical increase in unemployment on the financial health of the household sector. While arrears and bankruptcies have continued to rise since June, the start of the economic recovery has reduced the likelihood of this risk materializing in the near term. However, it remains a key source of vulnerability over time, given that the debt-to-income ratio is at historically high levels.

Jack Dorsey and colleagues have announced Square; a mobile payment acquiring terminal that is small enough to fit on a key fob, and works through any mobile phone with an earphone plug. First iteration works with the iphone, but it will work with blackberry and others. The common requirement appears to be a mobile device that accepts 3rd party apps, and has a standard earphone jack. The device and application acquires the data through conversion of sound into data, then transmits.

The device is designed to replace the merchant terminal for small businesses, replace the monthly terminal fee, and replace the merchant acquisition fee. It sounds like they will charge a fee eventually, but its free for now.

Lots of holes to pick in this, but at first glance it has the potential to be disruptive in payments for at least a group of small business. There is also some talk of future enhancement for p2p payments.  One question I have is how it will deal with chip cards.

[categories payments]

I recently covered Mervyn Kings proposal for Utility Banking; a banking business model that separates banking banking services from high risk investments. For example utility banking as I see it, would cover day to day chequing, savings, loans and mortgages, ATM’s, and online banking. It would have traditional FDIC type deposit insurance, and utility banks would be subject to capital requirements and would not be permitted to participate in off balance sheet banking, nor securitisation. Think James Stewart and ‘Its a Wonderful Life’.

In this piece Niall Ferguson takes it further suggesting that the Utility Banking approach still leaves the potential for Too Big Too Fail (TBTF’s) institutions that would inevitably be bailed out by governments, and therefore taxpayers.

How to take moral hazard out of banking | FT

Thus, Glass-Steagall and narrow banking treat only a part of our financial tumour, leaving the rest to metastasize. Limited purpose banking (LPB) is the only credible cure. It transforms all financial companies with limited liability, including insurance corporations, into pass-through mutual fund companies. Limited purpose banks would process securities and sell them to mutual funds. They would not be permitted to borrow to invest. Hence, they would never face a run and never fail. Risk-taking would be done by us, the people, via our purchase of more or less risky mutual funds.

Mutual funds are, effectively, small banks, with a 100 per cent capital requirement under all circumstances. Thus, LPB delivers what many advocate – small banks with more capital.

…

Under LPB people would be able to use cheques, debit cards and ATMs to draw on their cash mutual funds. Insurance mutual funds would permit people to diversify individual and share aggregate risks

This model of Limited Purpose Banking (LPB) would convert all banking to Mutual Funds. The different types of banking and investment requirements would be accommodated by alternative Mutual Fund types, from cash Mutual Funds to more speculative investment Mutual Funds. The Utility bank would be replaced by a cash Mutual Fund.

Niall makes the point that the dollar for dollar nature of Mutual Funds would solve the capital problem, and the ultimate risk would always be absorbed by the investor, ergo no bailouts required.

Relevance to Bankwatch:
It remains clear that the current banking model is not sustainable, and is prone to catastrophe. It is also clear that despite the stock market growth in 2009 that banking is not anywhere close to recovery. The banking results have reflected high investment returns, and mask the poor performance of retail banking. Consumers are retrenching and will be doing so for some time.

Further the need to solve the matters of transparency, and effective risk assessment has not been addressed in debt markets. Banks are continuing to operate as in pre 2007 times in those markets.

There is a potential for alternative banking models and it may be surprising where and when they begin to appear.

[categories profitability, business models]