The Bankwatch

Aite Group have a new report on bill payment co-authored by Ron Shevlin. While the headline is regarding the expected uptick in mobile payments, some other numbers caught my eye.

How Americans Pay Their Bills: Sizing and Forecasting Bill Pay Channels and Methods, 2010-2013 | Aite

“There’s an emerging segment of consumers—which we call Smartphonatics—that will lead to an increase in the use of the online and mobile channels for paying bills,” says Ron Shevlin, senior analyst with Aite Group and co-author of this report. “These young and affluent consumers are chomping at the bit to use their smartphones, and are very likely to change how they pay bills if it becomes easier to do so via mobile. The growth of biller-direct over consolidator, coupled with the projected growth in mobile payments, means an opportunity for bill pay solutions providers to create an industry-leading mobile platform.”

The summary indicates that 33% of bill payments are made by cheque and mail, with 23% made online. Its not clear from this summary where the remaining 44% are made but I assume that is direct debit to a bank account or at ATM. What surprised me is the 33% number. Somehow I assumed the percentage paid by cheque was still higher than 33%. If we are down to that number one would think there must be a way to encourage that group down to almost zero very quickly.

Five years ago Ray Ozzie wrote his famous memo on internet services disruption in 2005, following his becoming chief architect at Microsoft when Bill Gates left. Ozzie is leaving Microsoft now under unclear circumstances but his departure is accompanied by a new memo as it turns out. In the intervening five years, I cannot help but be disappointed notwithstanding the gains that Microsoft has made. Windows and Office have both improved dramatically (think Vista) and I no longer equate bloat to Microsoft products. But those gains had nothing to do with the content of the 2005 memo. That memo was all about cloud services and search/ advertising as a business model. Neither of those have come to pass at Microsoft.

When I think about the I find the confusion and similaries between Windows Live, Skydrive, Azure, and Office 365 quite staggering and the usability beyond comprehension despite the free 25 gig space. I have become a dedicated Google Apps user over roughly the same period, and the ease with which these services work leaves a highly unfavourable comparison for Microsoft.

Ray Ozzies Blog

Five years ago, having only recently arrived at the company, I wrote The Internet Services Disruption in order to kick off a major change management process across the company.  In the opening section of that memo, I noted that about every five years our industry experiences what appears to be an inflection point that results in great turbulence and change.

…

Certain of our competitors’ products and their rapid advancement & refinement of new usage scenarios have been quite noteworthy.  Our early and clear vision notwithstanding, their execution has surpassed our own in mobile experiences, in the seamless fusion of hardware & software & services, and in social networking & myriad new forms of internet-centric social interaction.

The new letter is quite reflective this time. There are hints about connected services and connected devices all pointing to ‘The Big Shift’ – an oblique reference to the book ‘The Big Shift” and the Deloitte authors. But all the while we get the feeling Ray was pulling Microsoft in a direction it did not want to travel.

The state of finances for American banks is dire.  Last week I noted the latest on the legal right of title problem associated with sub prime that could result in enormous loan losses for US banks.

More this week as the details unfold.  Branch Capital as reported by John Mauldin calculate $74 Bn in losses for Bank of America alone.  The more striking names here though are the European banks which were also amongst the hardest hit back in 2009/9, ie, RBS, Credit Suisse Deutsche Bank and UBS. 

The bottom line is that the banks who purchased subprime mortgage paper from US banks have the right to ‘put back’ to the original issuing bank. 

This will be a long drawn out legal affair as potentially each mortgage is pulled apart in front of a judge and a determination made.  What makes it worse is that each mortgage was often referenced in more than one piece of mortgage paper.  Lawyer work is a growing business for financial services in America.

Jim at Netbanker paints a great picture here about the potential for Doxo as a widepsread method of electronic bill presentment and payment (EBPP).  Having watched the evolution of EBPP both across North America and specifically in Canada with BMO and ePost since the ‘90’s the base business case has always been biller cost reduction.  There still remains the key question of what it will take to get to scale that allows the billers to actually reduce costs.

While billers see cost reduction from paper and postage, they must still maintain some infrastructure for managing the monthly statements.  It seems to me the real impetus for EBPP will be something that make it the easiest thing in the world for consumers  The integration with online banking was an assumption that it turns out was flawed and not for all.  Consumers need a choice, and choices need to, generally speaking, be open – not a lock-in solution.  Maybe a Doxo/ ‘facebills’ (sic) solution is the right approach.

Launching: Will Ebilling Startup Doxo Become a Household Word? | Netbanker

Why would billers pay for it?

• It’s a fraction of the cost of paper + postage
• Adoption of estatements has stalled at 10% to 15% of consumers even for billers who’ve worked relentlessly to get rid of paper; and the easy way to get adoption, charging for paper statements, get both consumers and politicians all worked up
• The Doxo platform provides a direct, secure, communications path to end users; including marketing messages
• No advertising from competitors makes Doxo more desirable than other third-party systems where billing info might end up residing (e.g., Google/Gmail, Mint, etc.)
• The network effect; managing multiple bills in one place is the carrot to get consumers to give up the paper

The new Commission set up this summer held its 4th meeting today. (The members of the Independent Commission on Banking are Sir John Vickers, Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf).

Their call for evidence that came out in September listed these potential policy options any of which make significant changes to banks and certainly along the lines of my discussion on the potential results from 2009.

Independent Commission on Banking (UK)

Reform options related to the structure of banks
••Separation of retail and investment banking
••Narrow banking and limited purpose banking
••Limits on proprietary trading and investing
••Structural separability, including living wills and resolution schemes
••Contingent capital
••Structure-related surcharges
Reform options related to the structure of markets
••Measures to reduce market concentration
••Market infrastructure reform

There is an increasing disparity between the US economy and the others in the west.  It is particularly noticeable between US and Canada who site right beside each other with one of the longest borders in the world.  The US situation kicked off in 2007 with concerns about US mortgages that contained underlying and unrecognised double risk generally associated with mortgagors ability to service and collateral value. 

Whereas in Canada the real estate market has been relatively uneventful with both ups and downs throughout the 2007 – 2010 period.

The US on the other hand has entered a period of a 3rd risk tied to questionable legal title to the homes under foreclosure. 

U.S. foreclosure mess chills investors, clouds market | Reuters

"We’re like a plane flying around in a holding pattern, waiting to land," said Tony Alvarez, an investor in southern California who is currently renting out 40 former foreclosed homes. "Nothing is going on, and why? Fear has taken hold in the marketplace."

Allegations that banks failed to review foreclosure documents properly or submitted false statements when they foreclosed on properties spurred a joint investigation by the attorneys general of all 50 states and triggered foreclosure moratoriums by some of the biggest U.S. lenders.

This latest drama goes to the core of market basics and will create a freeze in real estate markets similar to the freeze within the banking system in late 2008.  When there is a doubt about the value of mortgages to banks this will freeze all real estate transactions while the matter of title is resolved.

When I wrote up the piece on the sensibility of the concepts contained in Sharia finance I knew there were undercurrents everywhere that would react to the words Sharia and Islamic which would blind folks to the concepts that exist underneath those apparently inflammatory words. 

Sense about sharia | Economist

Contrary to some hysterical talk, nobody seriously suggests the use of Islamic penalties in any democracy. Nor is there any reason to fear Islamic finance: a campus discussion about zero-coupon bonds does not mean usurers will be flogged in Harvard Yard. Nor can anybody object if two citizens settle a commercial dispute on Islamic lines, or any other principles to which both freely adhere. In the English-speaking world there is a custom of arbitration, which has created a space in which religion-based arbitration services are accepted, offering Jews, Christians and Muslims a simple, cheap (and from their point of view, divinely blessed) way to settle disputes.

This week we have also seen Germany come out with comments about racial integration.

The Economist piece refers to the work at Harvard since 1994 on Islamic Finance.  The matters of concern about Islam and Sharia law are for another day and another blog.  Here i do want to separate the embedded values about finance contained in Islamic Finance and how they can help us Westerners see new ways to approach finance that will help us.  It is clear the approaches we have been taking are not working and just look here which includes the latest fraudclosure scandal to see the results. 

The promise of the Sharia approach is to share risk between lender and borrower.  This concept allows for future changes in circumstance that is inevitable.  This is not the only new approach available, but there are no others being presented so here is the first.  Western economies are in bad shape with a new structural unemployment in existence that will ensure consumer deleveraging and lack of purchasing capability.  This is an important addition to the debate about the future of consumer finance.

We can keep doing it the old way and expect different results (the definition of insanity) or we can seek different models.

Barry breaks down the detailed components of the subprime mortgage legalities.

The Impact of Error From Securitization to Foreclosure

There are quite a few misunderstandings, denials, and exaggerations floating around as to what the final outcome might be of “Fraudclosure.”

At the current stage, we really do not know how extensive the problems are. We could make wild and unsubstantiated conclusions, but we prefer reason and logic.

This from the Washington Post contains the details on the foreclosure mills aka law firms who are competing for their share of foreclosure work and form part of the ‘broken chain’ that is invalidating foreclosures.  This represents another layer of incompetence in the whole process.

First there is the matter of the legality of the mortgage

Second the sloppy methods employed by incompetent foreclosure mills and supported by fee penalties from Freddie for any delay in the foreclosure action.

For foreclosure processors hired by mortgage lenders, speed equaled money | Washington Post

The financial incentives show that the problems plaguing the foreclosure process extend well beyond a few, low-ranking document processors who forged documents or failed to review foreclosure files even as they signed off on them. In fact, virtually everyone involved – loan servicers, law firms, document processing companies and others – made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge.

"This was a systemic problem. It’s not like a few renegade employees made mistakes," said lawyer Peter Ticktin, who defends Florida homeowners facing foreclosure. "It was industry-wide and pervasive, and everyone knew about it."

I have been reading John Mauldins weekly emails for a while and I gain tons of insight through it.  Tonights note including quotes from David Kotok at (www.cumber.com) almost made me fall off my chair.  Like everyone I have heard that US banks are pressing pause on foreclosures and there was some talk of fraudulent foreclosure notices with what I thought I heard about shortcuts.  The issue is much deeper.

The Subprime Debacle: Act 2 | John Mauldin

"Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper…only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan.

…

"The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.

…

"So somewhere between the REMICs (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes) and MERS (Mortgage Electronic Registration System), the chain of title was broken”

In simple terms the mortgages placed with Freddie Mac/ Fannie Mae, were broken up into tranches where each mortgage was no longer whole … bits went into high grade securities, and bits went into junk bonds.  This was the attraction of the new vehicles with different rates of return.  In order to maintain chain of ownership between borrower and (original) lender the use of REMIC and MERS was designed to do that.

It failed.  The chain of ownership was broken between the borrower and the holder of the note.  That break in the chain says that the borrower no longer owes any money on the loan.  The issue of transparency has always been there with Mortgage Backed Securities MBS).  This goes much further than transparency.  The question is one of legality in creation of MBS and the methodology that supported them.

If you want to read the whole thing, sign up here.

This is huge.  This is why Ally Financial (formerly GMAC), JP Morgan Chase, and Bank of America have suspended mortgage foreclosures.  They run the risk of all the foreclosure actions being declared null and void.  This story is about to get big.