The Bankwatch

The ICB report recommended a system to permit account number portability between banks to make it easier to switch banks.  Such a system would also switch automatic direct debits.

Lloyds Bank (60% government owned) have prepared a report to support such a move.

UK banks float £2 billion account switching plan Finextra

According to the Telegraph, the database plan would cost between £1.5 billion and £2 billion and take around two years to build, while a full account portability scheme would be £5 billion and take up to 10 years to roll out.

Having just watched the Munk Debates on growth in China, my mind is on global economics.  This article in the WSJ yesterday by Jim Baker was about the debt ceiling fiasco in America. 

Then this little gem of a paragraph at the end of the article.

How to Deal With the Debt Limit

With the Federal Reserve ending its purchase of bonds later this month, the Treasury must rely even more on China, Saudi Arabia, Japan and other countries to invest in our securities. The cost of these borrowings will ultimately increase if the U.S. is not seen to be dealing with its fiscal problems. We must demonstrate to the American people as well as the world that our leaders are doing so.

He is of course referring to the misunderstood QE2.  In simple terms US treasuries will be priced by the market commencing July and all that implies for interest rates.

http://www.munkdebates.com/debates/China

Here is the link to the video. 

http://livestre.am/PhFU

Well worth the almost 2 hours.

IMF report today on the state of the global financial system and they note that risks have increased.  Of note is that the two bellweather economies, US and Japan are highlighted for political risk.  In days gone by, you expect that for the likes of Mexico, Argentine or Thailand.  How things have changed.

Global Financial Stability Report (GFSR) June update

Since the publication of the April 2011 Global Financial Stability Report (GFSR), financial risks
have risen for three reasons.

1. First, while a multi-speed global recovery remains the base case, downside risks to this baseline have increased. 
2. Second, concern about debt sustainability and support for adjustment efforts in Europe’s periphery is leading to market pressures and worries about potential contagion. Political risks are also raising questions about medium term fiscal adjustment in a few advanced countries, notably, the United States and Japan.
3. Third, notwithstanding some recent pullback in risk appetite, the prolonged period of low interest rates may push investors into riskier assets in a “search for yield.” This trend has the potential to build financial imbalances for the future, particularly in some emerging markets.

In fact when they summarise the countries that are on either ’negative outlook’ or downgraded it is a very interesting picture populated completely by traditional western economies and no Asian economies except for Japan.

Next they refer to efforts to seek double digit returns in a low interest rate environment, and we see those words that should strike fear into everyone – ‘financial engineering’:  in other words attempts to create financial returns through other than commercial means.

As leveraged loan prices recover (after the deep discounts of 2008–2009) and yields fall,
investors are increasingly turning to financial engineering to achieve double-digit returns.
Both new and refinanced private equity transactions suggest that related corporate
balance sheets are quickly approaching pre crisis leverage multiples. Though the aggregate
amount of financial leverage provided remains far less than before the crisis, high-yield
corporate bond and leveraged loan investors have recently been borrowing at higher earnings
multiples, not much below 2007 levels.

Lastly looking at banks specifically, the picture remains uneven across American and European banks with some real trouble spots in the event of any new type of banking crisis. Portugal, Germany and Ireland stand out as laggards.

All in all not a pretty picture.

Jim at Netbanker has a positive take on the acquisition of ING Direct (USA) by Capital One.  He sees them as complimentary and expects powerful and sound online marketing from the combined unit.

Is ING Direct to Capital One what PayPal was to eBay?

Will ING Direct’s online chops boost growth at Capital One like PayPal did for eBay when it introduced epayments into the online marketplace? Wall Street gave it a modest thumbs up, sending Capital One shares up more than 2% on a day when financials were flat. That’s a $0.5 billion positive swing in market cap. Not a bad start to the relationship.

But from a remote delivery perspective, they look very complimentary. ING offers primarily savings and mortgages acquired online. Capital One is huge in credit cards, auto loans and traditional branch-based banking services.

This surprise announcement puts the Ally Bank rumour to rest.  For more assessment here is the Wall St Journal who note that GE were also interested but only in the deposits, and not the mortgages.

There is much talk about the cloud and it has now hit mainstream media.  So now we get pieces such as this from Ruchard Waters and Chris Nuttal in the FT suggesting the end of the PC.   The end of something means it disappears.  This is ludicrous.  In fact from the same article Jobs is quoted, and his quote is far more accurate than the premise of the article.

Cloud threatens to end PC’s reign

Introducing Apple’s iCloud, Mr Jobs delivered what appeared to be a carefully scripted line designed to nudge the venerable personal computer – in all its guises – closer to retirement: “We’re going to demote the PC and the Mac to just be a device.”

I believe it is important to stay focussed on what ‘the cloud’ means.  In simple terms it means having an alternate hard drive that follows you around no matter what device you are on.

That in itself does not mean your PC is replaced by a dumb device that only works online.  It can, but it does not have to, and that direction is not yet set. 

For example to take one extreme, I know of one accountant firm in Toronto that has adopted a service from Telus that provides everything online including the OS. Clearly this was sold as a cloud service.  This is just dumb.  The poor folks with this service must log into windows running on some remote server and run everything from that server.  There is time to grab a coffee while this system gets itself running, when compared to running a local SSD drive.

That is not the cloud.  That is thin client and an entirely different discussion, but not according to Telus apparently.

The cloud is a mix of local and online.  The mix ought to be transparent.  Most of us use the cloud today, with examples being yahoo mail and gmail, dropbox, and a new arrival Amazon Cloud Player.  The point of these services is that your local experience is super fast because you have a fast computer, and a superb browser (Google Chrome is my choice).  Another cloud example for me is my hardrive back-up to Amazon S3.  It happens automatically every 15 minutes in the background.  If I lose or replace my laptop, I simply restore all my files from Amazon and am up and running in minutes … repeat minutes.  It also allows me to read and work with my entire hard drive from my iPhone no matter where I am. This has saved me on more than one occasion.

My point is that cloud must represent an improvement and while it will change the PC and allow many who mostly browse to move to tablets, it will not retire the PC.  An important distinction.

Steve Rubel very publically erased his blogging history and jumped to Tumblr to start afresh.  As he mentioned to Mathew Ingram at GigaOm the idea to to not confuse Google with old content that does not in his view reflect his social signals appropriately. 

The shift to Tumblr is a choice that is his and no issue there.  Although I found these stats interesting, with nothing particularly anti social about my choice, WordPress.  The big surprise for me is the demise of Google’s blogger – it is all but dead.

Anyhow the larger question was why remove the old posts from his previous blogs.  Mathew questions this approach and I would have to call it out as flawed. Steve’s thinking is that Google will get confused so he wants to keep his online presence simple and up to date with his current thinking.  The flaw there is that, for example, current thinking 2 years ago was Posterous.  What will current thinking be in 2013?

Anyhow, I still like Steve’s commentary and will continue to read.

Hallelujah Steve.

End of the Road for the Social Media Gurus

Steve goes on to write at Advertising Age

However, I am increasingly inclined to believe that such men and women, true "systems thinkers," are best poised to stand out and succeed in the digital age. This bucks the trend toward specialization and especially flies in the face of those who are professed social-media "gurus."

Worth the read for Agencies.

This is an unusually strongly worded order that requires Lending Club not just cease operations in Massachusetts, but to unwind and refund all fees collected since 2007 within specified dollar limits (eg. since April 17, 2007 and shall reimburse each borrower from whom borrower origination fees were collected in excess of twenty (20) dollars)

The order notes that there has been an examination ongoing for what appears to be years, and obviously did not conclude well.

WHEREAS, an examination/inspection of LendingClub was conducted pursuant to General Laws chapter 140, sections 96 to 114A, as of June 9, 2008 (the "examination/inspection"). Because of concerns regarding the Corporation’s compliance and financial condition, the examination/inspection continued in 2010 and concluded on March 10, 2011, to assess the Corporation’s level of compliance with applicable Massachusetts and federal laws and the Division’s regulations governing the conduct of those engaged in the business of a small loan company in the Commonwealth; and

Relevance to Bankwatch:

As I write this I know nothing about the circumstances beyond what I read there on the Massachussets government web site.

My comment is that this is an investigation  which has dragged on for three years.  The legal and work effort this entails for over 3 years is enormous.  Then the work effort to comply with the Order to refund fees charged over the last 4 years plus is gigantic, involving people who will have moved etc..  

The result is certainly not one that will encourage innovation in Massachusetts.

There has been a fair bit written about the Groupon IPO and while some have touched on it, there is one key point that needs to be made.  I remain sceptical about online advertising and affiliate marketing in terms of long term sustainability, and yet that is the basis of Groupons model, and that they can improve their margins by scale.

Groupon is not any kind of testament to whether we are in a dot com bubble or not.  Groupon is a classic case people becoming muddled by large numbers, and I will explain that in a moment.  The others that somehow Groupon  became associated with, Linkedin, FaceBook and Twitter are completely different.  Linkedin have gone public, and they have a potential profit story.  The other two have not tried to go public so there is nothing to defend there.

Groupon is a different story.  This from the SEC S-1 filing.  The story here is whether they can scale, and I do not see it.

First a brief explanation of the business model.  Groupon sells coupons to consumers, and pays 50% of the proceeds to the business that offers the coupon.  The first thing we notice is that the gross margin say in the 2011 3 months result is not $322 (50% of the revenue) but $52 million less.  There must be sufficient operational costs associated with getting the 50% back to the merchants, or from acquiring merchants, that it eats up almost 20% of the Groupon share of the revenue.

Next and sticking with the March 2011 results, we can look the marketing costs of $208M which all but wipes out the gross margin.

Revenue              $644

Cost of revenue  $375

Marketing           $208

Surplus               $  62   9.6%

A 9.6 % contribution to operational expenses is not good.  This company is just churning money.

If we boil the numbers down to their product, groupons, here is how it shakes out.

While the number that gets the attention is the $644M in 3 months, that is not the story.  The story is the gross contribution per groupon after acquisition costs, is less than $3.  The cost to acquire each groupon is what matters, and to what extent can the company reduce that cost with scale, a claim that is throughout the S-1.

To return to the point made at the beginning.  Groupon is not a story of internet companies.  It is a company based on extremely high marketing costs.  It is not clear why with scale of 5 times more groupons sold, or 5,000 more groupons sold, that the individual marketing costs of acquiring the consumer for each groupon will change.  That would require Groupon re-invent marketing beyond the current framework represented by typical online marketing (from S-1 – (online marketing initiatives, such as search engine marketing, display advertisements, referral programs and affiliate marketing).

The thing about FaceBook is that they have developed their own eco-system of users.  This can potentially open up new customer engagement and revenue opportunities that would not be available to others.

I don’t see that with Groupon.  This is a company based entirely on customer acquisition using the commodity that is standard online advertising, and commodity advertising  just get more expensive, not less.  The owners and investors might do well on this IPO but I see little in terms of benefit to others.