The Bankwatch

Here is a striking example of the power of collaborative ‘wisdom of crowds’ approach to information preparation, versus traditional top down beaurocratic approach.

I was reading the Obama speech in Ghana, and his references to the current and previous governments, including Jerry Rawlings which rang a history bell for me, so thought I would read up.  First off I checked what used to be my old favourite the CIA factbook, and it has not been updated since sometime before Dec 2008 [note highlight].

On the other hand a quick visit to Wikipedia had more than enough detail being up to date, including information about Obamas trip dd 10th July in the footnotes.  I copied one section from the history area below, and highlighted the notes about the recent election in 2009, something the CIA has not figured out yet apparently.

The efficiency and effectivness of the Wikipedia approach compared to the old style management and approval processes is stark.  [Incidentally, surely the CIA beaurocracy would at least update their site for the countries that their boss is visting?]

In fairness to the CIA it is probably impossible to maintain an up to date encyclopedia type site such as the FactBook within the constraints and context of their mandate.  To open the CIA up to a Wikipedia approach would not make any sense.  I only use this example to display that collaborative and engagement of the broader network wins every time for information dissemination.

CIA Factbook – Ghana

Formed from the merger of the British colony of the Gold Coast and the Togoland trust territory, Ghana in 1957 became the first sub-Saharan country in colonial Africa to gain its independence. Ghana endured a long series of coups before Lt. Jerry RAWLINGS took power in 1981 and banned political parties. After approving a new constitution and restoring multiparty politics in 1992, RAWLINGS won presidential elections in 1992 and 1996, but was constitutionally prevented from running for a third term in 2000. John KUFUOR succeeded him and was reelected in 2004. Kufuor is constitutionally barred from running for a third term in upcoming Presidential elections, which are scheduled for December 2008.

Wikipedia – Ghana

Rawlings soon negotiated a structural adjustment plan with the International Monetary Fund and changed many old radical economic policies; the economy began to recover. A new constitution restoring multi-party politics was promulgated in 1992, and Rawlings was elected as president then and again in 1996 to serve a second term. The Constitution of 1992 prohibited him from running for a third term, so his party, the National Democratic Congress, chose his Vice President, John Atta Mills, to run against the opposition parties. Winning the 2000 elections, John Kufuor of the New Patriotic Party was sworn into office as President in January 2001, and beat Mills again in 2004; thus, also serving two terms as President. In 2009, John Atta Mills took office as president with a difference of about 40,000 votes (0.46%) ^[23] between his party, the National Democratic Congress, and the New Patriotic Party, marking the second time that power had been transferred from one legitimately elected leader to another, and securing Ghana’s status as a stable democracy.^[24]

This is a variation on the theme I cover periodically called Vendor Relationship Management (VRM).

The variation here is that the Vendor must place the consumers product up for bif from competition when they are considering changing the terms, such as interest rates.  The consumer would then have the choice of accepting the change, or accepting one of bidders. (HT Payments News)

A Market Test for Credit Cards

We have an alternative solution, employing a market test of a proposed change. At the time when the lender proposes a unilateral change, it would be required to put the existing account balance up for auction on a LendingTree-like service that would allow other credit card issuers to bid for a chance to issue a new card and take over the existing balance.

Borrowers wouldn’t be forced to switch to the auction winner. They’d just be given the option. When an existing credit card issuer proposes a rate increase, it would be required to pass on the terms of the winning bid and a comparison with its own terms, and the borrower would decide whether he wanted to make the switch.

The focus on bank financial strength is generally on the lending side of the business and the potential for bad debts.  Here is another view, and something that drives some banks to make ever riskier loans to produce enough revenue to pay for their deposits.

For Banks, Wads of Cash and Loads of Trouble | NY Times

The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm

…

But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bank is barely hanging on.

When we assess leverage it is not just the quality of the assets, it is also the cost of the liabilities, which is what deposits are to banks – liabilities with an associated cost.

It is ironic that those deposits that banks are gathering across the US from other than their home state at high rates, are also FDIC insured.  So the US taxpayer has been passively promoting banks to take undue risks by gathering high cost insured deposits to fund their mortgage and loan growth.

This is just another element to take into account for The Great Unwinding of leverage in the financial system.  The deleveraging that takes place will result in smaller institutions, and much less value attributed to deposits in cash, due simply to a supply that far outstrips demand. The outcome will depend on whether the regulators institute limits on FDIC insurance, limits on brokerage or some hybrid of those.

Relevance to Bankwatch:

One more blow against the old system.  A banking business model based purely on arbritrage on interest is not viable, and highly susceptible to risk associated with leverage.  This leads to two conclusions:

1. Regulation: The unintended consequences of regulation such as deposit insurance are complex, and need to be considered by the regulators.  Those unintended consequences could be more expensive in the long run through higher taxes, than the immediate apparent benefit.
2. Bank models: Banks have historicaly been arbiters of money between lenders and borrowers.  Non Interest revenue from fees has been long considerd considered icing on the cake from interest revenue – essential icing, but nonetheless icing.  The new world is smaller and requires efficiency.  What if a banking model were built on fee revenue first?  This would require products and services that are seen as valuable by consumers, and it would drive different approaches than investment in expensive branches, ATM networks, and staff.

PS:  To provide a sense of scale of the problem, a back of the envelope calculation on some Canadian banks where I have an idea about the customer and staff numbers produces a customer to employee ratio of 150:1.  A similar cacluation on core banking (primary chequing with that bank) customers to employee ratio brings an incredible 50:1.  This hardly suggests that the investments in technology, branches and infrastructure over all the years has been effective.  Banks efficiency has been hidden from view by the growth in the financial system.  Much more to come on this.

Banks continue to be challenged by disintermediation from telco’s and here is another example, this time in Japan.  The service will launch 21st July, and allow sending up to $200 with only the payee’s phone number being required.

An interesting tweak is the ability to have the money deposited with DOCOMO under the guise of a credit to your account, however this is deposit taking by another name.

DOCOMO to launch mobile payments service

Customers of DOCOMO’s i-mode™ mobile Internet service on the FOMA™ 3G network will be able to remit up to 20,000 yen (about 208 U.S. dollars) per transfer, basically just by inputting the payee’s mobile phone number. The payee receives a mail notification via their DOCOMO mobile phone and is given the option of depositing the money in a domestic bank account or having the amount credited to their monthly DOCOMO phone bill. The payee can receive remittances totaling up to 200,000 yen (about 2,080 U.S. dollars) per month.

It is a lucrative service with charges to payor and payee.

The charges per payment (including consumption tax) will be 105 yen for the payer and 65 yen for the payee.

Researched by Nobuyo Henderson

ETRADE have released a new Online Advisor service, and let me take a look at a demo on the US site to review.

It walks the user through a set of relevant questions that source and validate the users investment needs, then produces an asset allocation model at the end.  For the self service type who wish to move beyond gut feel, and assess one portfolio or their entire portfolio, this tool is a useful addition.  Its the kind of thing that is worth an afternoon, and taking the time to properly assess the approach you would wish to take.

These kind of tools are a good start in self service, but the key is how they maintain contact with the user over time.  In this case it is starting to do that and the allocation results can be executed simply as new trades.  They key however will be how this type of service provides ongoing feedback over time.

Here are sample shots from a demo set up.

The folks at Skygrid have a beta financial news site that is focussed on financial news, real time.  It has been written up by Scoble and Techrunch so that was enough to pique my interest further when I was introduced to the service.

To be clear it is probably not for everyone.  It is however useful for those who follow the markets closely and daily providing various filters for different news sources, including web, blogs, and EDGAR.  The interface is work in progress, and be sure to turn off the ‘bubbles’ so you can see what you are doing.  This is a beta, and lots of feedback is requested.

There are a limited number of invites for those interested, and a very simple sign up by clicking through here for anyone interested.

This is an invitation for your private SkyGrid account

SkyGrid is a web-based financial news platform that delivers high quality financial content from trusted sources, in real-time.  SkyGrid gives its members the ability to filter financial news in real-time with sentiment, source type, and even real-time clusters that show which companies are being discussed the most in the news.

People who see it LOVE SkyGrid – techie and news junkie Robert Scoble has compared it to crack, and BusinessWeek just named SkyGrid founder and CEO Kevin Pomplun as one of this year’s “Best Young Tech Entrepreneurs.”  SkyGrid’s first members included leading financial institutions like BlackRock, Bank of America and J.P Morgan.  Today SkyGrid is free, but by invitation only, and invitations have been hard to come by.

The people made happiest by SkyGrid are those who are passionate about stock market news, business news, and financial information.

A very unusual and novel cost cutting measure from BBVA, the Spanish bank.  The 70% cost reduction, with a guaranteed pool of employees after the period is up is certainly a new approach.

Can’t help but think there will be unintended consequences after the 5 years are up, built certainly the immediate consequences will be more palatable than normal layoffs, which generate acrimony, as well as an expense one time charge.  This approach will drive accountants nuts.

It will allow the bank to make future hiring plans, and attrition management with some knowledge of the future.

Bank pays staff to take five years off | Daily Telegraph

Employees of BBVA, Spain’s second biggest bank, are being offered 30 per cent of their usual salary in return for staying away from work for between three and five years.

Anyone signing up to the scheme is guaranteed a job when their extended leave comes to an end. They will also have their health care costs covered for the length of their sabbatical.

Researched by Nobuyo Henderson

A central question for financial services is this:  “Where will the innovation come from in financial services?”

I read this piece from Dave over at Digital Money Forum, and it highlights a central problem that traditional financial services falls into.

The 50 year plan : Digital Money forum

That sounds like the Greek restaurant will have to give a British cardholder a couple of pages of A4 and make sure that the customers reads them before they punch in their PIN.

Anyway, the point is that for banks, the PSD comes at an interesting time when transaction banking is becoming more central to strategy. The threats from both new entrants and substitutes are, according to Bob (and I agree with him), high. In these circumstances, regulation is turning from a moat that competitors cannot cross into a millstone around the incumbents necks.

The problem is in the complication and diversification of businesses contained within a typical bank.  The problems are surmountable, but first they must be recognised.  The issues arise in part from interpretaion of regulation, and in part from the diverse nature of modern large banks.

Relevance to Bankwatch:

Regulation:

It goes without saying that there is host of regulation that must be complied with.  As the events have occurred over the last two years, regulation has become more of a factor in oversight of banks.   In my three part piece earlier this year, The Great Unwinding, (title refers to unwinding of debt and deleveraging of households and institutions) the point was that as the economic pie decreases is size, and at the same time the role of government increases that the effect will be to produce two types of banks:

1. Financial utilities; much as you turn on your tap for water, or plug into the wall for electricity, you will plug into these banks for basic services.  Nothing new, nothing extreme, and nothing innovative, unless the government tells them to do it and even then that won’t work – refer back to Daves piece above and SEPA.
2. Innovators: while in the minority, this group will be comprised of those who keep their heads above the trees and see that rather than a time of crisis, this is a time of opportunity;  opportunity defined as a new market that is diametrically opposed to the market of the last 10 years for banks.

Bank bureaucracy:

Banks have always been bureaucratic but the last 15 years has seen bureacracy become triumphant in many institutions.  It began to be a problem in the mid 90’s when this new fangled thing called internet required that the entire bank be properly represented at the point of a click.  Having spent 100’s of years operating independently, to ask product managers to talk with other product managers, and in the same room as electronic channel managers required new levels of collegialism that was never requested before.  There were no rules nor common norms that could be held up as principles to guide the discussion.

Everyone at the table would claim to be ‘customer centric’ and representing their customer.  Other approaches would say ‘the bank’ owns the customer, but then who represents ‘the bank’ in that conversation – the Chairman?

It also happened that we also saw a rise in regulation for privacy, security, complaint handling, ecommerce laws all of which brought even more partners to the above table.  The result takes us to Daves somewhat humourous, but too close to the truth point above about having customers complete a two page document prior to punching in their PIN.

Market differences:

So in a climate of crisis and regulation, it will be easy for the majority to reduce themselves to financial utilities.  It comes naturally to large organisations, who have not solved the riddles of focus and simplicity.

The innovators on the other hand will see the opportunity because they can see through the morass of problems and zero in on that opportunity with laser like focus.

I blogged earlier about the changes in the economy, and while that post applied to the US context, this equally applies to all western economies, including Canada, UK, France, Germany, and Spain as obvious examples.

These macro factors will play a large role in US banks and credit unions strategy design for the next 5 years.

1. no consumer purchase driven economy in US – with the implication of extended higher Government spending for some time to counter
2. US consumers save (increasing savings accounts and paying down debt)

When we think about banking over the last 10 years, the predominant consumer products that saw innovation have been borrowing products.  Lines of Credit, Mortgages, Credit Cards and Consumer loans have been pre-eminent.  If we read and think carefully about Timothy Geithners comments above, and I share his view, the nature of banking products and services that see growth for the next 10 years will be different.

Economic recovery does not mean a return to things as they were.

The dominant products will shift to becoming investment accounts, savings accounts, and money management services.

As consumers seek to save (economic terminology for hoarding cash, or repaying debt) they will be watching every penny.

As money is saved or spending is reviewed the requirement for real time information is added to the mix.  Questions will be asked, such as;  ‘can I afford this purchase this month’  or ‘what if I waited till next month’, or ‘how much have I saved this month’ or ‘how much have my total credit card balances reduced’.  This introduces the need for new payments services, and that are adding value by connection to money management services such as Wesabe, or Wells Fargo spending analysis service.

These questions should drive new and innovative services that banks have not been accustomed to creating.  It requires new thinking and re-alignment of strategic resources.  It is much easier for new entrants to banking to start small and simple in this new environment.  A mix of new entrants and smart existing players will be the innovators, and the winners.

A great source for reviewing the latest innovations in financial services.

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Wesabe have introduced a redesigned site.  It appears to be more than a surface change with nice use of interactive ‘hover’ features with personalised information inside the hover.  The menu is simplified, yet takes you to everything required, including ‘Connections’ that includes iphone and twitter connections.

Its clean, bright, and worth checking out.

wesabe

Wesabe Site Redesign

If you haven’t logged in to Wesabe lately, you’re in for quite a surprise. We’ve redesigned every single page of the site and have been getting some rave reviews about our new look!