The Bankwatch

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!

A short and useful paper offerring some points that help to frame the next few years for strategic planning purposes.  This to be read of course in the context of politicians preaching ‘road to recovery’ which leaves the uninformed with the view that we will get over this blip and back to normal.

I prefer to think of this as a shift that will profoundly change things for the next few years, with some good and some not so good elements in that shift.  It may be good that the banking industry will be shaken up, and out of that some innovation and better services will appear.  The less good part is that more bank customers will have to work harder and longer for less money, and accumulation of wealth will return to a savings culture rather than an asset accumulation one.

All this provides a different prospect for financial services, and products will need to be restructured or invented to match those busier, poorer customers who nonetheless have financial goals such as debt reduction and wealth accumulation for retirement.

The paper outlines three core results of financial crises.  This is based on empirical evidence of 18 post war crises in the developed world, including “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992) along with some developing country crises (the 1997–1998
Asian crisis, Colombia 1998; and Argentina 2001.

No real surprises here;  Low asset values, high unemployment, and high government debt.  Click through for details (13 pages).

The Aftermath of Financial Crises pdf – Reinhart (Univ of Maryland), and Rogoff (Harvard)

First, asset market collapses are deep and prolonged. Real housing price  declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.

Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.

Interesting to see some new and potentially innovative banking news come out finally.  Here is a new offerring from GMAC that is essentially a direct bank with a nice simple value proposition.  The offerring is deposit based.

Oddly enough, when I went to ingdirect to compare rates, I could not even locate the rates on a site that has become very complex somehow.

Ally Bank may have a winner in focussing on their three principles that will resonate with most consumers, and it is backed by the reputation of GMAC.

allybank.com

“The brand is founded on three principles:

1. Talking straight,
2. doing what is right for the customer, and
3. being obviously better than the competition,”

said Sanjay Gupta, chief marketing officer.  “It is a promise from our company to our customers.  We believe that being direct and honest is the best way to build lasting customer relationships.” Gupta added, “Given the recent financial market turmoil, people are looking for a safe, honest and efficient place to save and grow their money.

The company developed the Ally brand following extensive conversations with customers who clearly expressed the need for a trusted bank partner.  “The name Ally aptly fit the character of the brand,” Gupta said.

Today, the company launched a new Website, allybank.com, along with its new 24-hour customer call line, 1-877-247-ALLY (1-877-247-2559).   Depositors can open bank accounts online, by phone or by mail.

Incidentally I noticed GMAC were beneficiaries of the SCAP support, and I wonder if this new offerring is in some way related to a change in focus or business model, related to deposit gathering.