Archive for the ‘Open Finance’ Category
Derivates were a hot topic during the height of the banking crisis and we all remember they were the specific reason that AIG went out of business because they had been speculating in those products to an extent that far exceeded business requirements. When the markets froze AIG were unable to meet their off balance sheet commitments in the form of derivatives and went under. What followed in September 2008 was an $85 bn bailout.
The level of derivatives in the world was close to $700 Bn. To place that figure in perspective, world GDP is around $60 Bn. Derivatives which are in theory a financial hedge or insurance against shifts in markets or currencies are worth an astounding 10 times the value of world trade.
Even when we allow for secondary hedges (similar to re-insurance) there can be no good reason for derivatives at that level other than financial speculation.
Which brings us to this piece in the New York Times that describes the method being used to manage that global risk in the wake of the crisis. The regulators have delegated the responsibility to the group responsible for much of those derivatives, and the names will be familiar.
The NY Times piece focusses on the profits that come from the derivatiaves, and the extraordinary efforts to ensure that the trading in them remains with the banks and in a non-electronic form which appears to be related to retaining control of the market. It refers to similarities with Nasdaq in the ‘90s when it was pressured to become an open electronic exchange and that fees dropped significantly.
None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.
Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this “economic rent the dealers enjoy from a market that is so opaque.”
It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchange’s clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading.
Relevance to Bankwatch:
There are two points to be made here. The NYT makes the point that significant profits are being protected by a closed group, and you can bet those revenues are costs that end up costing consumers more for for underlying services and products such as petroleum.
The second point to consider is the larger need for a market that reflects 10 x world GDP. The lack of transparency means that we cannot really explain that, and I still believe this to be a large and undocumented risk.
I am not expert enough to begin to quantify the risk associated with derivatives, and I am in good company on that score. What I am qualified to state is the there can be no good associated with management of derivatives that amount for alongside your savings account. The parts of the new regulation that separate investment and retail banking must have some merit on that score.
But we know regulators will never get it all right, and lobbying efforts to retain the status quo will likely be based on ideas that the tremendous risk associated with another freeze up with the credit markets as we had in September 2008 could re-occur in a heartbeat.
All we know is the risk remains, and in this respect nothing has really changed since September 2008 with one key exception. The banking system has been guaranteed by governments implicitly since 2008 (explicitly in the case of Ireland) and this guarantee is the only thread holding it all together. That is why the US in particular is so keen to ensure maximum liquidity for banks (Quantitative Easing).
Why does it still feel that all we are doing is postponing inevitable tough decisions.
It was refreshing to read this piece, and takes us exactly where innovation in financial services ought to be going – the new (old) grand ideas.
What if Starbucks opened an online-only retail bank offering competitive deposit rates and a modest range of loans and mortgages? It could do that by partnering with a finance company such as ING, which has the appropriate banking licences.
All it would need to do is install ATM machines in its outlets, which would involve investing some money but would allow it to get more out of its existing branches.
National supermarkets in the UK, such as Sainsbury and Tesco, have opened retail banks and placed ATM machines in their branches, but there is no national grocery chain in the US with a comparable reach. Even Wal-Mart lacks outlets on most urban high streets.
I recall the brainstorming sessions in the 90′s at the bank, where the discussion about competition arose not from other banks but from:
- Starbucks levering their distribution and cards as a bank
- ebay or Amazon offerring a credit card
- internet only banks – ING was on the horizon – mbanx and Wingspan already out there
- whether to join the S1 online banking commoditised platform
- offer an All in One account that pulled together lending and deposits into one account
- how to deal with the role of aggregation- offer it, join it, or ignore it
- bill presentment – same idea – offer, join or ignore
- shift in business model from generalist to:
- product (manufacturer) – offer loans and deposts through others channels
- distribution (channel) – sell products & services of others – Open Finance (Forrester)
- segmentation (customer type) – focus on a niche market, although most interpreted as the generalist, all things to all market which is where most banks ended
Relevance to Bankwatch:
The problem today is that Banks are on strategy defined 6 – 8 years ago to bricks and clicks, focussed on customer retention and wallet growth. Customer Relationship Management (CRM) became the strategy de jour. Who would claim that has worked? Seibel disappeared inside Oracle for a reason.
Banks are all on the same strategy, focussed on mortgage as the entree, and upsell with other services later.
There is nothing out there that aims at shifting the balance of share of market in a substantial way. This is not about acquisition or mergers – we have done that, and “too big too fail” is too fixated in everyone’s radar now, or until capitalisation is fixed, in any event.
No, this is about business model shifts … shifts that would have a target of:
- double digit percentage shift in share of payments,
- extraction of share of deposits and payments from an existing industry (the Starbucks example),
- exponential elimination of costs relative to competition
- focus on what your are good at and eliminate the stuff you are not good at
Business models –
Mr Bank Chairman … what is your business model, and how is it different than the competition?
Supplementary question -
Who is your competition? Do you lost sleep over Citibank and Wells, or Tempo and Wesabe? Does your answer worry you?
PS … as I finish this post the most telling thing is something I have become acutely aware of. The blog categories I set up 5 years ago no longer apply, until I do a retrospective post such as this. Either those were really bad ideas, or ideas yet to come.
A sobering and powerful post on the power of social media for financial services. [hat tip mmpartee]
Such advice is interesting. At first glance one might ask whether it is serious. On the other hand would this not at least make a person sit up and take note. And what if others chimed in and the average response was that the advice was correct?
If we consider the development of Linux, where people participate and improve the system because they want to. Such selfless assistance is natural and a proven model.
A complete stranger whom I’ve never met told me the other day that my retirement plan was not appropriate for my investment objectives. I met this “stranger” on wesabe.com, a site that describes itself as:
“An online community of real people just like you, with real financial goals and concerns.”
“Make it much easier for consumers to find those institutions whose revenue models most meet their needs” | Bankwatch Interviews Marc Hedlund, Wesabe
After the post on Wesabe and their new API, I was fortunate enough to be able to pose some questions to Marc. I chose three questions, and I am thrilled at the result and the time Marc took to provide his valuable insights.
In particular, I would point readers towards two takeaways that I got from this:
- Wesabe is 100% consumer oriented, and specifically around the disproportionate increase in Bank fees, which is out of sync with both costs, and Banks’ brand messages
- how Wesabe views information, and through a combination of interpreted data, plus users evaluations, can produce meaningful merchant evaluations, which help consumers in their choices
Fascinating stuff! Read on, enjoy, and consider implications for your organisation.
INTERVIEW; MARC HELDUND, CO FOUNDER AND CHIEF PRODUCT OFFICER, WESABE:-
You speak of the “Value Bureau” as a means to allowing consumers to make better decisions. Can you expand on that, and maybe some ways we might expect those services to evolve, and your view on who might offer those services in the future.
Sure. Wesabe views a purchase as a kind of recommendation for the merchant to whom a consumer chooses to give their money. When a consumer has a need from a business, they evaluate options (“Where should we go to dinner tonight?” or “Where should get my car repaired?”) and then make a selection based on whatever factors matter most to them. Obviously, people will try to spend their money at the merchants they believe will best satisfy heir needs. By aggregating the decisions our members makes — their purchase (transaction) information — Wesabe is able to pull patterns out of these decisions, and use them to inform other members of the best values.
As a simple example, if 100 Wesabe members go to a new restaurant, and none of them ever go back, that suggests that the restaurant isn’t very good. If 100 Wesabeans go to a new restaurant and then 50 of them return within a month, that’s probably a pretty good restaurant. Looking at the decisions individuals make (for instance, does this person return to this merchant within this time period? how much do they pay compared to their other options?), we can make some excellent determinations of which merchants are satisfying their customers and which are not.
Of course, you may give money to the plumber every month because your pipes are old, not because you love the plumber. Likewise, you may be locked into a cell phone contract that really you’d rather not be in. Because of this, we ask people for explicit comments on their purchases. We believe that if we can get explicit feedback on merchants from even a very small percentage of users (and to date, we have received a great amount of this feedback), we can use that feedback to better interpret the implicit feedback purchase patterns imply.
This idea, of collecting post-transaction data for a great many transactions, is very similar to the idea of the credit bureau. Credit bureaus index their data by consumer — allowing businesses to look up a particular consumer and decide whether or not to extend that consumer credit. We index by merchant, allowing consumers to look up a particular merchant and decide whether or not to patronize that merchant. We believe this provides an enormous amount of potential value to consumers, especially through our Accounts tab (where recommendations are shown directly alongside the transactions the consumer has made in the past) and our Goals tab (where recommendations are shown pertaining to the consumer’s future financial plans).
Everyone worries about business models, and recalls the dot com days, in 2000. Can you expand your thoughts, perhaps only directionally, on how Wesabe will make money and continue to be there, a few years out, continuing to provide such an important service.
Forgive me for making this answer a lot shorter — we’re focused on building the primary service right now,which we provide at no cost to our users. All of our current services will continue to be free for all users of the site.
That said, our business plan is completely focused on building models that serve consumers directly. We are not, for instance, building software to sell to banks, nor are we planning to sell aggregate data for research purposes (though, as our API shows, we are intent on giving that data away within our service). We are also not planning on using an ad-supported model, since people come to our site looking for help controlling their money, while ads are designed to convince consumers to spend their money. We have previously announced plans to release a “Pro” version of Wesabe, so that members who want additional services beyond what we provide today could subscribe to a low-cost service for certain added features. In addition, we are interested in working with merchants who are intent on helping our users save money by reducing their costs and bringing their goals in reach.
Selfish question: while I recognise that Wesabe provides information and data on all aspects of consumers spending and lives, can you offer some thoughts on how you see the “information economy” as led by Wesabe driving change in one vertical, financial services.
I’ve written extensively on my concerns about banking models that rely on maximization of fee revenue rather than on deposit investment. In the U.S., we’ve seen banks and credit cards earn 1/3rd or more of all their revenue from fees. The sharp increases in overdraft and ATM fees — far above the growth of costs for these institutions — strongly imply that banks are creating circumstances where consumers are led into fee generation traps.
Banks in the U.S. are reported, for instance, to collect $17.5 billion a year in overdraft fees (see The Red Tape Chronicles)
The promise of the financial services industry is that banks and credit cards will protect your finances and maximize your purchasing power. Bank buildings constructed of marble blocks are designed to tell consumers, “Your money is safe with us.” Credit cards carry a message of financial freedom and power. Today, those promises are false — by creating circumstances where fees are maximized, the consumer can reasonably expect to *lose* their money at the bank, and severely constrict their financial freedom for years with credit cards — quite an irony.
I believe that many of these circumstances are created through poor information and inadequate tools. Wesabe is designed from the start to make sure consumers have all the information they need to make the best financial choices, and the tools they need to make savings and fee prevention automatic, painless, and reliable. We believe it is our job to get consumers to their financial goals. That $17.5 billion in overdrafts fees, as an example, could help a great many consumers reach their financial dreams a lot faster.
Wesabe’s emphasis on publishing information about merchants, including financial institutions, will make it much easier for consumers to find those institutions whose revenue models most meet their needs. We already see consumers writing to us all the time to ask how they can find a bank that will not charge them for downloading their data, nor for online access to their accounts. Many members have told us that they have switched their financial institutions in order to make their use of Wesabe easier, and to avoid institutions that have very high fees.
I would like to see institutions that provide high-interest savings, low average fee costs, and high customer service values promoted aggressively to Wesabe members. For instance, a disproportionate number of Wesabe members use USAA Federal Savings Bank, which meets all of these criteria. If we are able to help Wesabeans identify the banks and credit cards like this in their region, I believe that will be best for consumers and best for those institutions.
I hope this helps — let me know if you need anything else.
Marc Hedlund, Wesabe
US News produces a list of the top careers for the next few years, and there are some surprises, at least for me, and the speed of social transition.
U.S. News has sifted through trends in the economy and the workplace and has identified 25 professions that will be in growing demand as baby boomers age, the Internet becomes ubiquitous, and Americans seek richer, simpler lives.
Source: USNews.com: Best Careers 2007
Here is the list – surprises for me:
- lack of scientists
- lack of technology (except for System Analyst)
- No Financial jobs! Bankers beware!
Medical related and Management Consultant comprise the top 1/3 in salary.
Their analysis and rationale is well covered here. Here are some highlights:
- Not surprisingly, nine of the 25 careers in the U.S. News list are in healthcare.
- U.S. News also identified a number of desirable careers in the nonprofit and government sectors, where job security is usually strong.
- The list also takes into account the trend among employers to outsource jobs that can be done more cheaply in low-cost countries like India and China. That’s one reason a lot of popular computer-related jobs no longer make the cut.
- Occupational therapists, clergy, and management consultants, for example, work directly with clients, which requires personal presence and a human touch. Those careers are very resistant to being moved offshore
- Other events could shake up the outlook for certain jobs in 2007. Such as:
Terrorism. Many experts predict further terrorist attacks on U.S. soil. If that should happen, watch for a hiring boom in the areas affected. A cyberterrorist attack, for instance, would produce lots of jobs for computer-security experts. If the water supply gets poisoned, toxicologists will suddenly be in high demand.
Healthcare reform. New national measures could be years away, but lots of states are passing their own reforms. One result could be plummeting pay for physicians, [insert link] on top of even more onerous paperwork requirements.
Immigration. The growth in America’s Hispanic population seems likely to skyrocket, creating a virtually unlimited demand for translators
Its a fascinating view of how the western world is evolving in significant ways.
Relevance to Bankwatch:
I searched through their site and no mention of Financial, positive or negative. Financial jobs in many peoples minds have been outsourced to technology. The implicit assumption is that relatively simple technology can put consumers in touch with the financial services they need.
The mystique is gone!
Regular readers will know I am a huge fan of Wesabe. Their stats amaze even me. This kind of data and information, which I emphasize is, across many Banks, is invaluable and not held anywhere, except Wesabe.
We’ve had a fantastic response to the site from our users, as I’ve blogged recently. Wesabe is currently tracking $300 million (U.S.) in transactions for our users. We have over 135,000 merchants in our system, and over a million tags applied to those merchants. People are uploading data every minute of every day. We have data from banks and credit cards in 23 countries, and users in 95 countries.
I am impressed and Kudos to Wesabe and the team.
But it just gets better …
So while we’d originally announced that we were intending to give free Pro memberships for 2007 to everyone who uploaded in 2006, and that everyone who joined from then on would have to pay for uploading more than three accounts, we’ve decided to remove that limit. As of today and from now on, everyone who joins Wesabe can upload up to 12 bank or credit accounts for free, and use all of the current features of the site for free. (Our stance on ads has not changed — we are still not going to run ads on the site.)
This is fantastic marketing, and exactly the incremental benefit approach I would expect. I won’t predict here (but I might over a beer) where Wesabe will land, but this is clearly a resource of immense value that no Bank can command.
The problem with working in a Bank is that everything looks like a Bank. You can always tell a Banker because your hear a ton of acronyms, and words like channel, multi channel, integration, etc.
In fairness Bankers are not alone in their industry view of the world. Anyhow, in preparation for LIFT07, I got to thinking about why Banks are having such trouble breaking out into the internet space, and with something that’s probably obvious to everyone else, I compared to others in different industries.
The well known, and two not so well known, (but will be well known), online names that are successful, are successful for a reason.
In simple terms they made it, because they brought an innovation … a new element, a combination of not just self service, but with added value. The key being added value that made the online self service, experience worth the customers effort.
At its simplest, online is merely self service, but that’s kind of boring if there is nothing in it for the user. Why should I do it myself when you (the Bank) are getting the benefit (cost reduction)?
So lets consider some big names, with undisputed business success, and their online angle that makes them valuable. As I read the list, I thought of it this way … what does Amazon sell – books? really? How about eBay … do they sell online auctions? (note I omitted social networks until they prove a business model – I believe social will work when its tied to a successful financial model, such as Amazon, Flickr, and eBay have already done)
My take: they all (except Banks) sell something more than the basic service provided.
- Amazon sell comparison service, and convenience
- eBay sell trust
- Google sell reliable information
- Yahoo sell consistency
- MSN sell youthfulness
- Flickr sell control and immediacy, along with dissonant innovation. For example, – Information on which camera’s are used & ranked. What’s the odds the camera manufacturers are taking note of that, and what’s the odds none saw THAT coming!
- 37 Signals sell simplicity, and cross channel utility
- S3 sell computing as a utility, at a very low price (for those who are curious, check out the owner, and consider if they are a book seller, but we digress). If you are interested to pursue this thought go here.
These online brands have differentiated themselves from the competition. These are brand names that are universally known (last two will be known). The premise is that anything that hasn’t established a point of differentiation online, versus paving old cowpaths, is doomed.
The poor old Banks … held up as one of the most successful online ventures have none of that innovation. They have automated that which was handled by tellers, but little more. We see signs on the edge … such as Wells Fargo with the spending reports, but not much more – mostly just hard old style defensive marketing.
Following that premise, are Banks are destined to go the way of the corner book store, and the paper encyclopedia?
The innovations appear to be coming from vendors such as, Cashedge, Corrillian, OneVu, Scivantage, eFunds, S1, Andera, Accenture, uMonitor, and Infosys … to name just a few. None of these are Banks. The innovation is coming from providers of services, and Banks are buying those services at a rapid pace.
But none of this activity is Bank business model changing or differentiating.
Relevance to Bankwatch:
Where is the point of differentiation that sets a Bank apart from the competition? The pieces of Banks’ strategy are remarkable similar, and the analysts perpetuate this approach. Words such as:
- multi channel strategy
- channel integration, and optimisation
- customer segmentation
- product simplification
- customer centric
- putting customers first
How can a Bank go online, and set itself apart?
This speech by Lawrence Lessig is quite brilliant. He is speaking about the shifts and strains caused by democratisation of technologies that allow anyone with a $1,500 computer to take media, and create. He relates these tools to the pen and typewriter, and makes the argument that trying to remain with the status quo in terms or rules and regulation will fail.
The Q&A is particularly insightful, talking about the diferences between US and Europe … how the US in promoting freedom does quite the opposite. Overall, the 1 hour 16 mins is well worthwhile. Grab coffee or New Year drink and enjoy.
Relevance to Bankwatch:
Philosophy aside, the fundamental shifts that technology has brought changes many things, and while his focus is on media, the intent applies to financial services.
Doc makes the point that VRM can bridge the gap between customers and products in the confused DRM state that exists.
Technorati tags: VRM