Starbucks should start banking | FT

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.

Beyond the age of leverage: new banks must arise | ft.com

Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt.

He goes on to offer specific ideas on how the great deleveraging could manifest:

• bank debt write offs with terms designed to give banks time to sort themselves out within a fixed time – he proposes 10 years.

“There are precedents for such drastic action, notably the response to the Swedish banking crisis of the early 1990s. The critical point is to avoid the nightmare of a state-dominated financial sector. The last thing America needs is to have all its banks run like the rail company Amtrak or, worse, the Internal Revenue Service. State life-support for moribund dinosaur banks is an expedient designed to avert the disaster of a generalised banking extinction not a belated victory for socialism. It should not and must not impede the formation of new banks by the private sector. So recapitalisation must be a once-only event, with no enduring government guarantees or subsidies. There should be a clear timetable for “reprivatisation” within, say, 10 years.”

• “The second step we need to take is a generalised conversion of American mortgages to lower interest rates and longer maturities.”  He goes on to highlight systemic changes to debt and terms of debt contracts over the last 150 years that were used as vehicles to bring the economy back in line.

Point for economists and Keynes.  Ferguson says:

Today’s born-again Keynesians seem to have forgotten that their prescription of a deficit-financed fiscal stimulus stood the best chance of working in a more or less closed economy. But this is a globalised world, where unco-ordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth.

Relevance to Bankwatch:

All in all another thoughtful piece directed at broad based solutions that deleverage the world.  His argument that the approach of all world governments to borrow and create government based stimulus is not directed at the problem crisis symptoms, and sounds common sense.  When asset values have collapsed in the world by 40 – 50% and debt remained unchanged, how is more debt a solution?

It strikes me there is an opportunity here for banks’ to consider new and innovative products that alter terms, conditions and rates of existing debt that relieves pressure as suggested in Fergusons 2nd point above.  I would add that not just ‘New banks must arise” per Ferguson’s title, but that financial alternatives must arise too.

Mint Adds Support For Mortgage And Loan Tracking

further expanded its services by introducing support for mortgage and loan tracking. Users will now be able to keep tabs on their loans from over 1,000 supported institutions
…..

Mint has seen extremely quick growth since its launch at TechCrunch 40, and is now monitoring a total of $11 billion in assets, with 350,000 registered users
…..

Mint will eventually be able to move money around, but that functionality won’t be coming until 2009

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.

Cogent Thoughts » Blog Archive » Social Media vs. Advisors (round 1)

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.”

Mobiles bankieren in die EU. « – was einer so denkt –

Bis jetzt hatte ich gedacht, dass das eine afrikanische Tradition wäre. Ich finde das ganz spannend.

Translated:
Until now, I had thought that this would be an African tradition.  I find this very exciting.

I have covered the African mobile phone market, and this article builds on what is happening there. 

These “branchless” schemes typically allow customers to deposit and
withdraw cash through a mobile operator’s airtime-resale agents, and
send money to other people via text messages that can be exchanged for
cash by visiting an agent. Workers can then be paid by phone;
taxi-drivers and delivery-drivers can accept payments without carrying
cash around; money can be easily sent to friends and family. A popular
use is to deposit money before making a long journey and then withdraw
it at the other end, which is safer than carrying lots of cash.

Lots going on, BUT what really struck me was this sentence.

There is no need to set up a national network of branches or cash
machines.

So, what are we saying here.  The unbanked, those “poor” folks who for whatever reason have no access to ‘real’ banking services are in fact getting true Direct Banking!!!  [emphasis and sarcasm thrown in for free]

In North America, we are insulated from true creativity in financial services, partly by how Banks’ think, but probably even more by what consumers expect.  When you live in the middle of an incredibly poor area with nominal resources, such as Africa, it seems you can get accept total creativity in Direct Banking/ Branchless Banking, that would not work in North America.  Or would it?

How much about the approach to Branchless Banking is driven by incorrect assumptions?  Maybe, just maybe, our approach to creative solutions is limited by the current environment.  If we approached Direct Banking as Africa has done, and assumed no current resources, what kind of solution might we be able to develop that might address the business case challenges. 

Peer-to-peer lending | Crunchless credit | Economist.com

Why aren’t social lenders raising their rates? One reason is that, unlike banks, they are not facing higher funding costs caused by the seizure in money markets. Another clue lies in that word “social”. Mr Advani, whose business is designed to facilitate loans by family and friends, points out that parents tend not to foreclose on mortgages but to restructure them. Even when strangers are involved, lenders are usually not seeking solely to maximise returns.

Most intriguing of all is the possibility that social-lending sites do a better job than their mainstream counterparts of assessing risk. Zopa, which takes a stringent approach to credit assessment and will let only prime borrowers onto the site, boasts a default rate of just 0.1%. Prosper, which is more laissez-faire and has a default rate of 3%, provides measures of “social capital”, such as endorsements by friends, that help lenders to judge the risk of a specific borrower.

Relevance to Bankwatch:
The advantages that separate peer to peer lending from traditional banking, which the article highlights are:

1. lack of costly infrastructure:  peer to peer lenders do not have the costly infrastructure base that banks have tied up in, branches, staff, and old infrastructure based on a differently regulated model.  Banks must factor those costs into their pricing. 
2. broader view of return:  social lenders have different expectations on return than traditional Banks.  Social lenders factor the human element into their expectations.
3. risk assessment is better:  social lenders factor other elements into the lending decision, such as endorsements from friends or relatives.  The human scale of social lending facilitates a clear line of sight between lenders and borrowers, that is the antithesis of the Asset Backed Commercial Paper market that funds Bank lending.

The current market that peer-to-peer lending is tining compared to banking, but it is also brand new, having only begun circa 2005.  Banks would have to look to ways to insulate their own model from those disadvantages if they are to be able to compete with social lenders.

Technorati Tags: social+lending, peer+to+peer+lending, zopa, prosper, open+source+banking

Customer Reviews: Online Banking from Bank of America

Write a Review Tell us what you think about Online Banking by signing in to Online Banking to submit a review. Look for the link on your Accounts Overview screen or in the Customer Service area.

Results so far are mixed on two fronts;

1. presentation:  the display is horrible …  think email, or Google Reader in terms of laying it out.  There are 1,500 entries, yet you can only see 3 at a time, and even that with significant paging down.  There are ratings of things like “services available” with no explanation, nor can you summarise the ratings.
2. quality:  more importantly, the quality is suspect.  Each review is written as if it were produced by BofA fan, and many are written as if internal marketing groups has something to do with it.  Thats just my opinion.  Also when I sorted by lowest rating, only good reviews showed up?          

        Example:

“Banking online at BAC is very
convenient for me. I work during the day, but I still can transact
banking business at night when I get home. There’s no worry about
having to skip lunch to be at the bank.”

All in all, kudos for trying, and please don’t stop.  The reason that only 1,500 of your 20,000,000+ online customers have used it, is at least partly because of the reasons I gave above. 

Knowing BofA, the results will be collated internally, but get some advice from someone who has built web 2.0 web sites, and consider what others might want to see when they come to look at the results.  If you are trying to be ‘social’ then rule #1 is make it transparent, interactive, and returns the favour of users by providing useful, valuable feedback.

Technorati Tags: BofA, BAC, Bank+of+America

The restructuring involved a 6% boost in Assets and liabilities, using new wholesale and commercial deposits to repurchase its own Asset Backed Commercial Paper.  Translation …  the articles speculate this is in anticipation of significant writedowns in the 4th quarter.

Who is next ?  Watching and waiting for RBC, CIBC, Scotia information.

Canadian Banks & Insurance

Mr. Mihelic said his analysis may show BMO raised funds by borrowing from other banks and by attracting commercial deposits, possibly in anticipation of problems in the ABCP market. “BMO may have been ahead of the curve and prudent with respect to funding,” he said

… … …

Most recently, BMO has been dragged into the ABCP quagmire and has also been exposed as a significant player in the U.S. sector of the global credit crunch focused on structured investment vehicles or SIVs. The bank said this week it is not part of a group of top U.S. banks that has organized a US$80-billion fund to deal with the problems around SIVs, but said it is “following closely” developments regarding the proposed fund.

Relevance to Bankwatch:
Writing about the financial situation is not on topic for this blog.  My thinking though is this, and input welcome! 

‘Which Banks get the Web Lifestyle’ is the tagline for Bankwatch.  Implicit in that tagline is the view that the web brings the customer back into full focus, and that it forces, firms to look carefully at their customer positioning, because the transparency that the Web brings cannot be avoided. 

I won’t take advantage of the situation, and plug social lending/ open source banking here.  I will though use as an example that provides a nice example of the other extreme in customer transparency.  Banks need to think through the participation in all markets, which include retail customers, commercial customers, as well as the wholesale markets of commercial paper, commodities, and trading for their own account in any market. 

The degree of risk increases in that list towards the end.  In a world of transparency, the potential gains from such participation needs to be weighed against the potential for customer backlash.  I wonder if there will come a time, when analysts might reward Banks for a purer market participation, and if the gains might come from customer growth as a reward to the Banks’ greater responsibility to them (the customers).

Technorati Tags: BMO, sub+prime, banking+strategy

Thomas carefully develops the case that there are some seismic changes occurring in the world (meaning the whole world) that when they occur simultaneously will produce cataclysmic change in the world. My intention is not to rationalise the book … you can do that if you wish.

What struck me, and is relevant to Banks, is the powerful argument, centred in chapter 8, that the current financial markets are failing. Homer-Dixon refers to comments from George Soros, arguably the ultimate capitalist [emphasis mine]:

Capitalist societies are locked into their own self-referential, self- validating beliefs – a situation that makes them less flexible and more vulnerable to breakdown

This blog is not about to become a literary critic. When I read this, I had to think of the sub prime crisis. No-one who was part of the market can honestly say then saw that coming. A run on a British Bank, a French Bank freezing their investment funds, the entire Canadian Banking system placing a freeze (that expires today, Oct 15th) on all interbank commercial paper transactions.

So yes, there is something wrong with the current financial market system, that is run on a basis on supposed mathematical precision, and purity, yet that has completely ignored the human element, which is quite emotional, irrational, and the antithesis of mathematical.

Expect more fun over the next 18 months, and competition from the most unexpected sources.

Every 6 months Xubuntu Linux upgrades, and thats October. Last night a fairly significant upgrade popped up involving the part of the core with the name of 2.6.22.12.18, so I carried on as normal, and installed.  Then the crisis … wireless and some fonts were not working.  But this is Linux … so I rebooted to the earlier version. [Linux always keeps the last two versions available in case of emergencies]

Out of interest I checked the official Linux forums, and the activity became quite frenzied, with many reports of the issues, people reporting their log files, and within minutes it was raised as a bug.  It was late so off to bed.  This morning, several updates awaited, which installed perfectly, and now my trusty machine is running better than ever.

The message for me was beyond the quality of the operating system, which I won’t bore you with here, or even the peace of mind knowing the previous version is always there.  The message for me was the community responsiveness, and the enthusiasm and willingness to leave no stone unturned until it was corrected.  Corrected in less than 12 hours, and who knows in which time zone I might add.

The backdrop to that statement is here ….

Alistair Darling signals the end of easy money – Telegraph

The country now has a consumer debt mountain of £1.3 trillion. As this newspaper has warned, with a global credit crunch making its malign presence felt, that leaves a lot of people extremely exposed, as money gets more expensive.

Its clear that the lending environment that has existed for the last 10 years is at an end.  Time for new ways to think about lending.  The reason I say that, is that despite the comment from Darling, which is similar to how Finance Ministers feel everywhere, the consumer debt exists, and people need help during the transition.

TD and TBC are leading the charge in Canada – who is next?

The Better Banking Blog: Social networking rule no. 1: expect criticism

After asking the audience if Australia has Facebook (yes Brian, we have the Internet here too), Haier went on to discuss the reaction to the site from employees who were left wondering how best to respond to questions and criticism.

“Because these chats are going on instantaneously you have in some cases people criticising the bank, and in some cases asking a questions” said Haier.

“We had employees saying ‘Please tell us what we can tell them, help us..’
So within 48 hours we had to put a group on to monitor what’s going on and provide feedback – we didn’t anticipate that.”

Relevance to Bankwatch:
I predict that RBC and TD will adjust their strategic planning as a result of these seemingly small initiatives.  Thats why I characterise this as open source banking.  It is open, transparent, free, and built by a collective of interested parties.  That characterisation is the antithesis of Banks.  Hence it must be integrated into the strategic plan, with implications across all parameters, ie. personnel, technology, and business processes.

RBC p2p – Not your parents’ banking site

How often does a bank ask you for your input? We’re asking, so get ready. RBC p2p is a Royal Bank of Canada site for students by students. The idea is that you’ll learn about things like budgeting or saving or investments, from people who are going through the same things you are.

I like the tone, and the style.  Its very non-traditional bank, and that is refreshing.  I imagine the internal corporate communication folks are having a bit of a challenge, and that for me would be the litmus test for potential success, so good for them.

For now, they are seeking submissions from bloggers/ vloggers which will be narrowed down, to 6 by students voting for them. 

This will be a real test for RBC and if they can pull it off, with the right balance of openness and relevance for the intended audience, then this could be a winner.  Its a good sign that the site can be posted to FaceBook/ Del.icio.us etc.

Relevance to Bankwatch
This is significant, because it means RBC is outsourcing advice to students for students, at least in their stated intent.  That is the litmus test, that qualifies this is a social app, and into the realm of open source banking.

RBC p2p will feature video and text blogs written and produced by six
university or college students, the RBC p2p bloggers, so this will be
truly your voice, and reflect what’s really on your mind. Not what some
middle-aged bankers think could be on your mind.

(optional – my opinions and suggestions follow)

My suggestion to RBC is be prepared to bend with the wind, and do not expect this thing to turn out exactly as intended, but thats ok if it remains relevant, fun, and informative for students.  While budgetting is interesting (hmmm) its not the only thing on students minds by a long shot, so my suggestion would be to take a broad view of the relevance to students.  Also, why not build an app within Facebook F8 to follow the topics using RSS – not as hard as it sounds, no matter what the IT people tell you. Remember its important to be where they are, rather than have them come to you all the time.

Technorati Tags: RBC, royal+bank+of+canada, social+networks, open+source+banking

First this from the Economist leader; as you read this, think derivatives and securitisation. The least understood methods, yet that which have largely been credited for the efficiency of global capital markets over the last 20 years. Incidentally, the correction we are seeing is a good thing for those markets, a good thing for social lending, and open source banking, but more on that later.

Risk and the new financial order | Surviving the markets | Economist.com

But there is a price that is only now becoming apparent. Because lenders expected to be able to sell on the risk of default to someone else, they lent too easily. After all, they would not have to pick up the pieces. In theory, that risk should have been borne by the people best able to carry it. But with everybody having sold on the risk to everyone else—and the risk often being carved up, repackaged and sold again—nobody is sure where the losses are. The fear is that some risks ended up with those who least understood what they were getting into, and fear is a potent force in this disintermediated world. In the interbank market, every counterparty was potentially vulnerable. Even small amounts of bad credit can drive out good.

I posted the other day about ‘know your customer’. The world of derivatives and other financial vehicles take financial instruments, such as bonds, currencies, commodities, mortgages, and divide them into different components, then re-assemble them as financial contracts that are traded amongst Banks, and investment houses. The nature of that division, and re-assembly means that the original debtor, the final person who must pay that debt is lost in inter-bank transactions. Know your customer is lost.

In simple terms, thats what has happened with the example of sup-prime loans. BNP in France who froze three of their funds this week, own some component of mortgages in homes in the US. The fact that a Joe Homeowner, hypothetically, in Main Street, Witchita, Kansas, is three months overdue on their mortgage payment after their interest rate and monthly payments rose by 3% is transparent to BNP. All BNP know is that the debt instrument they purchased and rolled into their fund(s) is no longer worth what they expected it to be worth. Worse still, they do not know how many Joe Homeowners there are, to what extent they will default, to what extent the home value will cover the foreclosure, and how long that will take. BNP thought they purchased an income stream, but actually they purchased an overpriced bad debt.

Back to Basics

This will take some time to sort out. There will be short term improvements, but there will also be significant reluctance to purchase obscure instruments, where the underlying credit quality is not guaranteed, so that will result in tighter credit conditions that Banks impose on their mortgage and loan activities.

It is incumbent on all social lenders to watch this carefully, and appreciate there is an opportunity to provide a valid and financially sound alternative to borrowers and lenders. Social Lenders still use the common approach of credit ratings to signal likelihood of payback on a loan. But they have the added advantage of additional factors that can be brought into the mix, the secret sauce of social lending, that traditional Banks can never replicate. Social Lending is highly transparent, and hiding is much harder in the open. The quality of lending that can occur within a well run social lending operation can greatly transcend the ‘by the book’ transaction that occurs in a one on one application and approval process typical of Banks.

Incidentally, as as aside, recently Prosper have been having issues, bringing out phrases such as ‘lender revolt’ and Prosper need to get that under control, and eliminate the emotion. Their issues go back to problems embedded in their early offerring, of lending to people with poor credit. That have since been corrected, but long time Prosper lenders are bearing those costs associated with that lending. Such lending has been eliminated from Prosper since early 2007. They saw the problem, learned and eliminated it.

Social Lending by definition carries the promise of at least eliminating the problem that the financial markets experienced this week. A promise of a simpler financial process, one that is easily understood and explainable. It won’t replace the worlds capital markets, but if it can provide at least a small alternative to those who choose, then mission accomplished.

________________________________________________
________________________________________________

Background:
It is such a powerful piece, here, is the full leader from The Economist. I strongly recommend you buy it, and read the other related articles:

Risk and the new financial order

Surviving the markets

Aug 16th 2007
From The Economist print edition

The new financial order is undergoing its harshest test. It will not be pretty, but it is necessary

Illustration by Jon Berkeley

THE lifeguards had been scanning the horizon for an oil-price shock,
a bankrupt buy-out or a terrorist attack. But when the big wave struck
last week it surprised them by coming from inside the financial system
and threatening to swamp an unlikely shore, the money markets where
banks lend to each other to help cover their daily operations.
Investors have been asking for years if the frantic innovation in
finance, especially the securitisation of just about every form of debt
into a tradable asset, was a way to spread risk efficiently, or whether
this left the financial system prone to rare—but cataclysmic—failures.
It looks as if investors are about to find out.

Over the past week central banks have lent tens of billions of dollars to restore confidence to the markets (see article).
But it is already clear that this mess is about more than a bit of rash
mortgage lending to Americans who were in the habit of falling behind
with their monthly payments. Hedge funds and private-equity firms,
kings of the boom, are nursing big losses. Debt markets that once
handed out cash to all comers are tight or closed altogether. In almost
every asset market, investors are scurrying to reprice risk—which
mostly means to reduce it.

The gravest and most immediate threat is to the banking system. For
the time being, banks no longer trust other banks enough to lend them
money except on onerous terms; equally worryingly, they lack confidence
that other banks will trust them if they want to borrow. It is alarming
when the very outfits that exist to supply the economy with credit
start to hoard it from each other. At best this tightens monetary
policy; at worst, a shortage of cash will cripple the payments system
and cause runs on otherwise solvent banks and businesses that cannot
rapidly raise funds.

Underneath all the new technology and the fancy derivatives with
strange acronyms is a dilemma as old as banking itself. Anyone who
thinks that lending has been too loose—and many bankers do—should
welcome a purge: better now than later when the imbalances would be
bigger and the economy probably weaker. But if good banks fail and
money for good companies dries up, the purge will wreak huge and
wasteful damage on healthy parts of the economy. How likely is that?

Fear of the deep

Financial crises are always about the way people do business, and
not just the deals they have struck. Yet this one goes deeper than
most. The spreading panic has shown up weaknesses in some of the
foundations of modern finance. The past 20 years have created untold
wealth. As securities and markets have steadily taken the place of
old-style bank managers, the number of potential investors has grown
and the cost of capital has fallen. Much good has come of that.

But there is a price that is only now becoming apparent. Because
lenders expected to be able to sell on the risk of default to someone
else, they lent too easily. After all, they would not have to pick up
the pieces. In theory, that risk should have been borne by the people
best able to carry it. But with everybody having sold on the risk to
everyone else—and the risk often being carved up, repackaged and sold
again—nobody is sure where the losses are. The fear is that some risks
ended up with those who least understood what they were getting into,
and fear is a potent force in this disintermediated world. In the
interbank market, every counterparty was potentially vulnerable. Even
small amounts of bad credit can drive out good.

In theory, ratings agencies and mathematical models help investors
price the risk they are taking on, even if the securities they are
buying are scarcely traded. Yet when some supposedly good-quality
assets proved to be worth little, people lost faith in the models and
the ratings. Across the board, investors had failed to take account of
how fast and how far asset prices fall when everyone wants to sell at
the same time. Hard-to-sell long-term securities had been bought with
short-lived debt, which left borrowers vulnerable to a change in
sentiment every time the debt fell due. It does nothing to restore
confidence when the biggest model-driven hedge funds had to get in new
money. The people at Goldman Sachs lost a packet when something
happened that their computers told them should occur only once every
100 millennia.

Reassess, reprice and then rebound

The retreat to a new level of risk was never going to be orderly or
free of casualties. Neither should it be. Bankers and investors need to
suffer precisely because the methods of modern finance have been found
wanting. It sounds Darwinian, but the brutal demonstration that you pay
for your sins is what leads the system to evolve. Markets learn from
their mistakes. Only fear will spur investors to price risks better and
get them to put more effort into monitoring their counterparties.

If these lessons are to sink in, central bankers must stand
back—as, by and large, they have done. Every intervention now will be
taken as a sign of what the regulators will do next time. If they bail
out banks that have mispriced risk, the mispricing will continue. And
when the central banks do step in, it should not be to save the
financiers. The cost of intervention is warranted only to save the rest
of the economy from the financiers’ folly. By that test, central banks
were right to lend money to the banks in recent days, because it
ensured that a liquidity crisis did not become a solvency crisis. They
may yet have to take over a failed bank, though only if that is needed
to stop a run. It is still far too soon to cut interest rates.

Because this crisis taps so deeply into the newly devised structures
of finance, anyone who says the worst is definitely over is either a
fool or someone with a position to protect. As risk has become
bewilderingly dispersed, so too has information. Nobody yet knows who
will bear what losses from mortgages—because nobody can be sure what
those loans are really worth. Nobody knows if tighter lending standards
will oblige borrowers to raise more capital, triggering more sales in
stockmarkets and more pain. Nobody knows how messy the inevitable
bankruptcies will turn out to be. What markets need now is time to
piece that information back together. Time before the next wave
strikes.

Home Equity Share: Find Real Estate Co-Ownership Partners

Home Equity Share is the online marketplace for real estate co-ownership. We help home buyers overcome the high price of real estate by matching them with investors, allowing both parties to co-own property and enjoy the benefits.

Use Home Equity Share to find a real-estate partner, calculate your profit potential, and complete the Equity Sharing Agreement, all for free.

I see some real risks here, and I was not able to satisfy them in reading the site, because it is very American oriented.  It is also interesting timing given the jitters emanating from the Sub Prime fiasco.  In fact, this model probably won’t work without a sub prime mortgage marketplace to support it. Some thoughts:

1. 100% financing is encouraged here, and that is dangerous in a soft or declining market
2. the built in calculator defaults to 6% annual real estate value increase over the next 5 years – a dangerous assumption for neophytes
3. down payment financing is not permitted in Canada for insured mortgages, and highly frowned on by Banks for any mortgage.  The US market is different, but is tightening, so it is not clear to me how the 1st mortgage is arranged in this scenario.

We shall watch with interest.  I still look for a P2P lending site for mortgages, that follows normal lending practices, yet offers an alternative to using Banks.  I do not see this company in that light.

Thoughts?

University of Maryland, Baltimore County
Using the link structure, following are the main categories of users on Twitter:

• Information Source An information source is also a hub and has a large number  of followers. This user may post updates on regular intervals or infrequently.  Despite infrequent updates, certain users have a large number of followers due to the valuable nature of their updates. Some of the information sources were also found to be automated tools posting news and other useful information on Twitter.
• Friends Most relationships fall into this broad category. There are many sub-categories of friendships on Twitter. For example a user may have friends,family and co-workers on their friend or follower lists. Sometimes unfamiliar users may also add someone as a friend.
• Information Seeker An information seeker is a person who might post rarely, but follows other users regularly.

They go on to make some suggestions that would facilitate usage for people.

Based on our analysis of userintentions, we believe that the ability to categorize friends into groups (e.g. family, co-workers) would greatly benefit the adoption of microblogging platforms. In addition featuresthat could help facilitate conversations and sharing news would be beneficial.

Relevance to Bankwatch:
To better understand the dynamic driving online usage and how customer experience is changing, and developing, as Web 2.0 rapidly evolves.

Technorati Tags: social+networks, microblogging, twitter, facebook, open+source+banking

This from Gallup explores the old causes of a crunch arising from a dramatic drop in liquidity, and points out despite a worldwide glut in liquidity, the potential exists for a credit crunch now.

Looks Like an Old-Fashioned Consumer Credit Crunch

What causes a credit crunch? In today’s financial markets, many lenders make loans but do not hold them in their portfolios. Instead, they sell them to investors in the form of securitized investments. What appears to be happening in recent weeks is that the huge losses associated with some subprime mortgage investments are not only creating significant new risk premiums but also causing potential investors to shun all mortgage investments not guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.

For example, on Friday various mortgage lenders announced that they could no longer sell various types of jumbo mortgage loans and special feature mortgage loans to the investment markets. As a result, some lenders decided to stop making various types of mortgage loans and sharply increase the pricing of the loans they would make.

The key will be the extent to which the effect spills over into unsecured, and personal loan lending. 

I would argue that social lenders will view things differently, because the issue for them is not Bank liquidity.  Nor is the issue a change in borrower circumstances, caused by changes in the employment market, or high inflation.  Social lenders are well placed to represent borrowers well, and it will be interesting to watch how this plays out for the relative competitiveness of social lenders, in North America.

Technorati Tags: social+lending, zopa, prosper

Daily Herald – Borrowing others’ credit roils housing industry

Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.

Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.

The cottage industry lies in people ‘renting out’ their good credit to those who need good credit.

Brian Kinney, 44, a retired Army officer in
Glendale, Calif., pulls in more than $2,500 a month by lending out 19
credit card spots on two old Citibank cards with strong payment
histories. Kinney, whose FICO score is above 800 on the scale of 300 to
850, quit his job working at a Farmers Insurance agency and uses the
ICB income to tide him over until he starts his own insurance agency.

The reliance on a single point for a credit score has means of manipulation.  I would supplement that by anecdotal stories of people getting fake employment confirmations for their mortgage broker. 

In the future there is a potential for a market in broad based reputation system pulling information that cannot be compromised.  Such a system would be worth money to borrowers, and lenders.

Technorati Tags: credit+burea+manipulation

Longer term, these platforms will need to focus on working with open standards so that (bank) applications can have a chance to work in more than one place, or risk being ignored, with concominant risk to their own business model.  The attraction for firms to build on their platform and provide value to customers, cannot be in any kind of non standard development work.

Bebo signals plan to open up networking site to developers – Telegraph

Social networking site Bebo is likely to follow Facebook’s lead and open up its site to developers to create applications that work within the site.

Chief executive Michael Birch signalled the move at the dotcom networking event Second Chance Tuesday. “It’s a positive direction for social networking and I think you’ll certainly see more and more of it across other social networks,” he said.

On a related note, William at BarCampSeattle, notes Wesabes latest thinking to focus on iPhone as a means to cover multiple channels, and deal with this problem short term.  I read into that, focussing on Safari, since thats the only way into iPhone, and the result will work in many places beyond iphone (Mac, and Windows).

Technorati Tags: social+networks, web+applications, web+platforms, customer+experience

In particular, I would point readers towards two takeaways that I got from this:

1. 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
2. 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

Technorati Tags: wesabe, bank+strategy

The judges particularly liked the fact that with just 25 staff it was
able to provide a seamless customer experience. Using a discussion
board and a blog it is able to listen and learn from its members,
providing an innovative and more efficient marketing model. [emphasis mine]

So, for other reasons, i was doing a bit of analysis that included a fresh and closer look at Zopa.  I have two conclusions.  Zopa is not social lending, nor is it a social network, and here is why.

Social Network:  Lets begin with the above quote about the discussion board, and blog.  The discussion board is an off the shelf product by Invision.  it is not integrated with Zopa, and has little activity as far as I can tell.  There are about 7,000 posts there, which can be compared to Prosper with ~250,000 posts over a similar timeframe.  But what amazed me, is the lack of integration.  Even though I am registered with Zopa, I had to register again to gain access to the board, and the board did not recognise me as a registered member.  Without the direct connection between borrower and lender acitivity within Zopa, and their comments, the learning referred to in the above quote is minimal at best.  More importantly, Zopa is not developing basics for meaningful connections between members, that provide something of the viral effects one sees in social networks.

Social Lending:  This may be the more controversial point.  When discussing the socal finance space, names such as Prosper, Zopa, and CircleLending are often mentioned in the same sentence.  But while each has their own distinctiveness, there is a dramatic difference between Zopa and the others, that I believe places them in a different category.  Incidentally I am not questioning Zopa’s novel business model.  Its just not a valid comparable when assessing the merits of social lending. 

In Zopa Borrowers are categorised into what Zopa call credit markets.  Lenders choose one or more credit markets, and that is the extent of their involvement.  Zopa match lender money with borrower loans, and Zopa applies the diversification criteria based on Zopa’s interpretation of credit risk.  The borrowing and investing process is mechanical, and quite impersonal.

Social lending would by defintion require social interaction between borrowers and lenders at the time of the transaction.  Anything less is an online service from which people can borrow money, or people can invest money.

Relevance to Bankwatch:
I see two key differentiators between social finance, and traditional lending and borrowing.  These are critical elements, that define the new model.  Anything less would by definition, be more of a tweak to traditional banking.

1) market driven rates:

The interest rate environment in a true social lender is determined by market forces, between lenders and borrowers, and auction is one way to achieve that environment.  Zopa rates are defined by Zopa.

2) borrower and lender democracy:

Traditional borrowing has a fairly paternalistic feel to it, with the Borrower approaching the lender and “applying” for a loan.  They may be accepted or turned down.  Zopa is no different in that respect.

Social lending provides a more with much greater lender and borrower interaction, and is more democratic.  This interaction with a many (lenders) to one (borrower) and the discussion of the loan provides a more balanced relationship between them.  In fact that discussion broadens the discussion into a variety of subjective and qualitative factors which are closer to the nature of discussion which a Banker would consider during a one on one interview.  Those discussion elements form a view of the borrower that is deeper than only the credit rating, and form part of a Bankers judgment. 

Social Finance takes that bankers judgement and in essence allows the market to apply that judgment through an online exchange.  The extent that the exchange provides support for that judgement will evolve and become competitive differentiators between social lenders.

However in order to be considered a social lender in the first place, you must have that interaction at the point of lending and borrowing, and Zopa does not.  That interaction is essential to provide scale, and market efficiency, through better, more (financially) educated, and informed lenders and borrowers.  Anything less looks more like traditional online banking.

So as stated earlier, nothing at all wrong with the Zopa model, its just different than we might think.

Technorati Tags: social+lending, zopa, prosper, open+source+banking

So, what if we looked out to 2020, and consider how consumers will engage with their Banking.

Latest hypothesis: customer centric can only be achieved if Banks recognise the reality that customers require more than one Bank.

Background:
Social Networking has gained enormous scale very quickly. There are two kinds:

Horizontal with broad appeal: MySpace, FaceBook
Vertical with common interest appeal: YourRunning, YourCycling

The game changing event came recently, when FaceBook announced F8.

Mass Distribution through the Social Graph Applications will gain distribution through what Zuckerberg called the “social graph,” the network of real connections through which people communicate and share information. Facebook and all social networks have two core elements: the social graph and the applications that run on it. Because of the efficient spreading of information through the social graph, existing Facebook applications, such as Photos, have grown to leaders in their categories.

A complicated statement from Zuckenberg that can be summarised; Applications will be aggregated by each consumer and the glue will be social networking.

Channel vs Product
During the advent of internet and internet banking in the mid 90′s discussions started on the right structure for a Bank. One had a Bank develop its own products and sell them through its proprietary channels. Another suggested a Bank of primarily channels that sold products from anywhere, their own, or from other FI’s.

It might be that the flaw there was that the assumption was generally that Banks would remain central to the financial services experience. Back then some speculated on portals becoming customer central, and online banking functions appearing there. This view did not get much credence at the time, but probably for the wrong reasons. There is no particular incentive to use one portal over another, except technical capability. Such capability is not something that generates long term loyalty.

Technical developments
One aspect of Web 2.0 which is still in infancy, and gets little airplay except within the technical community, is the web as an application. Microsofts discussion on Software as a Service (SaaS), Amazon S3, FaceBook F8, Google Apps, are all examples of web based applications, storage, and application capabilities that are run in a browser.

This will mean that consumers can design their own web, aggregated as they see fit. Consumers can pick and choose the applications they want and need, and access them as they see wish in a PC browser, or a mobile browser.

It also means, and this is key, that applications are componentised. Its mix and match. I might want Google Mail and calendar, Yahoo Flickr for photos, and Microsoft Live for blogging. The problem is that what is missing here is me, the user. I need a single view of my services. My identity needs to be under my control and allow me to use the same identity to pull all my services together into my view of the web. No-one has designed that yet. But F8 has potential, and others will appear.

The significance for Banks, is that online banking is the opposite of Software as a Service. Online Banking is proprietary to each Bank, and homogeneous. Individual elements of online banking, such as bill payment, or spending analysis, cannot be used anywhere except within each Banks online banking.

The missing element – is it “Social?”
What is missing is a compelling reason for a consumer to have their services seen in one place. That would require several things:

• Trust
• Identity management
• an open platform built on open standards
• a compelling experience

F8 has 1, 3 & 4. While work is proceeding, 2 is not anywhere in a useful and accepted standard yet, but 3 out of 4 is not a bad start.

The big change that Facebook shows is the ability to aggregate various functions, including (so far), communication, photo’s, video’s, product preferences, and a host of others being added daily. It works because participants can choose their contacts, choose what to show, and share information as they see fit. Social is not about teenagers chatting. Social is about shared and common interests providing benefit to the larger group beyond that which any one person can achieve – the Wisdom of Crowds. Communication/ messaging is one component in that view.

Amazon, Chowhound, TravelZoo and Wesabe show the power in shared opinions on services.

The service(s) that pulls together the right combination of these elements will be the winner(s) because thats the ploae consumers will want to pull their services into.

The Future Bank
The future Bank may not look like a Bank at all. What if we follow the contexts discussed, and imagine a situation like this – truly customer centric.

Consider these services alongside customers email, messaging, photos, feeds, etc.

Aggregated Banking services:

• one log in
• bill payment from Bank 1
• Account history from Bank 1 and Bank 2
• Investment history from Bank 2 & Bank 3
• Social lending application
• Social investment application
• Generic debit card application (works for any open standard Bank)
• Mortgage information and history Bank 4
• Product comparison service from 35 Banks
• Product application/ purchase service accessing 35 Banks

This scenario places the customer firmly in charge of his financial services. Banks must be following open technology standards, and their services must be componentised, including new services, eg, provide a feed into the product comparison service. Bank must also accept they are competing alongside social financial applications.

Relevance to Bankwatch:
What percentage of customers will seek to manage their banking this way? It embodies a radical shift from the big bank view we see today. Customers pick and choose the products they need, but aggregate them themselves.

To compete Banks would have to dis-aggregate, and open up their services to make themselves accessible in this mix and match environment.

Alternatively and/ or in addition, some Banks could provide those aggregated banking services including services from other Banks (Open Finance). Banks could become the aggregator.

The attributes most cited for eroding trust were “disrespectful attitudes”, poor privacy, weak IT – including Web sites, poor corporate governance and a lack of investment in the local community.

Online banks fared worse than High Street banks in the customer trust study, with the two worst-rated banks both being Internet-based. Overall the lowest six ranked banks were those with no High Street presence.

Elton Birden, VP, UK financial services, Unisys, says banks must look beyond firewalls and data breaches and understand that consumers consider everything when deciding where to place their trust.

Source: Finextra

Technorati tags: Customer Trust

On the web it can be a whole different story. If you manage your expenses on a web based service you have the opportunity to contribute to community and to take advantage of its collective wisdom. Allowing your service provider to aggregate transaction data anonymously makes it possible for that provider to deliver a service that is better than desktop software in a number of important ways.

Source: Union Square

Technorati tags: Social Networks

Technorati tags: Open Source Banking

BERKELEY, Calif., June 20, 2007 – Wesabe, a personal finance start-up, today announced that the company closed a $4 million Series A round, led by Union Square Ventures (USV). An early-stage fund based in New York, USV’s best-known deals include investments in FeedBurner (acquired by Google) and de.licio.us (acquired by Yahoo!). O’Reilly AlphaTech Ventures, the lead seed round investor in Wesabe, also participated in the Series A round.

Source Wesabe

Technorati tags: Social Finance

Technorati tags: Open Source Banking

I’ll probably never know who sent me that well organized, methodical email, or what motivation they had for getting the stories written. But I do know this: after researching this story, I’m more afraid of the credit bureaus and their perverse business models than ever before.

Source: TechCrunch

The subject is a VC funded startup, LifeLock. LifeLock has a business model based on consumers protecting themselves from identity theft, fraud and junk mail.

The company is …. according to Cowan, adding 3,000 new customers per day. Their core product allows customers to put a “fraud block” on their credit. A new credit account cannot be opened by a person with a fraud block notation on their credit reports unless the company opening the account talks to them in person or over the phone and gets their permission.

In addition to putting a fraud block on accounts, LifeLock also regularly renews customers’ “opt-out” status with bureaus to prohibit them from selling this information. This makes it much more difficult for someone with personal information about you, including your social security number, to steal your identity and get credit cards with your name sent to them. I’m a big fan of these kinds of services (see my coverage of TrustedID, another company fighting identity theft).

Indeed, this service goes to the core of the credit bureau model, and some of their own services. They have a lock on consumer information, and that lock is highly oriented towards those that pay for the services, which are companies providing credit. Their intent is to provide control to consumers for identity theft prevention, and interestingly, junk mail protection. This from LifeLock.com

LifeLock is the leading player in the rapidly growing field of Identity Theft Prevention. We are based in Tempe, Arizona. Our company is led by experienced and successful entrepreneurs and industry experts. We are backed by Bessemer Venture Partners, one of the leading venture capital firms in the world. We serve tens of thousands of consumers in every state of the union, Puerto Rico and the US Virgin Islands. Take a moment to browse and learn about the team that will work for you.

When Arrington first wrote about LifeLock, he received an anonymous email. It turns out one of the company founders, since gone, had a suspicious past. Nonetheless, the VC’s, well known ones, had invested, because they liked the LifeLock business model. Arrington later found out he wasn’t the only one who received the email, which appears as a deliberate attack against LifeLock.

But something wasn’t quite right with the email. It wasn’t just a tip. It had eight PDF attachments with carefully organized background materials. A fifteen page “dossier” went into excruciating detail on the personal and business histories of Davis and Maynard. Facts were mixed with lots of speculation. This wasn’t a tip, it was a hit job.

Finally, Arrington sums up the root of his suspicion.

Bureaus don’t like services like LifeLock because they pull people out of their information-selling machine. LifeLock is a direct threat to their revenue.

Relevance to Bankwatch:
The Bureau system is core to credit approval process. The information there is sensitive, and complete. However it is essentially information that represents the consumer, and it has been something of a trade secret how that information is accessed, and used. Identity theft has opened a window to cracks in the current system, and the Bureau’s are reactive in how they address the problem.

Without commenting on the company itself, the LifeLock business model appears to be quite consumer focussed and to satisfy a need.

The social aspect is designed around goals and tips. 

Goals

You can create your own goal, or you can read others goals, and search for one that matches what you seek.  These are the most popular goals.

What immediately struck me is the normal, and quite predictable nature of these goals.  People are genuinely seeking advice from others who have been there, or still there, and working through it.  Its interesting too that the #6 goal is “make Wesabe better”.  Its also the most active with 84 discussions going on.

Popular Goals

  Pay Off My Credit Cards (508 people, 18 discussions, 1 tip)

  Create Emergency Fund (377 people, 4 discussions, 19 tips)

  Lower Spending (310 people, 4 discussions, 3 tips)

  Buy A Bigger House (211 people, 7 discussions, 19 tips)

  Stop Paying Late Fees, Overlimit Fees, Nonsufficient Funds Fees, ATM Fees, And Any Other Fees I Can Find! (130 people, 11 discussions, 14 tips)

  Make Wesabe Better (124 people, 84 discussions, 2 tips)

  Spend Money With Green Values In Mind (108 people, 15 discussions, 8 tips)

  Contribute To My IRA (96 people, 2 discussions, 17 tips)

  Buy A MacBook (72 people, 7 discussions, 4 tips)

  Don’t Panic About Money (69 people, 1 discussion, 12 tips)

Tips

The tip section is quite active, and people make longer posts here, explaining their tips.  The discussion seems more active than the financial goals section, and there is something there for everyone, with enough conversation on each to decide if its relevant for you.

Most of the tips have a financial or budget component associated with them. 

Most Popular Tips

Active Discussions

2  Save on long distance with VoIP by someoneelse

4  Save your Bed, Bath & Beyond coupons by Muggle Galleons

2  Avoid the “Soda tax” by Me and I

3  Free MyAccess Checking a BoA not so free by MattKo

2  Stay away from restaurants! At least fast food… by Amadeo

2  Buy Spices Online by gnubbs

2  Get a free credit report every four months by Muggle Galleons

0  Rent from Greencine instead of Netflix by someoneelse

1  Sneaky trick for cheaper electronics by Dragon Maze

1  Buy (Trader Joe’s) natural cleaners. Save money. Save the world. by jay.laney

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.

Source: Wheaties for Your Wallet » Blog Archive » A shift on Pro memberships

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.

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)

Amazon	Collaborative Filtering
eBay	Reputation
Google	Finding others’ information
Yahoo	Finding Yahoo’s information
MSN	Teens/ youth
Flickr	social photo’s combined with control & ease of use
37 Signals	Simple and incredibly useful
S3	Cheap and efficient – your virtual hard drive
Banks	online ATM – dumb terminal (pardon my bias)

  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?

Its a unique approach to investing sites, and is more akin to wesabe (personal finances social site), than any other investing site. 

Stockpickr lets you input your portfolio, then points out others who have similar portfolios, and the degree of similarity.

But that’s where it stops …  after reading the early promise from the usual press release the result is disappointing:

• the forum is quite disjointed from the portfolio’s – the forum is just that – another forum
• functionality- there is an enormous amount of things you can click on, and its overwhelming to learn, considering that those who use investing sites, are pretty sophisticated, and know the route(s) they want to take
• on the positive side, the underlying algorithms and the forum stuff have very positive content
• of course one of the tabs is a blog

Overall, a great idea, desperately in need of a usability expert and some better layout, and simplification.  But its more than that, and I empathise with the designers.  Its really hard to develop a social aspect, and have that translate into value .. value as defined by the sites users.

How social ‘stuff’ and financial can be combined, is not easy.  Certainly it cannot just be plugged in to a standard web site. 

I remain convinced the point is that the key shift in financial services lies with substituting expensive branch networks with social networks.  To understand that requires the realization that the branch network was integral with financial services in the old world.  If you remove that branch network that must be replaced with something of exponentially more value.  We have a head start there because consumers are telling us they do not trust large corps.  Social networks must be integral in the new world.  This means process linkages that predicate the online financial service provided on the social network.  The social aspect has to have reputation, credibility, and expertise.  This will deliver value.

eBay and Amazon have mastered this, albeit in a much less valuable transaction.  The eBay social standing, or the Amazon referrals are integral to the transaction.  Online financial services need a comparable degree of integration that still has to fully developed and understood.

Having said all that, I wish the team at Stockpickr well.  They have taken on a large challenge here, and certainly if I was ETrade, I would be watching very carefully.

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.

UPDATE:

Doc makes the point that VRM can bridge the gap between customers and products in the confused DRM state that exists.

Technorati tags: VRM

Consider ….  selecting OpenId would mean your personal preferences would follow you, no matter which site you are logging in to.

Link to Flickr Photo Download: OpenID login strawpeople

But I want to lay out a view on Wesabe and how they might fit in the larger picture, because they are breaking new ground.

1. When you create a tip, you can say what area that tip applies to, by adding the postal code for it. I use this to give tips about the auto shop I use, the grocery store that I think is a great local deal, and the doctor who keeps me from safe from abject hypochondria
2. Tag splits are one of those features that not many people know about yet — we knew they were on the more complex end of things, so we added them without making too much noise about it just yet. You can divide one transaction into multiple tags like this:
   

   Whole Foods                          $100.00
   Tags: groceries:80 food:80 cashback:20 berkeley

The work Wesabe are doing in my mind, is a crystallization one key element in the establishment of Open Source Banking, a term coined here and brought to my attention by Nishad. 

My simple description for Open Source Banking is the availability of banking services without Banks.  To make this real requires the deconstruction of the elements of banking, and their re-building again in a social network/ cluetrain context (obvious force).  But the core is that the rebuilt elements will eventually be driven by customers (underlying force).  But at the same time Banks won’t sit still, so there will be an ongoing dynamic tension represented by the double arrow in the middle. 

This picture needs work, but its my attempt to graphically display the thoughts that have been coalescing with me.  Again there is the obvious force of Banks taking traditional service and placing those online.  That is represented at the top by the yellow boxes.

But there is an underlying force at play driven by internet use, internet tenure, and demographic shifts that drives a desire to see and interact in new ways.  This is driving a new genre of online services depicted in the green section.  This is the natural networking force that is well represented and defined better than me, in the Cluetrain Manifesto. 

Wesabe is in the green section.

Banks have taken notice of the the green section with some toes dipped in the water.  The difference in Open Source Banking and why I don’t give Banks’ much credit yet, is the Web 2,0/ social element.  Call it what you will, but its the element that replaces lost trust in institutions, and growth in trust of peers, as defined in Cluetrain.

The best examples held up of the green section are Zopa, Prosper, CircleLending etc.  Those services are part of the equation, but are missing elements that old Banks still have such as service, advice, education, discussion – the elements that are characterised by human interaction.  Wesabe is different to me, in that it is re-defining financial advice, and references in a banking context.

There are some real learning’s here that can be applied in the social lending arena. Grameen Bank has made $ 3.4 billion dollars in loans to 2.4 million people. Yes … that’s an average loan size of $1,400. This is an extraordinary figure, that normal banks would sneer at, as being unprofitable, and impossible to process at a profit. Well you would not be far off. But Grameen has always at least broken even, and in 2005 reached ROE of 13%. Not to bad, and a Nobel Peace prize along the way for good measure.

Back to the book, and some of Grameen’s concepts and the fascination is how these concepts are designed to eliminate costly bank processes. This is the epitome of customer centric, and customer advocacy.

Here are some of the concepts:

• clear vision of higher purpose – laser like focus on the obective and ensure alignment with the higher purpose
• people want to succeed;
• credit is a fundamental human right
• there is an economic equation with microlending that flies below the radar of traditional economic theory
• collateral is required as a motivation to repay loans
• survival (as in staying alive, and supporting family) is a strong motivation to repay
• self managed ‘groups’ of like minded people provide a viral motivation to pay; peer pressure is a powerful force, not wanting to let the group down
• ‘Like’ groups work together in larger federations,
• Federated groups meet regularly with the bank for review purposes
• payment terms should be aligned with the borrowers motivation. Grameen has daily loan payments where appropriate
• the bank cares about the customers
• the mindset, and position of the customers is paramount; the loans and the lending processes are 100% designed around customers – thats not 95%, but 100%
• modern financial planning techniques, such as putting away money for a rainy day, have well understood metaphors with customers, such as in the Grameen situation, the Bengali customer of mushti chal (putting away a handful of rice a day, to build up a stockpile)
• the bank and bankers must take a proactive helpful approach to the communities they serve, including social, business and palnning assistance

Its a fascinating study, and impossible not to take something away from it. I have not touched on the applicability to other countries and the new challenges Grameen faces. I recommend buying the book.

Technorati tags: social+lending customer+advocacy

This would provide the ultimate power in the hands of the customers – and it or something like it will happen.

leveraging the metadata it gathers when its users upload images to build camera usage trends

Source: ballpark.ch / blog || interactive thinking

Recall, Wesabe is a social banking application, where participants upload their financial data, and share advice, hints and guidance with each other.

Who is Wesabe? We’re not a team of financial planners or number crunchers. We’re real people dealing with real money issues. We want to get rid of our credit card debt, are starting to think about college savings for our kids, have a sneaking suspicion that everyone else’s cell phone plan has more minutes for less money, are tired of getting stung by stupid bank and credit card fees, and dream of buying a more environmentally friendly car. We feel like businesses have stockpiles of data on us as consumers and think it would sure be great to have more information on where we spend our money so that we can make better decisions. Alone, that’s a pretty daunting proposition, but together, by pooling our knowledge, we can create an immensely powerful thing. We want to take control of our money to reach our financial goals, and invite you to join us.

Source: Wesabe

OK, so far so good. They are disassociating themselves from real Banks for sure, and relating to their customers.

You download your credit card and bank account information, and then it is shared in an appropriate and private way. This from the FAQ.

What do you mean by sharing? Do I have to give up my privacy to participate?

We never share your account data with anyone. What we do is look for patterns in lots of our members’ spending — patterns that would help inform the Wesabe community about good or bad values. For instance, when we see that enough of our members shop at a merchant, we will post the average transaction that they paid — not what each of them paid, and not any information about who shops there, but only the average payment. If too few people make a payment to a particular name, though, we won’t post information about those payments, because those may be private transactions (like splitting a dinner bill). If you decide to post a tip to Wesabe, or sign up for a goal, or make a comment on a tip or a goal, your “public name” will appear on that tip or goal — not your real name or your login name, but a separate name just for participating in the Wesabe community. We never reveal the real name of the person who uses a public name (unless we are compelled to do so by a valid court order).

Finally, here is a brief extract from one of the forums. I changed the names to protect the participants.

What is bad debt? John

I like the idea of this goal, but I was curious as to what other people think of as being “bed debt”

Credit card debt is bad, and most people agree that student loans are good (even if they don’t feel good when you are writing the check).

What is bad debt to you, and why?

Posted about 24 hours ago. [!] Comments

Bad debt, to me and the industry I work in, is uncollectible debt, debts that are written off and considered a loss.

CC debt is debt you should avoid, since it spirals easily if you allow it to.

Posted about 10 hours ago. [!] Clive

IMO, bad debt is when you borrow to pay for something that does not appreciate in value. A mortgage is generally good debt. A car loan is generally bad debt. Credit card debt, which is usually tied to consumer purchases (stuff!) is almost always bad debt.

Student loans are generally OK but can still be a major burden for many. I think peo ……

All in all, not a bad start.

“This is a bold move by Google. They are striking hard at a nearly $12 billion/year Microsoft revenue stream. And they are clearly trying to get this out the door fast, in anticipation of Microsoft Office 2007, which will include collaboration features for businesses (as does Office Live, announced last year).”

Source: “Techcrunch » Blog Archive » Google Makes Its Move: Office 2.0 – Mozilla Firefox”

This is significant, and I believe its time for Banks to re-consider their Office suite strategy.  I noted in July that the plethora of web 2.0 web based applications which work very smoothly, and are both network centric, and team centric, might well fit better with Banks needs. 

This move by Google is the first move out of beta in any significant way that could be seriously considered by a Bank for their enterprise needs.  There is more to come.

And that’s just the first move. According to Aaron Ricadela at InformationWeek, Google will soon add their Writely and Spreadsheet products to the suite, add collaboration tools that will work across platforms, and even provide technical support.

And others wait in the wings.

And while all of this is going on, Zoho is quietly building a really excellent online office suite of its own. Any of the other big guys could also quickly enter this game with a timely acquisition.

Software licensing is a large cost.  In addition if you ask the information security, and knowledge management guru’s at your firm, they will tell you Office technology is over-engineered for the average user, and with most files locally stored on individual PC’s the enterprise benefit from the majority of files is limited.  Teamwork is not simple with horrible version control and email being the preferred method of sharing documents.

Picture the future with one version for the big strategy deck,

• simple ajax interface
• filed centrally,
• multiple users editing and reviewing, 
• handling the version control,
• commentary,
• notations,
• user notification of changes through RSS feeds, and
• no related emails required in inboxes!

This is the promise of the next generation office suite.

Relevance to Bankwatch:

Study the next generation of office suites.  Try Writely, Zoho, Google Spreadsheet, Google Calendar, gmail.  Consider the costs of support.  Think about the attributes mentioned here, and re-think the strategy to determine what is best for you, based on the new realities.

tags: office+suite, office+2007, google+office, zoho, writely

BankerVision: The long tail of banking

I can’t help wondering if the long tail opportunity for banks is rather more substantial than manufacturing product for niche customer segments.

8 +/- years ago someone at Forrester coined the phrase “Open Finance” to denote the idea of selling others’ products. The idea was that distribution through internet was so disruptive, that unless you could offer various alernatives to customers, your offer would be immediately discounted. This also intrduced the separation of distribution from product.

The Net creates a new financial services environment that Forrester calls Open Finance. In Open Finance, consumers enjoy best-of-breed financial services combined with rich advice and the easy electronic movement of money.

I think that Open Finance is coming to pass now. Products such as mortgages particularly are so commoditised, margins have gone, and that there is little loyalty associated with the product. The loyalty tends to lie with the service, speed, convenience etc, and those attributes are all distribution related, not product related.

Create your own bank | This is Money

Zopa is the world’s first online lending and borrowing exchange for individuals, where the banks are shut out. Launched in March last year, the service now boasts 80,000 members, many with strange usernames such as Milkmongoose and Cowgirljo.

The concept behind Zopa – Zone Of Possible Agreement – is simple. It matches individuals that want to borrow money with those that are prepared to lend money at a rate which both parties are happy to accept. The service gives borrowers the opportunity to obtain money at much lower rates than what they would secure from the High Street.

For example, loans can be below 5%, compared to the lowest rate of 5.6% available on the commercial market.

They make money by charging borrowers.

Zopa makes money charging borrowers a one off 0.5% fee which is added to their loan. Lenders pay an annual fee of 0.5% of the amount they are lending.

Zopa is the world’s first online lending and borrowing exchange for individuals, where the banks are shut out. Launched in March last year, the service now boasts 80,000 members, many with strange usernames such as Milkmongoose and Cowgirljo.

The concept behind Zopa – Zone Of Possible Agreement – is simple. It matches individuals that want to borrow money with those that are prepared to lend money at a rate which both parties are happy to accept.

The service gives borrowers the opportunity to obtain money at much lower rates than what they would secure from the High Street. For example, loans can be below 5%, compared to the lowest rate of 5.6% available on the commercial market.

But it is lenders, who can put up between £500 and £25,000, that are flourishing under the system, with many finding they are getting better returns for their money than through traditional savings accounts.

Zopa claims that the service is like investing in another asset class, other than shares, property or cash, that will give a portfolio more diversification.

The lender sets the rate at which they are prepared to lend and the amount they wish to offer. As with any supply and demand model, you are likely to attract more custom if you set your APR at the lower end of the spectrum.

But Zopa says the average return is 6.8% before fees, tax and bad debts have been taken into account. With most general savings accounts paying below 4% after tax, this is a healthy rate of return. Lenders can earn better returns if they are prepared to take more risk and offer money to people with slightly tarnish credit records.

Zopa splits borrowers into A and B categories depending on their credit rating. The average gross return of a three-year loan rises to 10.6% if it is made to a category B person to reflect the increased risk.

To minimise the risk of bad debts the lender’s investment is carved up into small chunks and distributed between several borrowers and it’s not possible to lend more than £200 to any one borrower. Zopa claims this has kept the bad debts to less than 0.05%, but, as with any form of lending, there is always a risk of defaults.

Co-founder James Alexander claims that borrowers’ credit records are also checked with the three main credit bureaus. The organisation is regulated by watchdog, the Financial Services Authority and the Office of Fair Trading.

Zopa makes money charging borrowers a one off 0.5% fee which is added to their loan. Lenders pay an annual fee of 0.5% of the amount they are lending.

Ian Heathcock, a computer worker from North Staffordshire, started lending over the exchange in March in order to get a better return on his savings.

He said: ‘So far it’s gone well. The repayments I have been getting back, I have been reinvesting so it’s a bit like a snowball effect. I’ll see how it goes for a year before deciding whether to carry on.’

• Find out more at www.zopa.com