The Bankwatch

The British Chancellor of the Exchequer takes a stand on consumer credit.  With this statement, he makes an understated, yet clear point “there are times when going back to good old-fashioned banking may not be a bad idea”.

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.

After the post on RBC p2p, a colleague pointed out this piece on the TD experience in FaceBook.  While the article characterises this as ‘not plain sailing’ I say the opposite.  This is the new plain sailing so its time to adapt and get used to it. 

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.

Royal Bank of Canada (RBC) are quietly intrducing a new site that I would place firmly in the social space.  It is just getting going, and could be on a level of significance with Wells Fargo’s Studentloandown. 

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

The always clear and succint Economist sums up the current financial crisis in next weeks leader here. I say crisis advisedly, because the markets are carefully saying nothing, or alternatively, focussing on the sub-prime market in the US, while the reality could be broader, and in any event a signal of a need to get back to basics.

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

Read the rest of this entry »

New slant on Social Lending here from Home Equity Share, based in the US.  The concept  seems to bring together first time home buyers, with insufficient, or no down payment, with potential real estate investors, to provide home ownership benefits along with landlord type real estate investment financial benefit.

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?

Here is an analytical paper, that develops empirical evidence on how and why people are moving towards microblogging type platforms, and communication methods.  Its worthwhile for us to understand the motivations, notwithstanding the pro’s and con’s we each feel about them. 

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

There is a general sentiment that a consumer credit crunch is coming to North America, in the wake of the sub-prime mortgage debacle.

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

There is no end to creativity when it comes to credit.  There is a new cottage industry driven by people with bad credit, but otherwise able to afford a mortgage.

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

What a difference a day makes.  This announcement from Bebo validates TechCrunch’s Duncan Rileys comments that we discussed yesterday here.  Banks can will have to decide whether to focus on one or more ‘platforms’, or more likely (imho) the profileration of platforms, each with their own development idiosyncrasies, will drive them to inaction in the short run.

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

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:

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