http://www.cbc.ca/video/watch/News/TV Shows/Lang & O’Leary Exchange/ID=2239470660

Half of Americans want to do all banking online | Finextra

Of just over 1100 respondents, 52% say that their provider’s Web site is their primary method of banking, with 48% revealing that they would do it all online if it were possible. In contrast only a third of respondents consider the branch their primary method of banking.

Currently, Web banking is used primarily to check account balances and recent activity, make individual bill payments, transfer money between accounts and obtain financial information.

First the memory lane part.  I was with mbanx in Canada since 1996 and then Wingspan in Chicago emulated in 1999 (ok my opinion)

Retail renaissance | Economist

“IF YOUR BANK could start over, this is what it would be,” trumpeted the marketing campaign for the launch in 1999 of Wingspan, an internet bank. The following year the bank was gone. In September 2000, a few months after the dotcom bubble burst, it was absorbed by its boring American bricks-and-mortar parent, Bank One (now part of JPMorgan).

First the painful assessment of bank performance during this time and how they had little incentive to innovate.  I remember quite clearly the dramatic shift away from internet banking and towards increased branch presence during the aughties.  It made no sense to me.

In retrospect, the years in the run-up to the financial crisis were a golden age for banks. Even the dullest of them could earn high returns by taking big risks. And few really bothered to try to cut costs when their revenues were being massively boosted by a debt-fuelled bubble. Since the mid-1990s Europe’s big retail banks have managed to cut their costs relative to income by an average of just 0.3% a year, reckons Simon Samuels, an investment analyst at Barclays.

Yet even that modest figure flatters the banks. He calculates that costs over the period increased by an average of 8% a year. The only thing that saved them was that revenues increased a little faster.

Finally the lessons learned:

The effect of the debt bubble was more insidious than it appeared at first glance. In encouraging universal banks to build up their investment side, and some retail banks to dabble in exotic instruments that they did not always understand (demonstrating that even boring retail banks can blow up), it made them take their eyes off their bread-and-butter business.

Yet basic retail banking was, and remains, their main engine of profitability. McKinsey, a consulting firm, reckons that it accounts for more than half banks’ worldwide annual revenue, which in 2010 amounted to $3.4 trillion (see chart).

It (ed:  retail banking) has also proved, in the longer run, to be the most reliable generator of consistent profits and high returns on equity. A ranking of the world’s biggest banks by return on equity correlates closely with the proportion of revenue they make from retail banking, rather than from racier investment banking.

Relevance to Bankwatch:

Quite simply how many banks are capable of learning.  Most large banks have replaced bankers with investment bankers to run the business.  How will that hinder the renaissance, or can they learn ‘back to basics’?  Jamie Dimon is definitely right in the midst of that firestorm.

This from  courtesy of ZeroHedge.

According to Fortune Magazine (below), the derivatives at JP Morgan account for more than 10% of all world derivatives, and might well account for a chunk if not all of the growth in notional contract amounts.  Growth in all derivatives since 2009 is $43 trillion, while JP Morgan holds $ 73 trillion.  We know JP Morgan have been aggressively accumulating over the last 2 years.

JPMorgan’s trading debacle: why $2 billion is just the start

By far what makes JPMorgan the riskiest bank on Wall Street, and one of the most profitable, is the bank’s derivative trading book, which is far larger than any other bank in the world. JPMorgan holds derivatives contracts with a notional trading value of just over $1.6 trillion. (Update: Notional value is much, much higher: $73 trillion, but that’s just the size of the debt being insured not how much the bank might owe if the bets went bad. (h/t bbmoney)) That’s enough to wipe out the bank’s capital nearly 10 times over. Of course, JPMorgan says its derivative bets aren’t nearly that big or as risky as they appear.  Factor in hedges and collateral, and the bank says its actual exposure is just $66 billion. But we have just seen how well JPMorgan’s hedges can work.

Page 40 outlines Square requirements for electronic receipts, suggesting some reasonable new thought has gone into this.  It has flow charts for standard payments, refusals, and even loyalty points treatment.  There is some security stuff including key management.

The flow charts that outline how cards would integrate into the current payment networks are well laid out.

http://www.cba.ca/en/component/content/category/89-mobile-payments-in-canada

http://www.cba.ca/contents/files/misc/msc_20120514_mobile_en.pdf

Egan Jones Downgrades JP Morgan

The iconoclastic rating agency, and fully recognized NRSRO to the dismay of some tabloids, which just refuses to play by the status quo rules, and which downgraded the US for the second time last Friday, to be followed soon by other rating agencies as soon as US debt crosses the $16.4 trillion threshold in a few short months, has just done the even more unthinkable and downgraded Fed boss JPMorgan from AA- to A+.

That has now come home to roost.  The untouchable Jamie Dimon  has now to fire Iksil’s boss Ina Drew because of a mark to market trading loss of $2 Bn or more.

JPMorgan probe into London role in loss

Ina Drew, the head of the CIO, Achilles Macris, head of the London-based trading team, and Javier Martin-Artajo, another member of the team, are all set to depart, according to a person familiar with the situation.

Well today I came across new Dwolla offerring they name FiSync.  They characterise the new service as real time money transfer through their cloud service and are oferring it free to banks.

Unfortunately, and sorry Ben, but I predict this will not succeed at least not as currently offerred.  The reason banks won’t accept as offerred is one word – float.

The post notes the value of ACH transactions annually at 33.9 trillion.  If we run that number at the NY overnight rate of 0.16% for 2,3,4, and 5 days the value of that money to the banks’ is large.  If we increase the overnight rate to more historic values, it increases rapidly.

Unless one bank blinks, the rest have no incentive to take on the FiSync.   What would change that would be a Wells or similar taking it on then the rest would have to follow.

Relevance to Bankwatch:

There is another more subtle difficulty confronting FiSync and one that I suspect is why they are offerring free to banks.  The real stranglehold that banks have on payments is the shared systems they all operate on.  These include ACH and the credit card networks. 

The only way for a start up or a legacy bank to take those on is to go live with FiSync or something like that.  However they have no ‘network effect” while operating alone.  Customer A with money in a Wells account wants to send money to a customer at BofA.  In order for a startup to offer that service they could keep Customers A & B happy, but the startup would be required to fund the transaction until the ACH transactions clear with Wells and BofA.  The old banks retain a lock on their customers money and one of those locks is ACH. 

Its also worth noting that ACH has its roots in cheques which are declining rapidly in value.  That decline is being replaced to some extent by automatic debits for loan payments, bill payments and nascent debit card.

Another angle to attack which is ripe for competition is the incredible lucrative (to banks) merchant services business.  This is the fee revenue derived from credit card payments.  For every transaction banks charge the merchant anything from 1% ~ 4.5% +/-.    What is interesting to me in this space is that we have a relatively small group of merchants who would be highly motivated to move a portion of that merchant service fee to their bottom line.

Anyhow, kudos to Dwolla for trying to shake up the payments infrastructure.  I truly hope I am wrong and wish them well.

This article is a highly insightful piece from Esther that captures the essence of the role and responsibility of government as it applies to the free marketplace.  The words “unintended consequences” leap off the page here.  It is far to easy to design a solution that apparently attacks the problem directly but in fact has effects that were not even considered.

The reference to the US mortgage crisis driven by the apparently common sense desire for pervasive home ownership is an example of clear thinking that is lacking in government.

Markets of Magical Thinking | Project Syndicate – Esther Dyson

Unfortunately, the JOBS Act is as likely to be successful as the US government’s earlier attempts to ensure that American families could buy their own homes. Low down payments, deferred interest, and other enticements made it attractive for people to buy their own homes (or to speculate with second homes) whether they could afford to or not.

Mortgage brokers were happy to get in on the act. Some were driven by an honest mission to expand property ownership; others were driven by greed. Some knew that the people to whom they were selling houses could not afford it; others simply did not want to know. Some played by the rules; others forged documents. The banks that originated mortgage loans sold their portfolios to investors who didn’t really understand what they were buying.

In the same way, the JOBS Act will ease life for some deserving people – and most likely attract many more who are less deserving.

But there is nothing new here and the example of sending money for receipt by next day exemplifies his speech.

Rebuilding trust and confidence in banks and bankers | FSA Martin Wheatley

Even where we have brought issues to the attention of industry, such as the requirement to ensure payments reach the payee’s account by the end of the following business day, some firms failed to engage early enough to ensure that they were compliant.  I cannot understand why something as straightforward and helpful to the customer as this, is so hard to do.

Before electronic banking and electronic payments such as SWIFT between banks there were clearing houses to manage interbank cheque clearing with physical cheques.  That was 40 years ago and earlier.  The time taken to move the cheques back to the drawer bank took up to 3 – 5 days depending on the size of our country and the number of banks.

Fast forward to today.  We have electronic networks that are instant.  When I post this blog post, it will be on the internet immediately.  Same with email.  And it could be the same with money.

Bank choose to hold on to money that is ‘wired’ because that float as it is known in the industry is very lucrative.  The funds are invested overnight(s) and so long as all the banks co-operate by not unwinding that practise they retain that unearned profit.    Sure all the excuses are rolled out (ensure funds are cleared, reduce potential for fraud, allow for funds recall) but it is a smoke screen.  The profits generated by float need to be replaced by exemplary service that warrants a suitable fee.

Instant funds transfer could be here today, as with many of the other points Wheatley makes.  In time these areas that reflect 40 year old thinking are where we can expect to see transformational innovative start ups change the face of financial services.

hat tip to finextra for the reference to the Wheatley speech.

Purdy Crawford/ Pan Canadian Investments: The Canadian government did presciently freeze $35 billion in derivatives back in 2007.

But if you flip through the Canadian Banks search on this blog there is a general theme that Canada’s banks are not materially better capitalised than other banks in the world.  And now we have the ammunition many of us knew existed but had no evidence.

Todays bombshell from the Canadian Centre for Policy Alternatives, authored by chief Economist David McDonald, provides clear evidence of the extent of Government assistance to the Canadian banks during the crisis.  The amount of that assistance is $114bn.  This is several times total Canadian Bank equity.

The report begins;

The official story of the 2008 financial crisis goes like this: American and international banks got caught placing bad bets on U.S. mortgages and had to be bailed out. But not in Canada. Through the financial crisis, Canadian banks were touted by the federal government and the banks themselves as being much more stable than other countries’ big banks. Canadian banks, we were assured, needed no such bailout.

However, in contrast to the official story Canada’s banks received $114 billion in cash and loan support between September 2008 and August 2010. They were double-dipping in not only two but three separate support programs, one of them American. They continued receiving this support for a protracted period while at the same time reaping considerable profits and providing raises to their cE Os, who were already among Canada’s highest paid. In fact, several banks drew government support whose value exceeded the bank’s actual value. Canadian banks were in hot water during the crisis and the Canadian government has remained resolutely secretive about the details.

Now some details;

CCPA Report (pdf)

The first point of interest in the report is the extent of support as a percentage of the banks’ market capitalisation.  This one should be read in the context of the high leverage that banks enjoy courtesy of government support through deposit insurance and liquidity advances from the Bank of Canada on a day to day basis.

In the reports own words;

Three of Canada’s banks—ciBc, BMO, and Scotiabank—were at some point completely under water, with government support exceeding the value of the company. In March 2009, ciBc stood out for receiving support worth almost one and a half times the value of all outstanding shares. It would

have taken less money to have simply bought all the shares in CIBC instead of providing it with support.

The irony of CEO remuneration during this period is not lost on the report;

To top it off, the CEO of each of Canada’s big banks ranked among the highest paid 100 CEOs of Canada’s public companies and at the height of government support between 2008 and 2009 each CEO of each bank received raises in total compensation. For instance, Edmund Clark of TD Bank saw his overall compensation jump from $11.1 million in 2008 to $15.2 million in 2009.

The total support to Canadian banks and the surprise that CMHC was the primary conduit.

Individual bank support;

RBC

TD

Scotiabank

BMO

CIBC

And the reports conclusion which most would support;

A healthy financial system cannot be based on massive government support for which the details remain secret. It is only through an honest and transparent examination of what occurred and how it can avoided in the future that a stronger financial system can be built, which is in everyone’s best interest.

Relevance to Bankwatch:

This is a stellar piece of work and probably the best report on the Canadian bank system of the 2008 banking crisis.  Recommended reading for anyone interested in banking and how it really works.  There is no magic Canadian bullet.

Square Payment Pace Rises 25% in Niche Coveted by EBay | Bloomberg

Square, founded in 2009, is processing transactions at an annualized rate of $5 billion, up from $4 billion a month ago, as more consumers embrace mobile payments, Chief Operating Officer Keith Rabois said in an interview. The San Francisco company is making cash from sales before 5 p.m. on any day available in merchants’ accounts on the next business day, compared with as many as five days out for other processors.

But that is not what really caught my eye here.  Square credits the merchant next day in most cases, versus up to 5 days for other processors.  If there is one thing banks are able to control it is timing of payments.  I am not sure how Square do that, when they must use banks’ but for sure banks could beat that because they control the payment infrastructure. 

Details on Square:

Square’s technology enables U.S. businesses to handle payments through Apple Inc.’s iPhone or iPad, or through devices running on Google Inc.’s Android software. The card reader plugs into the headphone jack of the mobile device. The reader, introduced in 2010, is available atWal-Mart Stores Inc. (WMT), Target Corp. (TGT) and Apple outlets.

They must focus on the installed base of government and business customers.  Those customers all have installed Blackberry servers inside their corporate / government networks.  Can you imagine having your server and software working inside the US Government computer infrastructure?  This is an enormous competitive advantage.

I say if I am at Waterloo HQ of RIM, you must throw away all preconceptions about your handsets.  That battle is lost.  Open your eyes, integrate android, make a deal with Apple ios;  you already have the installed base, and the rest is just handsets.  Do not try to re-invent what others have done.

As with anything financial there are always unintended consequences, and those that seek to bypass the new rules.  Enter JP Morgan.

Banks test ‘CDOs’ for trade finance |ft.com

JPMorgan is among several banks that have begun testing investor appetite for the trade finance equivalent of collateralised debt obligations – the derivative products blamed for compounding the financial crisis – in an attempt to boost lending capacity

Trade Finance or the financing to provide working capital for imports and exports is experiencing reduction in lending capacity as a result of Basel 3.  Trade Finance accounts for trillions of dollars per annum, and will a significant revenue source for JP Morgan.

The interesting shift in this new idea is that Trade Finance would in effect be funded directly by Institutional Investors.  The regulators have acknowledged the problem JP Morgan seek to solve, but are hesitant to make more than minor changes to allow banks any dispensation. 

It seems to me what JP Morgan are doing is rational, and supports the idea that banks are over levered so locating additional sources of smart funding supports the target of de-risking banks.  I keep going back to the idea that banks have become such broad based credit vehicles and deposit taking vehicles that some separation of high volume and high risk from regular peoples finances is a good thing.

There remains plenty of money in the world and if JP can develop new method of wholesale access to it, then that seems in keeping with the spirit of the regulation design.

Someone I know was walking through shopping malls in Washington DC last month and there were many closed stores, including a Banana Republic.  That would be unheard of in Canada.  The effect of the 2008 crash is still with us especially in US and parts of Europe.  The target of re-building a safe banking industry is not easy and will require big adjustments.

I hate ads as much as the next person but the idea that a page is being altered and what I am viewing is not the same as is served on the ‘normal’ internet is quite abhorrent!

Hotel’s Free Wi-Fi Comes With Hidden Extras | NY Times blogs

The lines of code include references to “rxg,” which stands for Revenue eXtraction Gateway, a service aimed at generating money from Internet access points. On its Web site, a company called RG Nets, which makes Revenue eXtraction Gateway, explains that its system rewrites every Web page on the fly so that it can include a banner ad. “As you can see, the pervasive nature of the advertising banner on all Web pages guarantees banner advertising impression,” a narrator says in the video.

The Mint refers to this initiative as “the evolution of currency”.   What they actually mean is the evolution of change.  I was at first disappointed when I realised this was all about small payments.  It was no co-incidence the challenge was timed with the Canadian budget and the Mints elimination of the 1 cent coin.  The bigger picgture is that coins cost more to produce than their value.  When you associate that problem with the Canadian preference for electronic solutions, this initiative makes sense.  It is also a bite sized yet national initiative that has the government behind it.  This makes it less likely to become yet another fragmented and localised payment solution like Dexit.

I went to the Developers section which is hard to find, and finally got a much better description about the initiative and the implementation.  This from their site.

Digital Currency

• No personal data is exchanged in the transaction
• There is no intermediary or requirement for a proprietary network and as a result MintChip is a cost effective solution to merchants
• MintChip is designed to facilitate the payment of low value (e.g. less than $10) payments
• Anybody can participate regardless of their age or financial status
• MintChip payments are instant and irrevocable
• MintChips operate like cash in the physical world and virtual world and enables person-to-person payments
• There is no requirement for an external authorisation
• MintChip is backed by the Royal Canadian Mint

So I now have my mind around this solution as one that will eliminate the need to carry change and small bills.

In terms of acquiring locations they can use web addresses but more importantly QR codes.  This could finally put QR on the map.  Memo to marketers – putting a QR code on a poster in the subway where there is no internet service is not smart.  But I digress.

This whole initiative is well under the radar in Canada.  I learned about it on Techcrunch.  I say good luck to them and I want this one to work.  Tell your friends if you are in Canada,

I especially liked this paragraph that epitomises banks today.

US payments system failing to meet the needs of the digital economy | finextra

"The idea that money in transit is digital information which can be processed immediately has not been readily accepted by the banking industry," he says. "Most bank-sponsored payment schemes depend on clearing and settlement systems that are designed around batch processing and delayed settlement, and these clearing and settlement arrangements are being nurtured as opposed to being re-designed around continuous, real-time processing."

Cooperation and Connectedness—an Address to the Associated Press | IMF

By Christine Lagarde
Managing Director, International Monetary Fund
Washington, April 3, 2012

As prepared for delivery

Good morning. I am delighted to be here. I would like to acknowledge Tom Curley, who is just stepping down as Associated Press president and CEO after a lifetime of distinguished service in journalism. A warm thanks to Kathleen Carroll too.

It is important for the IMF to maintain a good, open, dialogue with all members, especially the United States—our largest shareholder. You, the media, play an indispensible role in this engagement.

I come this morning with a simple message: the global economy needs a strong U.S. economy and strong U.S. economic leadership.

Time and again over the last century, we have seen that U.S. leadership has been indispensible—bringing people together around shared values and an abiding vision of human potential, and economic potential too.

We saw this with the Marshall Plan after the Second World War. We saw it during and after the Cold War. And we saw it with the U.S. driving the global economy over the past half century.

The result has been a more prosperous world. A more peaceful world. A better world.

Today, we stand at yet another moment in history, where the United States, working closely with its partner nations, can help lead the world to a better future.

These are trying times. The global economy is trying to emerge from the deepest and most painful economic crisis since the Great Depression. At the same time, the world is growing smaller and more interconnected by the day, meaning that economic disruption in one country can touch people all across the globe.

With this in mind, let me talk about three things this morning:

First, where we stand in terms of the global economy.
Second, why the United States, in particular, needs to be engaged.
Third, why cooperation is so vital, and why I believe the IMF is especially valuable.

Global economy

Let me begin with the global economy. It’s fair to say that things are looking a bit better than they did even a few months ago. We can see some signs of thaw—welcome signs after the longest, hardest, winter in a generation. We see this in Europe, with some encouraging signs of financial stabilization. We see this here in the United States, with some encouraging signs of stronger growth and employment.

But we should not delude ourselves into a false sense of security.

The recovery is still very fragile. The financial system in Europe is still under heavy strain. Debt is still too high, public and private. Stubbornly high unemployment is straining the seams of society. Rising oil prices have the potential to do a lot of damage.

What is crucial at this point is that policymakers use the breathing space to finish the job, and not lapse into complacency or insularity.

Remember, we are here because of courageous policy actions, not blind luck. I’m thinking about the coordinated actions taken through the G20, in which the United States played a leading role. I’m thinking of the bold actions taken by major central banks to restore calm, including the Fed in this country and the ECB in Europe.

So what should be done to keep things on course? I see three broad dimensions.

First, it’s about stability. We must ensure financial calm. And here, I welcome the decision by the Europeans to strengthen their firewall, which should help stop contagion. And this should support a stronger global firewall, achieved in part by increasing the IMF’s resources.

More generally, we also need a stronger and safer financial sector that puts societal interest ahead of its own financial gain. This means better, and more coordinated, regulation. We’ve already come some distance here. The nations of the world, including the United States, have joined forces to strengthen global regulatory standards for banks through the Basel III process. We now need effective implementation, in a coordinated manner, of what has been agreed and more agreement on the outstanding areas—including regulation of derivatives and the shadow banking system, and effective resolution of banks with cross border operations.

Second, it’s about growth. In the short run, what matters most for growth is demand. But we should not ignore the supply side either, especially to keep growth strong and steady.

Boosting growth means using monetary policy to support activity, especially with no real signs of inflation among the advanced economies.

It also means using fiscal policy to support activity wherever possible. Yes, most countries need to bring down debt over time, and yes, some countries under pressure have no choice but to cut deficits today. But a global undifferentiated rush to austerity will prove self defeating. Countries like the United States with low costs of borrowing should not move too quickly.

But let’s not be too complacent either—total U.S public debt already exceeds 100 percent of GDP. The country needs a stronger push to fix its public finances in the years ahead, including by curbing the growth of entitlement spending and raising more revenue.

In the United States also, the recovery is being held back by the burden of household debt. Some of the statistics here are staggering—for example, about 1.5 million mortgages are seriously delinquent. More must be done to ease that burden. I’m thinking of actions to encourage mortgage writedowns and ease refinancing—and the U.S. administration has recently proposed new measures with those objectives. Aggressively implementing these measures can help avoid costly foreclosures, improve household finances, and boost consumption.

Remember, banks were helped so they could lend more; homeowners should be helped so they can spend more.

Third, it’s about jobs. Nothing enriches like gainful employment, so jobs must be a priority. This is a daunting challenge. Over 200 million people across the world today can’t find work. That includes nearly 13 million people right here in the United States. The plight of young jobseekers throughout the world is especially painful.

Growth must also become more inclusive, so that everybody benefits from rising tides. This is important all over the world, not least in the hopeful yearnings associated with the Arab Spring.

A world of interconnections

Americans might ask themselves: why should what happens in the rest of the world concern us? Don’t we have our own problems?

The answer is simple: in today’s world, we cannot afford the luxury of staying in our own mental backyards.

Think about it. When I was growing up, the world was a simpler place. Your livelihood depended pretty much on what was happening around you, in your own community, in your own country.

No longer. Today, a densely-woven web of interconnections zigzags across the globe. Since 1980, the volume of world trade has increased fivefold. By the time of the crisis, global capital flows were more than triple the level of 1995.

These connections are everywhere. As just one small example, think about how cars are made. A modern car needs up to 40,000 different parts, and the loss of a single part can bring the global supply chain to a standstill. So when a deadly earthquake in Japan knocked some parts out of commission, suburban American auto dealers started running out of cars.

On a larger scale, it’s fair to say that the story of the global financial crisis is really the story of global interconnections.

Perhaps more than any other country, the United States is intertwined in this global nexus, affecting—and being affected by—developments all across the world.

This is mainly due to its dominant financial sector. Our analysis shows that foreign banks hold about $5½ trillion of U.S. assets, while American banks have $2½ trillion of foreign assets. These are big numbers, showing that banking illnesses can be easily transmitted across borders. As we have so painfully seen, illnesses that come from the financial sector can be especially virulent—with large, widespread, and immediate effects.

The United States is also heavily integrated into the global trade network. It accounts for 11 percent of global trade.

These connections are particularly strong with Europe. About a fifth of U.S. exports go to Europe. And while two-thirds of EU trade is internal to the union, exports to the United States account for almost a fifth of the remainder.

Before the crisis, U.S. S&P500 companies were earning 20 percent of their profits in Europe. Five of the top ten overseas markets for U.S. investment are in Europe. European-owned companies in the United States employ about 3.5 million people.

So if the European economy falters, the American recovery and American jobs would be in jeopardy. So America has a large stake in how Europe fares—and how the world fares.

Cooperation and the IMF

This brings me to a larger point—integration poses great risks, but it also promises great rewards. Heightened global cooperation is the key.

History has shown us that when nations face common challenges in a spirit of solidarity, everybody wins. When nations pull apart in acrimony, going their own way and seeking their own advantage, everybody loses.

As Ralph Waldo Emerson said, “The reason why the world lacks unity, and lies broken and in heaps, is because man is disunited with himself”.

In the middle of the last century, two visionaries saw this clearly—an American named Harry Dexter White and Englishman called John Maynard Keynes. Having lived through the hardship and devastation of the first half of the century—when countries pulled apart and sometimes tore each other apart—they were determined to build a better world. I’m talking about the founders of the IMF.

The idea behind the IMF was simple: if countries worked together in the common interest and helped each other in times of need, then everyone would prosper together.

If this idea was important in 1944, it is equally important today.

So what is the IMF?

It is an economic club and a giant credit union, where the 187 member countries cooperate with one single mandate—global financial stability. We act as a conduit for countries to pool resources and provide a lifeline to members in need.

The IMF has been in the trenches from the start, helping our members overcome all kinds of challenges, great and small.

When the European nations clutched onto the Marshall Plan to climb back to economic health and vitality after a devastating war, we were there.

When the newly independent countries in Africa and Asia sought to find their footing in the postwar years, full of hope and optimism, we were there.

When Latin American countries struggled to break free from a morass of debt in the 1980s, we were there.

When the Berlin Wall came crashing down, and new nations stepped over the rubble into a bright new world, trying to build institutions from the bottom up, we were there.

And when the global economy almost collapsed three short years ago, we were there too.

Today, the world needs the IMF more than ever. Why? We can provide a circle of protection against global turbulence, and help members adjust to changing circumstances with minimal disruption.

But to do this effectively in today’s world, we need more resources. As I said earlier, now that the Europeans have moved first with their firewall, the time has come to increase our firepower. The ratio of Fund quotas to world GDP is significantly lower today than in the past. Sixty years ago, it was as much as 3-4 times higher. We’ve a lot of ground to make up.

As you know better than me, there is a great tradition in rural America—a tradition of “barn raising”, whereby neighbors all band together to build barns. Barns were large, costly, and hard to build, but absolutely essential for farming. The lesson is simple: together, the community can accomplish what the individual cannot, and everybody benefits. We should think of pooling our global resources in precisely these terms.

I must also point out that the IMF is a good investment for all our members, including the United States. Your money is not drawn upon until needed. Your money earns interest. Your money is used prudently—our programs always carry rigorous conditions to ensure their effectiveness.

No member country has ever lost money by contributing to IMF resources—and I assure you that will not change on my watch.

One last point: as the tectonic plates shift in the global economy—with dynamic emerging markets like Brazil, Russia, India, and China assuming an ever-greater role—these changes are also being reflected at the IMF. Our members have approved reforms to increase the quota share of these countries. Now countries must implement these reforms, and we are urging all to make progress by the time of our Annual Meetings later this year.

Even with these reforms, the United States will retain its leadership role as our largest shareholder.

Conclusion

Let me leave you with three thoughts.

First, cooperation can deliver. Over the course of the 20thcentury, we saw what can be accomplished when the global community pulls together, especially when the United States takes a leading role. Now is another moment for U.S. economic leadership.

Second, in a world riven by an infinity of interconnections, the ideal of cooperation is as urgent as when John F. Kennedy said, “Geography has made us neighbors, history has made us friends, economics has made us partners, and necessity has made us allies”. The time has come for the nations of the world to stand together again in the face of a major economic challenge, and with the U.S. as a lead partner.

Third, the IMF was founded more than half a century ago for precisely this purpose. We are here to serve our members—including the United States of America.

Support us. Use us. Work with us.

Thank you.

Groupon is essentially a sub-prime lender that does zero risk assessment | reDesign

Well, for starters, it’s not a coupon company nor a marketing company. At its core, Groupon’s U.S. business is a receivables factoring business, as I wrote last year. They give loans to small businesses at a very steep rate (the price of the discount plus Groupon’s commission). They get the money to fund these loans from credit card companies such as Chase Paymentech. Groupon is essentially a sub-prime lender that does zero risk assessment. And as word continues to spread about what a terrible deal running a Groupon is for many categories of businesses, the ones that will choose to run Groupons are the ones that are the most desperate. For U.S. based businesses, the only time I can definitely recommend running a Groupon is if it is otherwise going to go out of business.

The nature of Groupon business model is to bring out the worst in business practise and the worst businesses that practise those practices.  This company is the opposite of “do no evil".

City moves in on peer-to-peer lending | ft.com

As this type of “direct lending” has expanded into business loans – through websites such as Funding Circle and ThinCats – it has started to attract the attention of more sophisticated clients who are keen to lend larger sums. Funding Circle lifted the maximum loan limit from £100,000 to £250,000 at the start of this year.

The increased interest comes as the government is also gearing up to invest up to £100m in peer-to-peer groups that facilitate loans for small and medium-sized enterprises. The chancellor earmarked these funds in the Budget and the Department for Business, Innovation and Skills is expected to provide details of how they will be allocated next month.

And tapping this took me here in the browser

Government must lead the change.
For Canada’s payments system to substantially modernize, changes are required in multiple arenas, from consumer behaviours to accounting solutions, to the very procedures governments rely upon in delivering services. Industry has not implemented change due in part to uncertainty and lack of coordination. Therefore, the Government of Canada should lead the change by undertaking the following actions:
• Implement electronic invoicing and payments (EIP) for all government suppliers and benefit recipients.
• Partner with the private sector to create a mobile ecosystem.
• Propel the build of a digital identification and authentication (DIA) regime to underpin a modernized payments system and protect Canadians’ privacy.

The Task Force also calls on the Government of Canada to overhaul the governance structure of Canada’s payments system in a manner that puts the needs of users (consumers and businesses) first, protects the public interest and encourages collaboration and innovation by all stakeholders now and in the future.

Specifically, the Government of Canada should pass legislation to:

1. Define a discrete payments industry and require payments service providers to become members.
2. Create a new public oversight body for the payments industry that will:

a) Protect the public interest as broadly defined through a principles-based approach;
b) Monitor the implementation of changes to the payments system, ensure that it continues to meet the public
interest and propose adjustments where necessary;
c) Provide redress, where necessary, when industry behavior no long inspires trust, or enables access, competition or innovation.

3. Encourage industry to create a broad-based, collaborative, self-governance organization including both providers and users to develop and implement strategy and standards for the payments industry. This entity would be recognized by the public oversight body as a self governing organization.
4. Reinvent the objects, governance, powers , business model and funding of the Canadian Payments Association (CPA). This will enable the CPA to deliver the modern systems required for meeting the payments needs of all Canadians into the future.

The opening remarks note:

The Task Force for the Payments System Review has found that unless Canada develops a modern digital payments system, Canadians will be unable to fully engage in the digital economy of the 21st Century‚ leading to a lower standard of living across the country and a loss in international
competitiveness.

Moreover, the Task Force found that a thoroughly modernized payments system could save the Canadian economy as much as two per cent of GDP in productivity

Canada considers itself to be ahead of the curve on digital usage so it is refreshing to see this.

Twenty-seven European Union countries, the BRIC countries‚ even Peru and Romania‚ are significantly outpacing Canada’s transition to digital payments, with obvious negative implications for Canada’s global competitiveness and interoperability.

There are three recommendations.

Therefore, the Government of Canada should lead the change by undertaking the following actions:

• Implement electronic invoicing and payments (EIP) for all government suppliers and benefit recipients.
• Partner with the private sector to create a mobile ecosystem.
• Propel the build of a digital identification and authentication (DIA) regime to underpin a modernized payments system and protect Canadians’ privacy.

Here is the full report. pdf

Budget 2012 Clarifying Federal Jurisdiction Over Banking

The Government will introduce a preamble into the Bank Act to clarify the intent that all banking activities throughout Canada be governed exclusively by the same high-quality federal standards that have served Canadians so well.

Canadians benefit from one of the best-regulated banking sectors in the world. Canada’s banking regulatory framework rests on stringent prudential rules that ensure that our banking sector remains safe and sound and on consumer protection rules that stress consumer choice and transparent disclosure. These rules are enforced consistently by federal regulatory agencies including the Office of the Superintendent of Financial Institutions and the Financial Consumer Agency of Canada. The Government will introduce a preamble into the Bank Act to clarify the intent that all banking activities throughout Canada be governed exclusively by the same high quality federal standards that have served Canadians so well, and to avoid the creation of local and potentially inconsistent rules that threaten the uniform application of the federal banking regulatory framework.

Budget document

Fast forward to March 28th, 2012 and one Neil Heywood, who attended Harrow School, went to Warwick University in 1989 and was fascinated by Chinese culture, and moved on to Beijing to study the language.

Heywood “met a mysterious death in a Chinese hotel room had been drawn into the murky world of industrial intelligence-gathering before he died, The Times has learnt”.

This story just gets weirder. 

Mr Heywood benefited from his relationship with Mr Bo and was seen by Western companies as someone with rare access to the communist elite. Temporary employers of Mr Heywood include hedge funds, private equity groups, accountancy firms and lawyers, which used his expertise to understand deals or business partners.

Mr Heywood is known to have been in the southwestern city of Chongqing last June, when Mr Bo hosted celebrations as Party Secretary. Guests at one event included Henry Kissinger and Lord Powell of Bayswater, the president of the China-Britain Business Council. A day later, Mr Bo entertained Peter Mandelson at a banquet in the city.

The majority of Mr Heywood’s income appears to have come from due diligence research, checking the veracity of Chinese company statements, accounts and whether assets appearing on the books were genuine.

And this is where the financial services aspect creeps in:

Sources who engaged Mr Heywood’s services said that he was a specialist at working in “highly sensitive research situations”, including for accountancy firms that became concerned last year that their auditing work was exposing them to huge reputational risk.

hmmmmmmmmmmm

Debt and deleveraging: Uneven progress on the path to growth | Mckinsey Global Institute

Clairmail to Be Acquired by Monitise

The combined entity will encompass 13 million registered consumers across four continents. Clairmail and Monitise process billions of transactions a year and more than $10 billion of payments and transfers on a current weekly annualized basis.

Crisis and crash: lessons for regulation – speech by Michael Cohrs | BofE

We have clearly moved into an environment where the notion of self-correcting markets and light touch regulation is a distant memory.  However, care must be taken to ensure that regulators don’t go too far and stifle legitimate risk taking which creates value in the real economy.  The wisdom of hindsight, from which we benefit in considering the ‘light-touch’ approach, will not be available to us to evaluate the post-crash regulatory mantra of "intensive and intrusive" for some time yet.  But even at this early stage it seems clear that the correct balance needs to be struck.

There is clearly a political and practical desire to take aggressive action against banks with full bodied regulation.  The issue is whether that regulation will be effective.  The big talk at the January 2009 World Economic Forum was how we must resist the temptation to regulate against the last crisis and miss the causes of the next one.

And this statement in the speech is telling.

The need to draw meaningful lessons from what happened in the fourth quarter of 2008 continues to be urgent, although a friend who happens to be a Professor of History tells me it probably takes about 50 years to put dramatic events into a truly appropriate context. 

BlackBerry losing out to iPhone as banks re-assess approach to personal computing policies | finextra

While many of the country’s bank’s and government agencies remain loyal to RIM devices, the study found the first indications of a more flexible approach at Toronto-Dominion Bank. David Codack, TD’s head of employee technology said the bank was re-assessing its BlackBerry-only policy in favour of allowing employees to use personal Apple and Android devices for corporate e-mail.

This talk earlier this month was presented at the Securities Industry and Financial Markets Association’s (SIFMA) Legal Entity Identifier Symposium in New York, and is both very good in the Haldane tradition but also a direct shot at the poor state of bank technology and how that contributed to the 2008 crisis.

His overall point is lack of transparency of risk within financial services.  A solution he suggests is language, not spoken but in the broader sense of communication.  This language solution exists in two areas that he explores – supply chains and the world wide web.  Both are examples of network activity as are financial services.  The comparison notes the efficiency in the first two and the opposite in financial services.  The reason is the common worldwide language in the first two and the lack of that in financial services.

He notes that lack of effective communication results in instant doubt whenever there is an emergency such as 2008, and that translates into each bank not trusting each other so interbank activity dries up and the markets freeze.  This also occurred in 2011 in Europe.

The communication that he speaks of would mean banks would instantly know in real time the status of their next in line transacting partners and their partners (counterparties and their counterparties).  As he notes in 2008 the “The whole credit chain was immersed in fog”.

News Release – Towards a common financial language – speech by Andrew Haldane | BofE

Very few firms, possibly none, had the information systems necessary to aggregate quickly information on exposures and risks. This hindered effective consolidated risk management. For some of the world’s biggest banks that proved terminal, as unforeseen risks swamped undermanned risk systems.

These problems were even more acute across firms. Many banks lacked adequate information on the risk of their counterparties, much less their counterparties’ counterparties. The whole credit chain was immersed in fog. These information failures contributed importantly to failures in, and seizures of, many of the world’s core financial markets, including the interbank money and securitisation markets.

In seeking examples to highlight what the financial system needs he points to supply chains and the www.

To gauge that, we begin by discussing the progress made by two well-known industrial networks over recent years – product supply chains and the world wide web. For both, a common language was the prime-mover behind a technological transformation. That transformation has delivered huge improvements in system resilience and productivity.

Compared with these industries, finance has been a laggard. But the tide is turning. Since the crisis, significant progress has been made by financial firms, regulators and trade associations in developing information systems and the common data standards necessary to underpin them.

The introduction of the barcode vs bespoke company specific languages in 1974 was revolutionary.

During the 1980s and 1990s, this UPC technology extended its reach along the supply chain.  It did so by developing a system for locating products as well as identifying them. A Global Location Number (GLN) was introduced in 1980, tying products to fixed locations. And in 1989, the Serial Shipping Container Code (SSCC) was devised, enabling products to be grouped in transit.

Between 1980 and 2005, the total value of world exports quintupled.6 A common language was their glue.

Then a short history of the web and the glue that binds it.

On October 29 1969, the first-ever message was sent between computer networks at UCLA
and Stanford Universities.

In March 1989, Tim Berners-Lee, a British software engineer working at CERN, the
Geneva-based nuclear research lab, wrote a memo to his boss Mike Sendall.7 It was a
suggestion for improving information management at CERN

At the centre of this web was a common language – Hyper-Text Markup Language (HTML). This was a new lingua franca for computers, allowing them to communicate irrespective of their operating systems and underlying technologies.

To accompany this new language, Berners-Lee created some new co-ordinates for this global web – Universal Resource Identifiers, the most well-known of which is the URL (Uniform Resource Locator).

Looking at the measurement of the benefits from standardised communication, there are dramatic results in supply chains.

The risk of being out-of-stock in Wal-Mart stores equipped with radio frequency technology has been found to be 30% lower than in stores without that technology

His example of Echo Bay Technology (eBay) is a little weaker and we have seen eBay shift to more of a shopping mall model, but the user feedback model is powerful.

… Omidyar adapted the site to allow buyers and sellers to give each other feedback on transactions, positive or negative. These scores created a method for buyers to assess risk.

These examples are all in contrast to banks.  They have none of that efficiency.

The product recall example is powerful and provides a powerful metaphor for banks who trade products.  in todays world when a bank or a banks product is in question, the immediate reaction has to be to shut down all trading, because it is impossible to assess the extent of the risk.  It is systemic and cannot be localised whereas the drug manufacturers in his example have solved that.

If a product needs to be recalled, the manufacturer updates the common data pool with an instruction, alerting the distributor or dispenser at the next point in the supply chain. If a recalled product has already been sold, the points of sale can be tracked and those affected can be notified. Panic is no longer systemic; it is quickly localised.

Next up is the inter country work to develop standards for Product Identifier (PI) and Legal Entity identifier (LEI) but finance has a long way to go.  Such identifiers would identify banks and bank products.

He notes the extent of manual intervention within finance which exacerbates the opportunity for error.  Manual in this context includes Microsoft Excel which remains the current standard for much of finance.  Excel is both manual and fragmented.

A fragmented data infrastructure has a number of nasty side-effects. One is a reliance on manual intervention to operate data and risk management systems. Complete automation of business processes – second nature along the product supply chain – is a rare bird in banking. As well as improving efficiency, automation reduces the possibility of misreporting of exposures through human error.

Now Haldane gets to the roots of the problem in finance that this introduction might solve.  He compares the days that it took for banks’ to assemble consolidated risk pictures versus the real time view that exists in Wal-Mart.  The specific example of Lehmans losing a real estate investment exposure of $6Bn highlights this.

Piecemeal data capture also complicates aggregation of risk exposures. That in turn undermine effective consolidated risk management. In its 2010 report, the Senior Supervisors Group found that some firms could take weeks to aggregate exposures across their balance sheet.34 Even the best-run firms took several hours or days. This, too, contrasts starkly with the real-time inventory management systems operating along manufacturing supply chains, not only among the Wal-Marts but among the corner stores.

These data and risk management problems were well-highlighted in the official report into the
failure of Lehman Brothers, a firm whose risk management was felt to be close to the frontier
of risk management best practices ahead of the crisis.35 For example, the mistaken exclusion
of a significant commercial real estate exposure of $6 billion meant there was serious
misreporting to the Lehman’s board during the crucial months prior to its failure. Information
on a significant exposure was lost in translation.

Similarly with Lehmans, while bank wide exposures were within limits individual components were within breach and this was not immediately evident.

He notes this applies to all banks and not just Lehmans.

Real-time, consolidated data capture is still a distant aspiration. As long as that is the case, real-time consolidated risk management remains a pipe dream.

Not only is the risk management in banks hindered by lack of technology solutions he notes the possible cause when he looks at barriers to entry.

Lowering barriers to entry

Paul Volcker famously commented that the only useful piece of technological innovation in banking over the past 30 years had been the ATM. What is certainly true is that some markets for banking products appear to lack contestability. That has meant large incumbents have often dominated the banking landscape, in much the same way as was true until recently in music and publishing. In banking, this lack of contestability is one root cause of the too-big-to-fail problem.

Consistent with that, birth and death rates in banking are lower than among non-financial companies. They are lower even than in other areas of finance. Death rates among US banks have averaged around 0.2% per year over the past 70 years. Among hedge funds, average annual rates of attrition have been closer to 7% per year. Birth rates are similarly low. Remarkably, up until 2010 no new major bank had been set up in the UK for a century.

Banking is a protected industry and that protection results in limited competition and little innovation.  He makes the point that a lack of common language hinders new entrants.  We see that today with P2P lending platforms.  He sugests barriers to entry need to be lowered so that companies such as Paypal, and Zopa can be allowed to grow and develop better models than existing banks.

Commercial peer-to-peer lending, using the web as a conduit, is an emerging business. For example, in the UK companies such as Zopa, Funding Circle and Crowdcube are developing this model. At present, these companies are tiny. But so, a decade and a half ago, was Google. If eBay can solve the lemons problem in the second-hand sales market, it can be done in the market for loans.

With open access to borrower information, held centrally and virtually, there is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in time become the surplus links in the chain. Where music and publishing have led, finance could follow. An information web, linked by a common language, makes that disintermediated model of finance a more realistic possibility.

Relevance to Bankwatch:

It’s a fascinating talk.  Basically Haldane suggests:

1. A root problem of banks is a lack of consistent entity assessment and of product assessment
2. This root problem means there is no ready means to assess the risk of other entities (banks, funds etc) or the risk of the products those entities produce
3. A second root problem lies in banks lack of technology innovation.  Banks are as fragmented internally, as they are fragmented amongst each other. This fragmentation is especially evident in their technology.
4. This second root problem means that even with the consistent entity and product assessment problem solved, it would be impossible to effectively share that with each other and with the regulators.

Finally he notes that perhaps the best solution is to encourage new entrants who (I would suggest) are more skilled in technology, and will be better placed to solve these problems from the outside and in so doing perhaps force the incumbents to change.

A basic example I would suggest is wire payments.  Apart from the anachronistic name, the SWIFT system employed by banks, along with their own internal processes, results in money taking up to 48 hours to reach a destination bank.  This in contrast to the problem Wal-Mart have in moving physical inventory.  Surely the matter of sending money instantly would be a simple problem to solve but not without trusted standards.

In some ways this harks back to this which I wrote in 2008 suggesting there will be two kinds of banks.  Innovators and utilities.  I stick with that.  In this view most of todays banks would become utilities providing basic banking functionality that keeps the money moving.  High risk investment vehicles will be ring fenced outside these utilities. 

Innovators will be able to enter with transparent models which are easily understood due to real time data that does a significantly better job of providing risk profiles that ensure the customers and the regulators are comfortable with the innovation.

Confidence shaken in Indian government | ft.com

India lost up to $210bn in revenue by selling coalfields too cheaply, according to a leaked draft report by the state auditor on Thursday. The sale of the coal development blocks appears to have rewarded a handful of politically connected companies over the greater interest of India’s 1.2bn people, raising questions about the fairness of economic liberalisation.

Only days before, the government introduced a retrospective tax that could penalise old foreign investments. This means that – despite winning a Supreme Court ruling earlier this year – Vodafone, India’s largest foreign investor, may still face a $2.5bn tax bill it did not expect when it entered the country five years ago.

Relevance to Bankwatch:

India desperately wants to be accepted as a world player.  But ask the question … name an Indian bank?  There are a few but none will come easily to mind.  India sufferred when the Commonwealth Games almost did not happen.  India suffers from a confidence issue.

The reality is that the chaos Indians pride themselves in is a cover for chaos.  This is a desperately poor country that exhibits the worst of terrorism and the best of technology. 

There is so much potential and optimism in India.  Yet there is still serious doubt that only the government can tackle.

Lloyds to miss branch sale deadline | ft.com
A particular sticking point has been the discussions between the Co-op and the financial regulator, which is yet to be convinced the mutual has the appropriate governance and systems in place to run a much bigger banking business.

Relevance to Bankwatch:

The enforced sale of branches serves to highlight the reality that a capital intensive branch network located in areas that reflect 10 – 20 year old demographic analysis is just not that attractive.  Branch locations are based on either historic account traction, or new ability to rapidly grow deposits. 

Neither of those considerations work for new entrants purchasing an existing network. 

1. Branches in established neighborhoods which probably comprise the majority of Lloyds, have customers used to Lloyds.  A switch to another provider such as Co-op will produce dramatic changes, and will be targetted by competition.  Run off will be great.
2. Branches located in growth neighborhoods where people are seeking a new bank would be attractive, but the existing Lloyds network will have few of those.  This debacle began in 2008, or 4 years ago, so any newness has worn off.

The value of those existing branches lies only with the sellor I would argue.  Buyer value is going to be in knock down prices.

Fibre optics to connect Japan to the UK – via the Arctic

Meanwhile, a 15,600-kilometre link via the Canadian Arctic, to be built byArctic Fibre of Toronto, Canada, will cut the present round-trip time, or "latency", between London and Tokyo from 230 milliseconds to 168 milliseconds, claims company president Doug Cunningham (see map). Reduced transmission time will be a boon for high-frequency traders who will gain crucial milliseconds on each automated trade.

We know more now.  Great brand but stick to your knitting.  You do not want to go in front of the “Barney Frank” type interrogation that banking entry will require you to endure.  This is not a balance sheet issue.  Its  a much deeper regulatory, and oversight issue which cannot easily be consolidated with typical business processes. 

Don’t even get me started.  I love Apple.  Stick to technology.

What is the next industry Apple can disrupt? Banking! | GigaOm

A new survey of 5,092 respondents in the U.K. and the U.S. from marketing and research consultancy KAE found that one in 10 people would consider banking with Apple, and 43 percent of existing Apple users would

Finance: More flash than cash | ft.com

Last year, Lucas Scheybal challenged himself to live for two weeks in New York handling no cash or payment cards – instead using only a futuristic watch with a wireless chip.

It turned out to be easy. With a swipe of the device across a special reader, he was able to buy coffee at 7-Eleven or Starbucks, meals from outlets including McDonald’s and Subway, as well as cinema tickets and even petrol. “I did survive. Gasoline and food were not a problem. It was easy getting around New York because there are 20,000 taxis that accept contactless payments,” he says.

The downside is that the content revolves around yet another startup.  I commend Lucas Scheybal but the big worry for payments is reflected in the multiple devices we see in Asia on merchant counters.  I am afraid some kind of standard and common device / protocol agreement is needed to make this consumer friendly and gain traction.

The financial crisis has far reaching consequences, yet the consequences are somehow more obvious with such small countries than with large.

A proper debt restructuring | ft.com

Basseterre, St Kitts: The Government of St Kitts and Nevis announced  today that the
exchange offer launched on 27 February 2012 has received the overwhelming support of
its creditors.

… …

The  New Discount Bonds, which are to be partially guaranteed by the Caribbean Development Bank, entail a 50% reduction in face value. The balance is to be repaid over 20 years, with coupons set at 6% for the first four years, stepping down to 3% thereafter

It makes the iphone mail app look lame and Google mail app worthless (multiple email accounts are the norm Google).

The big talk is that push is not there.  My take – that does not matter.  Push on an iphone is useless until we get a battery that actually lasts 24 hours.  What is needed meantime in my view, is alerts for specific contacts similar to what Mailtones accomplishes.

Nice work and congratulations to 27 year old Dominique Leca On Rue Reaumur in Paris and the team there.  Email is a critical part of our day and thank you for making it work so well finally.

Sparrow takes flight: how a startup built the Gmail app Google couldn’t | Verge

And this is where Sparrow resides: at the intersection of technology and liberal arts. Sparrow has inspired many software artists but also takes inspiration from others (and as we’ve seen, is eager to embed great apps into its own heart). The view is a holistic one, and while Sparrow for iPhone is alive (yet crippled), it’s proof that when handled carefully and thoughtfully, third party developers can beat Apple and Google at their own game.

The loss at AIJ is staggering at close to $2.6 billion.

Japan probes asset managers after AIJ loss

Money Fund in Japan Told to Halt Operations

And some smart commentary from CFA

AIJ Investment Advisors: Made (off) in Japan

Hail the hidden champions: Why fringe markets may beat Silicon Valley (at least for investors)

These are companies like Sipwise, Gaminside or Grin.com, our most recent investment; not too fancy, and surely no Pinterest, but great growth, great teams and great financials. I would argue that these three are far better investments than the vast majority of the 500 startups of Mr. McClure’s.

Mathew Ingram writes a succinct summary of the problem on GigaOm:

Both are seeing their share of the ad market grow, but there is still one big question standing between them and the multibillion-dollar valuations they have received from investors — namely, do ads inserted into social activity actually work?

Brilliant.  Everyone gets excited about volume of eyeballs, but that is old thinking.  Mathew summarises the problem perfectly here.  Will people actually buy things that somehow are selflessly promoted by their friends.

The bigger story is highlighted in this thoughtful piece from Brad Stone on Business Week.  There are several anecdotes about GM, Ford and Newt Gingrich levering twitter in ways that reflect more on the troll like activity we used to see in 1990’s newsgroups, than in valuable sharing of valuable insight.  There is nothing about product quality or why I should buy in.

Where do I see shared value?  It lies in places where control is exercised by the owner and gaming is not possible.  Amazon recommendations for example are (I believe) largely based on my own activity.  That makes me more loyal to Amazon and more likely to use them, the more I see the value in the recommendations.  There is another important point here;  no-one can game what I do and buy.

A similar trend exists on Goodreads.  I choose who I observe, and their book choices hold value for me when I associate with what I know about them and what they are reading.  Again it is very hard to game because it would stand out if a thoughtful friend or person I know and respect who specialized in war history suddenly started buying bodice ripping romantic novels.

So there is another trend there;  knowing the individual on the other end.

There are possibly three things that marketers could learn from these small observations over a period of time:

1. My own behaviour is valuable to me
2. The behaviours of real friends and of people I know and/ or respect are valuable.  Their recommendation’s less so.
3. I am highly distrustful of big media trying to interpret me based on my postal code or click preferences.

I don’t know if the book model I describe is extendible at scale but FaceBook at least has some of the pieces in place to be thinking about that.  Twitter I have no hope for.  Twitter is that yappy group in the corner, and while I might pick up on gossip from them, and even get a smile or two, it will not impact my purchasing habits.