it seems like Prosper may be re-launching tomorrow as an approved service. I hope its true, and good luck to Prosper. I noticed this morning their site is down, and it actually does nto say maintenance as noted in the quote below, but "configuration changes".

Looks Like Prosper.com is On Its Way Back! | Prosper Lending Review

Paraphrasing Anthony’s email he says that the US SEC approved Prosper’s new securitized note trading platform at 3:30 PM on Friday, and that they pulled the site down over the weekend through Monday.

Looks like we might get (another) launch tomorrow from Prosper.com. Really looking forward to seeing them back into the P2P world.

This is a great story showing that an organisation, in this case a government, can adopt linux. The bad news is that is has taken so long, and I am sure this reflects the denial of users and managers. All I can say as a loyal linux user, is give it time and it will work.

The State of Munich’s Ongoing Linux Migration | Slashdot

Currently, about 60% of desktops are using OpenOffice, with the remaining 40% to be completed by the end of 2009. Firefox and Thunderbird are being used in all of the city’s desktop machines.

Implementing standard signature block.

Testing the new WordPress post from email. Will it really delete the signature?

Colin Henderson
The Bankwatch Consulting Inc.
The Bankwatch

Not often we see a plausible alternative in the payments space from banks, but here is one in the works.

German and French banks push ahead with new debit card scheme | finextra

Bundesbank board member Hans Georg Fabritius told the conference that a Visa and MasterCard duopoly is “an unsatisfying vision” for political and economic reasons. However, he warned that while the French and German project, called Monnet, is “promising” it is only a concept and he would want other countries to join in.

I found this piece on the upcoming Google OS useful for the Google quote.  There is so much debate on this new OS and most of it misses the point.  Its not about Linux versus Windows as many suggest – its about making computers become a simple tool.  This is something that unfortunately Microsft have failed to do.  It has been 14 years since the advent of Windows 95, and almost 30 years since the advent of the PC.  It has become accepted that you either have to be a compuer expert, or retain a support group for computers.  Why?

i think the attraction of a computer that just works will be strong for many people and strong enough to switch.

Can Google break Windows? The Times

“We hear a lot from our users and their message is clear — computers need to get better,” Sundar Pichai, vice-president of product management, wrote on Google’s blog last week.

“People want to get to their e-mail instantly, without wasting time waiting for their computers to boot and browsers to start up. They want their computers to always run as fast as when they first bought them.

“They want their data to be accessible to them wherever they are and not have to worry about losing their computer or forgetting to back up files. Even more importantly, they don’t want to spend hours configuring their computers to work with every new piece of hardware, or have to worry about constant software updates.”

It appears bank boards will be required to go beyond figure head status under upcoming regulation changes in UK.

Sir David Walker to shake up bank boards

The City grandee tasked with reforming corporate governance standards at Britain’s banks will this week set out plans for directors to receive formal training and annual re-election to the boards of financial institutions.

They will also address boardroom composition by stressing that boards need to have a proper balance of experience and understanding of a company’s risk strategy, and suggest that risk committees should be established alongside audit committees to aid risk management processes.

Sir David will also make a recommendation – already being dubbed “the Sir Fred Goodwin rule” by some City observers – that bank boards will need to demonstrate that they are capable of challenging an autocratic chief executive who they believe may be endangering the health of a systemically-important institution.

Here is a striking example of the power of collaborative ‘wisdom of crowds’ approach to information preparation, versus traditional top down beaurocratic approach.

I was reading the Obama speech in Ghana, and his references to the current and previous governments, including Jerry Rawlings which rang a history bell for me, so thought I would read up.  First off I checked what used to be my old favourite the CIA factbook, and it has not been updated since sometime before Dec 2008 [note highlight].

On the other hand a quick visit to Wikipedia had more than enough detail being up to date, including information about Obamas trip dd 10th July in the footnotes.  I copied one section from the history area below, and highlighted the notes about the recent election in 2009, something the CIA has not figured out yet apparently.

The efficiency and effectivness of the Wikipedia approach compared to the old style management and approval processes is stark.  [Incidentally, surely the CIA beaurocracy would at least update their site for the countries that their boss is visting?]

In fairness to the CIA it is probably impossible to maintain an up to date encyclopedia type site such as the FactBook within the constraints and context of their mandate.  To open the CIA up to a Wikipedia approach would not make any sense.  I only use this example to display that collaborative and engagement of the broader network wins every time for information dissemination.

CIA Factbook – Ghana

Formed from the merger of the British colony of the Gold Coast and the Togoland trust territory, Ghana in 1957 became the first sub-Saharan country in colonial Africa to gain its independence. Ghana endured a long series of coups before Lt. Jerry RAWLINGS took power in 1981 and banned political parties. After approving a new constitution and restoring multiparty politics in 1992, RAWLINGS won presidential elections in 1992 and 1996, but was constitutionally prevented from running for a third term in 2000. John KUFUOR succeeded him and was reelected in 2004. Kufuor is constitutionally barred from running for a third term in upcoming Presidential elections, which are scheduled for December 2008.

Wikipedia – Ghana

Rawlings soon negotiated a structural adjustment plan with the International Monetary Fund and changed many old radical economic policies; the economy began to recover. A new constitution restoring multi-party politics was promulgated in 1992, and Rawlings was elected as president then and again in 1996 to serve a second term. The Constitution of 1992 prohibited him from running for a third term, so his party, the National Democratic Congress, chose his Vice President, John Atta Mills, to run against the opposition parties. Winning the 2000 elections, John Kufuor of the New Patriotic Party was sworn into office as President in January 2001, and beat Mills again in 2004; thus, also serving two terms as President. In 2009, John Atta Mills took office as president with a difference of about 40,000 votes (0.46%) ^[23] between his party, the National Democratic Congress, and the New Patriotic Party, marking the second time that power had been transferred from one legitimately elected leader to another, and securing Ghana’s status as a stable democracy.^[24]

This is a variation on the theme I cover periodically called Vendor Relationship Management (VRM).

The variation here is that the Vendor must place the consumers product up for bif from competition when they are considering changing the terms, such as interest rates.  The consumer would then have the choice of accepting the change, or accepting one of bidders. (HT Payments News)

A Market Test for Credit Cards

We have an alternative solution, employing a market test of a proposed change. At the time when the lender proposes a unilateral change, it would be required to put the existing account balance up for auction on a LendingTree-like service that would allow other credit card issuers to bid for a chance to issue a new card and take over the existing balance.

Borrowers wouldn’t be forced to switch to the auction winner. They’d just be given the option. When an existing credit card issuer proposes a rate increase, it would be required to pass on the terms of the winning bid and a comparison with its own terms, and the borrower would decide whether he wanted to make the switch.

This breaking news from NY Times just a few minutes ago.  Long rumoured but if this is true then its welcomed by this linux user.

It does not show on techmeme or any tech blogs yet. Things could be getting interesting.

Google Plans to Introduce a PC Operating System

In a direct challenge to Microsoft, Google is expected to
announce on Wednesday that it is developing an operating
system for a personal computer based on its Chrome browser,
according to two people briefed on Google’s plans.

The move would sharpen the already intense competition
between Google and Microsoft, whose Windows operating system
controls the basic functions of the vast majority of personal
computers.

Update:  more here from siliconvalley.com

And the official word here from Google.

Speed, simplicity and security are the key aspects of Google Chrome OS. We’re designing the OS to be fast and lightweight, to start up and get you onto the web in a few seconds. The user interface is minimal to stay out of your way, and most of the user experience takes place on the web. And as we did for the Google Chrome browser, we are going back to the basics and completely redesigning the underlying security architecture of the OS so that users don’t have to deal with viruses, malware and security updates. It should just work.

Finally we are seeing hints of what we all know is inevitable.  It has taken a long time and probably this latest economic crisis, but the long view on branches suggests a damatic shift with less of them.

Slow but inexorable move to online banking

Yet slowly but surely, the internet is starting to make its mark on the sector as more people move their banking online. Lloyds is to shut up to 400 branches as part of its integration of HBOS. Its rivals are likely to follow suit.

A decade from now, the local branch could well be an endangered species as “cyber-banking” grows ever more popular and more branches close.

Fascinating insght into US antitrust thinking that is quite mind boggling.  They actually believe that the antitrust case against Microsoft promoted Google Chrome and Firefox!  This is a great example of reverse analysis thinking where the result rationalises the approach.

Microsoft Internet Explorer became huge because it was better and faster than Netscape.  That was 1996.  Time passes and IE became known as slow.  Firefox emerged, followed by Chrome  I see no connection to antitrust stuff here.

My Interview With Antitrust Expert Gary Reback: Google’s Looming Antitrust Issues | TechCrunch

One interesting insight from the conversation: I ask Reback if he thinks we’d be in a better world if Microsoft had in fact been broken up into two or more companies as was originally ordered. His response – “no.” The investigation and lawsuits themselves, he said, did enough to force Microsoft’s hand and allow browsers like Firefox, Chrome and others to blossom.

Interesting graph.  Look at 1980/82 and compare to 2009.  [ht Calculated Risk]

A summary in NYT of the fascinating Ferguson/ Fallows debate at Aspen on the economic relationship between China and US.

Ferguson: US and China are divorcing economically.  China will focus on internal consumption, not exports.  “Depreciation (of US $) is inevitable and the Chinese are working to end the dollar’s role as the world’s reserve currency.”

Fallows: “…  doesn’t know what the future will hold, but he believes that Chinese officials still see the dollar as their least risky investment. Domestically, China will not turn democratic, but individual liberties will expand. He agreed that China and the U.S. will dominate the 21st century, but he painted the picture of a more benign cooperation.”

Chinese Fireworks Display | NYT

I came to the debate agreeing more with Fallows and left the same way, but I was impressed by how powerfully Ferguson made his case. And I was struck by their agreement about what to do. This conversation, like many conversations these days, gets back to America’s debt. Until the U.S. gets its fiscal house in order, relations with countries like China will be fundamentally insecure.

The focus on bank financial strength is generally on the lending side of the business and the potential for bad debts.  Here is another view, and something that drives some banks to make ever riskier loans to produce enough revenue to pay for their deposits.

For Banks, Wads of Cash and Loads of Trouble | NY Times

The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm

…

But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bank is barely hanging on.

When we assess leverage it is not just the quality of the assets, it is also the cost of the liabilities, which is what deposits are to banks – liabilities with an associated cost.

It is ironic that those deposits that banks are gathering across the US from other than their home state at high rates, are also FDIC insured.  So the US taxpayer has been passively promoting banks to take undue risks by gathering high cost insured deposits to fund their mortgage and loan growth.

This is just another element to take into account for The Great Unwinding of leverage in the financial system.  The deleveraging that takes place will result in smaller institutions, and much less value attributed to deposits in cash, due simply to a supply that far outstrips demand. The outcome will depend on whether the regulators institute limits on FDIC insurance, limits on brokerage or some hybrid of those.

Relevance to Bankwatch:

One more blow against the old system.  A banking business model based purely on arbritrage on interest is not viable, and highly susceptible to risk associated with leverage.  This leads to two conclusions:

1. Regulation: The unintended consequences of regulation such as deposit insurance are complex, and need to be considered by the regulators.  Those unintended consequences could be more expensive in the long run through higher taxes, than the immediate apparent benefit.
2. Bank models: Banks have historicaly been arbiters of money between lenders and borrowers.  Non Interest revenue from fees has been long considerd considered icing on the cake from interest revenue – essential icing, but nonetheless icing.  The new world is smaller and requires efficiency.  What if a banking model were built on fee revenue first?  This would require products and services that are seen as valuable by consumers, and it would drive different approaches than investment in expensive branches, ATM networks, and staff.

PS:  To provide a sense of scale of the problem, a back of the envelope calculation on some Canadian banks where I have an idea about the customer and staff numbers produces a customer to employee ratio of 150:1.  A similar cacluation on core banking (primary chequing with that bank) customers to employee ratio brings an incredible 50:1.  This hardly suggests that the investments in technology, branches and infrastructure over all the years has been effective.  Banks efficiency has been hidden from view by the growth in the financial system.  Much more to come on this.

Banks continue to be challenged by disintermediation from telco’s and here is another example, this time in Japan.  The service will launch 21st July, and allow sending up to $200 with only the payee’s phone number being required.

An interesting tweak is the ability to have the money deposited with DOCOMO under the guise of a credit to your account, however this is deposit taking by another name.

DOCOMO to launch mobile payments service

Customers of DOCOMO’s i-mode™ mobile Internet service on the FOMA™ 3G network will be able to remit up to 20,000 yen (about 208 U.S. dollars) per transfer, basically just by inputting the payee’s mobile phone number. The payee receives a mail notification via their DOCOMO mobile phone and is given the option of depositing the money in a domestic bank account or having the amount credited to their monthly DOCOMO phone bill. The payee can receive remittances totaling up to 200,000 yen (about 2,080 U.S. dollars) per month.

It is a lucrative service with charges to payor and payee.

The charges per payment (including consumption tax) will be 105 yen for the payer and 65 yen for the payee.

Researched by Nobuyo Henderson

This interview with Roubini, on a visit to China, is wide ranging, and provides a good assessment of where we are in the economic cycle, why we got here, and importantly what to expect next.  In particular this assessment on US banks is sobering.  That aside, it is a worthwhile read.

Dr. Doom Has Some Good News

The first involved banks. Like Paul Krugman and others, Roubini had been warning that many banks were weaker than they seemed. Rather than trying to nurse them along, he said, the government should move straightaway to nationalization: “I’m concerned that we’re not going to deal with the bank problem as we should,” he said. “Some banks are insolvent. To prevent them becoming zombie banks, the government should take the problem by the horns and, on a temporary basis, nationalize them. Take over these banks, clean them up, and then sell them back to the private sector. Not doing that is one mistake we may make and regret.”

Morgan Stanley hooks up with one of the largest Japanese banks to compete with Citi and JP Morgan.

Morgan Stanley and MUFG in joint push | FT

Mitsubishi UFJ Financial Group is set to merge its securities subsidiary with Morgan Stanley’s Japanese securities operations, to create one of the top three brokerages in Japan.

The Japanese bank and Morgan Stanley have been in talks since MUFG invested $9bn last year into the then-struggling US broker, for a 21 per cent stake.

Researched by Nobyuo Henderson

Demographics is an interesting science, and one that has real impacts on society over time that are really only apparent after the fact.  Mauldin recounts a conversation with Strauss and Howe on their book, “The Fourth Turning“.  The premise is that the US and the western world move in 80 year cycles, with four ’seasons’ within each cycle.  As historians, they have looked back in time, and concluded the cycles are quite consistent.

Whether you buy that or not, the four cycles noted do describe the 20th century well, and place us firmly in the latter part of the third, or ‘unravelling’ cycle/ first part of the ‘crisis’ cycle.  We have been/ are in a period of high individualism and discredited institutions.  We are entering a period of tearing down, and re-building.  Following the logic, we will enter a period of renewal, collective optimism and willingness to work together and help each other soon.  We can always hope we do not need the full 20 years for the fourth ‘crisis’ cycle.  What do you think?

Outside the Box | Mauldin

The First Turning is referred to by Howe as a High. As this follows a period of crisis, one of the hallmarks of a First Turning is a heightened sense of community and collective optimism, driven in part by the fact that the society has just come through a difficult and challenging time. Consequently, during First Turnings, societal institutions tend to be strong while individualism is weak. The post-World War II “High” of the mid-1940s through early ’60s is the most recent example of a First Turning.

The Second Turning, called an Awakening, typically starts out feeling like the high tide of a High, with signs of progress and prosperity everywhere. But just as everything seems to be going along swimmingly, large swaths of society begin to chaff under the social conformity of the High, beginning to gravitate to more individualistic pursuits and demanding that their personal interests come first. You may recognize the “Consciousness Revolution” of the mid-1960s through early 1980s, correctly, as the Second Turning.

Next up, the Third Turning, which Howe calls an Unraveling, is much the opposite of a High. To wit, individualism dominates, while institutions are increasingly weak and discredited. Quoting Howe on the Unraveling…

“This is a time when social authority feels inconsequential, the culture feels exhausted, and people feel bewildered by the number of options available to them. It is a time of celebrity circuses and a tremendous amount of freedom and creativity in our personal lives, but very little sense of public purpose.

The most recent Third Turning began in the mid-’80s with Morning in America, and continued through the ’90s. Previous periods of Unraveling in American history were also decades of cynicism and bad manners. Think of the 1920s, the 1850s, the 1760s. And history teaches us that the Third Turnings inevitably end in Fourth Turnings.

Finally, there is the Fourth Turning, called a Crisis. The recent Third Turning appears to be winding down, and we are currently on the cusp of a Fourth Turning. This is a time of great turmoil, when society’s basic institutions are torn down and rebuilt, and seemingly insurmountable problems are addressed. During Fourth Turnings, America engages in a struggle for its very survival and redefines its identity as a nation. Large wars are often a part of this process. The American Revolution, Civil War, Great Depression, and World War II were all features of past Fourth Turnings.

I simply love this post at RWW.  The post is about how FaceBook could turn on the power of their userbase to the benefit of consumer power.  I have long been a fan of VRM and at the same time at something of a loss to see how it could be initiated.  Then I read this post, and new lights went on.

The post is about FaceBook, but it is less about them, than it is about business models for dot.com companies with large userbases who insist on following tradigital advertising models. The whole ‘We have lots of eyeballs so lets monetise’ thing.

[disclaimer]  I have long believed that adwords, adsense, and any such interruptive advertising model has only a limited online lifespan, and represent a termproary interlude that keeps SEO types busy in these formative internet times, until we get to the next level whereby the consumer is truly in charge.  Only then will I accept a Web X.0 increment.

I look at myself and my online behaviours, and maybe I am in the minority, but maybe thats because the tools I use are not well understood.  My online experience sees almost no ads except when I choose to do so, and I do so choose.  I see them in emails I deliberately subscribe to, I see them when I seek them out, but my standard web experience is protected by pop up blockers and AdBlock Plus.  If in doubt how many have PVR’s at home, and skip tv ads?

Its not that I don’t want to lknow about products and services.  I just don’t want to know when I am reading, listening and watching things on the web.  This is the power and the promise of the internet medium;  it has the power to be better.  I listen to Sirius Radio for similar reasons; I want to hear music not ads.

Enter Vendor Relationship Marketing (VRM).  Terrible title, but in essence VRM says you will decide when a merchant (vendor) may contact you, ie advertise to you.  Until then stay away. Here is one of the more provocative catchphrases from “The ClueTrain Manifesto” which forsaw this problem and solution 10 years ago.

The challenge is how to move from an interruptive model in radio, television, phone, mail, and now internet to VRM which would require a seismic and complete shift.

“be prepared to be misunderstood for long periods of time.” – Jeff Besos

Back to the RWW post.  Bernard does a nice job of pointing out that FaceBook is taking too long to develop a business model, and is taking longer than Google did.  He notes that it will take a radical shift in order to do that, and that shift will be misunderstood, but give it time.

I agree with Bernard.  The reason FaceBook and traditional advertising doesn’t work is because no-one wants to hear an ad in the middle of a conversation.  However FaceBook has the other benefit (some say weakness) of being a walled garden and Google cannot see inside.  He notes this is the perfect oportunity to turn that walled garden into a powerful tool on behalf of the consumer.  When they feel the need for a product, service or information on them, FB users could, through an RFP (Request for Purchase) process make it known to vendors, even to the point of naming their price or price range.  Vendors could respond.

This turns the ad model on its head.  The playing field is levelled between the merchant and the consumer.  If the merchant comes on stronger than the consumer wishes, or tries to return to old ways, the consumer can ignore them.

Relevance to Bankwatch:

Consider banking – every day thousands of RFI’s emanating from VRM services, and the banks can compete on them, all electronically.  Clearly this requires formats, standards, and defined processes but it makes an interesting future world view, and one that FaceBook could kick off.

The management of UK banking/ financial system has become highly politicised reflecting the general Browns government style. This from the meeting yesterday between Mervyn King, Governor of the Bank of England and the Commons committee.

Governor in dark on banking regulation | FT

His comments to MPs on the Commons Treasury committee flabbergasted its members. John McFall, the committee chairman, said the lack of communication at the top level between the Bank, Treasury and Financial Services Authority was unbelievable. “The tripartite authorities are a communications black holes, which is worrying.”

It is always interesting to look at the usage of this blog and which items are most popular, then speculate why that might be.  Any comments on this welcome, because I can try to adapt towards items that are needed.  Overall there is some consistency between the all time, and the newer stats.

Comments and observations welcome.

Most popular posts at the moment – June 2009:

• Deloitte report | “The Shift Index: Recession masking long-term competitive challenges”
• America’s largest Credit Unions
• How to web 2.0 your bank
• Japanese online shopping site Rakuten to open eBank
• Building the Bank of the Future – 2
• 6 years is too long for elimination of mag strip debit cards
• Online only Banks (branchless Banks)
• Consumer mindsets in North America have shifted permanently with regard to finances
• A new future based on a different revenue model is needed for banks
• The Great Unwinding | part 1 of 3: 2009 – 2012

Most popular – last three months

• America’s largest Credit Unions
• Online only Banks (branchless Banks)
• How to web 2.0 your bank
• CIBC Today” – CIBC Intranet P
• Wells Fargo mortgage business leaps ahea
• Forrester Research: CRM Market Size And
• Celebrating PayPal’s ‘centenary’ – Paypa
• Building the Bank of the Future – 2
• Can an “Internet only” bank work
• The power of alternative marketing – Starbucks

Most popular – all time

• How to web 2.0 your bank
• Online only Banks (branchless Banks)
• Which banks understand the web lifestyle
• CIBC Today” – CIBC Intranet P
• Building the Bank of the Future – 2
• America’s largest Credit Unions
• Can an “Internet only” bank work
• The power of alternative marketing – Starbucks
• The worlds biggest banks | Economist
• US banks likely to fail as bad loans soa

The OECD today produced a report that is sure to be controversial. They are upgrading all their forecasts both for 2009, and 2010, but that FT headline mask the real underlying situation as it applies to consumers and businesses which I see as relatively no change from other forecasts.

OECD sees strongest outlook since 2007 | FT

The report notes that the unemployment rates and slackness in the world economies will persist at end of 2010.  The optimism reflected in the headline appears centred on the GDP numbers, which are being driven by Government spending, not consumer or business spending.  Recovery is still looking L-shaped.

This chart on housing is illustrative of the depth of the shift.  The Canadian Price to Rent/ Income remains high relative to others.

Here is the link to the report.

OECD June 2009

Here are selected country headlines.

Canada:

The sharp contraction that began in the last quarter of 2008 intensified in the first quarter of 2009, led by collapsing exports, fixed investment and stockbuilding. The pace of contraction appears to be slowing, but recessionary conditions are expected to linger through the third quarter, with only a slow recovery thereafter. Unemployment is projected to keep rising until early 2010 and inflation pressures to stay muted.

US

The US economy is going through a severe and protracted recession which is projected to bottom out later this year, as fiscal and monetary support takes hold and the housing cycle bottoms out. In 2010, even after a recovery gets under way, GDP growth is likely to remain weak because of the slowdown
in capital accumulation, negative wealth effects and still adverse, albeit improving, financial conditions. In this environment, a considerable degree of economic slack, especially in the labourmarket, is likely to persist over the projection period, bringing inflation to very low rates.

Japan

The global crisis triggered a deep recession that is likely to be the most severe in Japan’s post-war history. The contraction in world trade led to a sharp plunge in exports and business investment, while falling employment and wages have reduced private consumption, leading to a projected
output decline of almost 7% in 2009. Fiscal stimulus is expected to lift output growth into positive territory from the second half of 2009, although at a rate that remains below 1% through 2010.

Euro Area

The euro area is in a deep recession, with external demand collapsing and domestic demand being weakened by tight financial conditions, rising unemployment and heightened uncertainty. Activity is expected to contract throughout 2009 and pick up only gradually in 2010, as the tensions in financial markets start to fade and the full effects of policy stimulus are felt. Rapid growth in unemployment and a large negative output gap will continue to dampen inflationary pressures throughout the projection period.

UK

The economy is in a severe recession, with output projected to decline by 4.3% in 2009 and recover only mildly in 2010. The financial crisis has severely impaired the supply of credit and house prices have fallen sharply, thus restraining business and household spending. The depreciation of sterling is mitigating the downturn, but cannot overcome falling foreign demand. The unemployment rate is projected to rise towards 10% in 2010, with inflation well below the 2% target for an extended period.

Deloitte put out some good stuff, but this one is superlative.  The context here is is for planners thinking about the future and wondering how to think about the future.  That context is hard to achive with so much information, and so much new information every day.  For example we have all seen and heard the Iran/ Twitter discussion, and impacts here and here.  We have seen government influence Twitter to keep the ‘people influence’ moving.  We see internet advancing rapidly, Google supposedly taking over advertising, yet Facebook with over 200M users, actively resisting advertising.  We see online banking growing rapidly, yet banks are stuck with expensive branches and staff in them.  We see concerns about bandwidth yet it grows inexorably.  We see PR and Marketing continually trying to force fit old methods into new models with little success.

These are simply examples that point to the understandable confusion both for planners, and for the people they must show their plans to.  Everyone is a participant personally as well as corporately in the 21st Century changes, and we need better mental models to work it through.

In short there are too many data points, and too many of them are seemingly contradictory.  One thing we all agree on is that things are changing, yet what is happening, and how can I make rational projections within these changing times that support planning for the next 2 – 20 years?

Enter this new paper from Deloitte with a well constructed index that looks at three indexes they refer to as waves:

The Shift Index:  Recession masking long-term competitive challenges | Deloitte Center for the Edge [121 page pdf link off this page]

Deloitte’s Shift Index pushes beyond cyclical measurement and looks at the long-term rate of change and its impact on economic performance. The Shift Index is focused on three sets of main indicators:

* Foundations, which set the stage for major change
* Flows of resources, such as knowledge, which allows businesses to enhance productivity
* Impacts, which help gauge progress at an economy-wide level

Index data points – click through for detail.

This paper resonated with me because it offers a simple model that is understandable, yet when I study the detail in behind, it captures the host of data points that provide the confusion and contradictions.  It deals front and centre with the reality that corporations, including banks, are not exploiting the digital infrastructure that is presented not the new capital, talent and knowledge flows that are present.

In simple terms the model has three waves, with the first two being drivers of change, and the third being the corporate outcomes.  The current situation is, understandably that, the impact wave is lagging the first two waves.  In short companies are failing to react and explout the opportunities offerred by the new digital infrastructure and knowledge flows that are available.  The result is more of what they refer to as toppling – companies failing.  They also note the recession is masking the longer term shift that is really happening.  This document screams – plan for the future, not the recession.

After my last post, I thought it better to follow up with some facts to support my contention that this economic recovery is L shaped in Canada and US.  This is not meant to be an economic projection, and I leave that to the professional economists.  However in terms of planning, banks ought to consider the high probability of a scenario where the reduction in economic activity will level off but hardly see growth in the near future.  This will be driven by consumer confidence and frankly their financial circumstances.

If we go back to the root cause of the recession it remains this;   a dramatic drop in consumer asset values resulting in leverage that is too high.  Layer in the concern about job security, and the real increase in unemployment, we must look carefully at ability to manage the debt based on current income, and the effect of that on the business of banking.

Here is the ratio of debt to disposeable income in Canada and US at end of 2008. [source: CGA Association Canada & Federal Reserve Bank of San Francisco]

Canada              US

%                                  136.5%             130%

The first surprise is that Canadians are more highly levered than Americans.  The CGA report makes these points amongst others:

… prospects of improving households’ financial situation in the near future are low. A balanced approach to spending, saving and paying down debt may be a desirable feature of households financial behaviour in the near future.

Hardly earth shattering stuff but the consequences remain that strategies need to account for this new consumer mindset in North America for the next few years.

When thinking about the future and the economic position of countries that banks must consider, I listen far less to politicians and more to IMF and World bank forecasts.

The use (misuse) of the term recovery fails to acknowledge what the circumstances for people and businesses will be on the other side of the recession.

Here is a new report from World Bank that looks to the future with more pragmatism, although they still use the word recovery.  Note their focus is skewed by their mandate for developing countries, however they have to look at the entire economic picture to get there.

Global Development Finance 2009: Charting a Global Recovery | World Bank

The world is transitioning from an extended credit boom and economic overheating to an era of slower growth. Looking to medium-term developments, participants in the international financial system—consumers, investors, traders, and firms—must adapt their behavior to the new realities of tightened credit conditions, a prominent role of the state in financial affairs, large excess capacity in many industrial sectors, and more closely coordinated regulatory policy

The use of the word transition here is important.  Consumers and businesses are moving from one reality (pre 2007) to another over the next 5 years.  That transition affects all bank customers, so its worth considering the impact of those shifts, and how products and services ought to be re-thought.

In simple terms the booms over the last 10 years which banks saw in mutual funds and mortgages with easy product volume crashing through the door will be replaced with thoughtful and careful consumers, who are wary of banks, for multiple reasons.  Banks took a credibility hit over the last 2 years, and that credibility will take time to restore.

Confidence in the international financial system must be restored

On a final note, it is important to recognize how the severity of the current crisis has undermined confidence in the international financial system (annex 3B). Many economic and financial indicators have exhibited unprecedented declines, moving us into uncharted territory in several respects. Uncertainty surrounding the outlook remains at an all-time high, suggesting that a nascent global recovery will be vulnerable to after-shocks of the present crisis and may not survive any marked deterioration in financial conditions.

(Source:  World Bank use both market- and survey-based proxies to gauge investors’ confidence, combining them with measures of consumer confidence in Canada, Germany, Japan, the United Kingdom, and the United States to extract a common global index, using the  well-established method of principal component analysis.)

The report has downgraded the view on growth for 2010, and as important speaks at length about the risk associated with the projection still being too optimistic.  The graph does suggest that investor confidence is ahead of consumer confidence.

The report calls for an increase in breadth and depth of financial services regulation.  The association of government with banks through increased balance sheet support, and regulation could be a double edged sword.  Government influence suggests increased safety, but it also implies more costly services.  Customers will watch this influence carefully, and look for those banks that match their expectations and needs.

We were just hit today with a case of fraud that affected my family personally, and it just validates my view that the security of our payments networks is a problem being swept under the carpet.  Every day, all banks contact thousands of customers to cancel their debit card because it was or may have been compromised.  This is a well kept secret, and has not made mainstream press yet.

In our situation we actually were the card compromised, and I know enough about the card usage to narrow down the location of the compromise which is why this one worrys me.  The compromise took place at a merchant, either a restaurant or a sporting goods store.  No ATM was involved so the compromise had to be a parasite POS terminal.

In our case the criminals used an ATM to withdraw cash shortly afterwards.  Incidentally thanks to our Bank for picking up on this event within a few hours and dealing with it.

Chip migration offers hope but only after mag stripe is eliminated, and that is another 6 years off, even though chip cards are now being isued in 2009.  The entire POS terminal fleet in Canada could be replaced quickly if their was a will to do so.

Chip Migration plans | EMV Canada

Interac Association has established migration dates for cards and terminals. Complete card and ABM conversion is required by the end of 2012; complete point of sale (POS) conversion is required by the end of 2015. After 2015, Interac debit magnetic stripe transactions will no longer be accepted at devices in Canada.

and this from Interac

The chip transition timeline

Every Acquirer (or payment service provider) has its own timetable in place for providing chip terminals. In order to ensure a smooth transition, Interac Association has implemented final conversion deadlines that work within merchants’ normal business cycles, so that merchants will be able to transition to chip within the set timeline and with minimum impact.

• Interac chip cards and terminals are already being rolled out across Canada.
• Complete migration to chip technology will take several years and the timetable for the introduction of chip will vary from one financial institution, and one service provider to another.
• All Automated Banking Machines (ABM), point-of-sale (POS) terminals and banking cards across Canada will be upgraded.
• Magnetic stripe debit card transactions will no longer be accepted at ABMs after December 31, 2012.
• Magnetic stripe transactions will no longer be accepted at POS after December 31, 2015.
• Chip cards will continue to carry the magnetic stripe, not only to facilitate the chip transition period, but also to allow cardholders to use their debit cards in other countries that do not use chip technology.

Relevance to Bankwatch:

Chip cards are coming, but the timeline is unacceptably long, out of desire to keep merchants, acquirors and issuers costs down.

In Japan, debit has never taken off.  On the other hand Suica and Pasmo are very popular, and gaining outside the original use of train service only into convenience stores and other small purchase locations.  That includes beer, other alcohol, magazines and movie rentals.

The idea of leaving thousands of dollars in full view with a 4 digit number as the only key is insanity.

Suica is successful because its handy being a wireless swipe,  and low risk with small amounts stored.

Chip will introduce the security of a non copyable card (we hope), but the 6 year wait in Canada is going to be an unfortunate inconvenience for the thousands that are compromised and have to replace their cards.

Reaearch by Nobuyo Henderson

A new working paper from the IMF reviews the Canadian mortgage market, and compares to the US.  There are striking differences, which they characterise as ‘boring but effective’.

Canadian Residential Mortgage Market | IMF working Paper {pdf – 18 pages]

Mortgage securitization is not as pervasive in Canada as in the United States, despite the shift toward bank origination and stronger government presence in the market. Only $267 billion (29 percent) of loans have been securitized, compared to about 60 percent of U.S. residential mortgages. $245 billion of these securitized mortgages are held by special purpose vehicles that issue mortgage-backed securities (MBSs) guaranteed by the government-owned Canada Mortgage and Housing Corporation (CMHC) under the National Housing Act.3 $142 billion of these NHA MBS were held by the Canada Housing Trust, funded by the CMHC-guaranteed Canada Mortgage Bonds (CMBs) (Figure 2).4 Only $24 billion were held by “private label” securitization vehicles.

This has little directly to do with banking per se, but it has a lot to do with information seeking, gathering, and the seismic shifts in how transparency of otherwise opaque bodies can be nullified by the internet tools available.  It is also just plain fascinating, and something all strategists should watch and try to understand.

Whether this was innocent or otherwise, it appears to be a fact that it happened hence the significance.  Also read here for discussion and note the ‘informed’ comments.  One cannot help but think that there is something deliberate to all this, and even that Twitter may be an unwitting accomplice.

[If this is the same guy, Cohen is actively engaged at State in Middle Eastern affairs, and published this "Iran’s Young Opposition: Youth in Post-Revolutionary Iran".]

With a hint to Twitter, Washington taps into a new force in diplomacy | NY Times

Yet on Monday afternoon, a 27-year-old State Department official, Jared Cohen, e-mailed the social-networking site Twitter with an unusual request: delay scheduled maintenance of its global network, which would have cut off service while Iranians were using Twitter to swap information and inform the outside world about the mushrooming protests around Tehran.

The request, made to a Twitter co-founder, Jack Dorsey, is yet another new-media milestone: the recognition by the United States government that an Internet blogging service that did not exist four years ago has the potential to change history in an ancient Islamic country.

“This was just a call to say: ‘It appears Twitter is playing an important role at a crucial time in Iran. Could you keep it going?’ ” said P.J. Crowley, the assistant secretary of state for public affairs.

update: Whose views are being managed and by whom? (Washington Post)

“Twitter’s impact inside Iran is zero,” said Mehdi Yahyanejad, manager of a Farsi-language news site based in Los Angeles. “Here, there is lots of buzz, but once you look . . . you see most of it are Americans tweeting among themselves.“

The US administration released a draft of their proposed regulatory framework today, putting the Federal Reserve front and centre.

The big theme is to promote broader control of any institution involved in banking, and to specifically eliminate exemptions such as the Thrift Charter.

Draft Fed report on Financial Institution Regulation pdf – 85 pages

This is a sufficiently provocative headline that I can hardly ignore.

Financial institutions have lost battle to protect customer data – TowerGroup | Finextra

US financial services firms have lost the battle to protect the personal information of customers and must now assume that all their clients’ data has been, or will be, compromised, according to TowerGroup.

First of all I agree with the headline.  The battle is largely lost;  I would go further, and hesitantly admit what few bankers will, that control over customers information never really existed.  Why do I say that?

Consider how banks have evolved, which is one account type at a time, one service at a time.  Each of those were managed by disparate computer systems, and as new products were added new systems were added. This problem has only been magnified by bank consolidations which added even more disparate systems.

The result is that Joe Customer has ‘files’ located within different systems, each with his own address, and personal information.  In fact he is often Joe C. Customer, or J.T. Customer in those other systems.  Government regulation that forestalled the use of Social Insurance/ National Insurance numbers as identifiers forestalled any common macro identifier for Joe.  The result is that the bank is not sure of Joe is the same in each system or not.  Similar addresses are a clue but hardly definitive.  I will have more to write on this later.

Lets return to the Tower piece in Finextra:

Meanwhile, companies should assume that traditional account information such as name, address, date of birth and account balance are useless as authentication factors. Instead they should consider using knowledge-based authentication and one-time passwords delivered via SMS.

Relevance to Bankwatch:

In other words, the very information that Banks do not fully control nor understand in context of customer identification, is the the same information that cannot be relied on any more.  The conundrum is that is the only information that banks have in place to rely upon.  This is hardly a recipe for success nor customer loyalty, and small wonder that customers accept and promote use of disaggregated financial services, spreading themselves between institutions as their own personal risk mitigation strategy.

Banks are very focussed on transaction security, using chip cards, two factor authentication and the like, but this does nothing for information security.  The Bank that can ever crack this nut by offerring complete information security, such that Joe in our example can feel confident about his financial information not being compromised might just give itself a leadership edge.

Europe and the ECB are slow with dissemination of analysis and information when compared to the IMF, US and UK.  But when they do, here is 226 pages of analysis that tells us Euro Banks will write off $283 Bn over 2009/ 2010.

More to come after I get a chance to digest, but meantime here it is for your reading pleasure.  They key is the general deterioration and reduction in forecasts since last in December 2008.

ECB Financial Stability Review pdf

The further significant deterioration of global macroeconomic conditions since the finalisation of the December 2008 Financial Stability Review as well as sizeable downward revisions to growth forecasts and expectations have added to the stresses on global and euro area financial systems. The contraction of economic activity and the diminished growth prospects have resulted in a further erosion of the market values of a broad range of assets.

Connected with this, there has been a signifi cant increase in the range of estimates of potential future write-downs and losses that banks will have to absorb before the credit cycle reaches a trough. Although there are great uncertainties surrounding such estimates of probable losses and of the  outlook for banking sector profi tability, the scale of estimates of potential write-downs has weighed on investors’ confidence in the resilience of already-weakened financial institutions. Refl ecting the challenges confronting the euro area banking sector, funding costs have remained elevated, the market price of insuring against bank credit risk has continued to be very high and the market value of many banks’ equity has remained significantly below book value.

Eurozone banks face $283bn writedowns | FT

Eurozone banks face additional losses of more than $283bn this year and next as continental Europe’s severe recession intensifies strains on its financial sector, the European Central Bank has warned.

The fates of the eurozone economy and its banks have become increasingly interlinked, the ECB reported on Monday in its latest “financial stability review” with banks losses expected to be focused on their loan exposures. Risks to the stability of the financial sector remained high, it said, while “uncertainty prevails” over the shock-absorbing capacity of the banking system.

As noted in Nov 2007, the next thing to watch following sub prime which was already prevalent then was credit card defaults.  It has taken longer than expected which is interesting, but it is now clearly a trend, although being managed so far.  It is clear that credit card companies are pro-actively managing the situation knowing full well that to ignore would bring disaster.  Read Calculated Risk here for examples.

Capital One Chargeoffs Rise To 9.4%; American Express Chargeoffs 10%; Card Issuance Drops 50%

Credit cards losses are accelerating at Capital One, a trend one should expect to continue given the rapidly rising unemployment rate. Interestingly, Capital One is returning TARP funds.

Rising defaults are also being noted in Japan as an issue.

5月の米クレジットカードローンのデフォルト率、過去最悪を更新

［ニューヨーク　１５日　ロイター］　米国のクレジットカード利用者によるデフォルト（債務不履行）が５月に過去最悪を更新し、米国の消費者が置かれた厳しい状況が浮き彫りになった。

また、規模が小さいキャピタル・ワン・フィナンシャル(COF.N: 株価, 企業情報, レポート)やディスカバー・フィナンシャル・サービシス(DFS.N: 株価, 企業情報, レポート)では、デフォルト率の上昇幅は予想を下回った。デフォルト率は、キャピタル・ワン・フィナンシャルが８．５６％から９．４１％に、ディスカバー・フィナンシャルは８．２６％から８．９１％に上昇した。

Researched by Nobuyo Henderson: – Credit Card companies are next to have financial problems.

Here is a quick summary GDP forecasts for North American planners.

Courtesy of CBC here is the summary of the banks and Bank of Canada GDP forecasts for 2009 and 2010.  For me the open question remains to what extent 2010 is wishful thinking.  The other and related problem with the graph is that GDP growth is calculated on a moving base.

So the other way to read this is that even if the 2010 forecasts are correct, the absolute dollar GDP at December 2010 will not have achieved the level of Dec 2008, or 2 years previous.

The IMF forecast for US GDP is here, and 2010 is barely in positive territory so that economy is still weak till beyond 2011:

4. The staff’s outlook remains for a gradual recovery, consistent with past international experience of financial and housing market crises. The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010. Against this background, GDP is expected to contract by 2½ percent in 2009, followed by a modest ¾ percent expansion in 2010 on a year-average basis (on a Q4-over-Q4 basis, -1 ½ percent in 2009 and 1 ¾ percent in 2010). Meanwhile, growing economic slack—with unemployment peaking at close to 10 percent in 2010—would push core inflation to very low levels, with the headline CPI expected to decrease by ½ percent in 2009 and increase by 1 percent in 2010.

And Europe here:

I happen to believe in the L shaped recovery theory.  Recovery will be based on a stop in the reduction of growth, and will flatline there.  We will not go back to the GDP $ levels of 2007 ( a return to 2007 would require a V shaped recovery).  This post from Mish summarises why, quite well.

The $3.6 Trillion Leveraged Loan Wall of Debt

However, the clock is ticking on many things at once: Leveraged loans, boomer retirements and subsequent downsizing, Pay Option ARMs recasts, Alt-A recasts, and last but certainly not least, a jobless recovery that ensures massive credit card defaults. Such structural problems in conjunction with changing consumer attitudes towards debt all but guarantee an L-Shaped Recession. The recession will end, but don’t count on a recovery.

Canadian Telco’s beat the banks out with the first serious country wide example of mobile payments in Canada, and frankly one of few in the world.  This is just one more example of disaggregated financial services, that cip away parts of what was previously banks’ territory.

The use of NFC technology is also worth noting here.  NFC (Near Field Communications) permits wireless data transfer over distances up to 10 cm.  This is designed to eliminate accidentally purchasing Dave Birch’s coffee for him.

In all seriousness while this has been a long time coming, my sense has always been that the telco’s would be front and centre in the payments business.  The 3.5% fee they are charging is essentially money for next to nothing to them in terms of revenue vs outlay.  They already have the riht deveice in the hands of consumers so they are off to the races.

Bell, Rogers, Telus to launch mobile payment service

The venture is the first tentative step toward a true mobile wallet, where phones equipped with the NFC chips themselves could be used in everyday transactions. Such phones are already in use in countries like South Korea and Japan, but have yet to come to North America except in trials.

Robin Dua, president of Enstream, said he hopes the service’s use of the NFC-enabled cards will pave the way for future adoption of NFC chip-enabled phones.

The software will work on most smartphones, including many of Research in Motion’s BlackBerrys. An iPhone application is also in the works he said.

Reuters have a summary section on the banking stress tests.  I think this is a topic that will come back in a years time, when new cracks begin to show.

Reuters

Banking Crisis – The Stress Tests

Researched by Nobuyo Henderson

California might just be the forerunner of a trend here.  The single largest impact of the new smaller world we have entered is reduction in tax revenues, and with Government costs higher than before, the need for deleveraging applies to Government too.

MISH’S Global Economic Trend Analysis

California State Controller John Chiang says California 50 Days From Financial Meltdown.

….

Personal income taxes were $475 million below (-23.0%) estimates in the May Revision. Corporate taxes were down $84.4 million (-25.8%), and sales taxes fell by $109 million (-3.3%).

Researched by Nobuyo Henderson

The last time saw a graphic such as this was 2007, when the schedule for mortgage resets on US sub prime mortgages pointed to an inevitable crash beginning end of 2007 and through early 2008.

Well here is the next picture that is eerily similar with forward predictions of similar catastrophe in 2011.   The US option ARM.  Apparently these are not necessarily sub-prime at least right now.  The real danger exists in the event that interest rates increase meaningfully to co-incide with the reset dates.

Also we must look at this in the context of the Banks rushing to repay government TARP / SCAP money.  It is quite possible the reverse will be happening with some banks in trouble again in 2011.

Option ARMs: Paying $98 a month on a $350 Thousand Mortgage | Calculated Risk

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

…

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

This new report (12 pages) with the subtitle ‘Restoring Broken Markets’ deals with the new reality of frozen securitization markets and the renewal of traditional banking – re-intermediation – as the backstop point along with 5 others including industry consolidation, government ownership, and consumer protection.  This is the first in a series, and I for one cannot wait.

Its a fantastic read, and ideas just start leaping off the page as you work through it.  But before we get into design, lets look at current state.

The Deloitte Center for Banking Solutions

The Deloitte Center for Banking Solutions is pleased to present the first in a series of papers on the new financial services marketplace. Entitled “Restoring Broken Markets,” the current piece explores the emerging trends that signal a paradigm shift in the financial services sector and the resulting implications for institutions, corporate America and the consumer.

The report makes for a good backstop to add to the mix when considering strategic options for the next few years.  This is the time to consider the implications on product and channel development in the context laid out here.

The first paragraph sums up precisely how I see things at the moment (emphasis mine)

The global financial system is undergoing a dramatic transformation. A period marked by high leverage and ever more complex financial products has come to an end. In its place, a new financial services marketplace that is now emerging will require different strategies and different business models.

I highlighted words in that initial paragraph to emphasise a point that I have been harping on – recovery does not mean a return to 2007.  The fundamentals have shifted, and I see three core characteristics that apply to bank strategy:

1. Leverage is now too high relative to new asset values, be it homes, stocks or corporate asset values.  Asset values will not go back to 2007 values so debt must come down.
2. Products are not longer relevant to the new marketplace.  Bank products are largely established based on criteria that apply to 2007 securitization rules.
3. Trust is eroded and customers have lost what little faith they had in Banks to do the right thing.

The trends outlined in the report are critical trends.  It is essential that Banks take a close look at their reponse to those trends.  Already we see a shift towards even more online deposit gathering, including account opening and GIC gathering.  We see Ally Bank with a return to a simplicity, online only, no small print, approach, that is clearly aimed at the new marketplace.

Ally is a great start and a return to the simplicity needed in this new environment we are entering.  Even there though the offerring is predicated (today) on rates.  Notwithstanding the other attributes Ally offers it is clear to me and I am sure to them, they will need to shift beyond rates in terms of meaningful offerrings when other banks enter the fray.

This is what I find fascinating about the space we are entering.  We will see hosts of ‘me too’ offers from the financial utility banks, but it is the innovators that will design products that capture new market share.

One contention I have long held is that product definition and channel definition (online, phone, branch) are not mutually exclusive.  We can go further and look at product defintions between products as also not being mutually exclusive.  In 2007 it was important to have products with uniform definitions that formed contiguous bundles for shipping off to the securitization market.  Now, instead of designing for securitization, banks must design for customers.

Examples:

• Credit Cards are designed to eliminate bank origination costs and shift default cost to the consumer through high rates.  Surely there is a better model in there?
• Mortgages are designed to allow the consumer to, in effect, forget about an enormous debt burden, while interest is maximsed and principal reduction minimised.
• Chequing and savings accounts is a brilliantly successful method of ensuring free deposits by separating funds into a vehicle that customers manage by leaving extra cushions of funds to protect against monthly automated debits.
• Personal Loans (short term 2 – 3 year) are with their intrinsic predilection towards principal reduction are downplayed in favour of credit cards – see above.
• GIC / CD products are designed to match the mortgage securitization market precisely and at current rates the customer will be paying the bank to hold GIC’s soon.

It is easy for armchair bankers to criticize product design now, and I realise I was there through all of it.  All I am saying is that the current product design is obviously designed to match an environment that is long gone; this is an exciting time to be in product design. Read the Survival 2.0 section of the report, and I challenge you to not be both scared and excited.

One early step for banks would be to ensure that product groups are amalgamated during design exercises, and do not forget those lonely channel folks in ATM and Online banking.  Collaboration is good.

This report offers real context and implication for new designs.  Anything less will merely provide more of the same and we know where that got us.