The Bankwatch

A useless piece of trivia from the markets.

Apple is worth as much as all EU banks | Financial Post

Technology company Apple is now worth as much as the 32 biggest euro zone banks.

That’s the stark result from a steep fall in the share price of banks including Spain’s Santander, France’s BNP Paribas, Germany’s Deutsche Bank and Italy’s Unicredit, compared to a steady rise in Apple’s valuation, according to Thomson Reuters data.

Step by step this cynical blogger is becoming a convert.  Raising $10M is a big deal.  It seems the model is to provide a quality front end with a bank and FDIC guarantees behind.

I remember back in the 90’s when internet was new and one of the models we conjectured was banks becoming ‘manufacturers’ sitting the in the background offerring banking services wholesale.  Part of that model requires Banks to buy in.

BankSimple have absorbed that model it seems and found willing providers.  key will be the financial arrangement between the players.  It is easy to take on the costs for the front end (BankSimple) but the bank must accept a fee structure that accepts they are relatively dormant in the back end.

More power to BankSimple and lets see where this goes.

The latest round of financing was led by current investor IA Ventures and joined by existing investors and Shasta Ventures. It follows an initial round of $3.1 million raised in September last year.

In a blog post, BankSimple founder Joshua Reich, says: “This financing allows us to shift gears from building BankSimple to launching BankSimple. Our business has many moving parts and this capital allows us to scale our engineering, operations, and customer service organisations in preparation for launch.”

This is a must read for anyone interested in banks and banking.

The coming world of smaller banks | Frank Partnoy – ft.com

How many people does it take to operate a modern bank and how much should such a bank’s shares be worth?

With that simple question Frank kicks of the article by reciting the seemingly dramatic reductions in banking staff.  Yet he points out the markets reacted by driving down stock prices of banks.  Then comes the killer point (emphasis mine)

Bank analysts cite several reasons for share price declines, including litigation exposure, declining investor and consumer confidence and a faltering economy. But one overarching factor, which also explains the increase in lay-offs, is the declining importance of banks.

Banks are supposed to play only a limited function in the economy. Historically they just match lenders and borrowers. Most banking activity – lending, underwriting, mergers, sales, trading and wealth management – revolves around the allocation of capital. But over time, banks have expanded into riskier and more complex activities, including structured finance, derivatives trading and regulatory arbitrage, which can allocate capital in distorted ways. But even distorted capital allocation is still capital allocation; for better and worse, that is essentially what banks do.

He goes on to compare technology companies such as Google, and Apple, and even refers to hedge funds all of whom attack problems strategically and not by throwing people at the problem.

He concludes by noting that whereas companies are broadly in business for the benefit of shareholders, banks have lost that and are in business for the benefit of employees.  Ouch. 

… although banks are supposed to be exemplars of capitalism, during the previous two decades, bank employees have consistently won the labour-capital battle. As banks expanded, employees extracted most of the gains, like professional athletes demanding their teams’ profits and leaving owners with paltry returns, or even losses.

The year 2008 was a tipping point for banks, exemplified by the sight of those bank leaders paraded before Barney Frank and Congress like errant schoolboys.  There has not been a better time for banks to get radical and break out of the current mould which results in all banks looking identical. 

Potential examples:

Thought experiment:  As a top tier full service bank, do we need …

• a brokerage – typically the least loyal of banking groups, there is less correlation between banking customers and brokerage than one might expect
• a derivative trading desk – if you need to hedge then purchase from someone else.  Why carry the employee overhead and counterparty risk?
• technology system developers & project management – yes … eliminate all system development, and project management.  Retain only the staff that are needed to maintain the current systems (perhaps 25% of current technology team).  Concurrently hire some new developers all under age 30 and many under 25.  Begin with a small team and work out from there.  They will build new systems using modern languages because that is what they know.  They will be able to connect to the old systems but will treat them as the black boxes they are and  graduate functionality and smart decisioning algorithms to the new front end.  Remember you cannot get there (modern internet platforms) from here (legacy and disparate systems).  Time to cut the cord.
• branches – the largest use of employees.  Time to get serious about banking online and move certain functions online.  Why open any bank accounts in branches.  It is a 1 hour exercise and one of the most labour intensive activities.  There are ways to manage AML activities online and automate those functions.
• loans officers – eliminate loans in branches and route to credit card division?  Automate personal lending and manage online only?
• ABM machines – enormously expensive and labour intensive to run.  Could be outsourced.
• flagship head office branches – today you can fire a missile through most and be unlikely to hit anyone except the bored staff.

Relevance to Bankwatch:

The message here is that incremental reductions of 10% here and 15% there are patchwork solutions designed to reduce expense run rate, and assume the remaining staff will pick up any slack.  Once you get over the pride hurdle of managing a full service bank that must have all the same departments that the competition does, frees up thinking to dramatically reduce run rates and shift towards a leaner more agile institution. 

Coupled with that must be a resolve to shift to modern adaptable technology platforms. I am aware of one bank that is thankfully rolling out a new upgrade to its commercial banking online platform this month (buzzwords removed to protect the innocent).  The big news is that this is a shift from a DOS based platform to windows .. wow! 

Banks for too long have been locked into large platform providers that have had a business model of aggregating providers over the last 15 years rather than providing simple break out web based systems that just work … online.  Give me a few Ruby developers over a monolithic bank technology division any day.

About time is all I can say about this.  The country that sticks to miles and mag stripes truly needs to get with the programme and I hope Visa are serious about forcing this through.  MasterCard should be all over this too.

Visa cites m-payments as it pushes US to EMV | Finextra

Now card giant Visa has set out its programme to drive the adoption of dual-interface chip technology to "help prepare the US payment infrastructure for the arrival of NFC-based mobile payments" as well as improve security and international interoperability.

This from June 17th, 2011 based on an IMF report indicating political risk in the US,  seemed to many as an irrelevant comment at the time.  No more, and note the reference to political risk in the S&P report.  All the talk of the $2 trillion mistake is missing the point. 

Even after the mistake is adjusted, the fact of American arrogance and political ineptitude between the three branches of government (Congress, Senate, President) adds up to political risk when viewed from outside America.

Alex at mybanktracker.com has a review of the current trend to eliminate bank debit rewards, following changes in interchange rules.  He has identified which banks are involved along with the article describing the background.

This article is a good example of buzzwords getting ahead of common sense, at least as much as we can discern from the articles.  Apologies for picking on Westpac but none to Microsoft or IBM.

Westpac to save from its own private cloud AustralianIT

Next month, Westpac will begin migrating about 40,000 mailboxes to the single Outlook platform from IBM Lotus Notes and Novell GroupWise used across the group. Full implementation is expected to take between 12 and 15 months.

With the private cloud, Microsoft applications will be hosted at Fujitsu’s local data centre and accessed by Westpac staff.

So far so good.  They need to get off technology from 1992 – we can understand that. 

Then …

He said an important factor for the move into the Microsoft private cloud was so that staff would have "hooks into the external world" of Facebook and Twitter.

The consolidated communications platform means staff will not have to toggle between Lotus Notes and a separate version of SharePoint then dive into a site such as Twitter outside the network, Mr Girn said. "They will have one container, one Microsoft dashboard in an integrated environment."

What can we imply from this:

• Microsoft Cloud is touted as a means to view email, Sharepoint and Twitter together.  (Last time I checked I can do that in my browser …hmmmm)

Finally, this from Nov 2010:

Major customer Westpac has renewed its IT outsourcing contract, believed to be worth more than $1 billion.

IBM will help Westpac transition to a new data centre in 12 months, as the bank ramps up its data centre consolidation exercise.

He said Westpac would look to IBM to delve into the world of cloud computing

Lest anyone doubt it, bank technology is far behind.  This is no exaggeration. 

My interpretation of the Westpac arrangement with Microsoft is that it adds incremental cost to their systems without any appreciable long term benefit.  But if they are really buying into a cloud arrangement with Fujitsu why did they commit to new data centres costs last November with IBM?

There is just so much wrong with these announcements.  If banks want to modernise their infrastructure and lever either private or public clouds first get a clear strategy.  First decision is internal or cloud.  If cloud, next is public or private cloud. 

The implication of cloud is to migrate existing infrastructure with a view to flexibility, speed to market, and cost savings.

Lets not talk about Microsoft cloud simply to get internet access, as it sounds above.  This does nothing for Microsoft, for the ‘cloud’ as a concept or Westpac.

Relevance to Bankwatch:

Going back to bank technology and being behind.  Everyone assesses every company today based on what they see on their laptop.  It needs to be quick, simple and effective.  Banks need to do all that, as well as to be able to communicate easily with their legacy systems. 

Therein lies the real challenge.  Its all very well to have a call centre employee chat on twitter but they also need to be able to quickly look up customer information.  This is a small hint at the prospect from cloud operations that house all systems (in a perfect world), yet I don’t get that from these confusing Westpac announcements which feel to me that they are being driven by vendor PR needs, not yours.  Sorry Westpac.

With only a few days left the people who manage money, banks and traders are essentially warning of a September 2008 scenario.

Fed under fire over default talks

They want to address contingency planning for a run on money market funds that hold Treasury bonds, the impact on capital and liquidity ratios if there are large inflows or outflows of deposits and the potential effect on short-term financing from any problems in the repurchase, or “repo”, market.

Brett King has a three part series of blog posts on Finextra that provide a good backdrop to state of startups in financial services.

I commented today with this, and wanted to expand on it after about the notion of disrupting banks.

I would take issue though that we are perhaps not yet seeing the ‘disruption of banking’.  As both a long time observer and market participant (disclosure – I am involved with CommunityLend in Canada) I see these startups carving a useful niche, sometimes profitable, sometimes not.  These niches are small and particular.  I believe Giles (quoted – from Zopa) when he states he has a better credit model and he is also particular in what he allows on the books.  Not to defend banks, but they have been under political pressure for decades to provide banking services to all.  It is also true they have been driven by quarterly targets to maintain stock market returns ( and employee bonuses).

This targetted versus generalist customer model view goes some way to explaining what we see in todays startups.  It might also go some way to describing what the future of financial services might look like;  a much more divided, niche, targetted set of providers numbering in the hundreds or thousands could well be an outcome.

We are yet to see a model that scales up the way a large bank scales however.  It is wonderful to see the start up activity that we see and I am happy to be part of that, but I include our own efforts in recognising that we are only nipping at the ramparts of the big banks, but we are hardly threatening to tear down those walls yet.

As a side note, in that future world of many startups providing financial services, I wonder how the regulators will act and what the impact will be of the first major catastrophe that affects thousands or millions of customers somewhere – a reality that will undoubtedly and unfortunately occur.

The idea of disrupting banks is something we all think about, but it is hard to do.  Part of the reason is that banks are the sum of very attractive component parts (deposit taking, lending, servicing fees) that requires them to be part of a restricted club run by the government, and the cost of entry to that club is very high.  Once you are in, you can operate on a very low capital base thus reducing cost of capital lower than other industries.  This makes banks attractive and it makes them resilient to disruption.

So start ups come along, see this barrier to entry and attack banks by picking one of the banks’ component parts, say lending (Lending Club) , or say servicing (BankSimple) and target that vertical amongst niche customer markets.  Sometimes this avoids regulation, sometimes not.  Just ask the P2P Lending folks in North America.

Going back to my comment on Bretts post this has not yet shaken any banks or required them to shift strategy in response.  In fact one of the problems with banks is that while everyone complains about them, almost everyone trusts them with their money, largely due to the implicit government guarantee even beyond deposit insurance limits.

The magic will come some day when a start up is able to satisfy the aspects of trust and superior service or even better , make some aspects of banks’ irrelevant by displacing some core aspect of their model with sufficient volume to matter.

The General Accounting Office (GAO) in the US as requested by the The Dodd-Frank Wall Street Reform and
Consumer Protection Act directed GAO to conduct a study of person-to person lending.

Their report is now released at http://www.gao.gov/products/GAO-11-613

It provides a comprehensive look at how Lending Club and Prosper work, the challenges P2P Lending presents to the regulators who are based on pre-internet business models.

This report addresses
(1) how the major person-to-person lending platforms operate and how lenders and borrowers use them;

(2) the key benefits and risks to borrowers and lenders and the current system for overseeing these risks; and (3) the advantages and disadvantages of the current and alternative regulatory approaches.