The Bankwatch

Tracking the consumer evolution of financial services

Archive for the ‘Business Models’ Category

The coming media crisis and parallels with the financial crisis

A general thread that has been building for me for some years now is highlighted in a few things I have seen recently. The thread is my hatred of advertising and in particular online advertising. For me it lies in the same category as junk (paper) mail except worse. I can simply throw paper junk mail out as one package, so it is not intrusive. Online advertising is horribly intrusive because it is pervasive. I use lots of things to ensure my online experience is minimally interrupted by ads

In 2004 people were asking about blog business models. Now it is social network business models. I have suggested other ways to deal with business models, but the mob continues to aim directly at advertising as the answer. It will pollute the web, and result in the opposite result than what is desired. It will not bring sustainability for them using advertising.

So what happened this week.

  • twitter volumes are already dropping. Pick any topical topic and search it on twitter – result 80% of the tweets are re-tweets of the topic. Its a gigantic echo chamber. In fact the next question – how many of those re-tweets were someone with a vested interest, a professional marketer, or a PR company? The theoretical value of wisdom of crowds does not allow for gaming the system. The black swan of twitter search.
  • the volume of requests to me at this blog for linkbacks, blogroll links and outright requests for ads is increasing significantly. That will never happen btw. However it is indicative of the desire for ‘social media’ results
  • A good friend who despite my recommendations still uses hotmail (now windows live). This persons entire contact list and archive of emails were deleted and it turns out this person not alone. Some kind of scripting virus inside hotmail launched by making the wrong click and signing up for something let the virus in. The clue was emails to all the contacts notifying my friend was happy with some TV or the like. Needless to say my friend is now using gmail exclusively but its a bitter lesson.
  • techcrunch reported on the real evil of ad networks online and the significant money being made. Its a long post, but the key is that no-one is generating any real value here. Individuals are getting rich and that is all.

So what is the point of these seemingly unrelated observations especially as I am a devout proponent of the value of internet. What I am against is traditional interruption advertising coming online. It pollutes the medium and hinders the genuine creation of new and valid business models.

Today I read Umairs post at Harvard and that solidified it all for me (Umair does that). He points to the coming online crisis that is the online version of the subprime crisis. Readers of this blog get the sub prime crisis. The coming online crisis is one of trust, and realisation that online activities require security and protection yet something more which is still to be invented – control. It will be a crisis and it will be a broad based internet crisis of confidence. The result will be serious and cause serious grief for banks and others who have come to rely on online for servicing.

The parallels with the financial crisis are interesting. The financial system was getting better and better at recycling money and the convoluted networks that were built lost sight of the origin of the credit instrument, and the underlying risk. Causes were lack of transparency, shadow markets, rapid expansion, and mis-allocation of risk amongst others. In the case of the online advertising market, there are similar attributes. Transparency is non-existent in most cases, because there is no way to know who is behind those ads. Shadow markets and rapid expansion – ditto. Mis-allocation is interesting. I avoid online ads because they are interruptive. At a deeper level, they are mis-allocation of resources away from user experience and towards the requirements of a stupid ad server that is busily collecting data on you. The value is highly one-sided – worse the server is gather data that may or may not be of any value. Internet is simply clicks – do clicks imply desire, need and future purchase patterns?

Relevance to Bankwatch:
Smart banks and others will look at the embedded value in the customer base they have and define models that add value to those people, not spam them. What is known about your customer base, and what do your customers actually want. Traditional advertising models assumes customer needs – internet models will (I believe) enjoin the customer to participate in the definition of what they need and in return protect them (the customer) from spam advertising. One example is the promise of VRM. But it is only one – others will be developed, and will be supported by powerful authentication tools.

Innovation is another loser in this coming crisis, or as Umair notes unnovation. In advertising land, innovation is all about finding ways to get inside peoples click patterns and drive ad revenue. There is not value created for the majority of consumers (90% + who do not click), nor for merchants who actually desire long term client loyalty.

This has turned out to be a negative post, but really it is intended to provoke thinking beyond online advertising and ad servers. Which innovations will align customer advocates and merchants in a genuine and trusted manner?

Written by Colin Henderson

November 12, 2009 at 21:57

Book | Business Model Generation: Osterwalder and Pigneur

It was exciting to open the mailbox tonight and see my copy of Business Model Generation.


I first met co-author Alex at LIFT in Geneva. He and his colleagues have performed much work focused on the aspects of business model creation, and in particular financial services. I was fortunate enough to be involved in a small way when Alex opened up the creation of the book online to what became 470 other online participants. The result is fabulous and a different kind of book … its more of a handbook for your business model.

I have been speaking here for two years that banks need to re look at their model. The current mid/post crisis situation for banks is dramatically different for them, when compared to the situation when they entered the crisis. The nature of consumer demand, and the mix of product requirement is different. Consumers are paying down debts, and taking a longer view of their finances. At the same time, Banks are looking at tighter liquidity requirements, and higher capital requirements all of which play into their ability to manage new product volume. Cost cutting will not be enough …. it will require drastic cost elimination in many cases to re-orchestrate the business model for the new normal. In this atmosphere, the old business model with tweaks will not, in my view, be enough. Amongst the financial utilities who are managed by government there is a real need and opportunity to become the innovator in financial services that is recognised by customers for being with them in this new world.

The book covers many aspects:

  • Canvas: definition of a business model
  • Patterns: understanding new models, eg free, open source, multi sided, long tail
  • Design: tools and methods
  • Strategy: evaluation and management
  • Process
  • Outlook and Afterward

It is a differently laid out book, and it is more of a handbook than a reference text. It is the kind of book you will retain on the office bookshelf and pick up often.

This is the perfect time to revisit banks’ business models, and Business Model Generation is in my view a great place to start thinking about that. I recommend it, and there is a complete 1st chapter available to download so you can decide for yourself.

Well done Alex and Yves.

PS .. in deference to the American FTC and their new requirement announced today, that people should believe what they say, ahem, I note that I believe the above and am not remunerated in any way.  Go Alex!

Written by Colin Henderson

October 6, 2009 at 21:14

A Sure Sign that we are at a Turning Point in Mobility and Use of Internet

I noticed an ad on CNN this afternoon, that really shows the gap that lies between old business and new business. The topic here is personal use of technology – how individual managers and executives use it. This reflects personal,and therefore institutional effectiveness. It reflects the difference in things happening over days, versus over months.

The ad was for GotoMyPC that “allows you to access your PC from anywhere in the word”. Its a funny ad that begins with a travelling executive who realises the information he needs is on his PC back at the home office, so he sends some carrier pigeons back to get his PC, and they forget the keyboard. Funny stuff, but there is much larger message here.

An no, the message is not get a laptop. That is a personal preference, and offers an interim solution, but does little for sharing the information, nor deal with hard drive crashes, or ensuring you have the latest version of the information. No this is a message about the ‘cloud’ and having the security of knowledge that you could be handed a blank brand new laptop today, and be up and running with everything you require in hours. That is security.

I have the good fortune to watch how developers use technology (new world) and compare it to the way bankers use it (old world). In both cases, the need is to share and co-operate on information. For developers the information is comprised of a large code base(s) and supporting requirement information. For business executives it comprises things like data, analysis, presentations, and plans.

First lets look at how this works and assume away from home office scenario:

Bank Executive preparing for a HQ meeting tomorrow:

  • opens laptop – can’t access hotel wireless network because of hardware security constraints on laptop. Eventually hooks up using ethernet cable although this forces him to sit on the uncomfortable chair, because the wire is too short
  • once online emails colleagues in different time zone to get the latest powerpoint after he realises his version on hard drive is probably not up to date. Also seeking the latest sales data because all he has is the end of August and now it is October. He has checked into SharePoint but it turns out the latest files uploaded are not the ones he assumed would be there and now he is freaking out.

Developer preparing to present to client tomorrow:

  • opens laptop, while in the comfortable seat, signs in (to laptop) and accesses wireless network. Hardware access security limitations not required because …
  • … he logs into github on the web (secure code repository) using SSH (secure keys) security through a secure tunnel. (incidentally, it is immaterial whether the developer logs in with Windows, Linux or Mac – same result – the consistency is at the code and network level, not the personal hardware level)
  • he pulls down the latest code base updated by developers from multiple locations, safe in the knowledge he has the latest version, and works on tomorrows presentation. Download is fast because it a series of text (xml data) which is not assembled into anything meaningful until on the laptop. Contrast with the bank experience that downloads actual large powerpoints, complete with large images etc.

Lets look at what happened there and the opportunity for business. In the case of the developer, the information base is completely abstracted from the individuals who manage it. Security is maintained through different access levels at github. The control lies in github. Different access levels in github provide some people access to send changes to git, while all can view. Not all can submit (“commit” in git language) those changes.

For the Bank executive it is all as good as he is at last minute changes, and in the hope that folks back in the other time zone get his last minute requests and whether he can integrate whatever he gets.

What is going on here? Well there are a few things at different levels:

  1. bank security is managed by licking down hardware and information. Hardware is locked down to become practically unusable, and often having the ‘smart’ executives use their personal gmail accounts to manage information exchanges (who will admit that method of keeping data in a handy cloud environment for access?)
  2. developer security assumes ant device could access the information, and security is managed by secure key exchanges and digital certificates.

Which of the above is the more secure? Which is more efficient? This is a fundamental question for bank CIO’s. It will turn out that 2) is the more secure, and also cheaper, but …. and I can hear this now … if it is cheaper how can it be more secure?

Relevance to Bankwatch:
Back to GoToMYPC. I hate to pick on them, and if fact they are providing a valuable service that circumvents many of the bank executives problems, but does not solve the intrinsic problem of securely sharing information.

The Github solution solves access, solves version control, and solves information management control. What if someone took the Github example and build a git for information, ie presentations, spreadsheets, documents, data access? Sorry SharePoint but from the moment you insist on proprietary Silverlight to enter you fail. Access must be open to alternative operating systems to access.


A github type solution that retains latest and previous versions ‘in the cloud’ yet still secure would be powerful. Github is not an afterthought, but part of the development process. Developers create on their own desktop, then save to git as they progress. This two step process allows for efficiency of a local desktop but retention of latest information in the cloud.

There has to be a way to shift banks into this type of environment, rather than the current method employed by most that offers security by making it well nigh impossible to do anything.

The challenge for banks and information security suppliers is to do what developers did … go back to the fundamental needs of executives and managers, which at some level is not at all different than developers and revisit the strategy. Yes this will mean throwing out investment in expensive infrastrucuture but if the alternative is better, faster, efficient, and saves money then the opportunity of sunk licence costs is immaterial. Perhaps it is time to move beyond personal pride and seek a better world for all.

Thoughts and experiences of bankers welcome, and feel free to be anonymous on this, if you need to protect the innocent 🙂

Written by Colin Henderson

October 4, 2009 at 15:06

Mullenweg’s Safe Bank Could not just Survive but it could Prosper

When Matt wrote his post the other day about starting a bank it got me thinking about the effect of what he is saying relative to profitability when we introduce a policy to be safe and carry capital reserves of 2 – 3 times more than todays banks.


– demand deposits = demand loans

– GIC (CD) = Mortgages

– incremental investment in higher returning mortgages is funded from cash

safe bank

Relevance to Bankwatch:

  • A $4 increase in gross profit results in a 15% higher Return on Equity when a lower capital ratio of 10% is accepted.  Note the stock market values ROE over absolute profits.
  • the increase in gross profit is not so much in absolute dollars, especially when we consider the additional risk taken on
  • the relative risk of Regular Bank is exponentially higher with $200 more in loans and $200 less in equity – thats a $400 differential
  • a 12% ($84) loan write down in Safe Bank is absorbed within the $300 capital, leaving them still at a substantial 24% capital ratio versus original 30%.
  • a 12% ($100) write down in Regular Bank eliminates their capital and requires FDIC takeover – THEY ARE GONE!

The basic question then is whether the Regular Bank can make up the absolute dollar shortfall relative to Regular Bank of $4 (20% of Regular Bank gross) by efficient operations, less /no branches etc.

A 20% improvement seems doeable.

This simplistic model is deliberately just that – simple.  It does suggest though that there is an opportunity to consider a different model that will still satisfy shareholders, but also satisfy common sense and a more conservative risk profile.  Which Bank will step up to this model?

Thoughts and critiques from the Basel experts welcome.  Note I ignored cost of capital for this exercise.

Alos here is the spreadsheet.  safe bank Note:  download, save, and change name to safe bank.xls – then you can open in Excel or OpenOffice.

Written by Colin Henderson

August 31, 2009 at 23:51

Conservatives propose radical changes to banking regulation in UK

There are some dramatic proposals contained in the upcoming white paper from the Conservatrive opposition [UK] this week. They make sense and go to the core of the flexibility that allowed banks to become too speculative. They address leverage, and the investment banking/ retail banking integration challenge. The Conservatives are larely expected to win the next election, sometime in the next 12 months.

Tories say break up the big banks | The Times

He will be clear, however, that the Bank should have powers to order banks and other financial institutions to hold more capital when times are good, so that they are well-placed to cope with the losses that arise during downturns.

These counter-cyclical capital requirements, one version of which was the so-called dynamic provisioning used for Spain’s banks, are seen by Mervyn King, the Bank governor, as an essential part of the “macro-prudential” toolkit.

The most controversial part of Osborne’s proposals, however, will be his response to the “too big to fail” problem for banks. He is expected to back King’s view, set out last month, that large and complex banks that combine retail banking with risky investment banking, should either not have their deposits guaranteed by the taxpayer or be discouraged by even larger capital requirements.

Osborne will make clear that he believes some banks were allowed to become too big. He will give the Bank the powers to intervene – and, if necessary, break up – banks whose size and structure threatens financial stability.

Written by Colin Henderson

July 19, 2009 at 00:32

Bank directors to receive formal training and capability assessment

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.

Written by Colin Henderson

July 12, 2009 at 15:15

Posted in Business Models

Tagged with , ,

Collaboration (1) vs Beaurocracy (0) | Wikipedia & CIA Factbook example

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]

Written by Colin Henderson

July 11, 2009 at 16:28

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