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Tracking the consumer evolution of financial services

Archive for the ‘Innovation’ Category

The value of patience | Haldane BofE

This is a remarkable paper from Andrew Haldane at the Bank of England.  There are lessons and direction here for everyone and it is not as dry as one might expect.  It is the more remarkable because it addresses human behavior and relates to economic context.  Not your typical Central Bank speech.  Lessons from Asia are being learned.

The most amazing for me is the HFT (high frequency trading) stat about Accenture in bold.

A few quotes to whet your appetite.

  • Take happiness. Studies have shown that happy people save more and spend less. Happy people also take longer to make decisions and expect a longer life. In short, they are patient.
  • Just as patience can self-generate, so too can impatience. And while patience generates self-improving cycles, its alter ego can create self-destructive cycles. Addiction is the classic self-destructive cycle. Drugs and alcohol chemically alter the balance of the double-self, increasing the value of instant gratification. This shortens time horizons, increasing further the value of instant gratification in a downward spiral. Unless arrested, this unfulfilling equilibrium becomes self-fulfilling.
  • John Maynard Keynes. He quipped: “markets can remain irrational for longer than you or I can remain solvent”.
  • By the time of the stock market crash in 1987, the average duration of US equity holdings had fallen to under 2 years. By the turn of the century, it had fallen below one year. By 2007, it was around 7 months. Impatience is mounting.
  • A decade ago, the execution interval for HFTs (high-frequency traders) was seconds. Advances in technology mean today’s HFTs operate in milli- or micro-seconds. Tomorrow’s may operate in nano-seconds.
  • HFT firms are believed to account for more than 70% of all trading volume in US equities
  • HFT is believed to account for between 5 and 10% of Asian equity volumes. This evolution of trading appears already to have had an effect on financial market dynamics. On 6 May 2010, the price of more than 200 securities fell by over 50% between 2.00pm and 2.45pm.32 At 2.47pm, Accenture shares traded for around 7 seconds at a price of 1 cent, a loss of market value close to 100%. No significant economic or political news was released during this period.
  • So disliking goods price inflation and liking asset price inflation suggests a potential time-inconsistency in preferences. It is leaving as a bequest for your children the mortgage but not the house.

Written by Colin Henderson

September 2, 2010 at 22:10

“Islamic finance is a medicine for economy” | Linar Yakupov in Tatarstan

I continue to be fascinated by product design in western banks and the sheer lack of innovation despite a clear permanently different business and consumer environment.  By innovation I don’t mean higher or lowers fees and interest rates.  What about the substantive design of products? 

The tile of this post is a provocative statement I located at Islamic Finance Expert that will likely meet mostly deaf ears in the US however when we dig beneath the surface , there is merit to the statement when we appreciate it speaks to the methodologies and product design employed by banks to fund business and retail loans.  So US readers, please bear with me.

The western capitalist and financial approach is naturally designed to be one of animosity.  It is a highly one-sided affair whereby the debtor has only one approach available to them which is maintain all the terms and conditions of the debt.  In contrast the creditor owns all the terms and conditions and is always in charge, particularly when the circumstances change and those new circumstances always add to the rights of the creditor.  Whereas there is no change in circumstances that could arise whereby the debtors position could be advantaged over the creditor. 

The opposing capitalist argument would be that positive changes in asset values or profits from business ventures all accrue to the debtor, with no advantage to the creditor.

The very design of this structure is designed to become animus immediately upon a change in circumstances.

What is it about Islamic Finance that it different?

The source of the statement in the title of this post came from someone I was listening to on BBC news.  Linar Yakupov is a financier in the central Asian country of Tatarstan, a state that is part of the Russian federation.  Most Tatars are Sunni Muslims.  The point of the BBC piece was to point out the dramatic shift in commerce here since the opening of Russia and the dramatic increase in importing and consumption of Halal foodstuffs.

The piece continued on to note the increase in consumption of Shariah or Islamic Finance – the financial version of Halal. 

I have noted here before some of the aspects of Islamic Finance back in the 2006 – 2008 period, and it fell off my radar during the credit crisis.  But my approach back then was merely noting the demographic shifts in western countries and the opportunity that created for western banks.  I see now this was a limited view of the opportunity.

Is the economy really that bad that we need innovation in product design?

This is a new normal.  I just do not see how traditional approaches to financing can be the only means to an end in this environment. 

The newer and deeper message promoted by Yakupov and others is that Islamic Finance is a better alternative and one that could navigate the gyrations of capitalist economies particularly as we look out at probably 10 – 20 years of economic re-engineering caused by:

  • western business & consumer deleveraging and the impact on asset values
  • unemployment absorption & geographic reshaping (think Detroit & Pittsburg)

These shifts are enormous and US, Canada, UK and Europe are all being impacted.  History tells us that post crisis periods create genuine industrial and business innovation.  This occurred in 1870’s and 1930’s.  Richard Florida points out that there is nothing like severe downturns to generate innovation in The Great Reset.  The 1870’s created heavy industry and railroads.  This was a dramatic change.  Innovation such as the assembly line and large factories really took hold post 1930 and the resultant consumer boom lasted until now based on continual growth.  Those innovations in the 1870’s and 1930’s were more than simply the equivalent of a new web model.  They involved systemic shifts in commerce and business.

Financial design worked well so long as everything grew reasonably steadily and bank product design followed along and supported that path.  But what happens now that that bubble is burst.  Does current product design support consumers and business effectively in times of continual doubt and the working out of structural unemployment and the new value of assets particularly housing which have average new price variances across the US of incredible proportions.  (Saginaw-Saginaw Township North, MI $59K to San Jose $630K).  The important note is that the average prices have taken a new form as industry and business changes produced dramatic unemployment where economies were strong prior to the economic breakdown.  I also note that the link where I located the average prices above notes NA for Detroit.  Seems a bit ostrich like of them. is closer to the mark displaying homes in the between < $28K up to >$65K ranges.

It is hard to imagine how banks can operate rationally with such shifts occurring.  The results are neither good for banks nor consumers.  Banks will simply exit the Detroits of the world and that sticks with the one-side model referred to above.

Some specifics on Islamic finance that could work for the post crisis world

Interview with Linar Yakupov.

Principles of investment that support local and infrastrucure: 

  • Firstly, according to Shari’ah principles – TIIC doesn’t participate in business connecting with gaming, alcohol and pork production etc. Yet another important moment, to which I would like to draw attention is the fact that TIIC will maximally distance itself from the oil patch. Generally, the investment company will be the additional lokomotive for the diversification of our economy – not only in Tatarstan but in other regions of Russia. 60% of investment will be for our Republic, the remaining is planned to be invested in projects of other regions of Russia.

Helping people help themselves:

  • In the Halal Industrial Park the facilities for successful completion of the cycle are provided in order to solve this problem – from the farmer to the consumer. HIP will unite the whole circulation of production flow: from the small and medium-sized businesses’ employers, engaging in manufacturing, to the consumer. Linova-Trade, the special company promoting the production of HIP, has been setted up yet. It will start the activity from the next year.

The main point:

  • Moreover, exactly the slant to the speculative instruments in the traditional finance sphere led to the grave crisis. On that score Islamic finance and banking, or ethical banks, how they started to be called nowadays, don’t allow to produce speculation and are turned out to be a sort of  anti-crisis instrument. We don’t say that Islamic finances are the panacea, but they could be the revitalizing factor for the whole economy. If this objective implements, we will be very pleased.

Sharing of risk is a core aspect within Islamic finance from International Shari’ah Research Academy for Islamic Finance (ISRA).

The nature of contracts, which requires that risk be shared by the contracting parties, exemplifies the principle of fairness and justice in Islamic Finance. For instance the partnership contract (musharakah) specifies that all the parties that share the capital in a particular venture will share the profit in proportion to their capital contributions. On the other hand, if there is any loss, all have to share the loss according to the portion of the capital contributed. This equity-based contract will also help to generate greater economic activities through the principle of profit-and-loss sharing; and the clearly defined risk-and-profit-sharing characteristic serves as an additional built-in mechanism to avoid any disputes and economic uncertainties.

Relevance to Bankwatch:

We are in changeable economic times, and everyone expects that to last for many years to come.  Today on Fareed Zakaria his topic was ideas as he seeks to understand what it will take to operate and thrive in this new world.  He interviews Robert Kaplan, Clay Shirky and Richard Florida.  (It is an hour that knocks it out of the park if the future interests you)

What struck me about the methodology espoused by Islamic Finance is not the adoption of Islam or Halal.  Rather it is the adoption of sound principles that avoid the bad and focus on the good (Umair would like that).  It is not a rhetoric argument to argue that gaming and alcohol business will not generate the innovation required to move us through these times.  Rather what struck me is the focus on non-speculative core business which in the case of Tatarstan happens to he Halal but there is no reason these finance principles cannot be applied to core businesses that operate in western economies. 

A core aspect of product redesign that banks can learn from Islamic finance is shared risk.  What if mortgages made during the period 2003 – 2007 had a proportion based on shared risk and benefit.  This would have limited the home ATM phenomenon, speculation would have been reduced, and frankly less risks would have been taken.  A product designed this way where the bank shared in the appreciation on homes would have had no interest in 2006, but what of such a product in the 2010 – 2020 timeframe?

Back in 2008 I noted the proposal by Niall Ferguson for a Jubilee as the only solution because he believes the deleveraging necessary is too large to absorb.  Jubilee means (amongst other things) debt forgiveness and Niall noted the many times this has been used in history to get past a bubble.  Islamic finance uses shared risk as a method of producing a softer landing than absolute debt forgiveness but achieves similar results.

It just strikes me that there are serious lessons to be learned from the world of Islamic Finance that can be applied to genuine innovation of western financial products that would work not just for Muslims for for western consumers, business and economies. 

Written by Colin Henderson

August 29, 2010 at 12:20

Goodbye Wesabe – now we will never know what could be developed

In what is the largest shock for me for a long time, Wesabe has shut down. I have long sung the praises of Wesabe and saw great potential for future expansion and delivery of innovative and useful services for people that no-one bank can ever offer. It appears they have run out of funding which I presume is because VC’s are not willing to support a competitor to Mint/ Intuit. This is shortsighted in my view but there we have the harsh reality of business.

Online Finance Startup Wesabe Heads To The Deadpool | Techcrunch

The startup’s homepage now consists of a letter to Wesabe users instructing them to download their account information by July 31, at which point nearly all of the service’s features will be taken offline and data deleted. 

And from the Wesabe home page:

In recent months Wesabe has been operating on a shoestring budget, with support from some of the developers and operations people who made up our core team. While the site has remained online and we continue to hear from people who find it helpful, we have not been able to provide the support people need to use it for something so central as financial management. I’ve felt especially terrible that some members have a good initial experience but then hit a problem, often after investing many hours, and aren’t able to get help with it. That’s obviously a bad experience, and not what we want to offer. Also, because Wesabe stores such highly sensitive data, continuing to operate the service with shoestring operations and security staff is not acceptable, and we do not want to continue accepting new accounts if we cannot guarantee the security level we believe our service requires.

Written by Colin Henderson

June 30, 2010 at 18:10

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

You know its bad when … the government is more innovative than your Bank

This post from James following his first week at the DWP (Department of Works and Pensions, and hosts of

DWP, is running an innovation experiment where they allow citizens to put their own applications on top of government data. Yes, that’s right: an API for the government.Show me a bank with API. You can’t, because there isn’t one. I have to go to a third party like Wesabe, who basically have to suck data out of banks without their permission, to get one. I think it is early days for what Direct.Gov is doing, but you can see the potential. More particularly, the fact of this experiments existence tell you lots about the sorts of things it is possible to do in the public sector.

Strange days indeed, and something that ought to worry bankers.

Written by Colin Henderson

September 1, 2009 at 13:08

Posted in Innovation

Tagged with ,

The Productivity Gap is closing in on Banks’ | Branches will be next

FT reports on a new Bain report concerning RoE at Banks, and the unliklihood that Banks’ can regain previous RoE levels.

This fits with the theme here of no more business as usual, post crisis. The spreads in this low interest enviroment are simply not high enough to accomodate spreads like we saw over the late 90’s and early 2000’s. Furthermore and separate from the spread issue, the growth in credit will not be there either because consumers are unwinding unwieldly debt levels that are now disproportionate to asset levels.

The course banks must follow is rejuvenated product suites, and of course reduction of cost base, which is why Bain leapt right to branches.

Banks’ may need to close a third of branches’ | FT

Business consultancy group Bain concludes that UK retail banks face a tough future in which their return on equity (RoE) could be 50 per cent lower than pre-recession peaks.

Bain said that over the past two decades, leading UK retail banks have posted RoE – profit divided by equity – averaging 24 per cent and are unlikely to see those levels again.

Written by Colin Henderson

August 17, 2009 at 20:27

The Best Business Model in the World

Umair zeros in on a real point that is precisely correct.  The point here is not what you may or may not think about prezi … the point is what prezi’s users think. Then relate that to what customers think of your bank’s products.

The best business model in the world is also the simplest: make stuff that’s insanely great

Everybody’s searching desperately for business model innovation: Detroit, newspapers, record labels, banks. No market is left untouched, no value proposition sacrosanct.

Yet, the best business model in the world is also the simplest: make stuff that’s insanely great. Stuff that’s insanely great does what Prezi does — amazes, enriches, and inspires. That kind of stuff doesn’t need a hard sell, a new market, or a convoluted product range. It just needs to be.

Written by Colin Henderson

July 27, 2009 at 14:54

Wesabe today announce that Palo Alto-based Addison Avenue Federal Credit Union is to integrate Springboard Community App

Wesabe are making progress with their Springboard product that I blogged about in March. For the details here is that post. They are announcing today that they have signed Palo Alto-based Addison Avenue Federal Credit Union. That is a big one, given the internet savviness of their customers reflected in the fact only 30% ever visit the branch.

The groundbeaker for me with this service, is the integration of a web app with an individuals online banking. This brings the outputs of the wealth of a social site into the personal world of online banking allowing the customer to investigate their finances and monitor progress against benchmarks.

Wesabe SpringBoard | Wesabe

Wesabe Springboard gives consumers a “smart” dashboard view of their account data and personal finances – guiding them towards value, savings and goal completion, and away from poor financial decisions. In addition, Wesabe Springboard includes community features that let consumers help each other by anonymously sharing advice, support and tips for getting the most value for their money. Drawing on Wesabe’s database of consumer spending behavior, Wesabe Springboard also allows users to benefit from the learning that comes from changes and patterns in how members shop.

Credit unions and banks can implement Wesabe Springboard through either a web services architecture or as a fully hosted web personal financial management (PFM) solution. Wesabe Springboard works with a wide variety of enterprise platforms, including .Net and Java. The web services option uses API-based integration to integrate into the financial institution’s existing online banking system.

Wesabe launched Wesabe Springboard in March and signed its first customer in just six weeks. For additional information on Wesabe Springboard, visit

Written by Colin Henderson

July 13, 2009 at 22:34

Posted in Innovation

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

A market test alternative for credit cards

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.

Written by Colin Henderson

July 11, 2009 at 14:46

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