The Bankwatch

Tracking the consumer evolution of financial services

Archive for the ‘Open Finance’ Category

Derivatives remain a dark secret with undocumented risks to economies and consumers


Derivates were a hot topic during the height of the banking crisis and we all remember they were the specific reason that AIG went out of business because they had been speculating in those products to an extent that far exceeded business requirements.  When the markets froze AIG were unable to meet their off balance sheet commitments in the form of derivatives and went under. What followed in September 2008 was an $85 bn bailout.

The level of derivatives in the world was close to $700 Bn.  To place that figure in perspective, world GDP is around $60 Bn.  Derivatives which are in theory a financial hedge or insurance against shifts in markets or currencies are worth an astounding 10 times the value of world trade.

Even when we allow for secondary hedges (similar to re-insurance) there can be no good reason for derivatives at that level other than financial speculation. 

Which brings us to this piece in the New York Times that describes the method being used to manage that global risk in the wake of the crisis.  The regulators have delegated the responsibility to the group responsible for much of those derivatives, and the names will be familiar.

The NY Times piece focusses on the profits that come from the derivatiaves, and the extraordinary efforts to ensure that the trading in them remains with the banks and in a non-electronic form which appears to be related to retaining control of the market.  It refers to similarities with Nasdaq in the ‘90s when it was pressured to become an open electronic exchange and that fees dropped significantly.

A Secretive Banking Elite Rules Trading in Derivatives | NY Times

None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.

Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this “economic rent the dealers enjoy from a market that is so opaque.”

It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchange’s clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading.

Relevance to Bankwatch:

There are two points to be made here.  The NYT makes the point that significant profits are being protected by a closed group, and you can bet those revenues are costs that end up costing consumers more for for underlying services and products such as petroleum.

The second point to consider is the larger need for a market that reflects 10 x world GDP.  The lack of transparency means that we cannot really explain that, and I still believe this to be a large and undocumented risk.

I am not expert enough to begin to quantify the risk associated with derivatives, and I am in good company on that score.  What I am qualified to state is the there can be no good associated with management of derivatives that amount for alongside your savings account.  The parts of the new regulation that separate investment and retail banking must have some merit on that score.

But we know regulators will never get it all right, and lobbying efforts to retain the status quo will likely be based on ideas that the tremendous risk associated with another freeze up with the credit markets as we had in September 2008 could re-occur in a heartbeat.

All we know is the risk remains, and in this respect nothing has really changed since September 2008 with one key exception.  The banking system has been guaranteed by governments implicitly since 2008 (explicitly in the case of Ireland) and this guarantee is the only thread holding it all together.  That is why the US in particular is so keen to ensure maximum liquidity for banks (Quantitative Easing).

Why does it still feel that all we are doing is postponing inevitable tough decisions.

Written by Colin Henderson

December 12, 2010 at 15:44

All banks have the same strategy | what happened to the Starbucks strategy?


It was refreshing to read this piece, and takes us exactly where innovation in financial services ought to be going – the new (old) grand ideas.

Starbucks should start banking | FT

What if Starbucks opened an online-only retail bank offering competitive deposit rates and a modest range of loans and mortgages? It could do that by partnering with a finance company such as ING, which has the appropriate banking licences.

All it would need to do is install ATM machines in its outlets, which would involve investing some money but would allow it to get more out of its existing branches.

National supermarkets in the UK, such as Sainsbury and Tesco, have opened retail banks and placed ATM machines in their branches, but there is no national grocery chain in the US with a comparable reach. Even Wal-Mart lacks outlets on most urban high streets.

I recall the brainstorming sessions in the 90’s at the bank, where the discussion about competition arose not from other banks but from:

  • Starbucks levering their distribution and cards as a bank
  • ebay or Amazon offerring a credit card
  • internet only banks – ING was on the horizon – mbanx and Wingspan already out there
  • whether to join the S1 online banking commoditised platform
  • offer an All in One account that pulled together lending and deposits into one account
  • how to deal with the role of aggregation- offer it, join it, or ignore it
  • bill presentment – same idea – offer, join or ignore
  • shift in business model from generalist to:
    • product (manufacturer) – offer loans and deposts through others channels
    • distribution (channel) – sell products & services of others – Open Finance (Forrester)
    • segmentation (customer type)  – focus on a niche market, although most interpreted as the generalist, all things to all market which is where most banks ended

Relevance to Bankwatch:

The problem today is that Banks are on strategy defined 6 – 8 years ago to bricks and clicks, focussed on customer retention and wallet growth.  Customer Relationship Management (CRM) became the strategy de jour.  Who would claim that has worked?  Seibel disappeared inside Oracle for a reason.

Banks are all on the same strategy, focussed on mortgage as the entree, and upsell with other services later.

There is nothing out there that aims at shifting the balance of share of market in a substantial way.  This is not about acquisition or mergers – we have done that, and “too big too fail” is too fixated in everyone’s radar now, or until capitalisation is fixed, in any event.

No, this is about business model shifts … shifts that would have a target of:

  • double digit percentage shift in share of payments,
  • extraction of share of deposits and payments from an existing industry (the Starbucks example),
  • exponential elimination of costs relative to competition
  • focus on what your are good at and eliminate the stuff you are not good at

Business models –

Mr Bank Chairman …  what is your business model, and how is it different than the competition?

Supplementary question –

Who is your competition?  Do you lost sleep over Citibank and Wells, or Tempo and Wesabe?  Does your answer worry you?

PS …  as I finish this post the most telling thing is something I have become acutely aware of.  The blog categories I set up 5 years ago no longer apply, until I do a retrospective post such as this.  Either those were really bad ideas, or ideas yet to come.

Comment on “Beyond the age of leverage: new banks must arise” | Niall Ferguson


Niall Ferguson nails the ultimate irony in the world today.  Every government is set on increasing debt as a means to solve the current crisis, however the reality is that they are potentially sending good money after bad, and not addressing the core issue. (emphasis mine)

Beyond the age of leverage: new banks must arise | ft.com

Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt.

He goes on to offer specific ideas on how the great deleveraging could manifest:

  • bank debt write offs with terms designed to give banks time to sort themselves out within a fixed time – he proposes 10 years.

“There are precedents for such drastic action, notably the response to the Swedish banking crisis of the early 1990s. The critical point is to avoid the nightmare of a state-dominated financial sector. The last thing America needs is to have all its banks run like the rail company Amtrak or, worse, the Internal Revenue Service. State life-support for moribund dinosaur banks is an expedient designed to avert the disaster of a generalised banking extinction not a belated victory for socialism. It should not and must not impede the formation of new banks by the private sector. So recapitalisation must be a once-only event, with no enduring government guarantees or subsidies. There should be a clear timetable for “reprivatisation” within, say, 10 years.”

  • “The second step we need to take is a generalised conversion of American mortgages to lower interest rates and longer maturities.”  He goes on to highlight systemic changes to debt and terms of debt contracts over the last 150 years that were used as vehicles to bring the economy back in line.

Point for economists and Keynes.  Ferguson says:

Today’s born-again Keynesians seem to have forgotten that their prescription of a deficit-financed fiscal stimulus stood the best chance of working in a more or less closed economy. But this is a globalised world, where unco-ordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth.

Relevance to Bankwatch:

All in all another thoughtful piece directed at broad based solutions that deleverage the world.  His argument that the approach of all world governments to borrow and create government based stimulus is not directed at the problem crisis symptoms, and sounds common sense.  When asset values have collapsed in the world by 40 – 50% and debt remained unchanged, how is more debt a solution?

It strikes me there is an opportunity here for banks’ to consider new and innovative products that alter terms, conditions and rates of existing debt that relieves pressure as suggested in Fergusons 2nd point above.  I would add that not just ‘New banks must arise” per Ferguson’s title, but that financial alternatives must arise too.

A complete stranger told me … | The power of wesabe


A sobering and powerful post on the power of social media for financial services. [hat tip mmpartee]

Such advice is interesting. At first glance one might ask whether it is serious. On the other hand would this not at least make a person sit up and take note. And what if others chimed in and the average response was that the advice was correct?

If we consider the development of Linux, where people participate and improve the system because they want to. Such selfless assistance is natural and a proven model.

Cogent Thoughts » Blog Archive » Social Media vs. Advisors (round 1)

A complete stranger whom I’ve never met told me the other day that my retirement plan was not appropriate for my investment objectives. I met this “stranger” on wesabe.com, a site that describes itself as:

“An online community of real people just like you, with real financial goals and concerns.”

Written by Colin Henderson

July 17, 2008 at 10:07

“Make it much easier for consumers to find those institutions whose revenue models most meet their needs” | Bankwatch Interviews Marc Hedlund, Wesabe


After the post on Wesabe and their new API, I was fortunate enough to be able to pose some questions to Marc. I chose three questions, and I am thrilled at the result and the time Marc took to provide his valuable insights.

In particular, I would point readers towards two takeaways that I got from this:

  1. Wesabe is 100% consumer oriented, and specifically around the disproportionate increase in Bank fees, which is out of sync with both costs, and Banks’ brand messages
  2. how Wesabe views information, and through a combination of interpreted data, plus users evaluations, can produce meaningful merchant evaluations, which help consumers in their choices

Fascinating stuff! Read on, enjoy, and consider implications for your organisation.

INTERVIEW; MARC HELDUND, CO FOUNDER AND CHIEF PRODUCT OFFICER, WESABE:-

You speak of the “Value Bureau” as a means to allowing consumers to make better decisions. Can you expand on that, and maybe some ways we might expect those services to evolve, and your view on who might offer those services in the future.

Sure. Wesabe views a purchase as a kind of recommendation for the merchant to whom a consumer chooses to give their money. When a consumer has a need from a business, they evaluate options (“Where should we go to dinner tonight?” or “Where should get my car repaired?”) and then make a selection based on whatever factors matter most to them. Obviously, people will try to spend their money at the merchants they believe will best satisfy heir needs. By aggregating the decisions our members makes — their purchase (transaction) information — Wesabe is able to pull patterns out of these decisions, and use them to inform other members of the best values.

As a simple example, if 100 Wesabe members go to a new restaurant, and none of them ever go back, that suggests that the restaurant isn’t very good. If 100 Wesabeans go to a new restaurant and then 50 of them return within a month, that’s probably a pretty good restaurant. Looking at the decisions individuals make (for instance, does this person return to this merchant within this time period? how much do they pay compared to their other options?), we can make some excellent determinations of which merchants are satisfying their customers and which are not.

Of course, you may give money to the plumber every month because your pipes are old, not because you love the plumber. Likewise, you may be locked into a cell phone contract that really you’d rather not be in. Because of this, we ask people for explicit comments on their purchases. We believe that if we can get explicit feedback on merchants from even a very small percentage of users (and to date, we have received a great amount of this feedback), we can use that feedback to better interpret the implicit feedback purchase patterns imply.

This idea, of collecting post-transaction data for a great many transactions, is very similar to the idea of the credit bureau. Credit bureaus index their data by consumer — allowing businesses to look up a particular consumer and decide whether or not to extend that consumer credit. We index by merchant, allowing consumers to look up a particular merchant and decide whether or not to patronize that merchant. We believe this provides an enormous amount of potential value to consumers, especially through our Accounts tab (where recommendations are shown directly alongside the transactions the consumer has made in the past) and our Goals tab (where recommendations are shown pertaining to the consumer’s future financial plans).

Everyone worries about business models, and recalls the dot com days, in 2000. Can you expand your thoughts, perhaps only directionally, on how Wesabe will make money and continue to be there, a few years out, continuing to provide such an important service.

Forgive me for making this answer a lot shorter — we’re focused on building the primary service right now,which we provide at no cost to our users. All of our current services will continue to be free for all users of the site.

That said, our business plan is completely focused on building models that serve consumers directly. We are not, for instance, building software to sell to banks, nor are we planning to sell aggregate data for research purposes (though, as our API shows, we are intent on giving that data away within our service). We are also not planning on using an ad-supported model, since people come to our site looking for help controlling their money, while ads are designed to convince consumers to spend their money. We have previously announced plans to release a “Pro” version of Wesabe, so that members who want additional services beyond what we provide today could subscribe to a low-cost service for certain added features. In addition, we are interested in working with merchants who are intent on helping our users save money by reducing their costs and bringing their goals in reach.

Selfish question: while I recognise that Wesabe provides information and data on all aspects of consumers spending and lives, can you offer some thoughts on how you see the “information economy” as led by Wesabe driving change in one vertical, financial services.

I’ve written extensively on my concerns about banking models that rely on maximization of fee revenue rather than on deposit investment. In the U.S., we’ve seen banks and credit cards earn 1/3rd or more of all their revenue from fees. The sharp increases in overdraft and ATM fees — far above the growth of costs for these institutions — strongly imply that banks are creating circumstances where consumers are led into fee generation traps.

Banks in the U.S. are reported, for instance, to collect $17.5 billion a year in overdraft fees (see The Red Tape Chronicles)

The promise of the financial services industry is that banks and credit cards will protect your finances and maximize your purchasing power. Bank buildings constructed of marble blocks are designed to tell consumers, “Your money is safe with us.” Credit cards carry a message of financial freedom and power. Today, those promises are false — by creating circumstances where fees are maximized, the consumer can reasonably expect to *lose* their money at the bank, and severely constrict their financial freedom for years with credit cards — quite an irony.

I believe that many of these circumstances are created through poor information and inadequate tools. Wesabe is designed from the start to make sure consumers have all the information they need to make the best financial choices, and the tools they need to make savings and fee prevention automatic, painless, and reliable. We believe it is our job to get consumers to their financial goals. That $17.5 billion in overdrafts fees, as an example, could help a great many consumers reach their financial dreams a lot faster.

Wesabe’s emphasis on publishing information about merchants, including financial institutions, will make it much easier for consumers to find those institutions whose revenue models most meet their needs. We already see consumers writing to us all the time to ask how they can find a bank that will not charge them for downloading their data, nor for online access to their accounts. Many members have told us that they have switched their financial institutions in order to make their use of Wesabe easier, and to avoid institutions that have very high fees.

I would like to see institutions that provide high-interest savings, low average fee costs, and high customer service values promoted aggressively to Wesabe members. For instance, a disproportionate number of Wesabe members use USAA Federal Savings Bank, which meets all of these criteria. If we are able to help Wesabeans identify the banks and credit cards like this in their region, I believe that will be best for consumers and best for those institutions.

I hope this helps — let me know if you need anything else.

Marc Hedlund, Wesabe

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Written by Colin Henderson

July 18, 2007 at 12:45

Building the Bank of the Future – 2


Last October 06, I tried what in retrospect was a rather poor attempt to consider the Bank of the Future, after considering the impacts of Web 2.0. It was poor, in the sense that I mentioned tools such as blogs, wiki’s and online communities, but I had no sense of the framework or how Banks could really use the tools to break out of their current transactional approach, and add the experiential side of the equation.

So, what if we looked out to 2020, and consider how consumers will engage with their Banking.

Latest hypothesis: customer centric can only be achieved if Banks recognise the reality that customers require more than one Bank.

Background:
Social Networking has gained enormous scale very quickly. There are two kinds:

Horizontal with broad appeal: MySpace, FaceBook
Vertical with common interest appeal: YourRunning, YourCycling

The game changing event came recently, when FaceBook announced F8.

Mass Distribution through the Social Graph Applications will gain distribution through what Zuckerberg called the “social graph,” the network of real connections through which people communicate and share information. Facebook and all social networks have two core elements: the social graph and the applications that run on it. Because of the efficient spreading of information through the social graph, existing Facebook applications, such as Photos, have grown to leaders in their categories.

A complicated statement from Zuckenberg that can be summarised; Applications will be aggregated by each consumer and the glue will be social networking.

Channel vs Product
During the advent of internet and internet banking in the mid 90’s discussions started on the right structure for a Bank. One had a Bank develop its own products and sell them through its proprietary channels. Another suggested a Bank of primarily channels that sold products from anywhere, their own, or from other FI’s.

It might be that the flaw there was that the assumption was generally that Banks would remain central to the financial services experience. Back then some speculated on portals becoming customer central, and online banking functions appearing there. This view did not get much credence at the time, but probably for the wrong reasons. There is no particular incentive to use one portal over another, except technical capability. Such capability is not something that generates long term loyalty.

Technical developments
One aspect of Web 2.0 which is still in infancy, and gets little airplay except within the technical community, is the web as an application. Microsofts discussion on Software as a Service (SaaS), Amazon S3, FaceBook F8, Google Apps, are all examples of web based applications, storage, and application capabilities that are run in a browser.

This will mean that consumers can design their own web, aggregated as they see fit. Consumers can pick and choose the applications they want and need, and access them as they see wish in a PC browser, or a mobile browser.

It also means, and this is key, that applications are componentised. Its mix and match. I might want Google Mail and calendar, Yahoo Flickr for photos, and Microsoft Live for blogging. The problem is that what is missing here is me, the user. I need a single view of my services. My identity needs to be under my control and allow me to use the same identity to pull all my services together into my view of the web. No-one has designed that yet. But F8 has potential, and others will appear.

The significance for Banks, is that online banking is the opposite of Software as a Service. Online Banking is proprietary to each Bank, and homogeneous. Individual elements of online banking, such as bill payment, or spending analysis, cannot be used anywhere except within each Banks online banking.

The missing element – is it “Social?”
What is missing is a compelling reason for a consumer to have their services seen in one place. That would require several things:

  • Trust
  • Identity management
  • an open platform built on open standards
  • a compelling experience

F8 has 1, 3 & 4. While work is proceeding, 2 is not anywhere in a useful and accepted standard yet, but 3 out of 4 is not a bad start.

The big change that Facebook shows is the ability to aggregate various functions, including (so far), communication, photo’s, video’s, product preferences, and a host of others being added daily. It works because participants can choose their contacts, choose what to show, and share information as they see fit. Social is not about teenagers chatting. Social is about shared and common interests providing benefit to the larger group beyond that which any one person can achieve – the Wisdom of Crowds. Communication/ messaging is one component in that view.

Amazon, Chowhound, TravelZoo and Wesabe show the power in shared opinions on services.

The service(s) that pulls together the right combination of these elements will be the winner(s) because thats the ploae consumers will want to pull their services into.

The Future Bank
The future Bank may not look like a Bank at all. What if we follow the contexts discussed, and imagine a situation like this – truly customer centric.

Consider these services alongside customers email, messaging, photos, feeds, etc.

Aggregated Banking services:

  • one log in
  • bill payment from Bank 1
  • Account history from Bank 1 and Bank 2
  • Investment history from Bank 2 & Bank 3
  • Social lending application
  • Social investment application
  • Generic debit card application (works for any open standard Bank)
  • Mortgage information and history Bank 4
  • Product comparison service from 35 Banks
  • Product application/ purchase service accessing 35 Banks

This scenario places the customer firmly in charge of his financial services. Banks must be following open technology standards, and their services must be componentised, including new services, eg, provide a feed into the product comparison service. Bank must also accept they are competing alongside social financial applications.

Relevance to Bankwatch:
What percentage of customers will seek to manage their banking this way? It embodies a radical shift from the big bank view we see today. Customers pick and choose the products they need, but aggregate them themselves.

To compete Banks would have to dis-aggregate, and open up their services to make themselves accessible in this mix and match environment.

Alternatively and/ or in addition, some Banks could provide those aggregated banking services including services from other Banks (Open Finance). Banks could become the aggregator.

Written by Colin Henderson

July 5, 2007 at 21:57

Top careers for the next few years is telling for Banks’


 US News produces a list of the top careers for the next few years, and there are some surprises, at least for me, and the speed of social transition. 

U.S. News has sifted through trends in the economy and the workplace and has identified 25 professions that will be in growing demand as baby boomers age, the Internet becomes ubiquitous, and Americans seek richer, simpler lives.

Source: USNews.com: Best Careers 2007

Here is the list – surprises for me:

  • lack of scientists
  • lack of technology (except for System Analyst)
  • No Financial jobs!  Bankers beware!

Medical related and Management Consultant comprise the top 1/3 in salary.

Actuary

Architect

Audiologist

Clergy

Dentist

Editor

Engineer

Fundraiser

Higher Ed. Administr.

Landscape Architect

Librarian

Management Cnsltnt.

Medical Scientist

Occupational Therapist

Optometrist

Pharmacist

Physician

Physician Assistant

Politician/elected off.

Professor

Registered Nurse

School Psychologist

Speech-Lang Therapist

Systems Analyst

Urban/Regional Planner

Their analysis and rationale is well covered here.  Here are some highlights:

  • Not surprisingly, nine of the 25 careers in the U.S. News list are in healthcare.
  • U.S. News also identified a number of desirable careers in the nonprofit and government sectors, where job security is usually strong.
  • The list also takes into account the trend among employers to outsource jobs that can be done more cheaply in low-cost countries like India and China. That’s one reason a lot of popular computer-related jobs no longer make the cut.
  • Occupational therapists, clergy, and management consultants, for example, work directly with clients, which requires personal presence and a human touch. Those careers are very resistant to being moved offshore
  • Other events could shake up the outlook for certain jobs in 2007. Such as:
  • Terrorism. Many experts predict further terrorist attacks on U.S. soil. If that should happen, watch for a hiring boom in the areas affected. A cyberterrorist attack, for instance, would produce lots of jobs for computer-security experts. If the water supply gets poisoned, toxicologists will suddenly be in high demand.

    Healthcare reform. New national measures could be years away, but lots of states are passing their own reforms. One result could be plummeting pay for physicians, [insert link] on top of even more onerous paperwork requirements.

    Immigration. The growth in America’s Hispanic population seems likely to skyrocket, creating a virtually unlimited demand for translators

Its a fascinating view of how the western world is evolving in significant ways. 

Relevance to Bankwatch:

I searched through their site and no mention of Financial, positive or negative.  Financial jobs in many peoples minds have been outsourced to technology.  The implicit assumption is that relatively simple technology can put consumers in touch with the financial services they need. 

The mystique is gone!

 

Written by Colin Henderson

March 31, 2007 at 15:07

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