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Tracking the consumer evolution of financial services

Archive for the ‘Open Source Banking’ Category

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 |

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, 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

How much about the approach to Branchless Banking is driven by incorrect assumptions?

Johan picked up on my post about mobile loans, but interestingly pointed to an Economist article in November entitled A bank in every pocket?

Mobiles bankieren in die EU. « – was einer so denkt –

Bis jetzt hatte ich gedacht, dass das eine afrikanische Tradition wäre. Ich finde das ganz spannend.

Until now, I had thought that this would be an African tradition.
  I find this very exciting.

I have covered the African mobile phone market, and this article builds on what is happening there. 

These “branchless” schemes typically allow customers to deposit and
withdraw cash through a mobile operator’s airtime-resale agents, and
send money to other people via text messages that can be exchanged for
cash by visiting an agent. Workers can then be paid by phone;
taxi-drivers and delivery-drivers can accept payments without carrying
cash around; money can be easily sent to friends and family. A popular
use is to deposit money before making a long journey and then withdraw
it at the other end, which is safer than carrying lots of cash.

Lots going on, BUT what really struck me was this sentence.

There is no need to set up a national network of branches or cash

So, what are we saying here.  The unbanked, those “poor” folks who for whatever reason have no access to ‘real’ banking services are in fact getting true Direct Banking!!!  [emphasis and sarcasm thrown in for free]

In North America, we are insulated from true creativity in financial services, partly by how Banks’ think, but probably even more by what consumers expect.  When you live in the middle of an incredibly poor area with nominal resources, such as Africa, it seems you can get accept total creativity in Direct Banking/ Branchless Banking, that would not work in North America.  Or would it?

How much about the approach to Branchless Banking is driven by incorrect assumptions?  Maybe, just maybe, our approach to creative solutions is limited by the current environment.  If we approached Direct Banking as Africa has done, and assumed no current resources, what kind of solution might we be able to develop that might address the business case challenges. 

Written by Colin Henderson

January 24, 2008 at 02:15

“Credit crisis has given social lending a friendly pat on the back” | Economist

Brief but succint article on social lending summarises the interesting fork in the financial services road that is beginning to highlight the new model and why it has the potential to offer a legitimate alternative to traditional financial services. 

Peer-to-peer lending | Crunchless credit |

Why aren’t social lenders raising their rates? One reason is that, unlike banks, they are not facing higher funding costs caused by the seizure in money markets. Another clue lies in that word “social”. Mr Advani, whose business is designed to facilitate loans by family and friends, points out that parents tend not to foreclose on mortgages but to restructure them. Even when strangers are involved, lenders are usually not seeking solely to maximise returns.

Most intriguing of all is the possibility that social-lending sites do a better job than their mainstream counterparts of assessing risk. Zopa, which takes a stringent approach to credit assessment and will let only prime borrowers onto the site, boasts a default rate of just 0.1%. Prosper, which is more laissez-faire and has a default rate of 3%, provides measures of “social capital”, such as endorsements by friends, that help lenders to judge the risk of a specific borrower.

Relevance to Bankwatch:
The advantages that separate peer to peer lending from traditional banking, which the article highlights are:

  1. lack of costly infrastructure:  peer to peer lenders do not have the costly infrastructure base that banks have tied up in, branches, staff, and old infrastructure based on a differently regulated model.  Banks must factor those costs into their pricing. 
  2. broader view of return:  social lenders have different expectations on return than traditional Banks.  Social lenders factor the human element into their expectations.
  3. risk assessment is better:  social lenders factor other elements into the lending decision, such as endorsements from friends or relatives.  The human scale of social lending facilitates a clear line of sight between lenders and borrowers, that is the antithesis of the Asset Backed Commercial Paper market that funds Bank lending.

The current market that peer-to-peer lending is tining compared to banking, but it is also brand new, having only begun circa 2005.  Banks would have to look to ways to insulate their own model from those disadvantages if they are to be able to compete with social lenders.

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Written by Colin Henderson

October 26, 2007 at 11:44

BofA dips toe in web 2.0 water | needs help

BofA are very conservative about this kind of thing, so its a big deal that they are at least trying something now. 

Customer Reviews: Online Banking from Bank of America

Write a Review Tell us what you think about Online Banking by signing in to Online Banking to submit a review. Look for the link on your Accounts Overview screen or in the Customer Service area.

Results so far are mixed on two fronts;

  1. presentation:  the display is horrible …  think email, or Google Reader in terms of laying it out.  There are 1,500 entries, yet you can only see 3 at a time, and even that with significant paging down.  There are ratings of things like “services available” with no explanation, nor can you summarise the ratings.
  2. quality:  more importantly, the quality is suspect.  Each review is written as if it were produced by BofA fan, and many are written as if internal marketing groups has something to do with it.  Thats just my opinion.  Also when I sorted by lowest rating, only good reviews showed up?          


“Banking online at BAC is very
convenient for me. I work during the day, but I still can transact
banking business at night when I get home. There’s no worry about
having to skip lunch to be at the bank.”

All in all, kudos for trying, and please don’t stop.  The reason that only 1,500 of your 20,000,000+ online customers have used it, is at least partly because of the reasons I gave above. 

Knowing BofA, the results will be collated internally, but get some advice from someone who has built web 2.0 web sites, and consider what others might want to see when they come to look at the results.  If you are trying to be ‘social’ then rule #1 is make it transparent, interactive, and returns the favour of users by providing useful, valuable feedback.

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Written by Colin Henderson

October 25, 2007 at 10:38

BMO first in laying the groundwork to mitigate against sub prime

I  have been awaiting specifics on how the sub prime crisis would impact Canada specifically, and these stories at noted by ‘Canadian Banks’ indicate BMO is one of the first out of the gate with significant balance sheet restructuring in advance of rumoured impacts from the US situation. 

The restructuring involved a 6% boost in Assets and liabilities, using new wholesale and commercial deposits to repurchase its own Asset Backed Commercial Paper.  Translation …  the articles speculate this is in anticipation of significant writedowns in the 4th quarter.

Who is next ?  Watching and waiting for RBC, CIBC, Scotia information.

Canadian Banks & Insurance

Mr. Mihelic said his analysis may show BMO raised funds by borrowing from other banks and by attracting commercial deposits, possibly in anticipation of problems in the ABCP market. “BMO may have been ahead of the curve and prudent with respect to funding,” he said

… … …

Most recently, BMO has been dragged into the ABCP quagmire and has also been exposed as a significant player in the U.S. sector of the global credit crunch focused on structured investment vehicles or SIVs. The bank said this week it is not part of a group of top U.S. banks that has organized a US$80-billion fund to deal with the problems around SIVs, but said it is “following closely” developments regarding the proposed fund.

Relevance to Bankwatch:
Writing about the financial situation is not on topic for this blog.  My thinking though is this, and input welcome! 

‘Which Banks get the Web Lifestyle’ is the tagline for Bankwatch.  Implicit in that tagline is the view that the web brings the customer back into full focus, and that it forces, firms to look carefully at their customer positioning, because the transparency that the Web brings cannot be avoided. 

I won’t take advantage of the situation, and plug social lending/ open source banking here.  I will though use as an example that provides a nice example of the other extreme in customer transparency.  Banks need to think through the participation in all markets, which include retail customers, commercial customers, as well as the wholesale markets of commercial paper, commodities, and trading for their own account in any market. 

The degree of risk increases in that list towards the end.  In a world of transparency, the potential gains from such participation needs to be weighed against the potential for customer backlash.  I wonder if there will come a time, when analysts might reward Banks for a purer market participation, and if the gains might come from customer growth as a reward to the Banks’ greater responsibility to them (the customers).

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Written by Colin Henderson

October 19, 2007 at 20:11

“The Upside of Down” | some thoughts on Banking

Over the last couple of weeks I have been reading ‘The Upside of Down‘, authored by Thomas Homer-Dixon. Its not often that a book makes an impact on how I think about things, but this book did. Generally I think of myself as a pragmatist, and no I have not suddenly joined the Al Gore fan club.

Thomas carefully develops the case that there are some seismic changes occurring in the world (meaning the whole world) that when they occur simultaneously will produce cataclysmic change in the world. My intention is not to rationalise the book … you can do that if you wish.

What struck me, and is relevant to Banks, is the powerful argument, centred in chapter 8, that the current financial markets are failing. Homer-Dixon refers to comments from George Soros, arguably the ultimate capitalist [emphasis mine]:

Capitalist societies are locked into their own self-referential, self- validating beliefs – a situation that makes them less flexible and more vulnerable to breakdown

This blog is not about to become a literary critic. When I read this, I had to think of the sub prime crisis. No-one who was part of the market can honestly say then saw that coming. A run on a British Bank, a French Bank freezing their investment funds, the entire Canadian Banking system placing a freeze (that expires today, Oct 15th) on all interbank commercial paper transactions.

So yes, there is something wrong with the current financial market system, that is run on a basis on supposed mathematical precision, and purity, yet that has completely ignored the human element, which is quite emotional, irrational, and the antithesis of mathematical.

Expect more fun over the next 18 months, and competition from the most unexpected sources.

Written by Colin Henderson

October 15, 2007 at 21:11

[] an example of the incredible power of Open Source

I have been running Linux for 6 months on my Thinkpad, and very happy with it.  I had my first example of what could have been, something of a crisis last night.

Every 6 months Xubuntu Linux upgrades, and thats October. Last night a fairly significant upgrade popped up involving the part of the core with the name of, so I carried on as normal, and installed.  Then the crisis … wireless and some fonts were not working.  But this is Linux … so I rebooted to the earlier version. [Linux always keeps the last two versions available in case of emergencies]

Out of interest I checked the official Linux forums, and the activity became quite frenzied, with many reports of the issues, people reporting their log files, and within minutes it was raised as a bug.  It was late so off to bed.  This morning, several updates awaited, which installed perfectly, and now my trusty machine is running better than ever.

The message for me was beyond the quality of the operating system, which I won’t bore you with here, or even the peace of mind knowing the previous version is always there.  The message for me was the community responsiveness, and the enthusiasm and willingness to leave no stone unturned until it was corrected.  Corrected in less than 12 hours, and who knows in which time zone I might add.

Written by Colin Henderson

October 6, 2007 at 10:28

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