The Financial Services Club's Blog

The World's Top 20 Banks 1994-2010 ... Anglo-American Banking Rules!

I’ve just received this month’s Banker magazine which the editor, Brian Caplen, describes as their most important issue of the year as it covers the latest Bank 1000 listings.

This year’s listings show a surprisingly stable crew of American and British banks.

World   Bank                               Tier One              Pre-tax
Rank                                            Capital                profit
                                                      $m                    $m
1        Bank of America Corp        160,387.77           4,360.00
2        JP Morgan Chase & Co       132,971.00         16,143.00
3        Citigroup                          127,034.00          -8,445.00
4        Royal Bank of Scotland       123,859.00          -4,366.29
5        HSBC Holdings                   122,157.00           7,079.00

Considering the crisis was meant to have killed these banks, you may find it surprising to see that Citigroup and RBS have maintained their leading positions.

This is down to the fact that the Banker measures a bank’s strength by its Tier 1 Capital, and so their positioning is more of a reflection of the sheer size of these firms than by their brand or market capitalisation, which is used in some other studies of size.

The Banker’s data is fascinating though, as the database also contains profitability, revenue, cost-income ratio and more, so it’s a useful tool in all senses.  And the online data goes back to 1996, so you can do some useful comparisons.

Mind you, my data - old Banker magazines - goes back even further so I quickly took a snapshot of a few useful year’s – 1994, 1999, 2004, 2008 and 2010 – to see how things have changed.  Mapping out the Top 20 banks of the world for each year makes for an interesting picture (doubleclick the picture to see a larger version):

Back in 1994, Japan ruled the world.

Then their economy went South and Origami Bank folded, Sumo Bank went belly up, Bonsai Bank cut back their branches and something fishy went on at Sushi Bank where staff got a raw deal.

Post-Japan’s slump, the Anglo-American financial system ruled. So you would think that, as that system failed, it also would have gone South.

Not the case.

Maybe that’s a reflection of the sheer scale of investment American and European firms have put into these economies to avoid such a crash.

Well worth spending time looking at the data and looking forward to playing around with it further.

What if the internet is your bank ... and you can't access it?

After Brett's post the other day which posed the question: "what if the internet is your bank?", I was quite amused just now, as I loaded Citibank's homepage and nothing loaded. 

Nothing at all.

Nowt.

Nada.

Zero.

Nothing.

Why so?

Because I use an add-on in Firefox called NoScript.

NoScript describes itself as the "best security you can get in a web browser!  Allow active content to run only from sites you trust, and protect yourself against XSS and Clickjacking attacks."

The only problem is that it results in screens like this:

 

No big deal, but made me laugh.

What is not so laughable is if you really do depend on internet access to get to your bank, and you can't access it.  Hello Bank of America ...

January 29th 2010

The Bank of America website is down since morning. Bank of America's main page is still not accessible as of now. The Bank of America website could be down due to cyber-attack, but it might just be a technical glitch. If you are trying to access your BofA online banking account, you can follow the Official Bank of America help account on Twtter (@BofA_Help) for updates.

The website is still functional if visitor enter through specific pages. For example, the Bank of America "About" page could be accessed without problem. Once in the website, you can navigate through the website normally.

UPDATE-1: The BoA website is back online.

UPDATE-2 (1:52 PST): The website seems unstable now, and have gone offline again.

UPDATE-3 (3:39 PST): BoA has ruled out a cyber attack but is still trying to identify the cause.

Hmmm ... cyberattacks work I guess.  According to informed sources, this was a Denial of Service attack, but BoA aren't letting on.  They haven't made any official statements about the cause ... and why would they as it either shows weakness of security or might encourage similar attacks in the future.

The land of a thousand voices

It seems that I’m having a long whinge and rant all week, but I’m trying not to.

What I’m really trying to do is to get some answers to this crisis of confidence in the banks and, consequently, the banking system. This is nothing to do with the credit crisis, but the response of the banks to the credit crisis, which is to trash all trust and confidence in their ethics and approach.

This is why there is this non-stop bleating about bonuses and interest rates. The banks justify this behaviour on the basis of all the other kids on the block are doing it so, if we didn’t, we would just get beaten up in the banking playground by the bonus bullies. This is what Stephen Hester said today:

Mr Hester warned “that employees are leaving because it was offering lower bonuses than City rivals. He also said that profits at the bank, which is 84 per cent owned by the taxpayer, would have been about £1 billion higher if it had managed to stop staff leaving. The bank said it had ‘paid the minimum necessary to retain and motivate staff who are critical to the recovery of RBS’.”

Trouble is, this doesn’t cut the mustard.

MPs warned that the public would be astonished that the bank was paying £1.3 billion in bonuses given that it today reported a £3.6 billion loss for last year.

“Vince Cable, the Liberal Democrat Treasury spokesman, said: ‘Stephen Hester is trying to justify the unjustifiable. Most bankers owe their jobs to the taxpayer. His comments will just reinforce the view of bankers in many people's minds as greedy and selfish.’

“Shadow chancellor George Osborne echoed the views of Mervyn King, the Governor of the Bank of England, by telling BBC radio: ‘I do think the level of payment in the banking sector has got completely out of kilter with the rest of society. It is totally disproportionate to what doctors are paid, people working in industry are paid, teachers are paid and the like. We need to bring down pay across the sector — not just in one bank, across the sector — and things like a bank tax, internationally agreed, might help do that.’”

Oh yes, and I love the photograph the Evening Standard  chose to run with that report.

Hmmm ... Hester, the fox killing, horse and hound man.

Nice.

Meanwhile, in the same paper, Chris Blackhurst writes about how we've blown our chances to rein in the banks:

“We somehow think that the bankers will take it upon themselves to lie down on the steps of St Paul's and seek forgiveness — and reform their ways and slash their incomes. They won't. They're human. Yes, they're pariahs, but they will carry on taking the money until they're forced to stop, until the authorities say bank licences will be relinquished if bonuses are paid.”

But none of these arguments raging in the media address the real issue here.

The real issue is not bonuses, profits, lending or interest rates.

The real issue is a lack of internal market leadership within the banking industry.

Nothing to do with regulators, politicians or press. The most significant failure has been the inability for the industry to act as a cohesive hole (sic: whole) to respond to the issues arising under their watch.

Instead we act as a fragmented group of a thousand voices.

Individual voices stand up and are counted, and some count more than others such as the Jamie Dimon’s, John Varley’s and Stephen Green’s. But nothing is co-ordinated or arranged in a way that makes sense or alleviates the public anger and distrust in the system.

Take the example of the past week of banker’s bonuses.

Initially, one bank – Barclays – set an example of waiving bonuses payments, as their leaders chose to repeat the actions of a year earlier and declined the multimillion pound pot they were entitled to. Reluctantly the rest then followed with RBS, Lloyds and now HSBC one-by-one agreeing not to award their leader’s bonus.

The result is that they were accused of being lame sheep in doing so, just following the lead of one, and it just looked limp.

It also rang of insincerity anyway, in that several of these leaders are purely deferring bonuses and have taken large swags of cash via other means (e.g. Bob Diamond’s $46 million payout on the sale of Barclays Global Investors last year) or just don’t need it as most are on million-pound plus packages. In fact, one cynic said that there would just be a top-up of their pension pots to compensate, and so no-one sees these token gestures as being anything other than that- ‘token’.

Does this justify the payouts to their investment banking teams by making such sacrifices?

No.

Does it restore faith and trust and displace the anger and mistrust?

No.

So all it’s done is served as some form of internal justification for the continuance of mega-bonus payments to investment banking staff.

The issue still lies with the press, politicians and regulators however: in this land of 1,000 voices, where no-one coordinated single voice resonates, where is the leadership to change the system?

Take the example I’ve just given.

What bankers should have done is worked together to create a co-ordinated plan across the sector pre-emptively and early on.

For example, Stephen Hester (RBS), John Varley and Bob Diamond (Barclays), Eric Daniels (Lloyds) and Michael Geoghegan (HSBC) see each other often enough in front of Treasury Select Committees to be able to co-ordinate their responses.

So why didn’t they all agree upfront to defer leader’s bonus payments, and announce this as a co-ordinated approach pre-results season?

A joint announcement of rationale and reasoning would have been far more powerful than the sheep mentality manner of following the leader.

Equally, Jamie Demon Dimon (JPMC), Vikram Pandit (Citi), Lloyd Blankfein (Goldman Sachs), Brian Moynihan (Bank of America) and John Mack (Morgan Stanley) see each other all the time in front of Federal Committees. So why didn’t these leaders co-ordinate responses to bailouts and bonuses?

You may say they did, but not from an observer’s viewpoint externally.

It looks like maverick individual actions and approaches, with no single voice to rally the industry to a resolution.

Why these ‘leaders’ cannot organise themselves is beyond the ken.

After all, if these global CEO’s of banks had created a co-ordinated and rational campaign to cap bonuses, waive their own, provide charitable donations, show how bank lending and bailouts had been atoned, then the media, public and politicians would not be baying for their blood.

The fact that: (a) there is no single voice of leadership that is co-ordinated across these banks speaking on their behalf; and (b) these leaders have allowed banks to behave without change, as they were before and as if nothing had happened, is going to lead to a showdown.

That showdown is not far away and, according got all my sources, will be far more draconian and vicious than any action that would have been taken if the industry had spoken with one voice, rather than thousand.

But then, this industry’s ability to self-regulate with transparency and integrity historically has been pretty poor so this comes as little surprise.

Meanwhile, you only have to look at the fact that our poor old Queen has been forced onto the tube these days, to realise how hard times are in Britain ...

40 days of the PSD

It's forty days since the introduction of the Payment Services Directive (PSD), so there has been lots of chat about the PSD this week, and how it’s working or not working.

Derogations and interpretations are rife, with the hottest and most contentious issue being the fact that charges are now meant to be shared (SHA in the SWIFT message exchange), except that many banks, institutions and even government administrations are insisting on OUR charging structures, where the sending bank pays all fees.

This issue is even causing ambiguity within a country, where one bank might accept OUR message payments from corporate clients in order to save the client having to re-jig their systems to accommodate, whilst another bank might not.

Even worse is where a bank sends a payment and gets a call from the beneficiary’s bank saying that they will process it as SHA but, if the client objects to the charges, then they will process it as OUR and ask the sending bank to pay the fee plus a potential ‘lifting fee’.

Elsewhere, some banks are taking the payments as SHA but then wrapping charges into other services and fees, so that the client does not realise they are paying or how much.

All of these shenanigans are just mere ‘teething troubles’ of course, as the PSD settles into the markets.

In fact, according to Ruth Wandhöfer, EMEA Head of Payments Strategy and Market Policy for Treasury & Trade Solutions at Citi’s Global Transaction Services and member of the EU Banking Council for the PSD, there are things that are being captured and changed. For example, some German banks were asking for €170 to process an incoming cross-border direct debit payment because their systems are so inefficient. This has been slapped down, with a maximum of €40 being viewed as an acceptable charge (that’s still high if you ask me).

Equally, some Spanish banks were asking for 4% of any transaction as their fee. That’s been slapped down too.

All in all, it is still clear that we have passed the start date for the PSD but the PSD has yet to start.

For example, here’s the state of transposition of the PSD according to the latest EU analysis:

What this shows is that Estonia, Greece, Latvia, Poland, Slovakia, Finland, Cyprus, Lithuania, Italy, Spain, Sweden and Belgium (Belgium!!!), all missed the deadline of 1st November 2009.

This is poor form as that means only 15 of the EU27 made it on time. Only in September, when I last checked the Europa website for the state of play, they had confidently predicted that 26 countries would meet the deadline.

Poor show.

Even worse, those that are making the deadlines are misinterpreting, adding or changing the intent of the text. These changes take one of three forms:

• Derogations
• Gold-plating
• Divergence

In the first instance, there are 23 derogations in the PSD. These are meant to allow each member state the ability to introduce the PSD without having to completely reinvent their payments infrastructures within country.

However, they are also creating major confusion, with the one derogation cited most often being the definitions of what is a microenterprise and how is it treated.

The UK classes microenterprises – small businesses – as consumers, and gives them all the rights and protections, products and services that would be afforded to a consumer in a payments transaction context. France, Spain and Italy, amongst others, use the derogation to classify microenterprises as corporates, and give them the rights and protections and products and services of a corporate client.

By doing this, they can offer and operate a consumer product as a corporate product under the PSD’s definitions, with the most obvious standout being the Italians who claim that the Riba – a direct debit in any other country – is actually a corporate product and therefore not subject to the PSD’s definitions of direct debits.

Gold-plating is also rife, particularly illustrated by the leg-in and leg-out dialogue where some countries are making themselves more attractive for payments processing by including US dollars and other non-EU currencies in their PSD definitions.

Finally, divergence is being created across countries by using definitions in different ways.  For example, Belgium and Slovakia have used derogations to enable their markets to define the payments cycle to be same day, rather than the D+1 (or +3) as dictated by the PSD; meanwhile the UK, by clever interpretation of value dating rules, has managed to get around this completely.

No wonder this is all so confusing.

Anyways, to clarify the confusion, Ruth Wandhöfer presented some interesting insights, and here are a few of her bullet points ...

What is the PSD?

The PSD represents a legal framework for payments within the European Union Single Market, covering the EU 27 as well as Norway, Iceland, Lichtenstein (not Switzerland!).

The PSD is a European Directive, which means that all Member States were required to implement PSD rule into their national legislation, a process called transposition, by the deadline of the 1st November 2009.

The PSD applies to payment transactions in euro and all other Member State currencies within the Single Market, where those are provided by payment service providers located in this Community.

The PSD covers all electronic payment services, while cash to cash transactions and cheques are exempted from the scope.

The PSD does not intend to cover payment services associated with securities asset servicing.

The PSD’s focus is on customer protection (not just consumer protection), covering the relationship between all providers and users of payments services.

With the aim of enhancing competition the PSD creates a new lightly regulated entity called a “Payments Institution”, allowing non-banks to handle payments and join the bankers’ payment schemes and associations.

The PSD also defines conduct of business rules for all payment service providers covering the end to end payer to payee relationship.

The PSD will have a revolutionary impact on the legal framework between banks and their customers setting stringent rules for information disclosure, conduct of business rules and service provision

Harmonised refund rules have been established to support SEPA Direct Debits, while unique identifier primacy ensures for enhanced levels of straight-through-processing.

Central Bank Reporting requirements for Euro transactions across the EEA still constitute a barrier to the free flow of SEPA transactions.

Every credit institution that provides payment services in the EEA will have to comply to PSD’s conduct of business rules.

Short-term issues with the PSD

Banking industry and Commission were strongly in favour of all countries transposing the PSD for 1/11/09 given intra EU/EEA cross-border payments are in scope.

In reality, the following countries are understood to have not been ready for the 1 November 2009 deadline: Estonia, Greece, Latvia, Poland, Slovakia, Finland, Cyprus, Lithuania, Italy, Spain, Sweden and Belgium. Spain and Slovakia joined in early December 09.

Consequent impact in practical terms: clients may experience a brief period of non-uniform treatment where a ‘PSD payment’ is being sent to a country yet to complete its transposition; and hence where ‘old’ legal regime practices could be applied.

An ideal ‘best practice’ would be if banks in late countries could voluntarily adopt key PSD payment processing provision (e.g. full amount principle) between 1/11/09 and transposition completion, but this may not always be possible.

To help minimise uncertainty, the EU banking industry within the PSD Expert Group is looking to establish Best Practice Guidelines designed to establish an approach in the key countries where transposition was delayed to ensure broad principles of the PSD are nevertheless complied with (e.g. the ‘no deduction’ principle).

Full Amount Principle and Charging Options

General rule: no deductions of charges allowed from the full amount where both legs of the payment are in the EEA and the transaction is in Euro or another Member State currency.

EU Commission Services are strongly of the view that charges code SHA is the clear requirement in line with the charge sharing principle in Article A52(2) (excepting in cases where there is a currency exchange) – despite the slightly broader interpretation in a few Member States (who have not ruled out use of OUR option).

The Commission and Banking industry further support a general move to using the ‘SHA’ charge code for all EEA currency payments travelling within the EEA.

The usage of SHA will ensure that the ‘full amount’ of the payment transaction will travel up to the beneficiary bank and a separate fee agreed with the beneficiary client will be charged or deducted (in a transparent way from the full amount).

Generally, the recommended best practice to all beneficiary banks is not to reject an incoming payment just on the grounds that the charge code is possibly ‘inappropriate’ as generally the beneficiary bank will not have all the facts necessary to make such a determination with certainty.

There were lots of other discussions about this during the week, but far too much to blog about every nuance of every chat.

Suffice to say, my own bottom line is that this ain’t working.

Roll on the PSD II.

 

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American Banks: Two Good, Two Bad

This week, it's Q3 results time for US banks and the story appears to be one of two good banks and two bad banks.

The good are JPMorgan and Goldman Sachs, who have both delivered stonking results. The bad are, you guessed it, Bank of America and Citi who are both struggling with domestic credit market losses.

In particular, JPM has impressed as, even with the absorption of WaMu and Bear Stearns, they delivered a $3.6 billion net income for the quarter and build upon consistent Q2 and Q1 profits.

Goldman are the same, although their profits were slightly below expectation as their investment banking part of the business was a disappointment. That’s why the share price took a hit but they can still afford to give everyone a jolly good bonus.

Both banks have paid back TARP funds and are well on their way to a return to the good times, much to the annoyance of the taxpayer.

Even more annoying for the taxpayer is the two banks left.

Like HBOS and RBS in the UK, Citi and Bank of America are still plagued with consumer and business debts and defaults. Particularly worrying is the continuing impairment of mortgage lending, and now consumer and corporate lending. One example is credit cards where default rates are now rising above 10% according to JP Morgan’s latest results.

Finally, Citi and Bank of America are also still plagued with TARP repayments, the Troubled Asset Relief Program.  As a result, Ken Lewis was told not to take any pay this year by the US Payments Czar who can order such actions due to the debt owed to the government.

As JPM and Goldman have paid back their TARP, they've set aside over $37 billion in bonus payments so far this year.  Whilst Citi and Bank of America have this TARP burden to bear they really cannot compete and, instead, are easy targets for taking star traders, clients and profits.

Aw shucks.

Here's a brief summary of the key news and views:

JP MORGAN CHASE

$26.6 billion revenues, up 81% on same period in 2008 with fixed income driving profits in investment banking, including a $400 million gain on leveraged loans and mortgage-related securities that the bank had previously marked down

The second-biggest US bank made a net income of $3.6 billion (£2.5 billion) up 72% on equivalent quarter last year ($527 million)

$1.9 billion net profit from investment banking division

Strong performance in its investment banking division cancelled out losses on credit cards and consumer loans.

The consumer lending business posted a net loss of $1 billion, up from $659m in the same period of last year.

Card services made a net loss of $700m, which was an improvement on the $992m lost in the third quarter of 2008.

Investment banking business made net income of $1.9 billion, up from $1 billion in the third quarter of 2008.

JPMorgan said it had also benefited from the impact of buying most of the assets of Washington Mutual, which it acquired in September 2008 after it had been seized by regulators.

$2 billion set aside for consumer credit losses, taking total to $31.5 billion as more than 10% of credit card customers failed to pay debts

The bank repaid its $25 billion of US government rescue funds in June.

$7.3 billion set aside for bonuses taking this years tally to $21.8 billion

GOLDMAN SACHS

Goldman Sachs' net earnings for the three months to 25 September were $3.19 billion (£1.96 billion), up from $845m in 2008, just before the Lehman collapse.

The profit figure was up from the same period in 2008, but it was lower than the $3.44 billion that Goldman made in the previous three months.

The bank paid back the emergency loan it had received from the government in July this year. It has come through the financial crisis relatively well, having been less exposed to the mortgage-related debt that crippled many of its peers.

Goldmans is doing particularly well thanks to the revival in world financial markets with most of its money from trading in stocks, bonds, currencies and commodities – a high risk, high reward strategy which other banks cannot replicate

Revenue from its mergers and acquisitions operations fell sharply from the previous quarter, reflecting the continuing lack of activity.  This caused investment banking revenues to fall to $899 million, 31% worse than same quarter last year and 38% down on last quarter due to declines in bond underwriting

Increased this year’s bonus pool to $16.71 billion (47% of net revenue)

CITI

$101 million net income but $529 million losses on continuing operations before taxes

Net revenues up 25% to $20.39 billion although revenues in the Securities and Banking Unit were down a third to $4.89 billion

$100 billion in writedowns and consumer credit losses so far

$8 billion in credit losses, compared with $4.9 billion in same quarter last year

Citi made $101m in the period, down from $4.28 billion in the previous quarter but up from a $2.82 billion loss in the same period of 2008.

In Q2, Citi reported a $4.3 billion second-quarter profit because of gains on its Smith Barney deal but its primary banking businesses continue to suffer from rising credit losses.

Citi is more exposed to consumer loans and has more bad debts. It got a $45 billion bailout from the US govt - The Treasury Department now owns a 34 percent stake in the bank after converting a portion of the $45 billion in rescue funds Citi received last year.

BANK OF AMERICA 

Bank of America posted a $1 billion third-quarter loss compared with a profit of $1.18 billion a year earlier.

Total revenue increased 32% to $26.4 billion.

Results were helped by profits from Merrill Lynch with gains from trading bonds, stocks and currencies. Losses on home lending and insurance widened to $1.6 billion from $724 million, and the loss on credit cards expanded to $1.04 billion from $167 million.

The bank said the provision for credit losses was $11.7 billion, with $9.6 billion of loans considered uncollectible.

Reserves for future losses increased by $2.1 billion, compared with a $4.7 billion addition in the previous quarter. The bank’s reserve is now 4% of total loans, compared with 4.7% at JPMorgan and 5.9% at Citigroup.

Net write-offs of uncollectible loans rose 11% from the second quarter to $9.62 billion. The bank wrote off $3.2 billion of home loans, including home equity loans, during the quarter, up 10% from the second quarter. Charge-offs on credit cards increased 5% to $2.17 billion.

CEO Ken Lewis is stepping down at the end of the year and his abrupt resignation and the lack of clarity on his successor are contributing some uncertainty surrounding the stock.

Bank of America earned $3.2 billion last quarter.

Bank of America needs to clarify its position on TARP. It would be a very positive sign to pay down some of their TARP as they have only paid $1.83 billion of the $45 billion due.

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Citi spent $1 billion on transaction services

Earlier this week, I noted that Citi were advertising the fact that they spent a billion dollars on global transaction services (GTS) in 2009. 

This is an investment in new infrastructure that delivers global real-time transaction services fit for the 21st century, and was one of the core messages on their booth at SIBOS:

For a bank that has needed government support to survive, some might question such spend.

Don't.

According to Citi's folks this is an intelligent investment, as GTS turns over $9 billion in revenues and $3 billion in income, as detailed in their latest results.

GTS is one of the best parts of Citi, so leave it well alone and keep on pumping investment into it.

I wouldn't say the same about the investment banking division, but then much of that has been sold off, so Citi's gradually getting back to doing what it does best.

Commercial and retail banking.

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Is there any innovation here? Nope

After the innotribe stuff, it was off to a panel debate about “payments innovation”.

This session was described as follows:

“The crisis has put the emphasis back on traditional banking and sources of revenue, with payments coming to the fore again. Yet payments are also seen as a commoditised, legacy business where scale is everything. Into this business come a series of new market demands which might change this such as same day retail payments, e-payments, mobile payments, contactless cards and real-time finality. How will these new opportunities develop and will they be profitable new forms of business? Can banks afford to develop new channels individually or will they need to co-operate further? Will non-bank players use technology to challenge banks for their new payments service business?”

Bearing in mind that innotribe was all about innovation, it is obvious why this session was of interest to me.

This session was chaired by Robert Heisterborg, Global Head of Payments and Cash Management at ING, with a panel comprising:

• Rajesh Mehta, Managing Director, Head of Treasury and Trade Solutions, EMEA Global Transaction Services, Citi ;
• David Sear, Divisional Managing Director, Travelex Global Business Payments ;
• Marcus Treacher, Head of electronic banking and e-Commerce, Global Transaction Banking, HSBC; and
• Russ Waterhouse, Executive Vice President of Products and Development, The Clearing House.

Here's a summary of how it went:

Robert Heisterborg:

Who’s driving innovation?

Rajesh Mehta:

The innovation drivers I can see include:

• the miniaturisation of payments - especially as there’s more P2P taking place;
• government’s needs, especially in current economic climate;
• banks seeing payments as a product rather than looking at payments as a business in its own right, which is what non-banks do;
• regulatory change; and
• risk management.

Citi in particular is focusing upon prepaid cards and mobile as key new innovation areas.

Marcus Treacher:

Often the idea of the innovator is not the way it works in reality. My favourite example is the ATM which was introduced as an automated teller in branches and it failed. In desperation, the developers decided to try the machine outside the branch and it took off. That was an accident, but one that created success.

Russ Waterhouse:

As a market infrastructure we’re the last place people would normally look for innovation, but we have to do this because it is required, expected and needed amongst our clients and community. The challenge to do this is that many of us benefit from the inconsistencies in the markets, and we have to rethink our business models if we are to take advantage of creating innovation through more consistency.

David Sear:

When we refer to payments innovation, the only example normally mentioned is PayPal and I’m a little tired of hearing about PayPal. They’ve been around over ten years now, so get over it. PayPal have a billion dollars of revenue in Europe alone so their innovation has happened, they have achieved change and they’re here to stay.

Now, as a consumer, I may not want PayPal because I find it difficult to use. It’s clunky and doesn’t provide me with the security I want. For example, a recent US survey by Nielsen found that 81% of consumers would prefer a P2P payment instrument provided by their bank. So we have to do a little better particularly as there is a trillion dollars of ecommerce out there each year, and 20% of that is cross-border.

Prepaid cards are becoming a mainstream in the payments landscape, and that’s another key innovation we are tracking.

Equally, I’ve heard lots of people talking about convergence this week and I’d like to see that. In particular, I would like to see the end of the back street money transfer agent. Bank2Bank and Card2Card services, such as Visa money transfer cards, should mean that AML will go away into a different place.

Robert Heisterborg then asked the audience: “We have been here for a week, is there enough innovation at SIBOS?” and over 80% of the audience said ‘No’. Where were all of you when the innotribe sessions were running all week????

We then started looking forwards to the future of payments.

Rajesh Mehta:

The future landscape for payments will fall into three camps:

• Large global players with the advantage of scale;
• Niche specialist players with a vertical focused advantage, e.g. payment practitioners for the health industry or the pensions industry; and
• Hybrids who are capable of innovating themselves but acquire capability, distribution and technologies from partners who do this better than we do

Robert Heisterborg then referenced an ING trial in m-payments in Romania that found the average transaction value of a mobile payment to be €2.44. Therefore, is mobile the cash killer?

David Sear:

A decade ago we talked about micropayments killing cash on the internet and it hasn’t happened. For example, Google has announced a micropayment service for content recently but these sorts of developments are all about ‘if we build it, they will come’. It’s not what consumers want though. Consumers don’t want to pay for content and Google’s announcement of micropayments for content will therefore not necessarily work.

Rajesh Mehta:

How can you say that David when, in Africa you have four times the number of mobile telephones than bank accounts? How come you don’t think m-pay will happen?

David Sear:

Because consumers are asking for other forms of payment that are more traditional, such as prepaid cards in Africa rather than mobile.

Rajesh Mehta:

What will drive the mobile is banking the unbanked rather than the payment itself. However, once banked, then mobile payments will come.

The audience were then invited to ask questions and the first was about the fact that Nokia have 1.3 billion telephones out there and relations with all the carriers. The fact that they’ve partnered with Obopay should be seen as a threat should it not?

Rajesh Mehta:

No, as they are working with the banks on this. We’ve created a financial cloud at Citi for example, as a super settlement mechanism for the kind of needs of Nokia. It’s a settlement and clearing role and there’s always going to be collaboration with a bank on these things, so the question is really about the last mile. The last mile is all about who wants the connection for something as ubiquitous as a toothbrush, which is what the mobile is these days. For this, do I need to own the last mile? Do I need to compete with others there? Or do I enable that capability and collaborate? There’s always room for collaboration.

All in all, it was an interesting discussion but the fact that the panel talked mainly about prepaid and mobile, but no real discussion of SEPA innovations around einvoicing or contactless payments was an oversight, so I asked about contactless.

Of course, the panel said that it was not purposefully missed off the list, and that this is going to be embraced.

My take on this: for ING, Citi and HSBC, contactless technology is still off the radar or it would have been referred to more strongly. Would have been interesting to see Octopus or Barclaycard or Visa PayWave or others, as thee form factor of contactless mobile or contactless watches (forget cards) is far more innovative as a consumer payment service than a mobile payment using SMS or something (which is where most banks focus first).

Net:net, and being honest, there was no real discussion of innovations here but the panel talked more about stuff that has been bubbling away for years in the form of prepaid cards and mobile payments. Even if they had talked about SEPA einvoicing and contactless, it’s not really innovatory.

What would be truly innovatory would have been to discuss the next generation of payments using wireless technologies to pay without any physical devices involved.

Now, that is revolutionary and I’ve got a whole nine yards on that innovation.

Anyone wanna hear it?

Regulate for what's needed, not politics

Just went to another great plenary session discussing whether transaction banking will be the engine for the next phase of sustainable growth and moderated by Karen Cone of TowerGroup. The panel consisted of the heads of global transaction banking from some of the largest banks:

• Werner Steinmuller of Deutsche Bank
• Andrew Long from HSBC
• Catherine Bessant with Bank of America
• Francesco Vanni d’Archirafi at Citi

Here’s my loose highlights of what was said and please note that these are not directly quotes but an interpretation which began with each panellist providing a view on the current regulatory environment ...

Andrew Long:

I went to the European Union to find a continent covered by regulations and thought that was bad. The recently retired chairman of our bank, Sir John Bond, said on his retirement that he joined an industry with zero regulators and there are now over 300 when he retired, and that was bad. The result is that the costs and confusion created by regulations outweigh the aims and the benefits.

Werner Steinmuller:

Regulators are always following what is happening and should be more forward looking, instead of always trying to mop up after an accident. I want to see the regulator, at least on the EU side, more coordinated. For example, we have European initiatives but no European regulator, and this would help if we had more harmonisation rather than country-to-country approaches. For example the PSD has country to country views and the cover payments initiative has no global coordination. The result is a lot of money involved in implementation.

Francesco Vanni d’Archirafi:

Just to switch the lights on we have to constantly upgrade our platform to serve our clients. Therefore business as usual, particularly with earnings pressure, will push the industry to continue to collaborate. I use scale providers when we don’t have the scale in our business and that is what others will need to do.

Andrew Long:

Regulators tend to introduce these rules and think we make so much money that it doesn’t matter, but they forget there are a lot of smaller banks that also have to comply. The costs for them are too great. This means there should be industry created platforms to support compliance with shared costs for all, rather than all the costs being applied to each institution.

Catherine Bessant:

When I think about the risks that are in the system, it is not that they are unknown to us but that they are different to those of the past: the average size of risk, the speed at which things move and how decisions are made, the costs and volumes involved. There are a lot of challenges there. The nature of counterparty identification and counterparty risk is a critical factor. Also, the places we take risk are not necessarily the places where we get paid. Daylight overdrafts for example, and the exponential risks involved there. We are not necessarily adept at educating our clients on the risks that we are taking and sometimes we are not adept at doing that internally. We have to work different ways as a result, in order to get value out of the system. This is why the notion around cooperation and leveraging scale and partnership within the industry makes sense.

Andrew Long:

We are all paid to take risks and if we didn’t, we wouldn’t be in business. In the securities space are massive risks hidden away. We are now talking about how we manage risk on an individual and systemic basis. There are significant intraday risks in there and we need consider these and price them accordingly.

Francesco Vanni d’Archirafi:

Everything we do is focused upon releasing working capital for our clients. The more you can squeeze cash from working capital, the more efficient our clients can be. This means we need to give visibility and transparency for our clients and allow them to manage risk on their balance sheet and transaction flows based upon that visibility and transparency to give them more control.

Catherine Bessant:

We, as bankers, have a duty to our clients to provide a window into the marketplace because we understand the functioning of the marketplace. We have a track on global trade flows and trade movements and, as capable as we are, we must step up our accountability to this so that our clients know as much as we do about those flows.

Andrew Long:

We will have to do more in responding to regulators and making sure our internal controls are in place. That means more costs as this is not just the risks we are aware of historically, but now legal risks and fiduciary risks and more. We’ll need to spend a lot of time on the legal documentation in the securities business for example.

Werner Steinmuller:

Compared to other areas in banking, we work much more together in transaction services, where our biggest competitors may also be our biggest clients. Without working together, payments would not work. For example, without SWIFT, we couldn’t do what we do. This is why, during the crisis, you didn’t hear about issues in the infrastructure and how the systems work or any failure in payments or settlement. BAFT is also following our interests and we are talking about how we can standardise the processes more and work together more. Sharing information on fraud protection for example, and also in the area of having a common voice to the regulator.

Francesco Vanni d’Archirafi:

We work together more because forcing people to stay with you because it’s difficult to unplug is the model of the past. This is why most banks will consider using shared services outsourcing from a competitor’s transaction services structure in the future for this reason.

Catherine Bessant

We’ve spent a lot of time working out where is the moment of separation where we need to compete and where is the moment to leverage where the scale and operation of working together can achieve more than competing. We have a joint venture with Wells Fargo in this space called Pariter** for example. The reaction to this announcement has been evidence of what an unnatural act this collaborative competition is. There were very negative reactions from some, including the Federal Reserve, about how that impacts the traditional ways we have done business. We have a lot of structures trying to craft cooperation now though, and the crisis has brought us to a moment where we have realised how we can work better together.

Francesco Vanni d’Archirafi:

The market forces us to do this, not just the regulators.

Andrew Long:

We are also seeing global changes in trade trends – the north-south trade flow is declining but the south-south emerging markets dealings are growing. There are huge opportunities here in Asia and once we work out how to leverage those opportunities through the right products in the right systems, we will be far more competitive as I’m sure my competitors are thinking today. If you introduce new products priced appropriately and have a good balance sheet, then you can grow your business by leveraging your strengths ... but you must know what those strengths are.

Catherine Bessant:

The value we get paid for the business that we do has not just reduced in the last two years, but in the last ten. There’s a painful truth about the economics of our business.

Andrew Long:

The regulators now recognise how systemically important our service is in trade flow and commerce globally, and are now asking: if we are so systemically important are we too big to fail? The answer to that is to ensure capital is covered and therefore this is why capital flow and analysis has been a key.

Werner Steinmuller:

Also, if a provider should fail, there should be no issue in moving their service to another. That’s the basis of open connectivity today. On another note thought, in Europe, I have two messages for the regulator on SEPA.

First, come up with an end-date

Second, harmonisation. If you have one SEPA Direct Debit, but each country with a different implementation then you don’t have a single direct debit for Europe, and this is crucial for SEPA. If we are not strict on harmonisation then the total SEPA introduction is at risk.

Note: this is what Weiner said in the research note on PSD and SEPA we released last week

Francesco Vanni d’Archirafi:

I agree and we also need to ensure the end-date is not too far out. A date please and the sooner the better in our view.

Werner Steinmuller:

2012 would be ideal, but 2013 is realistic.

Andrew Long:

I disagree. We don’t have an end-date it’s because there’s no client demand. So my message would be make SEPA and the PSD more relevant and get the markets – corporates and citizens and countries – to see it as necessary. They see it as driven by politicians however, and not as relevant.

Francesco Vanni d’Archirafi:

If we look at the European securities space, MiFID and T2S are creating major headaches for many of us around the table, and these programs have irrevocably squeezed profit pools from the trading environment. I think that’s good for Europe though as we have new business models and efficiencies delivered as a result. This is what SEPA should achieve in the future – more efficiencies through new business models.

Andrew Long:

I don’t disagree that we need efficient infrastructure but I take the view that rather than making the rules and then forcing the market to follow we should understand what the market needs and then make the rules.

** Wells Fargo and Bank of America have announced the formation of a joint venture to operate a single, combined automated clearinghouse (ACH) platform for both companies and their clients. The new entity, called Pariter Solutions LLC, will be the country's largest processor of ACH payments.

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Back with a bonus

It’s been nice having a break, and feeling like the banking system isn’t the only thing I care aobut in this world. Nevertheless, the eye wasn’t completely off the ball as several grumblings and mumblings have been taking place during the last two weeks.

The obvious and biggest story being the need to sort out bankers’ bonuses.

I’ve blogged about this stuff before, putting the arguments for and against big bonuses ... but seriously, there is nothing the governments of the world can do about bankers’ bonuses.

For a start, Barack Obama thought about a cap of $500,000 earlier this year. Various newspaper headlines screamed: “Obama imposes $500,000 ceiling on bailed-out bank bosses”, and this was seen as a good thing ... but only by the naive new incumbent of the White House that is who, like most of the populous, wanted to do the obvious thing and clip the wings of the evil banking system.

It just isn’t that simple.

Sure, bankers making ‘obscene’, ‘outrageous’ and ‘vulgar’ amounts of cash out of a failed system is a source of retribution to be sought, but not by making your country unattractive to the very people who fuel your economy.

That’s why Obama was rapidly shot down by those who understand these markets. Their argument went something like:

“OK, OK. So you’re a bit pissed with the banking system, as are all of us. But you gotta see it our way. The banking system is the fuel of the economy. If the system fails, the economy fails, you fail. You know that. That’s why you bailed us all out.

“Now then. What makes the banking system work? Having the brightest talent who totally understand and get these complexities of trading.

“Now you know how complex trading has gotten. That’s why we had these issues in Credit Default Swap Derivatives. In fact, the more derived a product is, the more complex it gets, the more risky it gets but, if you have guys who understand those risks and can trade in them effectively, then you make massive amounts of profit.

“That’s how the ‘vampire squid’ Goldman Sachs works, and that’s how all of us want to work. And it did us good for the past decade or so, didn’t it?

“So, you cap bonuses and you effectively are saying: the best and the brightest traders, go trade elsewhere. And they will.

“Just look at the dead meat on Wall Street and London.

“Royal Bank of Scotland for example. Lost a load of traders to BarCap and others overnight.

“Or UBS? Same thing.

“A bit of weakness in the system and stellar rewards await elsewhere for the best and brightest as can clearly be seen.

“So go on Mr. Obama. Put a cap on our ability to attract, retain and incentives the best and the brightest traders and you’ll soon see all your banks that are working fail. We will all fail because all the guys will be in some other country with some other bank.

“Oh yea, and you throw in a few things like: ‘working with the G20 in a co-ordinated fashion and we avoid this’. Sure. You think China and Russia would really see the opportunity to steal your main strength in the financial system – the knowledge – as something they would ignore or see as being just fair dues?

“We don’t think so.

“Your choice, Barack, but you stifle our competitiveness in salaries and bonuses and you sign our death warrant.”

In other words, the core of the financial system involves having top trading talent who understand their markets intimately in order to be able to deliver profits.

That’s why Citibank are arguing for $100 million bonus for their top trader Andrew Hall, and why Royal Bank of Scotland are paying Brian Hartzer $4 million as a signing on fee.

I liken it to footballers.

Do you really think that Christiano Ronaldo is worth or not worth £80 million?

Does it matter what you think because Real Madrid think he’s worth that and, if they have the money, they get the man.

This is how banks work and it may be economies they are kicking around rather than footballs, but the talented few who have proven track records deliver the greatest profits.

That is why America and Britain have fought Germany and France so hard over this matter, as America and Britain have the financial markets as the core of their economies and economic strength or, more recently, weakness.  But to cede these markets now, as they move into recovery, would be to place a nuclear bomb in the heart of Geithner and Darling's Treasury operations.

It just will not happen.

Governments therefore have learnt that they have to protect their banks, that are too big to fail, and their bankers, who are too bright to lose.

Finally, on this last point, do the brightest really deliver the greatest profits ... or is it their firm and environment?

In a fascinating study by Harvard Business School’s Professor Boris Groysberg of over 1,000 stock analysts who worked for 28 American investment banks between 1988 and 1996, he found that when a company hires a star away from another firm:  46% did poorly in the year they switched jobs and their performance remained lower even after five years; there is a decline in the performance of the group the star analyst joins; the market value of the company hiring the star falls; and the star doesn’t stay with the new employer for very long.

Grosyberg concludes that hiring stars does not do much for a firms’ or the star’s performance, and that everyone would be better off by growing talent inside the firm.

Hmmmm .... it's good to be back.

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The Top 10 Banks of 2009

And yet another Top 10 list is released today.  This time it's the Financial Times analysis of the leading investment banks of the world (doubleclick image to see the list properly):

This is hot on the heels of the Banker's release of the leading banks of the world, with the most profitable banks being:

ICBC (+$21.3bn)
China Construction (+$17.5bn)
Santander (+$15.8bn)
Bank of China (+$12.6bn)
Banco Bilbao (+$9.64bn)
HSBC (+$9.31bn)
Barclays (+$8.86bn)

and the banks with the biggest losses being:

RBS (–$59.3bn)
Citigroup (–$53.1bn)
Wells Fargo (–$47.8bn)
Fortis Bank (–$28.3bn)
UBS (–$19.6bn)
HBOS (–$15.8bn)

and adds to the Forbes list from April:

Global                                                          Sales      Profits  Assets      Market
Rank     Name          Country      Sector          ($bn)       ($bn)    ($bn)   Valn ($bn)

More to come I'm sure ...

... meanwhile, the UN's Millennium Campaign report, which also came out this week, states that the amount of money found to bail out financial institutions over the past six months is 133 times greater than the amount of aid given to poor countries over the past 49 years.

Point taken.

US Q1 Bank Results: Just a Blip?

So we've seen major US banks announcing great results in the last week with Citi dropping in with $1.6 billion after almost two years of losses; JPMorgan $2.1 billion; Goldman $1.8 billion; Wells Fargo (reporting Wednesday 22nd) expected to post $3 billion; and Bank of America reporting $4.2 billion profits at lunchtime today.

This is a great improvement on the last quarter, when JPMorgan made only $702 million Q4 net income; Citigroup lost $8.29 billion losses; and Bank of America made a $1.79 billion loss thanks to Merrill's $15.3 billion losses.

Now everything in the garden is rosy, isn't it?

No.

If anyone thinks we've seen the worst, then think again.

First, you have the USA running stress tests on the banks, which has all the bankers pretty stressed. 

The results of these tests will be released on May 4th, but don't expect any big shocks. No bank is going to be shown as distressed, as it's not in the government's interest to go anywhere near that route.

Second, President Obama said that more taxpayer money is needed to bailout the banks yesterday: 

"Different banks are in different situations. They're going to need different levels of assistance from taxpayers ... If taxpayer money is involved, I've got a responsibility to ensure some transparency and accountability in the operations of those businesses. We try to use as light a touch as we can. But I am not going to simply put taxpayer money into a black hole, where you are not going to see results."

More taxpayer money is needed?

"A black hole"?

Why would he make such a statement if the issues have gone away and the banks are back in the black?

Third, credit cards are the next big hole. 

Citi's latest results show that credit card delinquencies have doubled to 2.14% from under 0.96% in the previous quarter.  With $145.9 billion of credit on those cards with just Citi alone, this is a massive issue for them and JPM, BoA, HSBC and more.

Fourth, did the banks actually make money in Q1, or were they gifted that money by another operator, such as AIG? Only two weeks ago I mentioned that Zero Hedge has spotted AIG were unwinding their complete credit default portfolio during January and February, which immediately gives everyone a bonus.

Finally, with Ken Lewis at BoA under threat and Merrill Lynch rumoured to be falling apart at the seams, can these large banks really expect to sustain growth and profitability through Q2? 

Not if BoA is an example to follow where most of their Q1 profit came from asset sales and credit spreads ($1.9 billion gain from selling shares of China Construction Bank and $2.2 billion of gains tied to widening credit spreads).  And take particular note that credit loss reserves were increased to $13.38 billion, up from the $8.54 billion in the previous quarter.

Don't be too cocky about these results.


Postscript: more can be seen about this at Bloomberg TV where I was interviewed this morning resulting in the headline: "Skinner Says 'Time To Move On' for Bank of America Chief"!!!!

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Top 10 Banks in the World 2009

Forbes just published their top 2000 companies list.

Here's the Top 10 Banks (double-click picture to see larger version):

Global                                                        Sales    Profits  Assets    Market
Rank     Name         Country       Sector        ($bn)     ($bn)    ($bn) Valn ($bn)

For the last decade Citi and Bank of America were way up there too.

Now, BoA is 11th in sector and 38th overall (not bad) and Citi are 73rd in sector and 472nd overall (not good).  Citi are just behind Royal Bank of Scotland (68th and 431st), and right next to Akbank (65th) and Garanti (70th) from Turkey .

Watch this space.

And if you were interested ...

Biggest Globally

#1 General Electric
#2 Royal Dutch Shell
#3 Toyota
#4 ExxonMobil
#5 BP

Oil be darned!

Biggest Software & Services / Technology Hardware & Equipment (why do they separate these?)

#1  IBM  (28)
#2  HP (36)
#3  Microsoft (49)
#4  Cisco (69)
#5  Nokia (81)
#6  Sony (82)
#7  Panasonic (89)
#8  Apple (113)
#9  Canon (122)
#10 Oracle (128)

Number in brackets is position overall

AIG give Citi, JPM and BoA a Q1 bonus

It's not my usual thing to report news from other blogs but this entry on Zero Hedge is just incredible.

A trader who wishes to remain anonymous has sent them a letter claiming that AIG Financial Products (AIG-FP) built up billions of dollars of exposure to Credit Defaul Swaps (CDS) over the years, as we know.

Seeing the writing on the wall for another bailout, AIG-FP spent January and February unwinding their complete portfolio positions for many of these contracts with their investment banks.  This means that the close-out with the trading desks gave those banks "the most profitable deals" ever.

In other words, AIG-FP unleashed the flood gates to move bailout funds from the Treasury through their books and into Citi, JPM and Bank of America, if true.

No wonder those banks claim to have seen a good start to the year, as do Deutsche and others.

In fact, $50 billion of the $180 billion AIG bailout were direct payments to other banks, according to Blogging Stocks.

On the basis of these portfolio changes, it may well be more.

About $1.6 trillion worth all up.

Curiouser and curiouser.

MSNBC rip into Citi and Vikram Pandit

Tracy Bramlet blogs over at Finextra about this item from MSNBC:

This is building inflammation on top of inflammation, after seeing the anger over AIG stirred into real anger with this diatribe. 

I predict a riot.

Here's the transcript if you'd rather read it than view it:

Wall Street treated the bailout bill like a national blackmail scheme

March 19: In a Special Comment, Countdown’s Keith Olbermann expresses outrage at Wall Street over their continuing misuse of federal bailout money. Olbermann calls for the firing of bank executives and more stringent bank regulation.

“Finally tonight, as promised, a Special Comment on the latest atrocity from the banks. The vast, engorged, gluttonous multi-national corporations. Whose sneezes can be fatal to our jobs. Whose mistakes can turn us into the homeless. Whose accounting errors can be so panoramic that they can make our economy tremble and force us to hand them billions after billions in a blackmail scheme that has come to be known as "bailout."

“Five weeks ago Vikram Pandit, the chief executive officer of Citigroup, went back to Congress, tail seemingly between his legs, and, with entreaty dripping from his voice, announced "I get the new reality and I'll make sure Citi gets it as well."

“In point of fact, as Bloomberg News reports today, what Mr. Pandit "got" was a new $10 million executive suite for himself and his key associates.

“This is the same Mr. Pandit who said he would show his leadership by accepting compensation of $1 a year. In fact, he then "accepted" a total compensation package for 2008 of $38 million.

“Enough!

“Mr. Pandit, you're probably just a good actor and a damned liar and a con man. But I'll give you the benefit of the doubt and assume instead, that you just can't tell the difference between $1 and 38 million of them. That would certainly explain the maelstrom into which you, and your colleagues at Citi and your counterparts elsewhere, have gotten us, including the vast majority of us who are innocent bystanders.

“Your bank says your new $10 million office is part of a global strategy of space reduction that will ultimately save billions. It seems entirely appropriate to remind everyone, sir, that this promise could be fulfilled by Citi saving $2 a year for a billion years.

“God knows you guys have pulled off every other accounting trick every dreamt up by immoral man. You, Sir, and the other corporate pirates like you — those who are saved from your obsessive spending and greed and self-aggrandizement by the taxpayer — who then pretend to atone — who then publicly promise good behavior — and who then revert immediately to the rapaciousness that is your only skill.

“You, sir, all of you, need to be fired.

“Enough!

“And Mr. Pandit's corporation should be cut up into little pieces. And when he and the other ultra-millionaires wonder what hit them, we should make sure they are easily reminded. Our representatives should entitle the legislation that ends their moral ponzi schemes, "The Punish Vikram Pandit Act of 2009."

“The far right in this country, without the slightest provocation, screams "socialism," and the sheep who follow it, who do not know what the word means and do not know it is only being used because "communism" now rings laughably hollow. In this cry of fire in a crowded unemployment line, there is outrage.

“But there is also license. They think this is socialism? There is a million miles of reform to go before we hit socialism but if they're going to call us names whether they apply or not let's give them real reform.

“Break up the banks. Regulate the financial industries, to within an inch of their existences. Roll back corporate legal protections. Make liable the officers of corporations, for their debts, and for their deeds. Resurrect the rallying cry of a hundred years past: bust the trusts!

“AIG gives "failure bonuses" to the cretins whose dalliances in derivatives brought the company and part of the nation to her knees? Spin off that division whose traders are owed the 165 million in bonuses, under fund it, and cause it to go bankrupt.

“Enough!

“Let those with bonuses owed, stand in line before a bankruptcy referee, and wind up — just as you and I would — with half a cent on the dollar. Northern Trust fires 450 employees in December. Then takes a billion six in bailout money. Sponsors a golf tournament. Flies hundreds of clients to Southern California for private Oscar Parties including the renting of an airplane hangar and the hiring of the group "Earth, Wind & Fire?"

“Enough!

“Fire the executives. And fire up the Justice Department to figure out just how much fraud was involved in asking for a billion-six in bailout money when Northern Trust said nothing as the checks were written, even though it knew in advance that millions could be saved by simply cutting the fluff and the trumpery.

“Thirteen more companies that took bailouts, signed the mandatory documents that said they owed no back taxes lied turned out, per Congressman John Lewis of Ways and Means today lied — they owe, just among those thirteen firms, 220 million in back taxes?

“Enough!

“Have the IRS take these companies, immediately, to the tax courts to which the rest of us are liable. And strip those ancient, outdated laws of Corporation, so that the officers of the corporation are personally liable for their companies' debts, just as you or I would be. And if the monopolies of radio or television rear up to support the corporate structure, to say a contract is a contract, even though that isn't true for a union these days, only for an AIG Trader. Take the invisible, unused Sword of Damocles they still fatuously insist hangs over their heads, and make it real.

“Enough!

“Make sure both sides are heard. Re-regulate the radio and television industries to limit station ownership and demand diversity of management and product. Re-instate the old rules that denied one man all the voices in a public square. End all waivers of multiple ownership of television stations and networks and newspapers in the same market.

“And, yes, if a voice of the privileged classes unfairly uses his cable platform to call our neighbors who are the victims of this, "losers" to insist he alone speaks for the real people.

“Or if another, indicts without equal time for defense a particular elected official, and then offers himself as a candidate for that very official's seat, in violation of all canons of good or even fair broadcasting then tell the cable industry that the free ride is over and it is time that it too be regulated by the FCC.

“Enough!

“To all of you in the Corporate boardrooms.

“Stop viewing the public's reaction to this naked, unhindered robbery of the public coffers, and your audacious, immeasurable sense of proprietorship and entitlement stop viewing our anger as some kind of brief impediment, some traffic delay that keeps you from your God-given corporate ballpark sponsorships, and perpetually remodeled offices, and the divine right of $38 million "compensation packages."

“You, gentlemen and ladies, and not the good and long-suffering average people of this country, you are fomenting rage in this nation. You are the losers in this equation, and the people are the generous ones; they have not assembled in the streets with pitch-forks and flaming torches. You are the ones perceived — understood in a visceral and even transcendent way — as the committers of what is becoming class economic rape.

“And heed this one word before these people grow weary of forgiving you, and instead decide to bring the "good life" — which you have built on their backs — crashing down on top of your heads. When the next boardroom needs re-modeling, or the next bonus paid, or the next jet purchased, remember that one word:

“Enough!”

Vikram's Citi email that jumped the stock

You've probably seen it but, just in case, here's Vikram Pandit's internal memo that was leaked and resulted in a nice little jump in the stock price this week:

From: Vikram Pandit

Subject: Capital Strength and Earnings Power

Sent: Mon Mar 09 21:12:44 2009

Dear Citi Colleagues,

After a broad sell off in the markets last week, I thought I would give you a quick update on our position.

Despite the steps we’ve taken to strengthen our capital base, I am, like you, disappointed with our current stock price and the broad-based misperceptions about our company and its financial position. I don’t believe it reflects the strengths of Citi; our newly strengthened capital base, our unique global franchise and most importantly, the quality of our people. These are unprecedented times in the markets, but over time, the markets will recognize the many strengths of Citi.

I believe there are two key issues to focus on — capital strength and earnings power.

First, on capital strength, as you know, the preferred exchange we announced nearly two weeks ago is expected to make Citi the strongest capitalized large U.S. bank as measured by tangible common equity (TCE) and Tier 1 ratios. While our Tier 1 ratio will remain at 11.9% as of December 31, 2008, assuming 100% participation in the exchange, our TCE could increase to as much as $81 billion. Despite this addition of tangible common equity, some people continue to question our capital strength because of our net deferred tax asset (DTA) and the quality of our assets.

• DTA: Even if near-term conditions deteriorate significantly, we expect to be able to realize the majority of our DTAs.

• Asset quality: The Fed will conduct stress tests for all large banks in coming weeks. We’ve done our own stress testing using assumptions that are more pessimistic than the Fed has outlined and we are confident about our capital strength.

• In addition, the Smith Barney joint venture and the conversion of mandatory convertibles is expected to add another $14 billion to our tangible common equity over time.

In addition to our strong capital position, I am most encouraged with the strength of our business so far in 2009. In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. In January and February alone, our revenues excluding externally disclosed marks were $19 billion. Our client businesses are strong: our deposits are relatively stable, our client-driven Securities and Banking businesses have been performing well, including our recent #1 rank in M&A, and we continue to provide credit to consumer and corporate customers. You have all done a very impressive job driving revenues and reducing our cost structure, and it is gratifying to see the results first hand.

I also appreciate how distracting the confusion in the markets and the media can be. In case you missed it, you should read the article in Friday’s Wall Street Journal Deal Journal entitled “Citi Woes Don’t Distract Its Investment Bankers”. It was great to see you get the recognition you deserve and how you have remained focused on your clients and customers.

Lastly, I spent time last week talking to groups of colleagues and clients in Europe. It was good to hear from them. Not only did I learn a lot about what was on their minds, I was able to give them the full story of Citi and where we are today, including our full commitment to our global network and presence in over 100 countries, which is our key competitive differentiator. I would encourage each of you to continually engage with your colleagues and clients to ensure open lines of communication. To help in this effort, I have attached some important information points as an aid in your discussions. Please send me any feedback you may receive or any questions you are not able to answer.

Thank you again for your dedication. These are the times that will define us all.

Best regards,

Vikram

The New Economics of Banking

This is my fifth posting about why banking will be free (Parts One, Two,Three and Four).

I keep talking about this as it's clarifying my own thinking, and I'm intrigued to see if anyone wants to come up with an alternative.

This posting comes around because I was thinking about Banking on the Network and whether banks really will give away banking for free.  So here’s how the pricing and economics of Banking as a Service (BaaS - SaaS for banks) works.

The bank recognises that most activities outside direct servicing of the customer is commoditised. A commodity is worth nothing, and so all processing and technology is priced at near zero because they become freely available networked widgets (as discussed last time).

Commodity processing being made freely available is a radical departure from bank histories which is why this will be a culture shock for many bankers … and yet, the pricing and economics is relatively obvious.

Let’s start with the cost of building BaaS.

The cost can be however much you want it to be.  In HSBC’s case, the cost of building their global internet service is around $250 million … but that’s cheap enough considering that they were building a global bespoke service.

For HSBC that means they can launch a completely customised internet banking service in any country, by just ticking the boxes you want in that service and it's up and running.  No additional development or cost.

But for most, it's not $250 million developments, it's a few thousand dollars to deploy a piece of functionality.

Y’see the key point is that, whatever the cost is, once it’s built - it’s built.

That’s it.

You have sunk the cost and built the widget.

Now, the critical point is not to protect the widget but to get everyone to use it.

What’s the point of investing in a developments today if you can’t get volume?

And that’s the point of BaaS: once you’ve built your widget, crank up the volume and volume increases fast these days.

That’s how Chi-X, the pan-European equities trading facility, could take more than 10% of many traditional European exchanges equities trading ... within a year.

And, having built the system, it is why Chi-x, Turquoise and NASDAQ OMX and co are after volume.

It is why Zopa, SmartyPig and PayPal are leveraging volume.

And that's what any bank building components of applications should be thinking about today.

Volume.

Because additional volume adds zero cost and purely feeds return on investment.

Think of it like making movies. Once the movie is made, you’ve spent all the budget. Now, the point is to get bums on seats and market the hell out of it.

And that’s how banking widgets in BaaS should be considered.

Market the hell out of your widget, crank up the volume and focus upon the service delivery – the human interfaces – as your critical value-add differentiation. Your value-add is how you package the widgets and present them, not the widgets themselves.

That’s why Citigroup have been marketing the hell out of their FX and other services for the last two years. They want volume on their widget, and Citi are one of the few banks who have been white labelling their systems to other banks. They get some of the BaaS components.

The idea is really illustrated by telecoms folks who get networks.  For example, I once worked for NCR when they were owned by AT&T. I always remember the AT&T guys talking about “minutes on the network, it’s all about minutes on the network”, and that’s the key.

Once you’ve built the infrastructure, it’s all about getting volume because it costs you no more to process a billion calls than it does to process one.

Which brings us back to the economics of banking in the future, under the BaaS model and the culture shock this creates.

I was recently with a head of payments at one bank for example, who said: "our technology guys asked me the other day why we charge more for a $50 million payment than we do for a $5 payment, when the infrastructure costs to process are the same?  Are they mad?"

No sir.  They are asking an obvious question at the heart of the change that needs to be made to banking cultures as they realise the change that technology now delivers.

This payments guy was from that old school of banking that are the ones now waking up to the new world realities.

Thirty years ago, when many senior bankers were starting out in their banks, they were told that technology was expensive, inflexible and must be used forever, or at least until the systems peg it anyway.

That’s why every project was massive, time consuming and demanded huge cost.

When SWIFT, MasterCard, Visa and the key networks for transaction processing were built, for example, they had to be built by an industry consortium. No individual bank could afford such a huge project or cost. That is why these were cooperative groups back in the 1970’s across all banks, even though MasterCard and Visa are now proprietary firms. Nevertheless, the MasterCard and Visa IPO’s are only recent and recognise the economics of BaaS.

For example, back in 1975, the bank technology economic model looked something like this (double-click the image to make it bigger):

Massive cost that slowly over time could be recouped through usage. Cost was depreciated slowly, and could only be covered by high prices and margins. Hence, banks, SWIFT and the card companies all worked hard to create the infrastructure, and cover the costs of that infrastructure through high transaction processing and interchange fees.

That was back then.

This model had changed a little by 2000.

What was happening in 2000, was that the post-Year 2000 hullaballoo was over. Many systems had been renovated and rationalised. And the costs of building new systems had reduced somewhat thanks to HTML (an internet language) and component/object-based modelling.

Therefore, banks found the time and cost of building new systems had been fundamentally reduced … but the costs for usage and pricing did nto come down as fast.

After all, if you’ve got a good thing, hold on to it! So the pricing and fee rates did not change dramatically, although we did see SWIFT’s model changing.

For example, the then CEO of SWIFT, Leonard Schrank, was interviewed in 2003, and made a few statements about SWIFTNet was well underway using IP-based messaging, costs for a typical SWIFT message had come down 70% in the last decade, whilst volume had increased four-fold to 8 million messages per day.

This shows the new economic model in play:

What we were seeing a decade ago is the cost to build was coming down, and volume was rising faster than before, thanks to ease of communication and connection.

SWIFT gave those savings back to their banking members, because they are bank-owned.  However, banks have not yet passed all these cost reductions on to their clients but, thanks to today's competitive forces, they will.

Today competitive forces recognise how the network has changed these pricing models even further:

Today, the cost to build should become virtually irrelevant if you are using the right tools but, once built, the volume can be cranked up really fast, thanks to openness, standards, ease of networking and communicating.

You see, the bottom line is that the economics of banking has fundamentally changed. This is because banking is based upon technology, and the economics of technology has fundamentally changed.

New economics of banking: technology and systems, processing and functionality are virtually free; anything that is commodity activity should be brought in as a service and all pricing is for value-add, not commodities.

Today, it is a no-brainer to build new functionality, or even micro-functionality, and then deploy it openly, transparently and easily across the network.

That’s why banking will be near free.

It will be free because banks can build micro-functionality, widgets, and then make money out of volume.

If I can get a thousand banks to serve a million companies processing a billion transactions through my banking widget of commoditised functionality, then I make money.  And that process is far better than one bank working with a hundred firms to transact a thousand times through my very expensive and out-of-date legacy infrastructure.

The latter is the old way.

Banking on the network is the new and better way.

And how do banks make money in this new world?

By being the lowest cost integrator and offerer of the best white labelled banking widgets, and then charging me for advice and superior services to those commodity services offered by others.

This final part if where the culture shock will really hit.

In a world where every bank is offering transactions and processing for nothing, how can you make me feel you’re so worthy as to be worth a fee?

The answer to that one is to focus upon the customer experience.

The customer experience, service, dialogue and advice will become the critical differentiation and profit point.

Whoa … now that’s going to be tough isn’t it?

Yep.

Citigroup's tantrums on Park Avenue

Big trouble down at Park Avenue this week, as the New York Post discovered that Citigroup was about to spend $50 million on a new Corporate Jet.

Hundreds blogged, reported, commented and threw rocks at 399 Park Avenue, Citi's Head Office, until 24 hours later they announced the deal had been cancelled.

What they didn't say is that the bank had already signed the delivery note and paid the invoice.

Shouts of "f**k, f**k, f**k, F**K" could be heard throughout Manhattan as, in scenes eerily reminiscent of the recent US Airways river landing, the jet was just chucked into the Hudson River by senior members of the bank's staff.

Unfortunately, it means they now have to foot the bill for both the jet and the rescue operation. 

Whoops.