The Financial Services Club's Blog

£ $ € ¥ …元/圆: the Rise of Renminbi

We have a continual dialogue about Renminbi (RMB), or Chinese Yuan (CNY) if you prefer. 

What’s the difference? 

Well, Remnimbi is the proper term for the Chinese currency, as is referring to UK currency as the Pound Sterling and the American currency as the Dollar; whilst Yuan is the more colloquial term for Remnimbi, and is more like referring to pounds and dollars as quids or bucks,

FSClub friend Wim Raymaekers, Head of Banking Market at SWIFT, talks about this all the time, probably because so much currency movement is now moving through the SWIFT network.

He’s so wrapped up in this space, he sent me a guest blog post about it so, as it’s a worthwhile space to note, here’s what Wim has to say:

At the end of 2011, the RMB’s share of the global payments market was just 0.29% – dwarfed by that of the €/$ which combine to represent 90% of global volumes, at 43% and 47% of payments respectively – but the RMB did weigh in at #17 in the world’s payments currency league table, and its growth certainly outpaced that of other major currencies including the beleaguered euro.

The battle for supremacy among RMB offshore trading centres is also hotting up.

UK Chancellor George Osborne’s recent deal with Hong Kong, to position London alongside Hong Kong as such a centre, lays bare London’s ambitions in this regard – and the City could be starting from a stronger position than even Mr Osborne realises.

Hong Kong remains the world’s biggest RMB offshore centre, handling 78% of all RMB payments sent and received in December 2011, but the UK is well on its way to becoming the next big RMB offshore trading centre.

In Q4 2011, it already handled 30% of RMB payments (levelling with Singapore) and 46% of RMB FX transactions - not considering China and Hong Kong volumes in both cases.

This business intelligence is being generated by SWIFT to see which financial institutions have growing RMB volumes, where the corridors of activity are, which countries’ RMB businesses are growing, which are diminishing.

Taken as a whole, this data also demonstrates how rapidly the international RMB payments business is growing, and how actively many financial institutions are already participating in it.

Keep track of such information with the SWIFT RMB Tracker, published monthly.

Download the latest SWIFT RMB Tracker, January 2012

What the Facebook IPO means for banks

I haven’t written much about social media lately.  The reason is that it’s now mainstream and dull.  When you're scanning future views, you’re not as bothered about Facebook and Twitter when everyone’s familiar with and using such services.

Facebook's pervasiveness is well illustrated by the Facebook IPO  announcement, which gave a raft of good stats about how the service has matured as it enters its eighth year of existence:

• Facebook has a total of 845 million monthly users and 483 million daily users.
• Of its monthly users, half have used Facebook on their mobile.
• The company has 3,200 employees.
• Facebook is an advertising company. Of its total revenues of $3.7bn in 2011, 85% came from advertising. And that is down from 98% and 95% in the previous two years.
• The company makes $1bn in pure profit.
• Zynga, the games maker behind CityVille and FarmVille, single-handedly accounts for 12% of its revenues.
• The majority of its money comes from the US, but the majority of the users are outside the country, and the majority of its non-US revenues comes from western Europe, Canada, and Australia.
• The company generates 2.7 billion "likes" and 250 million uploaded photos everyday.

Eight years.

$100 billion IPO.

Not bad, Mr. Zuckerberg.

But what Zuckerberg has really done is more important.

It shows in Facebook’s mission statement: “Facebook was built to accomplish a social mission - to make the world more open and connected”.

Job done and, in so doing, it has unleashed the Power of One.

We saw the Power of One rise when MySpace launched the musical careers of folks like Lily Allen, Kate Nash, Sean Kingston and more.

The social network allowed artistes to attract interest without having to find major music moguls or clubs to perform.

The Power of One began in a world where the social aspects of the global network allow anyone to vote on anything, and make it mainstream if enough voters gather.

This is being proven again and again.

Recently, we have seen the Power of One through Tumblr.

In this month’s Wired Magazine, the front page article is all about David Karp who has created a $500 million empire through the blogging platform.

And the opening is all about a young chap called Chris Brown who created a photoblog “We are the 99%” on Tumblr.

The story speaks for itself:

On the evening of August 23, 2011, Chris, a New Yorker who wishes his surname to be withheld, created a Tumblr account. His aim was to raise awareness of the Occupy Wall Street march planned for September 17. The idea was simple: he asked users to submit a photograph of themselves holding a sign explaining their economic circumstances. He called the page We Are The 99 Per Cent, and promptly forgot about it.

Four days later, Chris returned to his flat, after spending time preparing meals for protesters, and checked the We Are The 99 Per Cent tumblelog. When he had left, there had been two photos in the inbox. "I thought, I'll have five or six more submissions," says Chris, now 29. "The inbox was overflowing. I spent that night reading through the submissions. By the time I was done, I had barely dented this thing."

One photo was from Priscilla Grim, a 36-year-old activist working on strategic communications for the Occupy Wall Street movement who has been "protesting one way or another for about 20 years". Grim noticed that, two weeks after submitting her image, the blog hadn't been updated, so she emailed Chris and offered to help to edit the blog: "It struck me that this was the perfect organising tool of today," she says. Together, they started posting the submissions. Some were short: "I served in the US Army. Served 16 months in Iraq. Now I deliver pizza. I am the 99%." Others were longer, from the jobless woman prevented from donating a kidney to her friend because she didn't have health insurance, to the 19-year-old single mother who said she went without food for days to buy formula milk for her four-month-old son. But they all kept the same format, with signs often obscuring the creators' faces. "We posted 100 photos before it went big," says Grim. The New York Times covered the blog. "After that, it went all over the place."

The blog became a meme and the meme went viral. As Wired went to press, 3,000 photos had been posted; the tumblelog receives more than 100 submissions a day. Protestors adopted "We Are The 99 Per Cent" as a slogan, writing it on signs and banners. "We're standing there with thousands of people screaming [the phrase]," Grim says.

Occupy Wall Street and many other social movements would just not exist in the same way without Facebook, Twitter, YouTube and the Power of One.

The real revolution of these networks is that they allow critical mass of new movements to be linked globally within days, as demonstrated by the We are the 99% story.

In banking, we see these changes occurring rapidly too.

Just look at Molly Katchpole, the young lady who posted a petition on change.org to get Bank of America to reverse policy and waive the $5 per month fees they were going to impose if people used their debit cards.

The fee was to recoup losses due to the implementation of the Durbin Agreement, part of the Dodd-Frank regulatory changes in the USA.  This agreement wiped out profits from interchange on debit card transactions and many US banks decided to add a fee therefore, in order to recoup losses (note: Bank of America were not the only bank to do this, just the first to get the headlines).

The move proved so unpopular that Molly’s petition rapidly gained traction, was promoted by change.org and then was picked up by major national media like the New York Times.

When the online petition reached 300,000 votes, Bank of America reversed policy.

It resulted in the program being voted the biggest PR gaffe of 2011 by most marketing magazines and CEO Brian Moynihan admitting that it resulted in a surge of account closures.

Note the speed of this change however, in that Katchpole posted the petition with 100 signatures on 1^st October …

… and garnered 200,000 signatures a week later.

That’s how fast things happen.

It’s a bit like Zynga getting 100 million users of the CityVille game in just ONE MONTH, and is still the most popular game on the internet today with over 10 million daily players.

The Power of One is all illustrated by speed, global connectivity, leverage of the individual voice and the nature of the network.

There are many other examples of how the Power of One is impacting banks – such as the Wikileaks and Anonymous impact on PayPal, Visa and MasterCard via Twitter, and the UK Students who made HSBC reverse policy on fees after a Facebook protest - and they show that banks should be afraid of the Voice of the Customer today.

After all, the connectivity of the Power of One fuelled the Arab Spring through Facebook and Twitter.

Who would have thought that Gadaffi, Mubarak and others would have been deposed due to the fire of Mohammed Bouazizi, a Tunisian market stall holder and his note left on Facebook?

Be at least a little bit afraid.

Josef Ackermann, CEO of Deutsche Bank and head of the Institute of International Finance which represents the world's banks: “we have a social responsibility, because if this inequality increases in income distribution or wealth distribution we may have a social time bomb ticking and no-one wants to have that.”

 

 

 

 

This bonus rage is just envy

It’s bonus season and, as in previous years*, the media and politicians stir up a row over rich pickings and knighthoods.

Some say there’s even a “whiff of the lynch mob” in the air.

Certainly in the UK it’s getting ridiculous as this week we saw the hysterical media coverage over Stephen Hester getting a million pound bonus for steering Royal Bank of Scotland (RBS) through this crisis, immediately followed by the Queen stripping Fred Goodwin, the former RBS CEO, of his knighthood.

Are these hysterics deserved?

Possibly some of it, but the bonus rage is not justified.

Sure, Stephen Hester’s bonus sounds amazingly rich to those who aren’t in a job of that stature, but a million pound bonus for someone whose package comes to over £7 million a year is about right.

This is because not all bonuses are the same, and the danger is that everything is lumped into a lynch mob cauldron of hate against bankers per se.

Take Stephen Hester’s bonus.

It’s not a bonus for being a risk-taking casino capitalist; it’s a bonus for meeting some of his objectives, managing a bank through a crisis.

That is normal business practice as many people get a bonus for annual achievement.

It is normal to have management-by-objectives and to reward staff for achieving those objectives.

In most firms, staff will get a bonus as a percentage of their salary each year, based upon achieving objectives in terms of staff management, customer satisfaction, revenues and profits.

That is usual and no-one in any other business sector is being forced to give up their annual bonus in the same way.

The trouble today is that any mention of ‘banker’ and ‘bonus’ gets people angry.

A bit like saying ‘daylight’ and ‘robbery’, a banker’s bonus is immediately seen as bad.

But the bonus that should be seen as bad is the one that is given with no recognition of the risks being taken, or the long-term return of that risk.

You hear several stories of bankers during the boom years making risky investments in complex instruments and getting multimillion pound rewards, only to leave the bank just before their investment portfolio crashes and burns.

No recognition of the risks that were taken, and no ability for the bank to get those bonuses back.

That was the mistake made in the boom years, and that is being addressed.

Multimillion pound packages are now taxed at 50% and are tied to long-term shares in the bank rather than cash.

The cash bonus days are over.

But how did we get to a stage where a banker can get a million pound bonus simply for being there?

It all goes back to the days of partnerships in the market maker world.

Checkout the history of Goldman Sachs, Morgan Stanley and you find investment banking bonuses originate from private partnerships, where the partners risk their own funds in order to share the rewards of their capital at risk.

Equally, the rewards were distributed on the basis of how well each partner performed, and bonuses were not a God-given right.

Unfortunately, as Goldmans reluctantly IPO’d in 1999 as the last private partnership in the investment world trying to keep this status, the bonus culture rippled over and the reckless risk of what is now referred to as ‘casino capitalism’, spilled over into the mainstream banking system.

What happened?

Well, the private partnerships were now competing with other mainstream banks and, in order to attract the best talent, the proprietary banks offered similar bonus packages and benefits as the private partnerships.

The difference however is that the mainstream banks didn’t have partners who put their own capital at risk.

They were just workers.

Staff.

Employees.

That’s where the bonus culture came from and where it all went wrong.

It’s being addressed today, but it got out of hand for a while and the hardest aspect is how to manage the transition from an over-the-top bonus culture to one that is managed through regulation.

You cannot force banks to be tough on bonuses.

As soon as you do that, you potentially drive a bank to other shores and lose fiscal revenue, as the UK government realises all too well.

The banking sector contributes over £50 billion to the Treasury’s coffers each year, and they don’t want to lose that income.

And banks gradually shake out poor talent over time anyway.  That’s why 200,000 bankers lost their jobs last year.

Finally, bankers who really want to invest and put capital at risk will evolve over time.  They’re called private equity managers.

So, the bonus battle will rage, but the media headlines are in the extreme.

In fact, much of it is just envy over wealth and the fact that some banking people were paid millions for doing nothing in the past.

We'll know this crisis is truly over therefore when the media's rage stops being with a manager in a bank, to any manager in any business who is being over- or under- paid.

 

From today’s Daily Wail

More top RBS bankers urged to give up bonuses 

 * Bonus debate 2011, 2010 ...

 

 

The future of capitalism

It’s Davos time, as usual.

In the last week of January, the great and the good of the world’s leadership from governments, business, academia and media all gather in Switzerland to debate the future of the world’s economies and the World Economic Forum, #WEF.

In the build-up to this year’s WEF, it seems that all the magazines, media and men are talking about capitalism, what capitalism means post-crisis and what the future of capitalism will be.

David Cameron made a speech about this last week, as did Nick Clegg and Ed Miliband, and much of the debate resonates with the speech of Amartya Sen that I attended last week.

The core of the debate is embodied in the quote by Winston Churchill that “capitalism is the worst form of economics, except for all the others that have been tried.” 

Link: TrogloPundit

True.

The debate is then what form of capitalism you want: state capitalism or liberal capitalism.

A wholly state run economy fails, as demonstrated by communism; whilst a wholly liberalised, free market economy also fails, as demonstrated in 2008.

So there needs to be a middle ground, but how middling is that middle ground?

Somewhere between the extremes of Western and Eastern approaches to commerce.

Some believe that the West is crumbling due to over-excessive free market liberalism.

In a 2011 report, the Organisation for Economic Co-operation and Development figured that the level of income inequality in the 22 member nations it studied increased by 10% since the mid-1980s, with conditions deteriorating in 17 of them.

A recent report  by the Institute for Policy Studies, a Washington-based think tank, found that CEOs at large U.S. firms earned, on average, $10.8 million in 2010, a 28% increase from the year before, while the average worker took home $33,121, a mere 3% more. At that level, CEOs’ paychecks are 325 times bigger than their employees’. In the 1970s, CEO pay rarely topped 30 times more.

Meanwhile, the average income for an American has reduced every year for the past three years.

On the other extreme, Asian markets are rising fast and taking over, using a more state-led capitalistic approach.

“The world’s ten biggest oil-and-gas firms, measured by reserves, are all state-owned …  state-backed companies account for 80% of the value of China’s stockmarket and 62% of Russia’s.”  [The Economist]

“The ten largest economies in Asia now spend roughly $400 billion a year on research and development (R&D)—as much as America, and well ahead of Europe’s $300 billion. China’s investment leapt 28% in a year, propelling it past Japan to become the world’s second-biggest spender … America’s share of global R&D spending is falling. In the decade to 2009, it tumbled from 38% to 31%, whereas Asia’s rose from 24% to 35%. But science is not a zero-sum game.”  [The Economist]

So there is a new model rising which, according to Time Magazine, “is not so much between capitalism and another ideology but between competing forms of capitalism. The financial crisis, growing inequality and faltering economic performance in the U.S. have tarnished American ‘leave it to the markets’ capitalism, which is being challenged by ‘capitalism with Chinese characteristics’, euro­capitalism, ‘democratic development capitalism’ (India and Brazil) and even small-state entrepreneurial capitalism (Singapore, UAE and Israel). All these models favour a more significant role for the state in regulation, ownership and control of assets.”

The Economist furthers this debate, asserting that the winner is ‘state capitalism’.

Link: Ifyouhavetoaskyoudontknow

“The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses capitalist tools such as listing state-owned companies on the stockmarket and embracing globalisation.”

Examples of state capitalism include:

“The 13 biggest oil firms, which between them have a grip on more than three-quarters of the world’s oil reserves, are all state-backed including the world’s biggest natural-gas company, Russia’s Gazprom, China Mobile and Saudi Basic Industries Corporation is one of the world’s most profitable chemical companies. Russia’s Sberbank is Europe’s third-largest bank by market capitalisation. Dubai Ports is the world’s third-largest ports operator. The airline Emirates is growing at 20% a year ...  State companies make up 80% of the value of the stockmarket in China, 62% in Russia and 38% in Brazil. They accounted for one-third of the emerging world’s foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular acquisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world’s ten biggest companies by revenue, against only two European ones.” [The Economist]

“State-Owned Enterprises (SOEs) make up most of the market capitalisation of China’s and Russia’s stockmarkets and account for 28 of the emerging world’s 100 biggest companies.” [The Economist]

“France owns 85% of EDF, an energy company; Japan 50% of Japan Tobacco; and Germany 32% of Deutsche Telekom. These numbers add up: across the OECD state-owned enterprises have a combined value of almost $2 trillion and employ 6m people.” [The Economist]

The Economist believes the trend for the next decade will be towards state capitalism based upon the Chinese model, albeit with caveats and issues along the way, and  concludes that “the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustainable model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller companies to merge to form national champions. South Africa is also flirting with the model:

• Over the past 30 years China’s GDP has grown at an average rate of 9.5% a year and its international trade by 18% in volume terms. Over the past ten years its GDP has more than trebled to $11 trillion.
• China has taken over from Japan as the world’s second-biggest economy, and from America as the world’s biggest market for many consumer goods.
• The Chinese state is the biggest shareholder in the country’s 150 biggest companies.
• China’s 121 biggest SOEs saw their total assets increase from $360 billion in 2002 to $2.9 trillion in 2010 … in 2009 some 85% of China’s $1.4 trillion in bank loans went to state companies.”

But note that, unlike America where CEOs’ paychecks are 325 times bigger than their employees, state capitalism is fairer in terms of income disparities: “in 2009 the average SOE boss earned $88,000 and the highest-paid, the chairman of China Mobile, $182,000.” [The Economist]  China Mobile has 600 million customers and is one of the largest telecoms in the world.

FYI, I debated these points a couple of years ago, and concluded that the future is one where capitalism is heavily influenced by the influence of the Chinese and Islamic principles.  

Seems to be coming true?

Link: The World Is Not Enough

Postnote:

The main reading behind this blog post is inspired by two cover page stories:

• How to Save Capitalism, Time Magazine
• State Capitalism, Economist supplement

 

Amartya Sen: thoughts on poverty and the global financial crisis

I attended an interesting lecture last night from an economic legend: Professor Amartya Sen of Harvard University.

If you haven’t heard of him, he’s known as the Mother Teresa of economics in his native India, and has spent a lifetime fighting poverty with analysis rather than activism. 

Awarded the Nobel Prize in Economic Sciences in 1998, for his contributions to welfare economics and interest in the problems of society's poorest members, Sen is best known for his work on the causes of famine.

He is currently Professor of Economics and Philosophy at Harvard University, as well as being a senior fellow at the Harvard Society of Fellows, distinguished fellow of All Souls College, Oxford and a Fellow of Trinity College, Cambridge, where he previously served as Master from 1998 to 2004.

An impressive guy.

Amartya delivered his speech as part of the London Stock Exchange Group series of lectures on the future of global finance, and the evening was hosted by LSE Chairman, Chris Gibson-Smith.

Here’s a brief summary of Amartya’s sentiments (I say ‘sentiments’ as this is not a record of his speech and incorporates my own spin on his words).

Some people say we live in interesting times, but I think we live in baffling times.

We live in baffling, rather than interesting, times because it is very hard to get any clarity about the future. 

The only thing that is certain is, in the words of George Bernard Shaw, “the greatest of evils and the worst of crimes is poverty”.

Shaw wrote this in the Preface to his brilliant play, Major Barbara, published in 1907. 

The tragedy of poverty is, of course, obvious to all - whether in Latin America, or in Asia or Africa, or in Europe and the United States. 

The calamity of deprivation and penury can hardly be missed by those who have bothered to think about the subject, no matter whether they are themselves poor or not. 

Lives are battered, happiness stifled, creativity destroyed, freedoms eradicated by the misfortunes of poverty. 

But Bernard Shaw was not talking, on this occasion, about the hardship of poverty, or the misfortune that goes with it. 

He was commenting, in a rather unusual way, about the causation and consequences of poverty - that it is bred through evil and ends up being a crime.

If poverty is indeed an evil, not to mention “the greatest of evils” as Shaw puts it, then there must be some wickedness, or at least some culpability, behind poverty - some wrong-doing that allows such human tragedies to occur and persist. 

This raises the immediate question: who, then, are the wrong-doers?

If you look to protesters today, such as the Occupy Wall Street movement, the wrongdoers are represented by the corporate greed of capitalists and the banks.

You can just as easily take the opposite view however, and look to the Tea Party movement who see the failure being that of government and government policies.

The Tea Party align with Adam Smith, the guru of capitalism, and believe that free markets should rule.

Who is right and who is wrong?

Or is this the right question? 

In thinking about strategic issues, we cannot but go into the question of culpability and the failure of duties and obligations. 

We have to ask: how can things be done differently so that the evil of poverty is ousted? 

We have to identify the nature and genesis of the wrong-doing that is responsible for the affliction. 

That is not, however, the same as trying to identify the wrong-doers?

The identification of wrong-doers is not our task and trying to identify the evil-doers is not the right strategy since the responsibility for creating an evil is very widely dispersed in the society. 

We have to see how the actions - and indeed inactions - of a great many persons together lead to this evil, and how changing our modes of actions - our policies, our institutions, our priorities - can help to eliminate poverty. 

Our focus definitely has to be on removing evil-doing, as part of our strategies and programs, rather than going on the wild-goose chase of catching the hugely dispersed collectivity of evil-doers, who may not even fully understand how their actions can be seen as part of an evil state of affairs.

In fact, we should eliminate the discussion of wrong doers completely, and focus our efforts more on how to stop poverty full stop.

This is why strategies such as closing sweatshop labour factories in poor countries, or arresting those who employ children in the making of carpets, would fail to eliminate the poverty of the victims if such action is separated from a general economic and social program. 

In the vast majority of cases the employees are there in those terrible jobs because they have very few options - none that are particularly good. 

This is because there has been a failure of the state and the society to create opportunities for decent employment, which makes it possible to recruit labour to do terrible jobs as the alternative may be unemployment and starvation.

That is why exploited labourers are led to soul-destroying work today in the poorer countries, and closing down sweated-labour factories without giving the victims alternative opportunities for employment or education - the latter is extremely important in the case of child labour - is not an adequate solution to the problems and predicaments of the precarious poor. 

There is, of course, moral merit in restraining the pursuit of profit of businessmen through exploiting vulnerable and freedom-less labour, but a fuller solution can emerge only through positive opportunities of alternative employment and occupation, and that demands societal action. 

So the first action to address poverty is to expand labour opportunities and assist in education, and not to just shutdown existing sources of income.

My argument so far has been based on seeing poverty as lowness of incomes. 

Is employment with income a full solution to all problems of poverty? 

To believe that would be to underestimate vastly the complexity of poverty, particularly the nature of persistent poverty. 

By way of example, lowliness of income is the primary cause of starvation rather than the lowliness of the availability of food.

Is employment for income in order to buy food the answer to everything therefore?

No, as this misses the point of why there is persistent poverty

Strategic examination about eliminating poverty, or even reducing its burden, has to go more deeply into the nature of poverty. 

Poverty is about the inability to lead a decent, minimally acceptable life, and while low income does make it difficult to lead a life of freedom and well-being, an exclusive concentration on seeing poverty as lowness of income misses out a great many important connections.

What are the other non-income factors that contribute to poverty: a lack of education, availability of work, investment in infrastructure and more, and capitalism addresses these issues by providing an insurance.

For example, all affluent societies have addressed extreme poverty issues through public policy programs, such as the public pension, the provision of school education, the availability of healthcare and more non-market non-commercial arranged facilities.

The economics of these areas are not obvious except that an insurance system run by the state or by some other social support system, not by profit-oriented private firms, may be a necessary part of the elimination of poverty. 

Affluent societies focus upon profit maximisation and the unrestricted search for profit, but if they only relied on profit maximisation they would not function.

As a result, they balance between market mechanisms and state activities.

There is no strategic formula as to the correct balance between market mechanisms and state activities – the contrast between China and Taiwan or America and Sweden are good examples of how approaches differ – but we need to understand these balances in order to create a better world that addresses poverty with finance.

Does this mean arguing against Adam Smith’s principles for free markets?

Not really.

That view is a result of a huge misunderstanding of Adam Smith’s principles, and my position is strongly influenced by his.

Adam Smith clarified how markets work and how they can work exceedingly well.  He believes that you need a well-functioning market economy and clarity of why you want such efficient markets to be.

The task of politicians in managing the economy is then to search for two distinct objectives: first, to provide plentiful revenue to cover the basic subsistence needs of the people before the subsistence needs of the state; and second, to provide the state with enough revenue to finance public services.

The financial focus of public services is a critical part of Smith’s work and Adam Smith had an overwhelmingly clear view about support of the poor and undersupported in his market view.

Within his free market principles, he clearly defended the role of the state to fund public services, such as education and poverty relief.

Adam Smith was deeply concerned about the inequality of society and never used the word capitalism.

The word capitalism does not appear in any of his books or any other writing, and it would be hard to carve out anything in his works on market economies that were based purely upon capital.

For example, he specifically argued about protections from unlimited usury practices.

So how should we think about the wrongdoers that need rectification, and how should we address poverty?

According to Adam Smith and my own thinking, the key is increasing employment.

Increasing employment must remain a worldwide priority and China, Brazil and India are doing much better at this than America and Europe.

As employment and economic welfare rises, the state must use such employment to improve public services for good living and public welfare and, in this respect, India is not doing this as well as China and Brazil.

Finally, for the West in general and Europe in particular, the crisis of 2008 was created by the malfunctioning of market economies – the result was the state had to create support for their economies and this is the reason for rising sovereign debt.

But the cause of this malfunctioning is clearly what was thought of as lack of accountability of governments, but governments are accountable and this is what we are seeing today.

What we are seeing is that, in order to pay back their debts, governments have far more accountability.  However, they are addressing this accountability in the wrong way.

It’s hard to see how massive austerity drives, which cuts demand and growth, can therefore be supported,

Just look at Japan and learn from what happened there over the last 20 years of austerity, which is still biting.

What these governments need is fast economic growth.

Economic growth creates resources to address unemployment and poverty.

This is the key to addressing issues in Europe and the West, and it is the indiscipline of governments that has failed the markets, not the markets themselves.

Europe needs a better form of economic accountability and management of their economies, rather than austerities which decimate human lives and economic growth.

In conclusion, I end by affirming that George Bernard Shaw was right, a hundred years ago today, to point to the connection between poverty and evil and crime.  The fact that this insight came not from an economist but from a dramatist and literary giant fits in well with my general thesis that the economics of poverty involves much more than just economics.  Human lives in society are interlinked through economic, social, political and cultural associations.  The nature, causes and consequences of poverty reflect the richness of those connections.  We have no reason to be surprised by that elementary understanding.

Amartya then took Q&A from the floor and was asked a few interesting questions.

Q: You appear to be saying that in this current crisis, it is the failure of states to regulate markets effectively that failed, rather than the markets themselves. Is this your view?

You cannot separate markets and state, and this crisis was a failure of both, but you also have to be aware of the relationship between free markets and state influence. 

For example, Adam Smith argued against usury, but was convinced to change his thoughts on interest after reading the works of Jeremy Bentham. 

The core of how markets and state should work is that free markets is the most efficient model of economic management, but free markets need states that set efficient regulations to avoid failure in order to be truly workable.

As this shows, free markets and the state are two separate entities that are interdependent.

A key question in the last crisis however is whether globalisation killed that interdependency to cause the spiral of crisis we see today.

Globalisation may have undermined national states, as government can no longer effectively regulate the free markets?

There may be some truth in this statement, and this is why the G20, G8 and other global activities – the World Bank and IMF included – are key to solving these issues this time around.

Q: Do you think the euro will survive?

No.

When the euro was created, I didn’t see why it was needed and didn’t believe it made sense.  I am a fan of Europe, don’t get me wrong there as my late wife was Italian, but to start a European integration without a fiscal foundation meant that it was never going to work.

You can see this today as many parts of the EU are not served well by a Europe that has no fiscal union.   Greece is a good example.

Now however the loss of a country would be very destabilising for this European Union.

This is why Germany is being forced to bailout Europe.

Could they retreat out of it? Yes.

Is that the right thing to do? I think so.

 

Postnote: some of Amartya’s speech is taken from a write up of an earlier presentation he made in 2007.  These words of wisdom are integrated in parts of this article to ensure more accuracy of content.

 

How to create a banking strategy

Following on from my discussions of solutions versus product people and vertical alignment versus horizontal, the question came up as to how to think strategically.

How can you really get inside the customer’s head?

What keeps the CEO awake at night (literally in the case of Lloyds Banking Group)?

And all those other strategic account questions which, if you could answer, would give you a real inside track lift to become more of a trusted advisor rather than product pusher.

This is a question I’ve dealt with for a long time and is why I do what I do.

I’ve also answered this question, thanks to reading management practitioner’s books and theories for years and implementing these ideas in reality.

Starting with In Search of Excellence and through Reengineering the Corporation to the Disciplines of Market Leaders, the Innovator’s Dilemma, Blue Ocean Strategy and The Experience Economy, I’ve pretty much seen ‘em all and done ‘em all.

Now we talk about customer-centricity, engagement banking and Bank 2.0.

I’m not saying these things aren’t useful – it’s always good to have some assistance in thinking clearly about change and how to change – but most of the management fads all boil down to the same thing: basic common sense thinking.

Y’know, Management By Walking About was one of the fads of its time.

Surely, managers should walk around their business and see what’s going on?

Process Improvement has been a big focal point. 

What do you want?  Processes to stink and get worse?

It’s all common sense.

So here’s my common sense way to get inside the head of your C-level client contact.

First, use future thinking to see what pressures are out there to challenge them.

I use forces of change for this based upon the simple acronym: PEST.

PEST represents the Political, Economic, Social and Technological changes over the next 3-5 year horizon that may seriously impact the client’s business, as outlined yesterday.

In banking, you can put these together into a generic (non-exhaustive) shortlist as follows:

POLITICAL FORCES FOR CHANGE IN BANKING

• Dodd Frank
• Volcker Rule
• Durbin Agreement
• Vickers Report
• Merkozy Eurozone
• East-West China divide
• US elections (2012)
• UK elections (2014)
• RBS/Lloyds privatisation

ECONOMIC FORCES FOR CHANGE IN BANKING

• Eurozone uncertainty
• Sovereign debt issues
• Remnimbi vs Dollar
• CIVETS / Growth8
• New Africa
• Russia WTO
• China inflation bubble
• China 2018 or 2047
• India post-2020

SOCIAL FORCES FOR CHANGE IN BANKING

• Crowdfunding
• Social finance
• Occupy Wall Street etc
• Wikileaks
• Anonymous
• Molly Katchpole
• Global connectivity 1:1
• New economies
• Virtual currencies

TECHNOLOGICAL FORCES FOR CHANGE IN BANKING

• Mobile
• Contactless
• Tablet PCs
• Social networking
• Social media
• Apps
• Connectivity
• Chips in everything
• Wireless touch

Once you have this picture, it’s quite clear to see the landscape of challenges for the CEO of most banks, and how they must change:

SUMMARY CHANGES IN BANKING

• Boring banking vs casino capitalism
• New regulations
• New economies
• Micromoney
• Hybrid value management
• Global currencies (Bitcoin)

Leading to some form of vision in banking, vis-à-vis my prior blog entries about APIs and apps:

VISION FOR FUTURE BANKING

• Bank products are apps, manufactured in such a way that customers can put them together to suit their lifestyle.
• Bank processing is open sourced, offered to anyone to plug and play with their offerings through APIs.
• Bank retailing is based upon competitive differentiation through big data analysis to deliver contextual personalisation.

This pretty well summarises the basics of how I work with some banks on strategy, and some technology firms on strategic account planning:

The trick then, and the harder question for the bank or the strategic sales director, is to pin down how all of this translates to their organisation’s strategy.

What will this bank need to change, and which solutions will guarantee to deliver this change for them on time and at the lowest risk?

I would share more, but this is the stuff that is the basics of creating bank strategies and strategic solutions sales … probably something that will become a basic training process over time.

Maybe it should be today?

 

Consumers will pay for better online banking

PwC conducted research with almost 3,000 banking customers from a range of segments across markets to discover their expectations of banking in the digital age.

They selected both emerging and developing markets including China, India, Mexico and the UAE, as well as developed markets like the UK, Canada, France and Poland.

The research revealed that there is a very high correlation between digital engagement and share of wallet for a customer, and that digitally active customers tended to have the largest product holdings.

They also found that if you are the primary financial relationship then this drives increased share of wallet leading to higher revenue generation. 

That’s no shock is it?

What may be a shock are the results of the willingness of customers to pay for new and enhanced digital services.

Whilst banks argue about whether to expand, maintain or shrink their branch footprints, most customers – particularly those under the age of 50 – view mobile and internet channels as their primary bank relationship channel.

The survey then tested the willingness of customers to pay for that channel and found that the majority would be willing to pay from $3 to $15 a month for enhanced digital account services, such as notifications through social media, spending analysis tools, third-party offers and storing documents in a virtual vault.

At a time when banks are finding it difficult to sustain revenue and margin growth, the fact that customers appear prepared to pay for the perceived value of using digital services that offer new value to customers, is significant.

This is particularly important as consumers trust banks to keep their information secure when compared with other providers, and hence are more willing to pay a premium for banks to keep information secure over other industry providers, such as mobile carriers.

All in all, an interesting survey and worth a glance, particularly for those of us who believe banks have an opportunity to gain increased client wallet share by innovating digital channels.

Download The new digital tipping point (2.25MB PDF)

 

Season's greetings and all that ...

That's me done ... will return here on 3rd January so, in the meantime, Joyeux Noël and Feliz Navidad.

Here's a few of my favourite ecards this year.

First, the Financial Services Club's of course ...

You may recognise it as our favourite new badge, and this is the specially commissioned Club cartoon by Hugh MacLeod.

There's then a few more traditional ecards, such as this one from the German firm Helaba:

I like traditional ... bring on Michael Buble.

OK, whatever.

Then we have the "let's use Christmas to advertise our business" ecards, the best of which is simple and sweet:

Use us for your savings, with a sweet little Christmas piggy bank.  I like it.

Less liked is this:

Look, if you're going to be so crass as to try to use Christmas to advertise and sell, do it with kids ...

Yes, far better.

Mind you, I can see the connection above, but some are less obvious:

With our technologies, your kids are half-baked?

That leads nicely into the more abstract cards:

I've been racing all 2011 ... can't we stop now?

If you want to be abstract, then please do it properly:

#innotribe rules!

A few folks then went to the trouble of making their cards interesting, such as Markit who have a poll to see what we think might happen in 2012:

Tiger Woods to win a Major?  Major Blonde or Major Brunette?

Interaction is good, and a few others sent similar themes.

Then there is the plain scary, such as this one:

OK, they're Swiss, so I'll let them off.

Finally, there's the NSFW (not safe for work) category of card.

One such card came from Innopay with their version of Tarantino's Pulp Fiction turned into Pay Fiction:

Nice.

I can beat that though ...

Finally, to leave you with the enthusiasm to face 2012 with energy, optimism and a smile, this video should be seen by one and all:

Season's Greetings, Joyeux Noël and Feliz Navidad.

See you in 2012.

The London Protest #OccupyLSX is useless

I’ve been down to the #OccupyLSX, or #OLSX for short, site several times. 

That’s the Occupy London Stock Exchange site for those not following them on twitter.

They were inspired by the #OccupyWallStreet, or #OWS folks, who began protesting back in September.

Our group is a similar rag, tag and bobtail amalgamation of disparate folks, from happy-clappy hippies …

… to anticapitalist activists …

… with a healthy dose of travellers, vagabonds and vagrants …

… thrown in.

They do have a point, but their point is lost with so many disparate views and groups. 

Some want environmental change; some want legalised drugs; some want a more eqaual society; and some just want to play their didgeridoo and hope for peace in the world.

It’s amusing rather than concerning.

• some are more activist, e.g. some took over buildings this week as protests and were being police kettled away;
• some  are more sharp, e.g. they caught an undercover policeman in their midst during the protests; and
• some are just dumb, e.g. the policeman who got so drunk that he fell asleep in the protestors’ tents.

In between, there is a serious point here.

From the Occupy London website:

“The words ‘corporate greed’ ring through the speeches and banners of protests across the globe. After huge bail-outs and in the face of unemployment, privatisation and austerity we still see profits for the rich on the increase. But we are the 99%, and on October 15th our voice unites across gender and race, across borders and continents as we call for equality and justice for all.

“In London we have occupied the forecourt of St Paul’s Cathedral, next to the London Stock Exchange. Reclaiming space in the face of the financial system and using it to voice ideas for how we can work towards a better future. A future free from austerity, growing inequality, unemployment, tax injustice and a political elite who ignores its citizens, and work towards concrete demands to be met.”

Now many sympathise with the point that the divide between rich and poor is too great, and that fat cat company bosses are getting away with daylight robbery.

For example, in this ‘age of austerity’ where most folks are losing their jobs, the latest survey of boardroom pay finds that the average compensation for a FTSE100 company director went up by 49% last year to £2.7 million per CxO; the richest 400 people in America have more wealth than the 155 million poorest combined; and it’s getting worse.

According to CBS News, “the top-earning 20% of Americans received 49.4% of all income generated in America compared with the 3.4% earned by those below the poverty line.  That’s a ratio of 14.5-to-1 gap between the richest and poorest; an increase from 13.6 in 2008 and nearly double the low of 7.69 in 1968.

“The poorest poor are at record highs. The share of Americans below half the poverty line - $10,977 for a family of four - rose from 5.7 percent in 2008 to 6.3 percent. It was the highest level since the government began tracking that group in 1975.

“The poverty gap between young and old has doubled since 2000, due partly to the strength of Social Security in helping buoy Americans 65 and over. Child poverty is now 21 percent compared with 9 percent for older Americans. In 2000, when child poverty was at 16 percent, elderly poverty stood at 10 percent.”

Also see Mission Silver for more.

Now most people agree with these core views.

Even bankers agree.

In a study by St Paul’s, that was released just after the protest started, they found that most financial professionals believe that bankers, stock brokers, FTSE 100 chief executives, lawyers and city bond traders are paid too much.

They say that of the 515 financial professionals surveyed, 75% agree that there is too great a gap between rich and poor.

So where is the disparity of opinion here?

There isn’t one.

But the issue lies more in expression.

If the 99%, as they call themselves as well – that’s the 99% of people not feeding at the trough of capitalism – want the 1% of those who are feeding to change, they need to make their point clearer.

And they need to make it more pertinent.

In fact, in London, they’ve really messed up by occupying a Church rather than the London Stock Exchange.

Who are they protesting against?

God???

Attacking a Church for Christ’s sake – sorry, for Cameron’s sake – is not going to change anything.

Meantime, no-one in the City cares about them.

In fact, no-one in the City is affected by them as their occupation doesn’t affect the banks, who are all now based in Canary Wharf and around Liverpool Street.

What a waste of time.

And if they want to make their point more pertinent they really need to hit people where it hurts, not just banks, but corporate greed and the divide between the rich and poor.

So how do you hit where it hurts?

In the wallet.

That’s what they really need to focus upon.

And to achieve that it needs political change, which is happening anyway.

Take note, the Bank of England are considering a crackdown on bankers’ bonuses through regulatory reform.  From the Sunday Telegraph this weekend:

Robert Jenkins, an external member, said earlier this month: "Return on equity is the wrong target. Over the last 10 to 15 years it has helped to make many bankers rich and loyal shareholders poor."

Return on equity, or RoE, rewards bankers for taking risk that in the recent crisis was ultimately borne by taxpayers.

Instead, both Andy Haldane, the Bank's executive director of financial stability and a member of the FPC, and Mr Jenkins believe that bonuses should be measured against return on assets, or RoA, which adjusts for risk.

"While the risks have typically been borne by wider society, the returns have been harvested by bank shareholders and managers," Mr Haldane has said.

According to his analysis, the effect on bonuses from switching targets would potentially be huge. Between 1989 and 2007, in which time there was "increasing focus on RoE as a performance target", the average pay of the top seven US investment bank bosses rose from $2.8m to $26m. If their performance had been linked to RoA, it would have increased to just $3.4m.

"Rather than rising [from 100 times] to 500 times median US household income, it would have fallen to around 68 times," Mr Haldane said.

The difference can be illustrated using a mortgage. If a house price rises in value from £100,000 to £110,000, the RoA is just £10,000, or 10pc. But if it was bought with a £10,000 deposit and £90,000 debt, the RoE on the £10,000 of equity is 100pc.

However, where homeowners bear the risk of a fall in house prices, bankers do not. According to Mr Haldane: "In effect, RoE is skill multiplied by luck."

The changes are therefore happening, but not as a result of the Occupy protest, but down to good old common sense.

And if the protestors want to push the regulatory changes through faster,  I would recommend our hippies, anarchists, travellers and homeless to go Occupy the Bank of England and Parliament until they get their regulations right and make the disparity between rich and poor, particularly where it’s based upon pure luck and no skill, a little bit better.

Meanwhile, their protest is pretty useless anyway.

By comparison with the States, where they have real passion, our lot are a damp squib.

In fact, there are many rumours that the protestors don’t even occupy the site in the evenings as it’s too cold.

So we went down there on Friday.

I stood by the tents and said: “I’m in favour of bankers’ bonuses, would anyone like to argue about that?”

No-one responded.

St Paul's Protest, 2nd December 2011, Part One from Chris Skinner on Vimeo.

I walked round the camp for about five minutes saying that I’d like to argue about why bankers’ bonuses are a good thing.

No-one came out of a tent.

St Paul's Protest, 2nd December 2011, Part Two from Chris Skinner on Vimeo.

It was 6:30 on Friday night, 2^nd December.

So much for an effective protest.

 

 

A Hugh MacLeod, Gaping Void special

At this year's SIBOS, the cartoonist Hugh MacLeod appeared etching and sketching.

Hugh is a humourous guy who runs the website Gaping Void that gets over two million unique visitors monthly.

I was lucky enough to have Hugh produce a work of humour for the Financial Services Club and the Finanser blog so, here it is:

We love it.  After all we do call the Club a drinking place for bankers lol and, as you can see, we've now added the cartoon as a badge emblem for the Blog.

Anyways, we're sure you'll see more of this and Hugh in the future and if you want some more now, here's more about Hugh:

Hugh MacLeod is a cartoonist, who makes his living mostly drawing“Cube Grenades” for clients and  publishing fine art prints via the internet. His first book, “Ignore Everybody” is published by Portfolio, an imprint of Penguin.

Also known for his ideas about how “Web 2.0″ affects advertising and marketing, after a decade of working as an advertising copywriter, Hugh started blogging atgapingvoid.com in 2001. He first started off just publishing his cartoons, but as time wore on he started blogging about his other main interest i.e. marketing.

In 2004 he wrote “Ignore Everybody” and “The Hughtrain”, which both got widely read in the blogosphere, downloaded over million times in total.

In 2005 he scored his first major blog marketing success with EnglishCut.com, a blog he started with Savile Row tailor, Thomas Mahon. It tripled Thomas’ sales within six months.

Since mid-2006 Hugh has also been helping a small South African winery,Stormhoek “rise above the clutter” in the wine market by using Web 2.0 tools to get the word out. Sales have gone up fivefold since then, thanks to Hugh’s marketing efforts.

Since 2006 Hugh has been constantly engaged as a public speaker, giving talks in both Europe and the US, talking about Web 2.0 and the ramifications it has on business.

Hugh’s basic mantra about blog and Web 2.0 marketing is “It’s a good way to make things happen indirectly”, a point lost on many corporate types.

 

Get Shorty! Andrew Haldane speech

Last night was the occasion of the Sir John Gresham annual lecture.

This year it was held at the Four Seasons Hotel in Canary Wharf with the keynote speaker being Andrew Haldane, or Andy as is the preference,  Executive Director for Financial Stability with the Bank of England.

Andy is speaking at the Financial Services Club in 2012, so I was particularly interested in his speech, as well as the fact that I’ve heard and read much about him in the past.

Andy’s theme for the night was short versus long-term investing, and whether short-termism is a good or bad thing.

This theme was based upon Gresham’s Law – bearing in mind this is the Sir John Gresham lecture – that bad money will drive out good.  In today’s parlance, short money will drive out long.

But this is nothing new, Andy argued, as short-termism has been with us since time immemorial.

Just look at a few notable quotes from history:

“The untutored savage, like the child, is wholly occupied with the pleasures and troubles of the moment;  the morrow is dimly felt;  the limit of his horizon is but a few days off”, Jevons (1871)

“Like children who pick the plums out of their pudding to eat them at once”, Marshall (1890)

“It implies only that our telescopic faculty is defective, and that we, therefore, see future pleasures, as it were, on a diminished scale.” Pigou (1920)

It’s all about impatience versus patience and our inability to defer today’s pleasures until tomorrow.

That’s the nature of why we are short rather than long term.

But patience is a uniquely human characteristic.

No animal demonstrates patience like humanity, as it is part of how our brain is built with the pre-frontal cortex providing patience whilst the limbic mid-brain around the cerebral cortex dominates with impatience.

So what is this all about?

Well, from a million or so B.C. to around 50,000 B.C., very little happened.

The GDP of the planet stayed consistently low.

Then something changed.

In 50,000 B.C., Neanderthal man died out and homo sapiens took over.

What changed?

The Brain.

Neanderthals had a short frontal lobe, which is why their forehead is angled, whilst their skull was larger at the rear to accommodate the cerebral cortex.

This is similar to most animals, who are impatient therefore and seek instant gratification to instant needs.

Homo sapiens emerged, and their foreheads elongated as the frontal cortex increased in size.

Hence, patience is a virtue that homo sapiens discovered and is the reason why productivity increased so rapidly from 50,000 B.C. onwards.

The brain is still developing dynamically, and technology today is changing how our brain works.

For example, there was recently a study released that proves that internet search engines are changing the way our brains remember information, as readily available information online makes people easily forget facts since computers become their external memory.

Our attention span is shortening as a result, with jobs, relationships and attention all collapsing into shorter time cycles.

Football managers used to get four or more seasons to prove themselves; now they’re lucky if they last more than one.

Alex Ferguson may well have lost his job 25 years ago, if today’s climate of rapid churn had applied back then.

CEOs used to have a tenure of ten years or more; today, the average is under five.

And marriage is an institution that is lucky to survive till death doth you part.

This applies equally to shareholdings, where the average holding of shares today is months compared to decades forty years ago.

The result is the short money will drive out long, and this self-destructive behaviour is easily seen in evidence today.

For example, in a recent survey, 78% of CFOs said that they would rather sacrifice economic value for smooth quarterly earnings.

That means they would rather avoid investing in their firm’s future if it meant this quarter’s earnings would be consistent.

We see this in dividends.

Forty years ago, dividends were not always issued.

If the company was struggling or needed to invest, they would withhold dividends.

Not now.

Dividends are issued every quarter, regardless of how the firm is coping.

Maybe this reflects the pressures on stock prices and management who often have a stake in their firm’s performance due to share options.

Or maybe it’s just the pressure of the short-termists and the capital markets.

But myopic investing is not necessarily good for growth.

For example, using net present value discounting in a myopic view means that you can see negative returns on projects that would actually be delivering profits in a rational view.

As little as a 0.1 change in NPV can make the difference.

Equally, it shows itself in how firms operate their Research & Development (R&D) budgets.

A survey of the Top 1000 UK corporations found that only 1.39% of revenues were invested in R&D in listed companies compared to an average 2.63% for unlisted companies; similarly only 1.44% of revenues were placed into R&D for UK owned companies compared to 2.7% for UK based companies owned by overseas corporations.

Short-termism is rife in our businesses and it constrains long-term growth and value.

A similar survey was performed across 100,000 US companies by Asker and company found that private firms are over twice as likely to invest in the long-term value of their firms when compared with public companies, and over three times as likely to consider such investments.

So Andy’s presentation kind of summarised the nature of short term capitalism, or quarterly capitalism as McKinsey call it, and he concluded with a few ideas as to how to rectify such short-termism.

These included bringing in some longer term performance metrics for corporations and investors based upon their rate of portfolio churn, R&D spend, etc; linking shareholder rights to the length of a shareholder’s share holding; linking capital gains tax to length of the holding, such that you pay lower taxes for longer holdings; and more.

All good ideas and a view that, at the end of the day, we need to stop the short-termists “picking the plums from the pudding” or allowing the “untutored savage” to ravage the markets.

Andy was then asked a few questions form the floor.

I was amused to hear him talk about lessons from the crisis and that we thought we needed “more regulation and this time it will be better, and more regulators but this time they will be smarter.  That kind of didn’t work.  We must look instead at the fundamentals of the financial markets structure and address core issues such as the fact that there are some very big banks and many small banks but a missing middle.  There aren’t enough mid-size banks out there.”

He did say that regulators are getting some things right now: they recognise the importance and implications of systemically important financial insitutions (SIFIs) and the capital requirements for large banks that go with this.  On the downside however, regulators are still grappling with births and deaths - making it easier to get new banks born and unworkable banks removed.

He also has a dramatic turn of phrase.

Take this one for example: “almost all dinner party conversations I go to about the post financial crisis, I go in depressed and leave suicidal.”

But, on regulations and monetary policy, he concluded that “the game is to slow down the deleveraging of the global markets and that is what we have done through zero percent interest rates and quantitative easing.”

On that note, I think he’s pretty much spot on and look forward to meeting and hosting Andy at the Financial Services Club next year.

 

For a more expansive version of this speech, a similar presentation was given by Andy in May 2011, to the 29th Société Universitaire Européene de Recherches Financières Colloquium:  New Paradigms in Money and Finance?  in Brussels.

 

The High Priests of Banking

Talking about the St Paul’s protesters yesterday, you do wonder if they maybe have a good point or two to make.

Like their American counterparts, I’m sure they do but unfortunately it’s all a bit loose and airy-fairy, with a mixture of happy-clappy hippies, anarchistic anti-capitalists and an articulate few who can say it’s all about corporate greed.

Trouble is that’s too loose and unfocused to be an agenda for change that will work.

What’s needed is a singular objective such as: tie every corporate action to something that delivers benefits to society, or something like that.

A method whereby every transaction, every commercial movement, every electronic transmission submits a direct benefit to communities, citizens and taxpayers.

It doesn’t have to be in a tax form – it could be committing staff time to community projects – but it has to be allied, linked and integrated into commerce directly and with transparency.

Anyways, that’s not my agenda.

My agenda is banking and what needs to change there, and it was interesting talking with bankers yesterday about St Paul’s and other matters, in that the subject of religion came up several times.

Morals, ethics and religious focus is a mantra that’s been around a while now.

It first came up for me when I presented at Gresham College a couple of years ago.

At the time, there was this big debate about much of banking being ‘socially useless’, and how to turn this into something socially useful.

Various banks made commentary about this theme, and it was interesting that the two most outspoken leaders were both lay preachers: Sir Stephen Green, Chairman of HSBC at the time, and Ken Costa, former Chairman of Lazard International.

Back in 2009, both were talking about the industry losing its moral compass and how it was requisite to bring that bank.

The latter is now very active in making that happen by promoting an ethical code to the City, after leaving Lazards in March this year.

The issue for Costa is one of faith, as he is very active in the Church.

This is why he’s penned several articles about faith in commerce, with the latest in the weekend Telegraph saying that the City must rediscover its morality.

In the article, he states that although he believes that free market are the best way to create growth and jobs, boards and shareholders must have a better understanding of what constitutes real value.

“The present duty – on all boards to maximise shareholder value as the sole criteria for satisfying the return to shareholders – cannot continue.  I am aware that this is a big change that will need detailed discussion, but we need to start with big ideas.

“For some time and particularly during the exuberant irrationality of the last few decades, the market economy has shifted from its moral foundations with disastrous consequences. I cannot recall when public feeling worldwide has run so high, and even if only a minority takes its anger on to the streets, no one should imagine that the majority is indifferent to their cause.”

Mr. Costa should know what he’s talking about as he’s been appointed by St Paul’s to negotiate with the Occupy London Stock Exchange (#olse) group to see how to create an ethical corporate agenda for change.

He’s actually supported by a large group of people called: The City.

It may be surprising to some that the St Paul’s Institute ran research that was about to be published as the protesters moved in, which discovered most City workers believe inequality is a real issue.

The survey interviewed 515 financial professionals during August and September, and found that 75% thought that the wealth divide is too great and two-thirds believe that bankers are paid too much.

Interestingly, over half stated that deregulation of the financial markets had led to unethical behaviour (you can download the report if interested).

And maybe there’s the point.

Historically, banks have had a religious backbone.

For example, in my meeting yesterday were former directors of Barclays Bank and Barings Bank.  Both said they started each day with “Director’s Prayers”, with a salutation to God each morning as a group.

That backbone has been lost since the Big Bang, they claimed (October 1986).

One of them said that the City would fall apart if you practiced what God preaches.

When queried, he clarified to say that you buy when you think the seller is an idiot and you sell hoping that the buyer is one.  That’s how to make money in the City, and that’s where the ethos breaks down.

Does this mean that we all have to move to Sharia rule?

No.

But it does mean a change of thinking, a return to grass roots and a way of looking forward with more certainty.

This was the core of Bob Diamond’s speech to the BBC Today Lecture last week.

Bob Diamond is the CEO of Barclays Bank and, in a lengthy speech, he focused upon trying to answer the question as to how bankers can become “good citizens” again.

“First, we have to build a better understanding of how businesses and banks work together to generate economic growth; second, we have to accept responsibility for what has gone wrong; finally, most importantly, we have to use the lessons learned to become better and more effective citizens.”

He feels that banks have done a poor job of explaining how they can be ‘socially useful’ and makes clear that So banks make sure that a banks role is to make it easy for companies and governments to access capital by establishing a large consistent market of buyers and sellers.

“To do this they put capital at risk in order to discover what the market is willing to pay.  When banks do this well, interest rates are lower. If interest rates are lower, government and business borrowing costs less.  Without this, the result is clear - an increased cost of borrowing, higher taxes, lower public spending, slower economic growth and higher unemployment.  Providing this kind of support to clients requires banks to take risk but this is not speculative trading, so it bothers me when these activities are caricatured as gambling.

“These activities serve a social purpose and meet a real client need whether they are carried out on behalf of governments, pension funds businesses or individuals.”

 Critically, he makes the point that just as bankers caused the crisis they can also put it right.

“First, it's about how we behave, especially with our customers and clients; second, it's about what we do, and in particular how we help those customers and clients create jobs and economic growth; and third, it's about how we contribute to the communities we serve in many other ways.”

It’s a good speech – although some critiqued it as just being platitudes, motherhoods and apple pie – but as Bob says at the end:

“To the question ‘can banks be good citizens?’ the answer must be ‘yes’. But I'm mindful of what was said to me three years ago: ‘Bob, think about the fact that no-one will believe you.’  We're in the early stages of working to restore trust.  I'd like to be able to say we're achieving that, but I know that for you, seeing is believing.   You may not be able to see what's different today, but over time I very much hope you will see that and more.”

And note, he doesn’t use the words religion, ethics or morals once in this speech.

It’s not a question of religion.

It’s a question of culture.

“Culture is difficult to define, I think it's even more difficult to mandate - but for me the evidence of culture is how people behave when no-one is watching.  Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.”

Damn right.

And I’ll be watching to see just who makes decisions with trust and integrity.

I guarantee that under these definitions, it isn’t Goldman Sachs.

Lloyd Blankfein on the one hand claims that their bank is doing "God's Work" whilst, on the other, when asked by Senator Carl Levin at an SEC hearing last year: “Do you think (investors) care that something is a piece of crap when you sell it to them?”, Lloyd calmly answers: “no”.

There’s something slightly hypocritical in that response isn’t there?

And whilst one maverick firm can break the oath of morality to do what’s right, then all others have to follow to compete is the usual mantra.

A moral compass, an ethical view and a religious purpose in banking – or, just being a good citizen – surely has to merit a bank doing what’s right for the customer.

Until some banks and bankers get that through their thick skulls and cultures, nothing has changed.

 

 

Who needs to focus on the customer?

Thinking more about componentised versus integrator banks leads to an interesting dialogue that started way back for me.

Fifteen years ago, we were grappling with bank models and structures and talked a lot about whether banks could be integrated retailers, processors and manufacturers of financial services or should they be specialised.

Then the book The Discipline of Market Leaders by Michael Treacy appeared, and he reinforced the idea that this was not possible.

In the book, Treacy says that businesses are three dimensional around customer, operations and products, but can only excel in one dimension.  Therefore you have to decide whether you are going to lead by being customer intimate (a retailer), operationally excellent (a processor) or product specific (a manufacturer), as you cannot be brilliant at all three.

This is not necessarily true as there are exceptions to the rule – just look at Apple or Tesco who achieve more than one facet on the scale of three dimensions – but you get the idea.

I’ve been intrigued with such discussions for years because an old friend, Professor David Llewellyn of Loughborough University, was espousing similar ideas back in the late 1990s.

David’s theory was that banks would be componentised, just like airlines, telecoms and other industries had been.

Banks therefore had to decide whether they wanted to be the best interface to money – an integrator – or the best provider or processor of money – a component.

Again, it’s another way of saying are you a retailer (interface), processor or manufacturer of financial services.

David illustrated the theory well by talking about airlines and making it clear that airlines manufacture nothing but purely provide an interface to a seat.

The key in airline selection is who provides the interface most appropriate to your needs for that seat.

If it’s cheapness you want, fly Southwest; if it’s luxury, fly Emirates; if it’s functional, fly American; if it’s service, fly Singapore.

Each airline excels in a dimension of product, process or service, and each airline emphasises a slightly different aspect of interface to seats based upon how they put their offer together.  It is how they integrate the components of air traffic routes, engineering, catering and service that allows them to be a market leader, even though they build and manufacture none of these components.

Others do this and banking, he claimed, is the same.

Now there are components of banking at the back end – money markets, securitisation, SWIFT, CLS, etc – that provide the core elements of delivering financial service at the front end.

You could claim that these are the core components that banks integrate for delivery.

But David’s point was more targeted at the front-end customer experience, and hence it was more to do with components of mortgage, credit cards, deposit accounts and such like, and how banks integrated these into their branch and call centre operations and, today, internet and mobile channels.

Which brings me around to today.

Today, we talk about customer experience and engagement rather than interfaces and service, but the point being made is the same.

If you’re a bank that believes you want to provide customer intimate experiences through the best integration of the components for engagement, then that is a specific strategy to follow that has to be clearly thought through and delivered.

And this is where it gets wobbly as most banks are not focused upon customer intimate engagement.

Sure, the customer is important but, over and over again, we see the banking is defined by product and process.

“This is subject to compliance and therefore cannot be changed.”

“The regulation will not allow us to offer this.”

“We behave in the shareholder’s interest first and foremost.”

“Cost of processing is paramount.”

“We live in a zero margin world and compete on rates.”

“Customers think all banks are the same, so we ensure our fees and charges are aligned.”

Sure, there are exceptions to the customer intimate rule – USAA and First Direct – but generally banks are focused far more on products and processing.

This was illustrated by a comment from one seasoned financier at the payments conference I attended this week: “it’s notable that at all the banking conferences I attend, we never talk about the customer”.

Certainly we had talked about T2S, SEPA, the PSD, SWIFT MX and ISO20022; we had talked about mobile, NFC, facebook credits, M-PESA; we had discussed Basel III, the Eurozone, Frank-Dodd and Durbin; but, for all of these discussions, we had not really talked about customers and customer engagement.

We had danced around it, but no-one really focused upon what the customer needs, wants and desires from their bank experience.

Maybe this is where the future lies: in truly being customer intimate.

Or maybe, due to the barriers to entry of regulation, capital, structure and compliance, banking can continue to be a wholly process and product centric service, with the customer engagement coming last.

That’s certainly how it would seem to have played out for the past two decades and, even with others moving into the financial markets space, it may well be how it remains.

After all, the other comment that’s been used at most conferences I’ve attended is that customers change their spouses more often than their banks.

And if that’s the position – once you’ve got ‘em, they’re locked in – then who needs to focus on the customer?

 

Banking as components or integrators

I just spent the day in a payments conference focused upon operational excellence.

We talked about Basel III, SEPA, the PSD, Mobile … the usual stuff, but there was a particularly intriguing presentation from Olivier Denecker of McKinsey in the morning session on what operational excellence in payments is all about.

I took a whole bunch of notes, and here’s a few of the key bullet points:

• EU banks RoE went from 13.5% in 2007 to 3.9% in 2010 = increase revenues or decrease costs to survive
• Payments = 30% of the €150 billion cost base of EU banks
• Although payments is well automated for STP, half of all costs are still people-related
• IT application costs in payments vary by a factor of up to 3x between the best and worst in class providers
• IT spend varies between 5.7% and 11.7% of operating income between best and worst in class performers
• Outsourcing in EU has DECREASED for the issuance of credit and debit over last decade (increased for acquiring)
• McKinsey recommend banks become more like car makers and common source components, outsource more and use standard metrics for benchmarking

What struck me as Olivier talked is that banks don’t view payments as a separate product stream.

It’s not an individual product line.

For most banks, it’s an integral part of the bank operations.

It’s the glue that hooks the customer to the bank.

It’s the core of their offer.

That’s why banks find it so hard to think of payments neutrally, objectively, dispassionately.

Payments are not objective, they are emotional.

For most banks, they are very emotional.

Ask a banker to outsource core payments processing and they’ll give you a look like you’re the devil’s spawn.

It’s just not done.

And yet, this is changing.

Payments is no longer the glue for bank, but more like the foundation and even bulilders don’t always drill the foundations.

They bring in specialists.

That’s what Olivier was driving at: bring in common component providers and develop value on top of their services.

This is where it gets interesting as banking has historically been a vertically integrated industry, providing an end-to-end service that is wrapped around the customer and is incredibly difficult to unlock.

And yet it will be unlocked if Olivier’s message comes true and banking is driven into a componentised industry where you have a payment app, a balance app, a cashflow app, a budgeting app, a fraud app and so on and so forth.

Oh, wait a minute.

That’s Banking-as-a-Service if I remember rightly (presentation from February 2009!).

Banking as a Service (download)

View more presentations from Chris Skinner

The presentation may be two years old but Banking-as-a-Service is coming around faster than many might believe if you checkout

Square (now processing $2 billion a year),

iZettle (€8.2 million raised this week),

PayPal (now going offline as much as online with cards),

Movenbank (no plastic, no cards, no hidden fees),

Zopa (active lenders up from 9,000 in 2008 to 16,000 in 2009 to over 22,000 last year),

Banksimple (over $13 million invested and now demonstrating their offer

BankSimple Demo from BankSimple on Vimeo.

… jeez, there are 100s of these startups and established disruptors out there doing stuff as I’ve not even mentioned what Facebook, Google, Amazon, Apple, Bitcoin, Ven Currency and others are doing here.

Suffice to say that the componentisation of banking and shift from vertical integration to horizontal components that can be put together as you like, is happening and happening fast.

Has anyone noticed?

 

 

 

Art for art's sake

Banks have great treasures behind their marble veneers, as demonstrated by their art collections.

UBS own around 40,000 art objects, including works by artists such as Jean-Michel Basquiat and Andy Warhol, and JP Morgan Chase is known for having a significant collection, established 50 years ago by David Rockefeller.

It was also notable that, as Lehman Brothers assets were sold off, they included a major collection of art works from Roy Lichtenstein to Damien Hirst.

The value of such collections is unfathomable, having been built up over so many years, so I was particularly intrigued to pick up a book from Standard Chartered at the Eurofinance conference last week called: “Banking on People: a Visual Expression of the Standard Chartered Culture”.

Front Cover artwork: Miao Girl with Silver Necklace by Shen Ming Cun

The book is all about the artworks that adorn Standard Chartered’s Head Office at One Basinghall Avenue, London. 

The art hangs in their hallways and foyers for all to see, and most of it is modern portraits.

Painting: Girl reading on a Bench, by Michele Del Campo

The book tells the story of how previous CEO’s and Chairmen collected a lot of old world art.  For example, Sir Patrick Gillam, Chairman from 1993 to 2003, bought a piece of art by Edward Lear in 2000 to celebrate the opening of StanChart in Lebanon.

Guess what he bought?

A piece by Edward Lear called A distant view of Beirut, with Mount Lebanon above from 1866.

The thing about such art is that it’s expensive to buy – most Edward Lear landscapes sell for over $20,000 a piece – and so when Sir Patrick was succeeded by Mervyn Davies, a new approach was taken based upon buying new works of art that reflected the culture and history of the bank.

The theme is therefore people.

Zhang Ziyi, by Eleanor Reed

Many of the paintings have been sourced from the UK and the BP Portrait Awards, but more recently has diversified to allow paintings to be hung acorss the bank’s 1600 global offices.

How the decisions are made is really interesting.

Peter Sands the CEO and David Stileman, CEO of Standard Chartered Americas, are the key decision makers.

In the book, David is quoted as saying:

“Tom (Tempest-Radford, Curator) sends me images and I look at them on my iPhone and decide at once.  It sounds awful but in fact looking at something on a small screen gives you a good sense of its visual impact.  If a picture works on an iPhone, it is probably going to be able to make an impact in a busy office space.”

Interesting.

There are over 100 artworks in the book by artists ranging from Corinne Dalle-Ore to Li Yueling, Shen Han Wu to Jane Lewis and more.

Here are just a few:

Harriet White's Bob (left); and Josie McCoy's Cate Blanchett 

Two Sean Henry sculptures:

The Dreamer, by Valery Koroshilov:

p.s. on bank-related art and history matters, you may remember that a wee while ago, I visited HSBC’s archives in the East End of London, a massive warehouse of history.

 

 

Not cashless but less cash

I’ve been on travels lately and found myself seriously questioning cash.

It began on the journey out to Iceland when I decided ot get some cash from the AMEX office at Heathrow airport.

First, the AMEX office wouldn’t take my personal BA-AMEX card, but would accept my AMEX corporate card.  No explanation, rhyme or reason. 

I should have given up there and then as when the surly AMEX assistant – Heathrow Terminal 1 assistant, name of Prakash fyi – handed over the cash, it was all in ISK500 notes. 

ISK500 is worth about £2:50 (€3, $4), so over 100 ISK500 notes was really appreciated.

It was also at a seriously rubbish exchange rate, but I was drawn in by the promise of no commission and a free stress ball.  I never got the stress ball, even though the exchange stressed me out.

I then landed in Iceland only to be told that no-one uses cash anymore.

Like many of the Scandinavian countries, cash has been replaced by card and everyone accepts cards from taxis to buses to newspaper kiosks to geysers in bars.  So no cash needed.

As a result, I felt like the most uncool person in Iceland as I wandered around paying for things with ISK500 notes that raised surprised eyebrows everywhere.

I therefore made a decision that on my next trip I would go cashless.

This was to Denmark and Germany last week, and turned out to be surprisingly easy.  Well, in Denmark anyway.

Everywhere I went, I got out my trusty piece of plastic and everyone smiled and happily took the payment via their cellphones and terminals.  Most taxis had a payments app they used easily to process payments, and even offering the card in exchange for a beer was no problem.

Germany was slightly more difficult.

Arriving at the hotel and offering the taxi driver the card in payment resulted in a “oh, you want to pay by card?” as though I was causing a problem.

I think I was as it took the driver about ten minutes to boot up his phone app but, eventually, payment processed no problem.

I made sure that, on the return taxi, they were aware that I wanted to pay by card beforehand.

Now the travails and travels of a cashless European may be of little interest or surprise to those of you more on the leading edge of mobile payments and cards but, for a grumpy old Brit, this was a bit of a revelation for me.

You see I live in a world where most stores have signs saying “no cards accepted for payments under £20” and the sight of card in payment for a beer or newspaper would be viewed with incredible suspicion.

No such challenge in most of Europe and, in Scandinavia, the sight of someone with wads of cash is seen as being of more suspicion.

This then got me thinking about cash, cashless and competitiveness.

According to most of the research I’ve seen, the minimum a country can get cash down to is around 4% of all payments by value and around 30% of all payments transactions.

Cash is still used for predominantly small payment exchanges between individuals as a value exchange that is trusted, immediate and anonymous.

This may not be the case for the long-term as smartphone apps allow P2P payments to be made easily, but it is certainly the case in economies that are cash minimised.

Even in cash-based economies, cash is reducing at an increasing rate.  For example, the Royal Mint tell me that new coins have halved in production in the UK over the past 15 years, and the ECB say that euro note production is still increasing but a decreasing rate too (see chart at end of entry).

There’s then the argument that cashless creates competitiveness, with Singapore, Finland and other nations believing that their high ranking in the World Economic Forum’s annual global competitiveness league is due to their highly electronic payment oriented economies.

Whether true or not, there is certainly something to be said for economies that make the electronic transaction process simple for commerce and, above all of these things, it tells me that the world will be reducing physical cash flows rapidly over the next decade.

Will these lead to a cashless society?

No.

Cash is still an essential source of commercial flow for most economies as it still has the trust for an immediate exchange of value anonymously.

But it will lead to a less cash society.

Equally, as mobile apps take off and replace cards and cash flows, it wouldn’t surprise me if cash reduced to under half of its current volume even in the most electronic societies of the Scandinavia’s, Singapore’s and similar.

That could mean cash reducing to under one percent of payments by value and less than 20 percent of payments transactions in the near term.

Now that would truly be a cash less society.

 

Postnote:

Worth a look at the ECB’s trends for Euro notes (double click image to see larger version):

And it costs more to print a dollar bill than it’s worth, even though cash in America is unlikely to disappear in the near term.  As discovered in a recent research note by friend Ron Shevlin at Aite Group:

“Despite forecasts of a cashless society, the United States is nowhere near the realization of this vision. In fact, if the use of cash were to decline by 17% every five years—our forecast for 2015—the use of cash in the United States wouldn’t fall below US$1 billion before the year 2205, roughly 200 years from now.”

 

 

 

Iceland: where banks are becoming just PFMs

I mentioned I was in Iceland last week, and was interested to find out what the banks were thinking.

We only ever hear of Iceland’s woes and troubles, and so the ability to see first-hand what was happening to the banks was one that could not be ignored.

According to Wikipedia, there are only a few commercial banks left in Iceland: Arion Bank, Byr, MP Bank, NBI and Íslandsbanki, although their information is slightly wrong as they list Landsbanki as defunct whereas the bank is still running well, admittedly 81% owned by the government.

In fact, it’s very easy to get things wrong, as highlighted by Deena Stryker’s article to which I referred last week.

I also got my own sums muddled, as I thought Landsbanki was privately held still, but it’s not.  It’s majority owned by the Icelandic government, unlike Íslandsbanki and Arion Bank who are 5% and 13% government owned respectively.

In other words, the Icelandic banking system is not dissimilar ot the UK or Ireland or others in the EU, where governments have had to subsidise their banks to avoid complete collapse.

Similarly, as outlined in the document that refuted Stryker’s article, Iceland is not bankrupt or dead.  It is still severely challenged, but then aren’t we all?

So, to be accurate, Iceland’s external debt – as in the country, represented through the Central Bank – was equal to 57% of the GDP of Iceland in 2003 rising to 104% in 2009, according to World Bank statistics. 

Iceland’s banks’ debts were much higher however, reaching nine times the level of Iceland’s GDP in 2007.  The result was that, at the end of the second quarter of 2008, Iceland's external debt was 9.553 trillion Icelandic krónur (€50 billion), with over 80% held by the banking sector.  This value compares with Iceland's 2007 Gross Domestic Product of 1.293 trillion krónur (€8.5 billion).

So Iceland’s banks were the issue, rather than the country of Iceland.

In fact, Iceland the country is still doing relatively ok it seems, compared to the PIIGS, although it is having to sell off some of its crown jewels to stay afloat.

What intrigued me during the visit were the banks themselves.

If you’re not aware of what happened in the crisis, you can find out over on Wikipedia, from which this brief summary is based:

On 29 September 2008, a plan was announced for the bank Glitnir to be nationalised by the Icelandic government with the purchase of a 75% stake for €600 million. The government stated that it did not intend to hold ownership of the bank for a long period, and that the bank was expected to carry on operating as normal. According to the government, the bank "would have ceased to exist" within a few weeks if there had not been intervention.  The nationalization of Glitnir never went through, as it was placed in receivership by the Icelandic Financial Supervisory Authority (FME) before the initial plan of the Icelandic government to purchase a 75% stake had been approved by shareholders.

On 6 October, a number of private interbank credit facilities to Icelandic banks were shut down. Prime Minister Geir Haarde announced a package of new regulatory measures including the power of the FME to take over the running of Icelandic banks without actually nationalising them, and preferential treatment for depositors in the event that a bank had to be liquidated.

The FME placed Landsbanki in receivership early on 7 October.  A press release from the FME stated that all of Landsbanki's domestic branches, call centres, ATMs and internet operations will be open for business as usual, and that all "domestic deposits" were fully guaranteed. The same day, the FME placed also Glitnir into receivership.

That afternoon, there was a telephone conversation between Icelandic Finance Minister Árni Mathiesen and UK Chancellor of the Exchequer Alistair Darling.  This resulted in Alistair Darling taking steps to freeze the assets of Landsbanki in the UK with the Landsbanki Freezing Order 2008 passed at 10 a.m. on 8 October 2008 and in force ten minutes later. Under the order the UK Treasury froze the assets of Landsbanki, and introduced provisions to prevent the sale or movement of Landsbanki assets within the UK, even if held by the Central Bank of Iceland or the Government of Iceland. The freezing order took advantage of provisions in sections 4 and 14 and Schedule 3 of the Anti-terrorism, Crime and Security Act 2001.

Geir Haarde said at a press conference on the following day that the Icelandic government was outraged that the UK government applied provisions of anti-terrorism legislation in a move they dubbed an "unfriendly act".  It is reported that more than £4 billion in Icelandic assets in the UK were frozen with the Financial Services Authority (FSA) delaring the UK subsidiary of Kaupthing Bank in default on its obligations and placed the bank in administration, selling its Internet bank to ING Direct.

On 9 October, Kaupthing was placed into receivership by the FME, following the resignation of the entire board of directors. 

As can be seen, these were terrible times and the banks that were in play were no more.

The new banks of Arion Bank, Íslandsbanki and Landsbanki are therefore very different to the banks that disappeared in the storm of the crisis.

Reformed, revitalised and re-energised, the banks are now focused upon the citizens of Iceland and doing a good job for them.

Or so it seems.

For example, here’s a slide from the Íslandsbanki presentation I received that resonates with the discussions I had with the other banks there:

What this slide shows it that Iceland’s retail banking system has historically been at the very forefront of all technological developments in Europe.

As with most Scandinavian countries, Iceland is virtually cashless – about 96% of all payments transactions are electronic – and everything is online.  Over the past few years, 30% of Iceland’s bank branches have shut down, and a further 30% is expected in the next few years.

Mobile is a key focal point today as is Personal Financial Management (PFM) software – Meniga is an innovative Icelandic PFM provider that Íslandsbanki use.

In fact, the most interesting aspect of this slide is that it shows the herd mentality of banks.

The Icelandic banks were all focused upon outdoing each other in the 1990s in the race to deploy innovative technologies for self-service.

They led the world in internet and mobile banking, and created a hotbed of innovation.

Then easy access to securitised lending markets opened up, and they took full advantage of the loans business.

As a result, Icelandic banks gained large-scale operations in UK, Netherlands, Norway and other overseas markets, and their clients did the same with everything from West Ham Football Club to the House of Fraser being prime targets for Icelandic investments.

Not bad for a country about the size of Coventry (UK’s 11th largest city).

Since the crisis hit, and the banks were allowed to be ‘let go’, the country is reforming in a post-crisis world with a new banking order.

One that has returned to its roots of innovation around customer-centricity.

That’s why the rollout of PFM as a platform is a key for the Icelandic banks, and not just Íslandsbanki but also Landsbanki and Arion Bank are rolling out similar platfroms as core.

This may be the reason why: excellent user engagement.

These metrics were shared with me, based upon 18 months of PFM usage amongst Íslandsbanki's customer base:

• Over 25% of online users signed up for stand-alone PFM within 6 months 
• Over 75% of new PFM users use PFM again within two weeks
• Over 25% of new PFM users use PFM five times or more in the first month, and spend more than double the time in PFM compared to online bank (the average time onsite is 12 minutes, with 35 pageviews per PFM session)
• More than half of all PFM users are still active a year after signing-up

And their customers love it, partly because it brings in a form of gaming in finance, where you can compare your activity with everyone else's.  Here's one of their ads for example:

And, in a recent customer survey, Íslandsbanki found that:

• Over 80% of users are “pleased” or “highly pleased” with PFM
• 9 out of 10 users say they’d recommend PFM to others
• 66% say PFM has helped them see how they can improve financially
• 41% say they have improved financial behavior after starting to use PFM

According to Íslandsbanki:

• Active PFM users have increased the total number of Íslandsbanki accounts (current, savings, credit card) by 19,4% on average after using PFM for 1 year. Other groups show no or slight increase only.
• Active PFM users have increased Íslandsbanki transaction volume by 4,5% on average after using PFM for 1 year. Other groups show no increase.
• Affluent customers are significantly more likely to use and be pleased with PFM than other groups
• There is also evidence of significantly improved retention of PFM users with 71% of users saying that Íslandsbanki‘s PFM offering increases their loyalty

There’s many other stats I could place here, but perhaps the most telling comment is when the bank tells me that PFM is now replacing their online bank.

In other words, PFM is their online bank.

I suggested that PFM is their bank.

They smiled.

This tells me another thing.

If Iceland and Scandinavian banks set the trends for retail banks across Europe, maybe all banks will just be PFMs by the end of the decade.

Now there’s a thought!

 

We are Knights of the Bank Table

Sometimes, especially in the summer, it gives a time for reflection and surprise.  

Today's surprise is the story of how the Knights Templar invented modern banking and made the Swiss the best bankers in the world.

This is prompted by the Knights Templar being back in the news again, due to the fascination of Anders Behring Breivik, the Norwegian mass-murderer who hit the headlines after massacring 77 victims last month.

Breivik posted a video on YouTube about the Knights Templar 2083, claiming that he had co-founded the “Knghts Templar Europe” with eight others.

The Knights Templar fascinate many people.

For example, I was fascinated by them thanks to Monty Python and the Holy Grail …

… no wonder we get on so well with our French friends.

Amazingly, when you look into their history, you find that the Knights Templar or, to be more exact, the Poor Knights of Christ and the Temple of Solomon, were created and destroyed by the French.

The Knights were established in Jerusalem in 1118 by nine French Knights, with the mission to protect pilgrims to the Holy Land.

They may have been known for protecting pilgrims and launching Crusades, but their other real skill was banking.

In fact, many say they created the modern version of banking.

What?

Yep, they sure did.

This is because most of the Knights were the sons of nobility and, as they joined the Knights Templar, they had to take a vow of poverty.  The result was that they Order accumulated large amounts of cash and property, donated to the Order by family and relations of these young bucks. 

In other instances, the nobles themselves would join the Knights, to take part in a Crusade, and would put their estate in the hands of the Order during their absence. 

Overall, the Knights Order was trusted by most nobility to look after their goods and chattels, as the Order had an international infrastructure behind them, namely the Church and the Pope.

For all of these reasons, the Knights Templars' financial power was significant, with much of the Order's infrastructure devoted to economic rather than religious pursuits.

This meant that, by 1150, the Order's original mission – a freelance security service for pilgrims travelling to the Holy Land – had changed to one of guarding valuables.

For example, the Order would guard and escort people to the Holy Land and, during the pilgrimage, the pilgrims would leave their valuables with the Order in exchange for a letter of credit, an early form of traveller’s cheque that is still used today in commerce.

This worked by having the pilgrim visit a Templar house in their home country where they would deposit their deeds and valuables. In exchange, the Templars would give them a letter describing their holdings, which would form a trusted proof of being good for the money.

The letters had codes of proof that all the Order could recognise as being a real letter of credit.  There’s some disagreement as to how the codes were used, but generally it was thought that the letters were encrypted with a cipher alphabet based upon a Maltese Cross.

As a result, whilst traveling, the pilgrims could present these letters to other Templars along the way to withdraw funds from their account.

It was a real innovation as it meant that the pilgrims were safe from robbery during their journey as they weren’t carrying valuables.  It also increased the power of the Templars.

The Knights' involvement in banking grew over time into a new basis for money, as Templars became increasingly involved in banking activities.

One of the biggest sticking points being how to make money on their deposits, as usury was a core principle that the Church would not support.

Usury – the use of interest – is not allowed in most religions, and has split Islam and Christianity ever since.

This shows the power of the Knights Templar, as the face that they did lend money in return for interest didn’t have them excommunicated or distanced from the Church.

In some ways, you can see the modern version of Islamic Finance in the ways in which the Knights Templar achieved this, as they used loopholes in the religious strictures to create profit from loans.

This was by ensuring that the Order retained the rights to property, so they didn’t make money from interest but from renting.

In other words, they soon moved from being “the Poor Knights of Christ” to being incredibly wealthy and powerful, with hundreds of ships, banks and castles at their disposal and 9,000 estates from Scotland to Syria.

However, with wealth and power came envy and hostility, with the Order eventually disbanded when King Philip IV of France put thousands of them to death in the 14^th century in order to plunder their wealth for his war against England.

Those bloody French again!

This led to another little known fact, but one that explains many things in today’s modern world.

The Knights, fearing their lives and wealth, fled and unified in the founding of Switzerland.

Just check out their flags …

The flag on the left is Knights Templar and on the right is the Swiss flag.

And we all know that the Swiss are both neutral and bankers – where did that come from?

Well it goes back to the ending of the Order and the founding of Switzerland.

When the first Swiss cantons rebelled against the Holy Roman Empire, the Knights Templar solders were sent to overthrown them.

Instead, when the Knights got there, they were amazed to find the farmers and merchants of the Swiss cantons were fighting as a first-class opponent, rather than some unstructured rabble.

As a result, when the Knights were on the run from the French King, they fled to the cantons of Switzerland and asked for help.

This is why, when Switzerland was founded as a confederacy of the cantons in 1291, it rapidly rose to prominence as both a financial centre and temperate community that could tolerate religious divides and opposing views, and still does today.

All fascinating stuff.

Oh, and if you want one more piece of fascination, guess why we’re all afraid of Friday 13^th?

Thanks to the Knights Templar.

Back in 1307, when King Philip IV decided to wipe out the Knights and take their wealth, he sent his army out to disband the Order on , yes you guessed it, Friday 13^th October 1307.

 

Thanks again to the Week for reminding me of this, and Wikipedia for adding depth.

 

The real rip-off culture? Part Three

In the final part of a three-part review (parts one and two) of money lending and the accusation made by Vince Cable, the Business Secretary, of a “rip-off culture” in parts of the financial system, I decided to pick on the story of Arran Coghlan.

Arran has recently been acquitted of assaulting two police officers.  He was accused in 2008 of breaking the nose of one officer and splitting the lip of another, but the case collapsed a week ago when the Crown Prosecution Service offered no evidence.

What's this got to do with money-lending?  

Well, that's Arran's main business and he's very good at it.  He's also very good at getting off the hook, having previously been charged and acquitted of three murders and a plot to flood Britain with cocaine.

His story is told in depth in a recent Daily Mail article, and there was one bit I found particularly interesting where, after being cleared of his first murder case, he says that: ‘people treated me with a little caution in case there was any truth in it. At first I was unhappy about it, but I realised as I got into money-lending business that the perception was not without its advantages in persuading people to pay on time.’

Very true.

I suspect that Mr. Coghlan is very successful at what he does - money-lending - but I also suspect that unlike Wonga, the payday firms and the banks, his interest rates are far less transparent and the repercussions for not paying on time are far more severe.

So, here's a summary of his story taken from the Week.  

Arran Coghlan doesn't look like trouble, says Paul Braacchi in the Daily Mail.  Yet, in the past ten years, the lanky, polite 39-year old from Cheshire has been charged with murder three times.  Each time, he was acquitted.  Last month, he was cleared of a plot to flood Britain with cocaine; and last week he walked free after a case in which he was charged with assaulting two police officers collapsed.

The press, convinced there is no smoke without fire, has dubbed him Teflon Don.

“I detest that description because it suggests I have ‘got off’”, he says.  “I didn’t ‘get off’.  The police tried to stich me up.”

Five times?

“I can understand how  it might look”, he says.  “But do you honestly think the Old Bill would drop case after case against me unless they had to?”

That’s not to say he’s a paragon.

Raised by a single mother on a Stockport council estate, Coghlan admits he drifted into petty crime (he once serviced 18 months for car theft), before becoming a loan shark in his 20s.

It was around this time that he was charged with his first murder – the drive-by shooting of a local gangster.

Despite his acquittal, he says, the case lent him a certain cachet.

“I think people treated me with a little caution in case there was any truth in it. At first I was unhappy about it, but I realised as I got into money-lending business that the perception was not without its advantages in persuading people to pay on time.”

These days, he says, he runs  a respectable business consultancy.

“My business is totally legit”, he says. “I’m very proud that I’ve come from nothing and done rather well for myself.”

Yet he has spent nearly five years on remand for crimes he hasn’t been convicted of – and the police are still on his case.

His most recent murder trial was last year – when he was accused of shooting dead a local gangster who suddenly appeared in his house.  The jury believed his claim that the gun went off during a struggle – and only after the gagster had slashed Coghlan’s neck.

“The scar is on my jugular vein”, he says. “It was a good shot — but not good enough. I don’t do dying — that’s for others.”

Read the full interview with Arran at the Daily Mail. 

Innovation and risk: creating 1,000 mph car

We had a fantastic meeting of the Financial Services Club last night.

It was the close of our 2010-2011 season of meetings, and therefore slightly racier subject matter with Richard Noble, OBE. 

Richard is an inspirational character and the driving force behind Britain’s land speed record winning cars: Thrust2 and Thrust SuperSonic Car (SSC).

Richard set the land speed record in 1983, driving Thrust2 himself at speeds averaging 633 miles per hour (1,018 kilometres per hour).

Then, in the 1990s, a battle broke out between an American team, the Formula 1 McLaren team and Richard Noble’s team to break this record and the sound barrier.

The other teams were well advanced with multimillion dollar budgets, but Richard’s team had passion and engineering prowess.

As a result, on 15^th October 1997, Richard’s team claimed a new land speed record, driving beyond 763 miles per hour (1,228 kilometres per hour).

Here’s a short video of the record-breaking drive of ThrustSSC:

This record still stands and ThrustSSC was the first car to be supersonic.

It was also an indescribably risky project at the time. 

First, there were all the challenges of getting the project financed.  No banks wanted to help, nor government.  The project ended up being virtually wholly funded by sponsorship, driven by Richard’s passion.

Then there’s the risks involved in building a car that can withstand such speeds.  As Richard mentioned in his first land speed record attempt, the way the car was built back then meant that, if it had been driving at just 7 miles per hour faster (11 kilometres per hour), it would have taken off!

Finally, there’s the risks of failure due to any number of reasons: weather, the track, animals and birds or stones on the track, the tyres, parachute, brakes, etc.

It takes nerves of steel to do these sort of projects and that’s why we discussed this at the Financial Services Club last night, as risk management is what it’s all about.

Taking risk out of the game.

When we talk about high frequency trading, real-time payments, liquidity risk or anything in banking, we are talking about and taking big risks with the world’s finances.

Richard is taking big risks with the car and the driver.

Or is he?

I asked Richard about Richard Hammond’s crash on Top Gear:

This was a 300 mile per hour crash.  Under half the speed of the Thrust SSC vehicle.

Richard explained that everything was wrong with the attempt by Hammond, from the car to the track to the safety checks to the weather … shame that Top Gear hadn’t consulted the expert.

And there’s the rub.

Sure, there’s risks but Richard takes out all the risks, as far as is humanly possible, to ensure the car drives safe.

This is why there are so many tests and test runs before any record attempts, to ensure that everything is a known factor and that there no known unknowns.

And why is all of this topical now?

Because Richard is trying to break the land speed record again.

And this time it’s a big challenge.

A really big one.

A 1,000 miles per hour challenge (1,609 kilometres per hour).

This new project is called Bloodhound SSC, named in deference to the original Bloodhound missile.

The aim is to run the car twice over the salt flats of South Africa in 2013 or 2014.  The project is already four years from inception, and has designed and proven the car can reach the 1,000 miles per hour mark in simulation tests.

In theory that’s fine but, in practice, it’s a little bit more complicated.

For example, the car will achieve this feat in the Hakskeen Pan salt flats of South Africa, a long flat area that has just 61mm of variation over a two kilometre stretch of land.

The challenge will be to clear the area of all obstacles, particularly any stones of which there are 1,000’s for every metre of track.

This is why there are major clearances taking place of all debris and potential hazards, including removing any stones or other possible obstructions on the track such as scorpions, of which there are also many.

But the key question is: why do this again?

No-one’s beaten the sound barrier record … yet.

And there’s the rub.

Richard is motivated by the fact there are always people who want to go faster and, in the mid-2000’s, Steve Fossett announced that he would challenge for the land speed record.

Fossett’s team built a car – the Sonic Arrow – that they hoped would exceed 800 miles per hour (1,287 kilometres per hour).

Unfortunately Steve Fossett died in September 2007, and so his car project stalled and was recently put up for sale.

However, Noble had by then committed to exceed 1,000 miles per hour and the project was under way.

So, the parallels with banking are there.

It’s all about being the fastest you can be with the least possible risk.  This is particularly true in City trading, where Goldman Sachs and Chi-x dominate due to their ultra high frequency electronic trading liquidity pools.

Sure, the risk is there, but those who manage risk best and at the fastest speeds get the highest returns.

Oh, and if you really want to get a sense of how risky and fast Richard’s project is, then take a look at this …

… incredible and inspirational.

And that’s what the project is really about: being the inspiration for Britain’s next generation of engineers.

The Bloodhound SSC project has over 4,000 schools involved in the program, with the aim of creating a new generation of engineering intelligence second-to-none.

That’s pretty inspirational too.  

Finally, if you feel inspired, you can sponsor the Bloodhound SSC Project for as little as £10 and get your name on the car's tailfin.  

No sting in this tail.