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There are regular discussions at the Financial Services Club, conferences and meetings about the cashless, branchless future.
Visa and MasterCard are huge advocates of a war on cash, as are the mobile wallet providers.
Brett King and the Bank 2.0 crowd talk lots about a branchless world of banking and how branches are all irrelevant to future bank operations.
Let’s be clear, it won't happen.
There is no such thing as a branchless world, and a cashless future will not happen in my lifetime.
Much as I would love to see this future of a branchless, cashless future – don’t get me wrong, I’m a huge advocate of getting rid of bricks, mortar and paper – the reason it will never happen is that these forms of commerce and finance are important.
Branches are required for advice, sales and service but, more importantly, trust.
Regardless of how irrelevant branches may be in terms of distribution, any bank that wants to get new account openings has to have a branch.
That’s why:
Santander purchased Abbey, Bradford & Bingley and Alliance & Leicester’s branches to become one of Britain’s largest branch-based bank networks behind Lloyds and Royal Bank of Scotland (NatWest);
Virgin purchased Northern Rock’s branches to get some form of physical footprint in the UK;
The Co-operative Bank is buying the 632 branches Lloyds has been forced to sell due to the European Commission’s verdict on UK bank competition after the HBOS merger; and
Metro Bank is opening their tenth UK branch in High Wycombe, with a plan to achieve 24 branches by the end of this year, and then organically grow to over 200 branches by the end of the decade.
Some people argue that branches are irrelevant but, if they were, why are all of these new and expanding banks opening or acquiring branches?
Because they create trust and because it is regularly shown that anyone, including and especially young folks, want a branch locally if they open an account.
Even HSBC’s branchless bank, First Direct, has the backing of HSBC and its ATM network to rely upon if things go wrong; as do Cahoot! (Santander) and Smile (Co-operative), our internet-only banks.
Branches are a core part of community and relating to people with a human touch.
This is why branches will always exist.
So we talk about a branchless future, but should be talking about a less branch future.
The same with cash.
We will never be cashless, just less cash.
This has been shown in many economies, specifically in Iceland, Sweden and other economies.
They get to certain level of cashlessness and then the cashless process ends.
This is because there is no substitute for cash today: cash is anonymous, immediately recognising a value exchange, fuels the shadow economy and is totally trusted.
No other form of currency exchange has the same capabilities.
Not yet anyway.
We can talk about a branchless, cashless future, but it’s a dream and will not be reality for years to come.
So I’d rather talk about a less branch, less cash future, and see what that means.
How far can we push the less branch, less cash world?
What is the minimum number of branches to be effective (in the UK, they say about 250).
What is the minimum level of cash that can be in play to run an economy effectively (in Sweden, they say about 3.5% of the value of GDP, which would equate to about a fifth of the volume of transactions).
Can we push this any further?
If so, by when and how?
Something that will be debated for years to come, I’m sure.
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 1st October …
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.”
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 Excellenceand through Reengineering the Corporationto theDisciplines of Market Leaders, the Innovator’s Dilemma, Blue Ocean Strategyand 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.
For most of my life, I’ve been aligned to the financial services industry as a supplier of technology.
Throughout this time, my role has been as a solutions person, providing technologies that solve financial processing problems.
And, throughout this time, I’ve dealt with technology companies that struggle with moving from being horizontal to vertical, from generic to specific, from platform to solution.
It cropped up again yesterday, where a company that is well established has now realised they need to be vertically aligned to the financial industry rather than generically offering products.
Before I go any further, I should point to the differences between solution versus product from an earlier blog:
Product people are myopic. They are short on everything. Short-sighted, short term, short on time and short on developing relationships ... Solutions sellers are different, as by their very nature they want to know your problems first.
The discussion went from horizontal providers offering generic products to the need for vertically aligned firms providing specific solutions to specific markets, and the challenges of how to get from A to B.
Banks provide a specific challenge in this context as they are so complex, with so many lines of business and so many regions of interest, that nothing can provide a single solution to all the problems of the bank worldwide.
They are not one-dimensional, which an enterprise solution would imply. They’re not even two- or three- dimensional. A bank is more like a Rubik’s Cube, with so many dimensions, facets, structures and operations.
That is why there is no such thing as an enterprise approach … unless it’s one-dimensional.
What is one-dimensional?
The rollout of an operating system or a communications tool, such as a mobile telephone.
Once the central decision is made, a bank can roll-out a standard single dimensional product to all people.
Other examples include email, word processing, payroll and more.
This is well illustrated by the decision by one bank to adopt Google cloud services for example.
The headline states that “Spanish banking giant BBVA is switching its 110,000 staff to use Google's range of enterprise software.”
It’s Google’s biggest deal for cloud computing ever, but Google aren’t vertical.
They’re a horizontal product company.
So you read further and find that all the bank specific things in BBVA stay within the bank. It’s just the horizontal collaboration tools such as email, calendar, docs, chat and video conferencing, that are moving to the enterprise cloud.
It illustrates the point well that enterprise solutions are purely standardised tools – like email, spread sheets, telephones – as well as systems that can be used in shared service operations like HR, Marketing and IT.
This is why I would say that payroll and CRM are enterprise solutions, as they can be implemented without alignment to the industry specific needs.
Anything that needs to be tailored, organised or deployed in a specific way to suit a line of business or regional operation, is not enterprise.
It’s not horizontal; it’s vertical.
That’s why firms find they have to move to vertical when they move away from a generic, mass market offering to a specific offer aligned to a specific need in a specific industry.
Then it gets challenging.
The best way to illustrate this is through personal experience.
I worked for a firm that offered an office automaton system.
It integrated word processing, spreadsheets, presentations and more into a standard desktop application.
Call it Microsoft Office if you like.
Once a bank decided it wanted Office, it could rollout the product easily to all staff worldwide.
No major tailoring, change or adaptation needed.
This company then came up with a system that provided process automation and workflow as part of the Office suite.
As soon as they did this, their product was no longer generic but specific.
As a result, they rapidly had to move from product pushers to solutions sellers, and from horizontal to vertical market alignment.
That proved incredibly difficult, as the sales organisation was geared towards short-term targets for product sales, had no knowledge of their customer’s business practices or processes for that matter, and typically spoke to middle management in IT.
The process automation system needed solution sellers who were intimate with the whys and wherefores of their client’s businesses and could engage in a decent conversation with C-level people within the lines of business.
As can be seen, there is a complete dichotomy of approach between these worlds of sales and structure, and is the reason why technology firms struggle between their horizontal and vertical alignments.
In conclusion, it is also clear that enterprise is generic and horizontal, whilst any change to that generic offer to make it industry focused turns it into specific and vertical.
The challenge is that firms don't always realise when they've taken their generic products and solutions into specific offers and, when they do, they don't realise how difficult it is to turn their generic product sellers into specific solutions advisors.
If anyone's interested, we can spend days talking about this as, you guessed it, I've got a few solutions ;-)
What’s hot in tech in 2012 is a continuation of what’s hot in tech in 2011: cloud, smartphones, tablet PCs, contactless mobile and more.
Rather than just repeating all that again, let’s be more specific:
Contactless mobile will reach a tipping point in retail payments
Social media will become a core communications tool
PFM, combined with social media, is going to enjoy a boom year
Tablet PCs with financial apps will be pervasive and ubiquitous
Risk management will be a key area of software development
FPGAs and GUIs will be deployed across investment markets
“Data as an asset” will be the most common phrase used
The last item is the most important one, and the preceding items show why.
Contactless mobile will reach a tipping point in retail payments
I covered this yesterday and could repeat it again, but suggest you checkout yesterday’s entry if this is of interest to you (it is repeated at the end of this blog entry if you don’t want to click through).
Social media will become a core communications tool
There were a number of major PR gaffes during 2011, where banks were caught short over social media usage.
The biggest one was from Bank of America, who tried to introduce a charge of $5 a month to use debit cards.
Customers didn’t like it and one – Molly Katchpole, a 22-year old nanny – forced the bank to change its position purely by using Change.org to create a petition that garnered over 300,000 signatures.
This was voted one of the greatest PR blunders of 2011, although there were several others, such as Chase donating $4.6 million to the NYPD the day before Occupy Wall Street started; and Citibank getting caught beating customers to death in their branches in Indonesia.
These were some of the more shocking stories of 2011, and the only reason I know about them is via Twitter and Facebook, blogs and YouTube.
Social media has reached the level of naming and shaming firms in real-time.
It’s had this power for years, but now the customer knows how to leverage such technologies to achieve real change.
That’s what the year of the Protester has been all about – a world where a whisper can be heard as a wail, with word of mouse racketing up the roar.
Customers – both retail and commercial – now want banks to be honest and, if they screw up, to admit it fast and retract their mistake.
Banks will therefore work hard to use social media to create conversations and communication that is customer centric and transparent in 2012.
If they don’t, they risk alienating and losing business across the board.
PFM, combined with social media, is going to enjoy a boom year
PFM, or Personal Financial Management, has been discussed for a while in innovation meetings, but will enjoy its most successful year of implementation in 2012 as banks get the message.
I got the message when I visited Iceland last summer, but it has been an area that has been creeping up on us all.
This is because most bank internet access is old hat – just an online version of the old mainframe transaction systems.
PFM provides a far richer customer experience, moving the bank’s online services from being just a record of transactions to one that shows the customer’s lifestyle, with proactive budgeting and alerts, is a no-brainer.
Combine this with improving the use of social tools as a communications mechanism – linking PFM into Facebook, Twitter, YouTube and Banking Blogs – and we will see banks make significant moves in these areas this year (if they haven’t done so already).
Tablet PCs with financial apps will be pervasive and ubiquitous
Almost two years ago, I said that iPads will take over treasury ops. Everyone looked at me as though I was from another planet.
A year later, many banks have launched treasury based iPad apps for their clients.
For example, in November 2011 BNY Mellon launched the TreasuryEdge app designed to provide “timely information on the client's cash accounts, with information related to decision-making on cash flows, balance and investment levels; an activity feature that allows clients to report and take action on various payment activities; transaction tools that allow clients to create, verify or release intra-company transactions; and reporting tools that allow for the generation and delivery of basic TreasuryEdge reports to the mobile device”.
J.P. Morgan launched their cash management ACCESS mobile app around the same time.
“J.P. Morgan ACCESS Mobile features include the ability to view multicurrency cash balances, transaction details and alerts for J.P. Morgan ACCESS and third-party bank accounts in the United States, Mexico, Canada, Latin America, Europe, Africa and many Middle East locations; a one-of-a-kind Quick Decision feature. Clients can add anticipated transactions and set target balances – at the account level – for an instant projected cash position; customizable business critical alerts (for example, alerts notify clients when balances fall below a preferred level, or when a credit posts to the account, with links to supporting detail).”
As can be seen, apps and iPads have come a long way.
When these things are no longer toys for consumers but tools for business, it becomes seriously pervasive and ubiquitous.
That’s why, building on the simplicity of PFM for consumers and Treasury apps for corporate, the Tablet PC will be everywhere, mainly because Tablet PCs simplify everything.
You don’t have to think with an app – just touch and go.
Combine the simplicity of apps, tablet and smartphone with the ubiquity of contactless mobile communication 24*7, and you can see the bank of the future has arrived in 2012.
There are a few other key things occurring too though.
Risk management will be a key area of software development
During summer 2011, our annual European payments survey found that risk management is an area that is very underserved by technology and software solutions.
First, we asked whether the banks would know their future financial exposures in the case of another liquidity event.
73% are able to do this but only 39% of banks were able to do this with technology – 34% were using administrative processes to find their positions – and only 17% could do this in real-time.
More importantly, we asked whether a bank would know their unsettled transactions if a clearing and settlement disruption occurred. 91% would be able to do this but, of these, only 29% could do it in real-time.
Do banks know their exposures to specific individual counterparties intraday? Two out of five banks can do this through automation, but only one in five in real time.
And do banks know which assets are in play in a “liquidity event”, such as a Lehmans crash?
Only a third of banks (37%) could do this with technology.
That’s an area ripe for automation and support, and so risk management will be a key area of technology focus in 2012.
Interestingly, American Banker sees nine key trends in risk management developments:
Adoption of enterprisewide risk management software among smaller banks;
Adjustment of credit risk models for Procyclicality;
Looking beyond the credit bureau report to assess consumer creditworthiness;
The use of new methods of calculating product pricing based on risk;
Risk model validation;
Creation of keep-it-simple dashboards for bank board members;
Real-time and intraday risk monitoring, alerts and reports;
The bringing together of different risk systems, such as commercial loan risk and trading risk or fraud and anti-money-laundering; and
Bigger risk data sets leading to the use of performance- enhancing technologies such as in-memory computing.
FPGAs and GUIs will be deployed across investment markets
Towards the end of 2011, I gained some insights into the use of new hardware processing capabilities in the investment banking community, specifically the use of FPGAs – Field Programmable Gate Arrays – for Graphical User Interfaces (GUIs) to model risk and provide real-time analytics.
This is a big area of focus in the capital markets community, particularly as risk modelling is becoming so complex.
For example, Monte Carlo simulations involve fifty year or more scenarios with roll back, querying, resets and roll forward all built into the modelling.
That’s complex and involves massive amounts of data analytics, taking petabytes of data and churning through it in real-time using complex formulae.
Using FPGAs, banks are finding performance levels 30 times better than doing this through a CPU and 175 times better in efficiency terms.
That’s why this is a big deal in 2012 for the low latency, high frequency trading community.
“Data as an asset” will be the most common phrase used
And all of this comes full circle in the end, and back to data.
Banks are data businesses.
Everything they do is bits and bytes, networked in real-time.
Exabytes of data are churned every day, and data is a key raw material for a bank.
Again, it’s stuff I talk about all the time, but this year banks will really start to get into data as an asset if, for no other reason, the risks of data.
Data risk is illustrated for me by three articles that hit my desk as I came back to work this week.
First, a report by Forrester into the potential for personal identities to be compromised or leveraged as individual get to manage their digital footprints better.
He’s wrong, as every Bitcoin transaction is traceable throughout its lifetime usage. The shadow economy works on anonymous transfers and transactions, not auditable ones, but it’s an interesting idea.
The real point is that Bitcoin is interesting as an encrypted digital currency. It’s not like PayPal or Facebook Credits, as it has no centralised control authority, but all of these demonstrate that the new form of value is in data.
Data management, data security, data audit trails and data exchange as a form of value transfer is what 2012 is all about.
Finally, the Economist had a fascinating article on The War on Terabytes. Here’s the essence of the article:
America’s defence secretary, has suggested that a cyberattack on financial markets, the power grid and government systems could be “the next Pearl Harbour”. In a move that received surprisingly little attention, Barack Obama signed an unprecedented executive order in July declaring the infiltration of financial and commercial markets by transnational criminal groups to be a national emergency.
The article moves on to discuss Lehmans crash as a game of data.
A paper prepared for law-enforcement officials by a group of anonymous moneymen … analyses trading data from American exchanges. It shows that a handful of small and midsized regional brokers saw their market share in equities trading skyrocket in 2008 to the point where some were, for a while, doing more business than giants such as Goldman Sachs and JPMorgan Chase …
The bulk of the trading appears to have been “sponsored access” agreements, under which established brokers can in effect rent their identities to other traders so that the latter do not have to jump through the usual regulatory hoops … these trades were heavily concentrated in big, troubled stocks such as Citigroup and Wachovia, the survival of which was seen as critical to the stability of the financial system. They were mostly short-selling, the paper concludes, and a good deal of the shorting may have been of the illegal “naked” kind, where the short-seller does not bother to locate and borrow the shares first.
Supporting this conclusion is a huge spike in trades that failed to settle at the time—in Lehman’s case, the number shot from tens of thousands to tens of millions.
Nervous?
Sponsored access is not the only way that a determined assailant could create havoc. The “flash crash” of May 6th 2010, in which American equities spectacularly nosedived, showed the damage that can be done by high-speed algorithmic trading. It is much easier to drag markets down when they are already reeling, by the use of such things as short-selling, options and swaps, points out James Rickards of Tangent Capital, an expert on financial threats. This is what the military would call a “force multiplier”.
Worried?
You should be.
According to experts, flash crashes are commonplace and we’ve done well to avoid another massive one … but it’s likely to come.
I could talk about data issues and opportunities for ages, but the bottom-line is:
Banks are technology firms who provide financial management solutions.
Banks can take opportunity by combining the simplicity of apps, tablet PCs and smartphones, with the ubiquity of contactless mobile communication 24*7.
Banks biggest threats come from risk created by the mismanagement of data, and data is therefore the banks greatest asset and weakness.
In 2012, this is going to be the year banks focus radically on locking up these opportunities and risks, through investing wisely in technochange.
Make your own mind up about my predictions. Here's what I said would be the big ticket items for bank technologies looking out to 2011 a year ago:
More social media developments as firms like Foursquare, Groupon and Quora add functionalities not seen before;
More bank mobile apps, with clever structures and device-specific security;
The creation of new retail payments structures, as Apple and Google get into mobile payment wallets and PayPal and Facebook push credits to the extreme;
The maturing usage of internet and mobile television, along with video communications for dialogue on the move;
Cloud computing becoming acceptable as a service for financial applications;
Major investments in creating agile infrastructures and platforms to respond to regulatory requirements.
Finally, if you can't be bothered clicking through, here's a repeat of the contactless payments piece from yesterday as promised:
Contactless mobile will reach a tipping point in retail payments
Speaking of new business models, the one that most retailing banks will move towards is contactless mobile and contactless tablets.
The experience is highlighted well by various firms, but my favourite contactless illustration is from Discover Card and Square:
The reason why I use this one is that everyone assumes contactless = NFC chips. It doesn’t have to be. Contactless in my world, is any payment that is simple, automatic and wireless.
That’s what the Discover video shows.
However, NFC is a key part of most contactless plans, so it is also a key part of the process of evolution.
Contactless chips have been around for ages but, on their own, are relatively useless. We then put chips in cards, but these again are not great.
But put a contactless chip into a mobile and then we’re rocking.
That’s again illustrated well be Google.
The tap-and-go experience is good one, and one that provides major convenience for the customer – whether the customer is a corporate who wants to drive higher sales through their checkout points, or the consumer who wants speed, ease, convenience and value.
It can focus upon not just turning phones into higher volume purchasing points, but into point of sale points too, and all geolocated as contextualised point of focus.
That’s why Movenbank is launching in 2012, as the first cardless and cashless bank.
So, if the major conversation of 2010-11 was mobile, the focus in 2012-13 will be contactless mobile.
2012 set to be the tipping point for mainstream contactless adoption
77% of contactless owners across all three markets agreed or strongly agreed that contactless technology would ultimately become more commonplace than cash as a payment method (UK: 73%, Poland: 79%, Turkey: 79%)
87% also agreed that contactless will be instrumental in bringing mobile contactless payments to market in the near future (UK: 84%, Poland: 89%, Turkey: 89%)
And, just in case you want any further detail, checkout this infographic from NFC rumors:
Yesterday, we talked about the economic outlook for 2012. What about the banking outlook?
Well it’s also challenging, with five clear things happening:
Regulatory change will still be high on the agenda
Investment banking will get a radical overhaul
Clearing and settlement will become a much bigger focus
Reconstructing distribution will be a big challenge
Contactless mobile will reach a tipping point in retail payments
Regulatory change will still be high on the agenda
It’s pretty obvious that the world’s regulators are continuing to struggle with how to manage the financial system, as most cannot even agree on a definition of what is a commercial versus speculative trade.
They’re getting there … but it’s taking time (three years so far).
Maybe that’s good, as we don’t want to rush into senseless change, but it’s also bad as every regulator has a different idea of how to tackle this crisis.
For example, in the USA Paul Volcker, the wonderfully outspoken former Chair of the Federal Reserve and creator of the Volcker Rule which bans proprietary trading in investment banks, says that working out what is speculative or not is easy: “Bankers know when they're doing a proprietary trade, I assure you. If they don't know, they shouldn't be in the business. If there are big unhedged positions constantly, then it's proprietary trading.”
That’s the rule: if it's not hedged, it's pure speculation.
But this rule will cost, and cost a lot according to Oliver Wyman , who found that the decrease in market liquidity will deliver a $315 billion paper loss for investors in US corporate bonds.
Certainly, it will reduce trading volumes with the Financial Times quoting Brad Hintz of Sanford C. Bernstein, who reckons the Volcker Rule will see Wall Street’s fixed-income desks experience a 25% decline in revenue and a 33% cut in pre-tax margin. That ain’t good for jobs, and will only pile more misery on top of the 200,000 jobs lost on Wall Street in 2011 (compared to 174,000 in 2009).
London’s going through the same, but the challenges are different as the approach is different.
Here in the UK, we are ring-fencing investment and commercial banks under the Vickers report recommendations, which now have the government’s backing.
The idea is that banks are separated into two – an investment bank and the commercial retail bank. The idea is that if the investment bank dies, it can be killed without murdering its sibling.
That’s great in principle, but in practice is far more difficult.
For example, the separation will cost anything up to £8 billion a year and it doesn’t even achieve the derisking it seeks.
The Vickers Report is designed to get rid of the results of casino capitalism, if it causes death to the investment bank; whilst the Volcker Rule is designed to get rid of casino capitalism.
The Vickers Report tackles the issue without recognition that it is often poor practices in commercial and retail banking that messed up our biggest banks. Nothing to do with casino capitalism at all.
HBOS’s commercial lending portfolio, secured through easy access to wholesale funding markets, is the reason why it collapsed. Same with Northern Rock and Bradford & Bingley with high risk mortgages.
So the idea of keeping the commercial and retail banking system ‘safe’, by ring-fencing it from the investment markets, is not something most people accept or believe.
Paul Volcker doesn’t believe it: “I don’t believe in a firewall or Chinese wall between them, as you need a very high ring fence to stop the deer jumping over.”
Then there’s the human cost of these proposals, with many thousands more losing their jobs in the City, and some estimating it could be up to forty percent of the total workforce in the City. RBS, for example, has already shed a quarter of their workforce, with another quarter expected to go after Vickers.
Unintentionally, there is a belief that the Vickers reforms will also be a gift for foreign banks.
Add to this the lurking storm of Europe and the UK’s veto over reforms due to City concerns, and it is no wonder that regulatory matters are still high on the agenda in 2012 … and 2013, 2014, 2015 …
Investment banking will get a radical overhaul
I’ve only put this heading in there as a follow-on to the regulatory piece that preceded this paragraph.
Personally, I have a vision that investment banking will end up being a facilitative role, with platforms and technologies to enable trading, but no trading in the bank itself. Instead, all the speculators and traders will be out there in private equity and hedgeland, not in the banking system.
Just a thought.
Clearing and settlement will be the big focus
Due to the changes taking place across the spectrum of investment banking and capital markets, clearing and settlement infrastructures will become a big focus.
This is partly down to the new regulations for OTC Derivatives and more, but also due to increased focus upon liquidity risk and collateral management.
Markets have an extreme between the high risk and high leverage we saw leading up the crisis – when Lehmans collapsed, every $1 of debt was leveraged twenty times across the markets so their $400 billion of losses escalated to near $10 trillion of risk – and minimal risk and leverage you see in markets like Russia.
When I visited Russia’s exchanges in 2009, here’s what I wrote about SPIMEX and RTS:
“Both exchanges proudly talk about their focus upon real-time analysis of traders’ positions. In the case of SPIMEX, they offer real-time settlement and straight through processing, so there is no risk for trading. In the case of RTS, they offer real-time positioning of every trader and every trader’s client portfolio, not just in real-time for their own trades but also for the knock-on effect of their dealings in derivatives down the line.
“I asked RTS about their risk management, and they made clear that for each transaction, the risk is calculated for the trader’s portfolio, including all orders to be filled, in real-time. There are then two clearing sessions during the day. One at 14:00, which takes three minutes to process, and the second is at end of day, and takes fifteen minutes. If a margin call is made, the broker must cover their position within two hours or, if at end of day, before the start of the next day’s trading.
“This discussion got interesting, as RTS and SPIMEX appear to be developing systems that ensure no trader can leverage risk to the levels where the market implodes, and they do this in real-time.”
So we’re now seeing US and European markets grappling with how to implement clearing and settlement systems that enable liquidity, minimise risk, and strikes a balance between unbridled speculation and zero risk.
This is an area that has grown in interest with our clients and sponsors, so much so that on February 29th the Financial Services Club is launching a Clearing & Settlement Working Group (CAS-WG).
The CAS-WG will hold its first meeting at BT’s offices in Newgate Street, and is organised in association with the Realization Group.
The aim of the CAS-WG is to debate and discuss all aspects of clearing and settlement infrastructures, and the first agenda will have four panels discussing:
Volker/Vickers/MiFID II and impacts on post-trade operations and IT, particularly with regard to OTC Derivatives and Clearing
T2S – problems of change and implementation for settlement
Giovannini Group Recommendations, Innovation & Technology – what progress has been made?
Standards in Post-trade operations
Panellists from organisations including Euroclear, LCH.Clearnet, EuroCCP and EMCF will be attending. If you would like to attend, then let us know.
Reconstructing distribution will be a big challenge
Moving away from investment markets, retail and commercial banking is still undergoing big changes. As discussed all the time here, branches specifically are a problem.
Banks will have to deal with this problem in 2012, as they cannot sustain loss-making operations anymore.
In some regions, six out of ten branches have closed (Iceland); in others three out of ten (Denmark); in the USA, four out of ten branches are loss-making; whilst in the UK, some analysts (me) estimate that as many as four out of five bank branches could close by the end of the decade.
The fact at the core of this change is that banks are electronic businesses distributing through electronic media, and the branch just does not fit that model of business.
As banks need to be the most cost effective they can, why have a branch?
It would be like bookshops fighting to keep their stores open, when it’s obvious they’re dead as they’re all losing money; or travel agents, record shops, video rental stores, etc, etc.
When your business model is dead, admit it and move on.
Contactless mobile will reach a tipping point in retail payments
Speaking of new business models, the one that most retailing banks will move towards is contactless mobile and contactless tablets.
The experience is highlighted well by various firms, but my favourite contactless illustration is from Discover Card and Square:
The reason why I use this one is that everyone assumes contactless = NFC chips. It doesn’t have to be. Contactless in my world, is any payment that is simple, automatic and wireless.
That’s what the Discover video shows.
However, NFC is a key part of most contactless plans, so it is also a key part of the process of evolution.
Contactless chips have been around for ages but, on their own, are relatively useless. We then put chips in cards, but these again are not great.
But put a contactless chip into a mobile and then we’re rocking.
That’s again illustrated well be Google.
The tap-and-go experience is good one, and one that provides major convenience for the customer – whether the customer is a corporate who wants to drive higher sales through their checkout points, or the consumer who wants speed, ease, convenience and value.
It can focus upon not just turning phones into higher volume purchasing points, but into point of sale points too, and all geolocated as contextualised point of focus.
That’s why Movenbank is launching in 2012, as the first cardless and cashless bank.
So, if the major conversation of 2010-11 was mobile, the focus in 2012-13 will be contactless mobile.
2012 set to be the tipping point for mainstream contactless adoption
77% of contactless owners across all three markets agreed or strongly agreed that contactless technology would ultimately become more commonplace than cash as a payment method (UK: 73%, Poland: 79%, Turkey: 79%)
87% also agreed that contactless will be instrumental in bringing mobile contactless payments to market in the near future (UK: 84%, Poland: 89%, Turkey: 89%)
And, just in case you want any further detail, checkout this infographic from NFC rumors:
‘Nuff said.
So there you go, the five biggest things that will happen in 2012 in banking:
Regulatory change will still be high on the agenda
Investment banking will get a radical overhaul
Clearing and settlement will become a much bigger focus
Reconstructing distribution will be a big challenge
Contactless mobile will reach a tipping point in retail payments
This is not exhaustive of course, as there’s plenty of other things happening, such as Fred Goodwin being brought to trial for breaching company rules (a sure vote winner for the coalition government).
Anyways, a final set of predictions tomorrow about how and which technologies to watch in banking in 2012.
You can sense an audience’s reaction as you present ideas on innovation.
Sometimes its warm and engaging, sometimes distant and thoughtful, and occasionally remote and cynical.
I experienced all three reactions last week when presenting at a bank’s annual leadership conference, with the third being the reaction I like the least but enjoy debating the most.
This was a third of the way through my dialogue about how transactional branches need to be shut down as mobile delivery through contextual, intuitive servicing is the new focus.
A hand was raised in the audience, and this manager loudly opinioned: “this is all well and good, but where is the money?”
Ah … the old “show me the money” statement.
I’ve heard it regularly and, in fact, most regularly from this particular bank.
Purely due to time and structure, I couldn’t answer the question raised properly until the end of the presentation – this wasn’t meant to be an interactive workshop, maybe it should have been – and, as a result, the rest of the presentation had a mood change amongst everyone to: “show me the money”.
All the innovations I talk about regularly – new forms of currency, value exchange, hybrid real life and virtual economies, alternative commerce systems, the use of Big Data and the threat of those who get it, the mobile world of revolution from Africa to America, etc, etc – was now tainted with the undertone: “show me the money”.
An innovation presentation on the future of banking is not meant to be a presentation about the business case for new banking models, although maybe it should be.
I’ll work on it next year.
But here’s a story about why the “show me the money” crowd have the wrong focus.
There’s an old bar in my town called: “The Branch”.
It’s been there for hundred of years and has a regular and loyal crowd who drink there.
It’s always made money by selling nuts, crisps and sandwiches, along with high priced spirits and beers.
It doesn’t serve a decent wine, as no-one came to the Branch and asked for wine, but the beer is the focal point for the largely male crowd who attend there.
A few years ago, a little bistro place opened nearby called: “The Upstart”.
The Branch manager wasn’t particularly concerned about it.
After all, it was positioned totally differently to the Branch, in a different market with a different focus.
It served wine, when the Branch didn’t.
It served hot meals, when the Branch didn’t.
It was more like a restaurant than a bar, and it didn’t serve beer and didn’t have a loyal customer base.
So the Branch manager wasn’t worried about it.
He thought that the Upstart wouldn’t succeed and, even if it did, that it wouldn't affect the Branch's business.
The Upstart thought differently.
The Upstart didn’t know if it was going to make money, but had seen the idea of hot meals and wine working overseas and believed it could work here.
After a while, the Upstart had a few loyal customers.
They were mainly families, and these families often included people who previously went to the Branch.
These folks could not afford to have a night at the Upstart and at the Branch regularly, and slowly the loyal customer base of the Branch were all too often to be found in the Upstart’s premises.
Eventually, the Branch could see it was losing business and so the manager changed his ideas a little.
He began to serve wine and hot food.
But the crowd didn’t buy it.
They didn’t like the dark and old view they had from the Branch and soon it was abandoned, apart from a few loyal souls who were dedicated to their beer and sandwich.
Meanwhile, the Upstart was enjoying a buoyant business, with high margin food and wine purchases in volume, and so the new business was not only making a profit, but a substantial one.
The moral of the story is that, with innovation in banking, you shouldn’t necessarily look for the profits but should seek to avoid the losses.
The reason I say this is that banks are protected by bank licences which means they enjoy a monopoly.
This is why no new banks have opened for hundreds of years and why it is difficult for new entrants to get into banking.
However, if new entrants erode the fringes of the banking model where they can enter, then it is often around the parts that make money, like credit and loans, insurances and mortgages.
This has been shown to be the case regularly through the past few decades and the danger is that all the bank will be left with is the loss-making deposit account of the corporate and consumer.
If that’s all you want, fine; but it’ll give you losses as you lose cross-sell opportunities.
Moebs Services Inc estimate that the average checking account costs American banks $349 to manage, whilst the average revenue per account is just $268, implying a loss of $81. Javelin Strategy & Research found that customers using online banking cost banks $192 a year, $167 less than customers not using online banking who cost $359 a year.
This is why banks need to fear the Upstart chipping away at their higher margin business as, in most cases, banks only have something to lose rather than gain.
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.
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?
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!).
… 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.
MAG-net is the networking group in the City for the Mines Advisory Group, MAG, a charity supported by the Financial Services Club and others that clears areas of mines so that schools, villages and life can continue as it should in post-war territories.
They invited me to speak about anything I wanted, and so I created a new presentation about the similarities between banks and landmines (see UBS today).
The presentation developed around the idea of banks being mines that explode in economic terms, in a similar way in which landmines explode and blow away people and animals in the real world.
My premise was that just as landmines blow the legs away from humans, banks blow the legs off economies.
It’s obviously the case that this is true today, what with the Lehmans collapse with Credit Default Swaps creating the first financial crisis; and now sovereign debt in the Eurozone is developing the second.
How can such economic landmines exist in a world where we should have cleared them by now?
They exist because we allow innovation in financial instruments in an unregulated form.
That innovation is all around derivatives of derivatives.
Untried and untested weapons of financial destruction are being created every day and planted as hidden potentially unexploded bombs across the financial system.
This has been well documented in many books, with F.I.A.S.C.O. cited by many as a great illustration of the issues in a storybook form or, if you prefer the academic version, Infectious Greed, gives you the lowdown.
These two books by Frank Partnoy document the issues of derivatives, which are both good and bad.
They are good in creating leveraged risk which allows commerce to become more capable. They are good in hedging risk, allowing trades to take place that otherwise could not. They are good in bringing together mixed asset classes, so that previously unrelated goods and services can now be traded together. They are good in offsetting future uncertainty, which is why they are used.
They are bad because they are so complex, most traders don’t understand them. They are bad because they are called ‘exotics’, and are so exotic that they can explode. They are bad because they allow firms, such as Goldman Sachs, to create a massively web of interlinkage between risk that ensures those in their world can have huge exposures whilst Goldmans themselves avoid such loss. They are bad because they allow debt to be leveraged so greatly that it becomes unmanageable.
All of the latter are the landmines of economies, and are no better demonstrated than by Lehmans collapse and Europe’s sovereign debt crisis.
I illustrated these two points with two charts.
The first is from June 2008, and shows the notional exposure of Goldman Sachs’ main counterparties just before the collapse of Lehman Brothers (doubleclick image for larger version):
Oh what a tangled web we weave, when first we practise to deceive! Sir Walter Scott
Now don’t think I’m Goldman bashing because, as I said last night, they are the most effective bulge bracket player in the world’s markets in creating risk and therefore alpha returns. That’s why their clients use them. However, they are also the most effective institutions in the world’s markets in creating risks that can explode in the face of their clients. That’s why they sell ‘crap’ to their customers (by their own admittance) and are happy to do it.
The second chart I used to illustrate the landmines that firms such as Goldman Sachs lay in the world’s economies is the European sovereign debt crisis and a data visualisation of which countries are most exposed to whom:
Again, derivatives were used to package sovereign debt in the same way as mortgage debt, and has created this second loss of confidence in the European economies.
The whole presentation can be seen here (needs the words to make sense probably) ...
... and the only positive note is that we can save human limbs by clearing landmines using mice to sniff the mines out.
Let’s get some more mice in the financial markets.
Postnote:
In researching the presentation, I found large numbers of images of people with limbs missing. Some were graphic, some were funny, some were moving and many were tragic. Give MAG five minutes of your time http://www.maginternational.org/ to consider supporting them. And any MAG-net member gets a 20% discount if they join the Financial Services Club so it’s worth supporting them for that reason alone surely?
So the Vickers Report has finally crept out into the wilderness.
All 358 pages of it.
Half of it talks about how to increase the competitiveness of banking and the other half about what to do if a bank fails in another crisis.
The latter has garnered all the news headlines, whist the former has been generally overlooked.
More copy has been written about this report than anything else in banking over the past week or so, with a selection of headlines that makes the mind reel. Here’s just a few:
If you want the truth, you can read the full Vickers report, which I’ve been reading this morning and so far have found nothing too surprising, as most has already been leaked.
Ring-fencing is confirmed, where banks separate domestic retail banking services from global wholesale/investment banking. The commission is vague about whether banking to large companies should be in or outside the ring-fence but it suggests that between one-sixth and a third of the £6 trillion of bank assets should be inside the ring-fence.
The ICB describes the ring-fence as "high" and said that the ring-fenced part of the bank should have its own board and be legally and operationally separate from the parent bank.
Ring-fenced banks should have a capital cushion of up to 20% comprising equity of 10%, with an extra amount of other capital such as bonds. The largest ring-fenced banks should have at least 17% of equity and bonds, and a further loss-absorbing buffer of up to 3% if "the supervisor has concerns about their ability to be resolved without cost to the taxpayer".
Capital could be moved from the ring-fenced bank to the investment bank, as long as the capital ratio of the ring-fenced bank did not fall below the 10% minimum.
And on creating new competition:
The ICB has backtracked on an idea in its interim report that Lloyds Banking Group be required to sell off more than the 632 branches it currently has on the market to meet EU rules on state aid. It dilutes this, to say that it "recommends that the government seek agreement with Lloyds Banking Group to ensure that the divesture leads to the emergence of a strong challenger bank."
It should be easier to switch bank accounts and the ICB recommends "the early introduction" of a system that makes it easier to move accounts and that is "free of risk and cost to customers". It rules out number portability — as is used with mobile phones — in favour of this switching service. The amount of interest that customers miss out on by having a current account — known as interest foregone — should also be published on annual statements.
The industry should be referred for a competition investigation in 2015.
For the most part, I’m disappointed with this report. It’s not that I’m against bank reform, but what is the right sort of bank reform?
What this report appears to do is tread a fine line between bank anger, government need and public input, and comes out on the side of muddle.
It’s already had plenty of flak for this, but let’s pick on a couple of things.
First, account portability. Why hasn’t the ICB included this, as it makes eminent sense as discussed back in December at the ICB meeting I attended.
What the report actually says about this is as follows:
“The Commission recommends the early introduction of a redirection service for personal and SME current accounts (to make account switching easier) which, among other things, transfers accounts within seven working days, provides seamless redirection for more than a year, and is free of risk and cost to customers. This should boost confidence in the ease of switching and enhance the competitive pressure exerted on banks through customer choice. The Commission has considered recommending account number portability. For now, it appears that its costs and incremental benefits are uncertain relative to redirection, but that may change in the future.”
In other words, the cost of using different account numbers between banks allowing portability is too great. For example, if might from RBS to Lloyds with account number 75280025, there may already be someone at Lloyds with that account number. Therefore, to introduce account portability of account numbers, you would probably need to renumber all the bank accounts in Britain with unique ID’s. That’s why it’s been dropped.
But then the report adds more details to this idea (page 218) and shows it is feasible:
“Under account number portability, a customer’s sort code and account number would not change when the customer changed banks, thereby avoiding the need to change any payment or credit instructions. Evidence to the Commission suggested that the effect of account number portability could be achieved through the creation of an ‘alias database’. This proposal is for a new database to be created with a new code for each account that would be assigned to each sort code and account number: a customer would give the direct debit originators (and creditors) they deal with the new code, which would never change; when the customer moved banks, the sort code and account number assigned to the customer’s code would change and nothing else.”
Later on (page 222), it expands on the risks and opportunities of account portability:
“One significant benefit of account number portability (whether done through making existing account numbers effectively portable, or through the creation of an alias database) is that it would remove the cost of switching to direct debit originators, as well as those who make automatic payments into customers’ accounts. However, given the importance of the payments system, it would be critical to ensure that the migration to account number portability did not disrupt the flow of payments or introduce greater operational risks into the payments system.”
In light of a need for bank reform, this would have been a worthwhile aspect to develop now, and it is something left in the report for further evaluation so you never know.
Nevertheless, the big question is whether this would improve competition anyway?
Competition is more about the barriers to entry – governance, licensing, capital, technology etc – and hence, these are more mighty areas … that the report also fails to address.
The report mentions competition 414 times, and yet the main recommendations of the interim report:
“that the divestiture of Lloyds’ assets and liabilities required for EU state aid approval will have a limited effect on competition unless it is substantially enhanced;
“that it may be possible to introduce greatly improved means of switching at reasonable cost, and to improve transparency; and
“that the new Financial Conduct Authority (FCA) should have a clear primary duty to promote effective competition”;
... have all been watered down.
Then we move onto ring-fencing, which purely addresses the aspects of what to do if a bank fails.
"Structural separation should make it easier and less costly to resolve banks that get into trouble. By ‘resolution’ is meant an orderly process to determine which activities of a failing bank are to be continued and how. Depending on the circumstances, different solutions may be appropriate for different activities. For example, some activities might be wound down, some sold to other market participants, and others formed into a ‘bridge bank’ under new management, their shareholders and creditors having been wiped out in whole and/or part. Orderliness involves averting contagion, avoiding taxpayer liability, and ensuring the continuous provision of necessary retail banking services – as distinct from entire banks – for which customers have no ready alternatives. Separation would allow better-targeted policies towards banks in difficulty, and would minimise the need for support from the taxpayer. One of the key benefits of separation is that it would make it easier for the authorities to require creditors of failing retail banks, failing wholesale/investment banks, or both, if necessary, to bear losses, instead of the taxpayer."
Living wills and all that aside, the proposal to leave banks as integrated universal operators – good for Barclays – by purely creating a delineation between their domestic commercial and retail banking operations versus their global links is a duck out.
Why?
Because it does not address the issue of why banks fail, but just what to do when they fail. This is a positive thing according to some and yes, sure, it's a good thing to know what to do when a bank fails ... but why not try to deal with the core of failure as, even if we know what to do, a bank failure in its investment arm will still destroy value in its overall operations.
Northern Rock illustrates this well where, as a pure retail bank, it failed due to securitising its loans and mortgages in the wholesale markets. Surely these aspects of potential liquidity failure should have been in the report, and how a bank builds an illiquid position that leads to failure, rather than just what to do post the event.
And no, I'm not forgetting that through a ring-fence recommendation increased capitalisation of both the retail and investment operations will help, but an illiquid position is still on the cards and that is surely a point that should have been the core of the reforms, not the post-failure fall out?
Equally as Sir John Vickers has been saying in today's press calls: “the too big to fail problem must not be recast as a too delicate to reform problem”, but is he reforming or just adding insult to injury?
As the action of ring fencing is a unilateral action not being followed by any other major nation right now, it may be the latter.
Renowned former Federal Reserve Chairman Paul Volcker gets to the heart of the matter when he says that he “completely doesn’t understand the British approach, where they can leave all these questions unanswered. They said they wanted a retail bank in the same holding company as everything else. I don’t know what ‘everything else’ means. Is that not a bank too? It’s just a wholesale bank. Who makes the payment system work – the retail bank or the wholesale bank … the philosophy is you are a group of banks that serve the consumers, the retail customer, and that hold their deposits with the central bank and so forth, does not solve the problem with all the other parts of the financial system. I also don’t believe in a firewall or Chinese wall between them, as you need a very high ring fence to stop the deer jumping over.”
Sir John may claim the fence is high, but it cannot be high enough.
When a Barclays investment bank fails, it will still bring down Barclays Bank as Barclays investment banking operations represents 42% of the bank's total revenues (Royal Bank of Scotland generates a third of all revenues from investment operations; HSBC 27%; and Lloyds Banking Group is unceratin as it has no official investment banking arm).
Meanwhile, the costs are at least £4 billion to implement these reforms and the overall programme has really hammered the value of the UK banking sector in the world's financial markets:
With much of the loss of value this year due to Sir John's committee's actions combined with the Eurozone crisis.
So my key question is that we are living in a world where Basel III, G20 reform, European Union Directives along with American restructuring is creating so much imbalance in the global financial system that adding to such imbalance though unilateral action is questionable.
“Among just those working in the banking sector, however, support for the idea has collapsed - and while a small majority of bankers still back a ring-fence, net support have fallen from +46% to +15%. This is surely a reflection of recent rumbling in the press on the dangers of such a scheme to the sector.
Those working in the banking sector, however, thought the idea would make no difference in preventing a repeat of 2008, while thinking it would be actively damaging to promoting UK economic recovery, getting banks lending, as well as keeping HQs in the UK.
All in all, the whole area is a cauldron of trouble and messiness that this report has done little to resolve and, if anything, has fuelled more debate about the UK’s sole stance in the face of global regulatory drives.
So what should we do?
We should ensure that we work in harmony with Wall Street on the capital market reforms whilst implementing domestic policies to lower the barriers to entry for new entrants in banking.
The former may be seen as being difficult, but the #1 objective of the UK should be to maintain UK’s attractiveness as a centre for financial services.
That’s the piece that has been most badly damaged by these proposed reforms.
Luckily, it won’t be implemented until 2019 in order to ensure consistency with the developments of Basel III, so delay was inevitable after all.
A few further comments:
Andrew Gray, UK banking leader, PwC, said: “The report from the ICB today sets out a clear statement of the direction it believes should be followed in order to reduce the risks of banking in the UK, increase competition and ensure globally competitive banking based in the UK. The measures recommended will have a far-reaching impact on the way in which banks operate in the UK in future. A key question for government to consider will be the trade-off between improved financial stability and facilitating economic growth. The core proposals revolve around the use of ring fencing of retail banking activities to ensure both the financial stability of the banking sector, but also to ensure the government is not called on to rescue the banking sector in the future. Ring-fencing on its own does not change the risks inherent in banking (except when it comes to resolving failed firms) and the ICB recommends higher capital levels than those proposed by the Basel Committee. The importance of a strong banking sector as an integral part of the UK economy is clearly recognised, as is the need to ensure the UK remains a globally significant centre for financial services. Overall, these proposals, while not unexpected, will represent a significant change to the UK banking landscape. These are detailed proposals which will take time to digest and, in doing so, more questions will emerge. It is too early to assess the real impact on the UK banks and the wider economy. The real consequences will only become clear once the Government decides what is to be passed into law.”
Michael McKee, Head of Financial Services Regulation at DLA Piper, commenting on the Independent Commission on Banking - Final Report, said: "The ICB Final Report has stuck to the line set out in the Interim Report. Most interesting is the detail of how the ring fence will operate. It will focus on deposits of individuals and small businesses - but this is likely to catch a lot of private banking business too. The ring fence looks like it will be quite a "hard" ring fence - a retail bank will have to deal at arms length with other parts of the group and apply large exposure rules. Moreover the ICB sticks to its guns about a minimum level of 10% capital for retail banks and also wants a lower leverage limit than international proposals. Overall, therefore, the ICB has withstood political pressure from the Liberals but has taken a tough line on the content of its ring fence."
Edward Sankey, Chairman of the Institute of Operational Risk (IOR), said: “We are concerned that the Vickers Commission are proposing economic solutions to what they believe are economic problems. However the IOR believes that the root causes of the financial crisis were failures in people, processes and systems, which are the targets of operational risk management. The proposals will not on their own do anything much to reduce the possibility that failures by people, processes and systems will not again threaten banks and their clients. Time and again we have seen that more sophisticated regulation and restriction leads to more sophisticated efforts to find ways through them, or even plain evasion. We have a great opportunity to make lasting reforms that will not only help to ensure a sustainable and profitable UK banking sector, but also strengthen UK economic growth. Unfortunately the Vickers Commission is focusing on the wrong solutions – solutions that will do little to correct the failures in people, processes and systems that preceded the crisis.”
Andrew Wingfield from SJ Berwin’s Financial Institutions Group commented: “The ICB’s proposals totally focus on retail protection and would impose a cost ahead of any bank failure. The costs of restructuring and higher equity capital levels will place returns under further pressure and the ICB’s proposal will likely be a Herculean task given that people and IT systems are intertwined within banks. The key recommendation (in our view) is around a clear message to UK banks to ring-fence their operations with the tone of the political debate already showing signs of an irreversible process and the Government committing to immediate steps towards implementation. Over the next few weeks, it will be interesting to see whether support for the recommendations wanes as the party conference season approaches. However, the message is softened by a long final implementation deadline of 2019, which is intended to synchronise the timeline with the implementation of new international standards under Basel III. In our view, all Banking reform measures adopted by the UK authorities need to be carefully analysed in order to ensure that the full consequences on the economy and the recovery of banks’ ability to support customers is understood.”
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.
I just made a comment this week about Facebook Credits being bigger than Amazon by 2020.
This was on the back of my favourite stories about Zynga becoming the biggest PayPal merchant in under a year on the back of Facebook games, and how QQ and Second Life currencies have been examples of how virtual currencies can and will work.
But I suspect Facebook might screwup this opportunity as they stiff their community with the 30% fee base and mandatory usage of credits.
It seems like restrictive practices that a monopolistic firm would apply, and does not fit the nature of community-based practices.
So, as I haven’t blogged in detail about this, here’s a quick round robin on what’s hot in the virtual currency world of Facebook.
From Facebook’s overview: “Facebook Credits are a virtual currency you can use to buy virtual goods in all games on the Facebook platform. You can purchase Facebook Credits using your credit card, PayPal, a mobile phone and many other payment methods powered by PlaySpan.”
The basic idea is simple.
If you are playing games in Facebook, such as Zynga’s Farmville or Cityville, you can quickly and easily buy additional fun using the Credit system.
This interview with John Silverman, chief executive officer of Ifeelgoods Inc on Bloomberg on 1st July, puts it all in context:
The reason July 1st was a big day is that this was the day when Facebook made it mandatory to use Facebook Credits for any games or apps on Facebook.
Now this is where it gets interesting, as Facebook take a 30 percent cut from any payment made using Credits. That’s a whacking big slice of the action.
By way of background, the 30 percent cut was introduced in February 2010, nine months after the Credits system was launched in May 2009, with the idea that 70 percent of the payment stays with the developers of games whilst the 30 percent allows Facebook to develop the games ecosystem.
Zynga is the biggest gaming firm on Facebook, and therefore critical to the success of Facebook Credits.
Zynga are the fuel that created a sustainable gaming system on the social network.
This is illustrated by the documents Zynga just filed for their IPO, with many believing their business will reach a valuation of around $20 billion.
Not bad for a firm that deals in virtual nothings.
“From 2009 to 2010, Zynga’s revenue increased 392 percent. In 2010, Zynga made $27.9 million profit on revenue of $597.5 million. In the first quarter of 2011, the company had revenue of $235.4 million, a 133 percent increase from the previous year, putting it on track for well over $1 billion in sales this year.”
So you can see why Facebook needs Zynga and Zynga needs Facebook but, with Facebook stealing taking 30 percent of Zynga’s revenues, there would be some issues here surely.
And of course, there were until a deal was struck in May 2010, where Facebook and Zynga agreed a five year partnership for the use of Facebook Credits in Zynga games.
The deal would obviously be a sweet one, but what does it mean after 2015 for Zynga?
“In 2010 Facebook adopted a policy requiring applications on Facebook accept only its virtual currency, Facebook Credits, as payment from users. As a result of this change, which we completed in April 2011, Facebook receives a greater share of payments made by our players than it did when other payment options were allowed. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform, change how the personal information of its users is made available to application developers on the Facebook platform or restrict how Facebook users can share information with friends on their platform. Beginning in early 2010, Facebook changed its policies for application developers regarding use of its communication channels. These changes limited the level of communication among users about applications on the Facebook platform. As a result, the number of our players on Facebook declined. Any such changes in the future could significantly alter how players experience our games or interact within our games, which may harm our business.”
In other words, Zynga’s business is TOTALLY reliant on Facebook.
It is why Zynga filed documents with the Security and Exchange Commission last Friday, saying that it generated “substantially all our revenue” from Facebook and that a breakdown in the relationship could “harm business and adversely affect the value of our Class A common stock”.
Maybe Facebook should buy Zynga or something, but this is not the point of this piece. The point of this piece is that Facebook is on course to generate $1 billion in revenue this year from social gaming.
If that is the case, the social gaming market on Facebook alone is worth at least $3 billion, as they’re taking a 30 percent cut.
This is an ecosystem that is only a couple of years old.
And sitting on Facebook is an Amazon-styled embryonic retailer called Payvment.
Described as ‘the mall of the future’ , it has 60,000 retailers in its social store, with about 400 new etailers added every day.
So here’s why I think Facebook Credits is big news.
If Facebook gets its act together for using Credits for Commerce, then they could be bigger than PayPal and Google.
This is because, by 2020, Facebook – or it could be Google Circles or something else – will be the internet.
People will go there first and stay there, visiting all of the destinations these ecosystems offer and trading with them in their currencies.
These social sites will house millions or even billions of people in a social ecosystem that embraces music, relationships, ideas, creativity, business … life basically.
And where there’s life, there’s commerce.
As a result, the dominant internet-hosted world of 2020 will encourage their credit system as the de facto standard.
Just like PayPal did for Web 1.0, Facebook or Google will try to become the de facto payment service for Web 2.0.
It may be in partnership with PayPal (Facebook) or a bank (Google), but all the user will see is their internet-hosted world.
The way Facebook could get into this space is by offering Credits as bonuses to retailers who transact through their service.
They may do this in partnership with someone like Payvment, and offer 1 Facebook Credit as a bonus for every $10 spent.
The credits can then be used by retailers to advertise on Facebook and so on and so forth.
In other words, it becomes a virtuous virtual circle.
Rather obvious really.
So the vision a bank should be considering, if they want to be relevant to this future life, is that if there’s a next generation world where everyone lives virtually, exchanging virtual goods and services with virtual credits, where is the relevance of the bank?
Right now, in the context of social worlds and virtual currencies, banks are irrelevant except as dumb pipes beneath.
After all, Zynga sits on Facebook Credits which sits on PayPal which sits on banks.
Everyone’s taking a cut to reinvent the system for the future world.
But what if the future world says “no”.
Tomorrow, Amazon just sits on Google Circles, and who needs anything else?
In the 1990s, I spent a long time studying bank trends and the future strategies banks and other would take.
The conclusion I came to is that there would be a general cross-industry bank trend, where non-banks would enter banking and, in order to get banking skills, would acquire banks.
The end-game would be that banks would acquire and merge with retailers, telco’s and other bank-like companies whilst bank-like companies, such as retailers and telco’s, would merge with banks.
Two decades later, that prediction hasn’t come true.
Banks are still banks and non-banks are still non-banks. For all the forays of non-banks into banking, banking still remains the core domain of banks.
Sure, there’s been some erosion of the periphery – savings, investments, loans, credit cards – but the core remains the banks primary domain: the deposit account.
This is because the core account is based upon the transaction.
The payment.
The piece that everyone says is commodity, but it’s actually the sticky bit that allows banks to go for the share of wallet around it.
Core transaction services are the stomping ground of banks and it’s the reason why they are so loathe to lose it.
But as the Payment Services Directive, Faster Payments and more encroach into the system, more and more non-banks are starting to attack that core bank capability.
Transactions are no longer a bank’s domain.
It’s why M-PESA has shaken the Kenyan banking system, as Safaricom takes over the core processing of payments across this country to become the nation’s number one bank.
And it’s the reason our friends at Banking Review write about some new research from Amdocs, which states that banks will end up in a head-to-head battle with mobile carriers.
The telecommunications industry is on a collision course with the banking sector ... that’s the finding of new research from customer experience systems provider Amdocs, which interviewed 120 telecommunications service providers across the Asia Pacific region ...
The survey found 95 per cent of all telecommunications operators have an active, defined strategy towards mobile payments, with billing on behalf of app stores and virtual goods, and prepaid top-ups the top three most popular markets being pursued.
If that statistic isn’t enough to scare bankers, there’s more. Over three quarters (84 per cent) of telcos surveyed are pursuing bill payment services, 79 per cent are investigating peer-to-peer money transfers, and 76 per cent are working to offer point of sale or wireless services to enable the purchase of products. And it’s all about the money, with new revenue streams the reason given by 83 per cent of those surveyed when asked the major benefit of pursuing mobile payments.
It's good scary stuff.
But I have to spread a little sprinkle of salt on this cauldron of change.
And my salt says that banks have been very good at stopping any non-bank stealing their turf over the past two decades. That's why we haven't seen a cross-industry merger and acquisition spree yet.
It still may happen and telecommunications firms and banks may merge and become one in the future but, for now, the idea of mobile carriers and other non-banks eating the banker’s lunch is nice in principle but, in practice, a head-to-head with the mobile carriers is unlikely.
After all, any non-bank that tries to get into a bank’s core domain of stickiness is going to be seen as a predator and, being especially adept at deflecting predatory activities, are banks just going to sit and let this happen or will they move the goalposts?
I suspect the latter and that’s what we’re seeing right now: the goalposts moving.
Banks are moving from basic transactional services – which the mobile carriers will attack – and into what I will call Transactions Plus.
Transactions plus, or Transactions+ if you prefer, is where banks demonstrate their worthiness by showing you that it’s not making a payments transaction that is important.
You can now make a payments transaction with anyone: a mobile carrier, Western Union, PayPal, Square … you name it.
What’s important is the ‘+’.
The + is everything that goes with the transaction: the cash dispenser, the online access, the contact centre focus, the budgeting system, the app …
This is how banks in the tweenies – the teenage years of the new millennia – will make their gains and differential.
They will focus upon the everything that goes around the transaction, rather than the transaction itself.
This is just as true in commercial banking, where corporate value-added services are the key, as it is in retail banking due to the basic transaction itself being commoditised.
The issue therefore is to realise that what was once the core stickiness for a bank service – the transaction – is no longer core.
This is the piece that has been yielded to the non-banks and is no longer a focal point for the bank.
And that is the point that Banking Review has picked up on, in that the core transaction processing of a payment is now an area where banks are head-to-head.
It is why banks need to focus upon the Transaction+.
For banks that understand this, they are creating stickiness elsewhere in the system.
I’ve written about the end of privacy before, but now the big news in the UK is that privacy is a joke.
There is no such thing.
For example, we had a court of law here that could implement superinjunctions to stop the media leaking information about people’s private lives.
Major stars of media, sport and business had taken out these superinjunctions, or “gagging orders” as they are known colloquially, to stop details of their inflammatory matters getting into the press.
Unfortunately, these gagging orders are a joke as, just by placing them, the knowledge of their exploits become known to many people.
This is why so much is leaked, such as the details of the private matter of Sir Fred Goodwin having a fling with a senior colleague after the Royal Bank of Scotland’s collapse.
Then we went one step further and had some loose cannon release details of all the major superinjunctions in the UK.
The orders are court orders that are meant to mean no mention of any names can be made by any media.
The trouble is that it’s old media that conforms to the law, not new media.
For example, the old media can now report details of Sir Fred’s affair because the information was shared in our Parliament. This is a Parliamentary Privilege that allows some breach of court orders if a member of government believes it to be in the public interest.
As a result, John Hemming and Lord Oakeshott discussed details of some of these superinjunctions and suddenly Sir Fred’s affair could be reported by old media.
And boy, did they have a heyday, with the Sun's front page on Friday wrapping it up the best …
And more inside ...
Unfortunately, as British media's most loathed businessman, Sir Fred should expect the media knife to lodge in his back at every opportunity.
Even so, old media is still unable to report the information about who he had the affair with, even though new media has made it clear who the lady in question is.
More worryingly for Fred is also the fact that the FSA are now going to rake over those coals.
All in all, it is clear that new media has completely decimated privacy, as demonstrated by the lack of power of the courts.
For example, one of the leaked names is a certain Manchester United football player who is implicated in an alleged seven month affair with a former Big Brother contestant.
As soon as the player went for a writ against twitter, then things got even more interesting.
The player’s lawyers lodged papers in the UK High Court ordering twitter to disclose who the leaker on their website is. The order is not against twitter as a company itself, but "to obtain limited information concerning the unlawful use of twitter by a small number of individuals who may have breached a court order".
The thing is that twitter is based in the USA, and does not necessarily have to comply.
Equally, by lodging such a motion, the footballer in question has become the target of almost every twitter user.
Again, in this privacy debate, the Sun's front pages put it best ...
... and yes, this week really did mark the end of privacy.
But not without a fight.
For example, just by serving a writ against twitter, the footballer in question became the target of every internet search for the past 72 hours ...
... and then his lawyers made it worse by taking action against a journalist who named the footballer in a tweet. The journalist is now also the target of the writ.
In an even more ludicrous state of affais, due to the nature of the superinjuction, the journalist cannot be named.
It's a very Harry Potter style moment when the man who named the man who cannot be named cannot be named ... unless you're in new media world.
Mobile featured heavily throughout the International Payments Summit and it is clear that mobile is not only important; it is imperative.
This was made loud and clear by a comment from Daniel Marovitz of Deutsche Bank that it used to be that online and offline worlds were separate because, to make an online payment, you had to go to a computer and hit enter on a keyboard. Now that’s all changed as the mobile allows you to make online payments immediately 24*7 through a device in the pocket. That’s new and radical, as it means the online world is now integrated with the offline.
Through the course of such exchanges about mobile, several things became clear to me.
First, mobile is lumped in as one area, but is actually about a hundred different things;
Second, banks are finding mobile challenging because it has merged the online and offline worlds;
Third, banks see mobile opportunities based upon partnerships and joint ventures with mobile carriers, but this is wrong;
Fourth, the underbanked and unbanked are the initial targets to be serviced through the mobile carriers;
Fifth, apps are incredibly disruptive; and
Finally and most importantly, mobile is a real game-changer.
Let’s start with the fact that mobile is not one thing.
There is mobile internet and mobile texting; mobile apps and mobile devices; mobility and wireless; SMS and NFC; SIM and EMV …
There is mobile payments and mobile banking; mobile bill pay (checkout Danske Bank for this one) and mobile bill deposit; mobile balance checks and mobile cheque deposits (USAA et al); mobile account opening (Jibun Bank and eBank) and mobile telephone calls to contact centres (!) …
There is mobile identification and mobile biometrics (Voice Commerce); mobile secure tracking and mobile proximity marketing; mobile as a payments device and mobile as a point of sale; mobile for texting money and mobile for reading QR codes …
There is such a rich variety and diversity of what is meant by mobile now, that it is plainly annoying to talk about mobile as though it is a single thing in banking.
I would suggest that talking about mobile is like talking about banking.
“Oh, I want to talk about mobile” is the equivalent of saying, “Oh, I want to talk about banking.”
What sort of banking do you want to talk about?
Retail, investment, commercial?
Brokerage, wholesale, branch?
International, domestic, regional?
FX, derivatives, exotics?
Online, offline, direct?
Come on.
Get some context around mobile and start talking the specifics, not the generics.
Second, the merger of offline with online.
I’ve already mentioned this, and said it was a challenge.
It was already a challenge, when we talked about having customer contact 24*7.
When we moved into call centres and then the internet, it was a challenge as customers were suddenly making demands at 3:00 in the morning.
But we handled it.
Now customers are using mobile devices to use bank services 24*7 electronically.
And yes, we will handle it … but it’s slow.
Take the example of making a mobile payment,.
During the conference this week, David Birch of Consult Hyperion challenged any bank in the room to make a payment using a mobile directly from their bank account to any individual in the room.
No-one could.
Sure, you can use mobile to do bill pay, balance cheques, money transfers and more; but a simple exchange of £20 between me and you? Forget it.
The only way to do that is via PayPal!
So banks get mobile, but they’re getting it v e r y s l o w l y.
It reminded me of how Chip & PIN was born.
Chip & PIN was conceived in the year 2000, developed in the year 2003 and implemented in the year 2005.
Five years to get from an idea to the delivery of a new security system.
In that same timeframe, Facebook created over 600 million users and took over the planet.
When I asked the leadership for Chip & PIN why it took so long, he explained it has to be a cohesive and consensual process.
So ok, you move at the speed of the slowest.
When I asked him why they went for Chip & PIN rather than Mobile & PIN which, by 2005, would have made far more sense; he said it was because mobile was not advanced enough in 2000 to be used as a security device via SMS and OTP (One Time Passwords).
But it is now!!!!
So why banks still take five years to make a decision and implement it when it takes Zynga six weeks to release a social game and garner 100 million users is beyond me.
Third, banks think winning in mobile is through JVs and partnering but this is wrong.
Banks are not the best organisations at collaboration, except amongst themselves.
It is difficult to name a single successful bank and non-bank partnership, but easier to point to others that failed.
This is because bank business models are completely unique and different.
Banks deal in basis points – bps … who else deals in bps???
Banks are regulated for resilience, security and robustness, whilst mobile operators are regulated for agility, innovation and fees.
If a mobile call fails to connect it's irritiating but there's no problem; if a payment fails to get through, there's a problem.
That's why banks want to control everything which, in a partnership, is not a good thing.
The result is that for all their good intentions, banks find partnering tough.
I could point to 1,000 examples but the best is NTT DoCoMo.
NTT DoCoMo and their e-wallet Osaifu Keitai, is liberally pointed to everywhere as being the most advanced mobile service in the world.
Its financial usage as an ewallet, NFC device and more is second-to-none.
So when NTT DoCoMo wanted to get bank services on their mobile, what did they do?
They bought a credit card company.
Far easier than trying to partner with a bank that didn’t understand them or their business model.
The same can be said for several other carriers, such as easypaisa in Pakistan and, in the case of established mobile carriers like Vodafone’s Safaricom in Kenya who operate M-PESA, when a mobile carrier does partner with a bank it will be on their terms, not the banks.
Which brings me to my fourth point: the underbanked and unbanked are the target markets for mobile carriers.
Nokia Financial Services, Ericsson, Telecom Italia and others attended this week’s Summit and they all underlined the same view: it is the underserved that will use mobile first.
This is why mobile has succeeded in Africa, and is now crawling across other regions where markets are under-served.
Where people had no access to bank or payment services, being able to suddenly make and take a payment wirelessly via the mobile is nirvana.
You suddenly have a service that previously was only available by walking 100s of miles or having someone do that on your behalf for a massive fee.
You have a service that used to cost a bucketload, being commoditised into a cheap wireless activity.
For the unbanked and underbanked, mobile moves the world from high cost remittance services to low cost wireless services.
That’s a big deal.
It is the reason why the mobile carriers will go for the high volume, low value first.
Grab the customer base the banks don’t want.
Look after the microfinance and low profit pool.
It’s only just over three billion people.
If banks ignore three billion people, that’s ok.
Someone can make money out of that.
High volume, low value money, but money all the same.
And that’s the mobile carriers’ mission.
Intriguingly, that’s also a classic innovator’s dilemma approach, in the words of Clayton Christensen.
Start with the bottom-end, then upscale.
The fifth area is how apps are really disruptive.
I’ve already talked a bit about disruptive apps such as Angry Birds, a $0.99 mobile app that generated $75 million for its creators in a year.
Apps create micropayments and micromoney.
More importantly, apps deconstitute banks into components.
This was first demonstrated by BBVA who launched the tu cuentas service two years ago, but has built up a head of steam such that my vision of Banking-as-a-Service (BaaS) is finally here.
BaaS allows the user to mix and match apps to suit their financial lifestyle and build their own bank in the cloud.
That’s new and different, and is something unthinkable even a few years ago.
Which brings me to my final point: mobile is a game-changer.
When the online and offline worlds meld into a seamless service, the world has changed.
When everyone on the planet can be connected P2P, B2C, E2E, the world has changed.
When anything can be moved electronically and wirelessly 24*7, the world has changed.
When industries that were delineated are merged and integrated, the world has changed.
When you can balance check with an app or text your partner money at three in the morning, the world has changed.
When money can be transacted from an African village to an Indian paddyfield via a Chinese entrepreneur and an American taxi driver, the world has changed.
After the bank reporting season in the UK last week, the most notable row that has emerged – alongside bonuses and a lack of lending – is the lack of taxes banks pay.
Banks are remarkably adept at being tax efficient – or should we say, tax avoiders – and this has been known for years. It is tolerated by governments as the taxes they avoid are all legitimate accounting techniques to minimise corporation tax whilst, on the other hand, they are big payers of national insurance contributions, pay-as-you-earn and other employee earnings-related taxes.
This conundrum puts governments in a bind: if they clamp down too hard on their banks, then they lose a possibly major chunk of tax revenues. However, by not clamping down on the banks, they lose a major chunk of tax revenues anyway.
This dilemma is the one facing the UK government in particular, as they see a dysfunctional banking system that they want to tax heavily but they know that, if they do, the banks will leave.
This was clearly demonstrated by the often mooted rumour about HSBC relocating to Hong Kong – that’s been around since Michael Geoghegan’s office moved there two years ago, although it’s interesting that new CEO Stuart Gulliver has clearly said the office should be in London – and Barclays to New York.
Such sabre-rattling frightens the likes of George Osborne and Vince Cable, but does it frighten the likes of Mervyn King and Sir John Vickers?
Probably not, as Mervyn King has been quite outspoken over the weekend about bankers bonuses and poor treatment of customers whilst promoting the idea that banks should be split between boring banking – retail and commercial – and casino banking – investments. A view that appears to be increasingly endorsed by Sir John Vickers, who will provide the regulatory framework for long-term bank reform later this year.
If it does go this way – higher taxes on bonuses and salaries, the forced split of proprietary trading (the casino bit of investment banking) and general restructuring, then be assured that it will mean the banks will relocate.
Not Lloyds and RBS – the government owned banks – but the big two of the big four: HSBC and Barclays.
Now, is this a big loss?
Yes and no.
It comes back to the taxation piece.
According to a report by Pricewaterhouse Coopers, banks more than pay their way in the UK economy.
The industry contributed an estimated £53.4 billion to UK government taxes in the 2009/10 financial year, accounting for 11.2% of the total UK tax take.
The figure, which excludes the 50% top rate of tax and the Bank Payroll Tax, is down by £8 billion from the previous fiscal year but the sector has overtaken North Sea oil and gas to become once again the largest payer of corporation tax in 2010.
The sector employs over one million workers which helped to generate £24.5 billion in employment taxes.
Wonderful.
That’s slightly less than the amount stated by the banks in Project Merlin’s documentation (HM Treasury published summary, pdf document), where the banks say they will “contribute a cumulative £8 billion of total tax take (covering direct and indirect sources, including the Bank Levy and VAT) in 2010 and, on the same basis, £10 billion in 2011.”
But what’s £45 billion here or there?
The real issue is that the banks can easily offset tax liabilities based upon clever accounting.
For example, leading accountant Richard Murphy writes that the UK banks received an effective subsidy of £19 billion, by writing down this amount as deferred tax liabilities due to expected losses in 2008:
“If some £19 billion in tax might not be paid as a result at some time in the future, there is an extraordinary double subsidy going on for these banks. Not only were their losses underwritten by the state in 2008 (and in most cases they still are receiving some form of state support, if only by way of asset guarantees), but they will now receive a second round of subsidy when over years to come they will offset those state subsidised losses against the profits they might now make only because they have been saved for the benefit of their shareholders by the UK government.”
So there is some issue here about tax isn’t there?
It’s one raised often by the Treasury Select Committee and, in particular, by campaigner MP Chuka Umunna who asked Bob Diamond in the last meeting how many offshore companies the bank had in global tax havens.
No wonder they only managed to pay £113 million in Corporation Tax last year. That was on the back of pre-tax profits in of £11.6 billion.
Similar questions are being raised by analysts about Lloyds and HSBC.
For example, Lloyds Banking Group won’t pay any corporation tax until 2015 or after, even though it made over £2 billion in pre-tax profits.
Ian Fraser writes a good summary of the analysis of Lloyds results over on Naked Capitalism, and the point made is that creative accounting can make any bank look good.
Lloyds were buoyant about rebounding from more than £6 billion in losses in 2009 to a £2.2 billion profit in 2010 … except that the statutory profit was a loss of £320 million.
There are many definitions of profit.
Charges of £1.65 billion as the cost of integrating HBOS with Lloyds, a £500 million purse to reimburse mortgage customers for over-charging and a £365m loss on the sale of two oil-rig subsidiaries had been stripped out of the ‘profit’ figures.
There are many definitions of profit.
There is also a thing called “fair value unwind”.
In Lloyds accounts, they have a specific area relating to the HBOS acquisition representing fair value, and the “fair value unwind represents the impact on the consolidated and divisional income statements of the acquisition related balance sheet adjustments. These adjustments principally reflect the application of market based credit spreads to HBOS's lending portfolios and own debt.”
In other words, it is the write down of what was over-valued in the HBOS takeover and, as a result, higher valuations on HBOS assets and business lines since the deal was done had added £3.12 billion to Lloyds’ headline pre-tax figure.
There are many definitions of profit.
There was a further £7.9 billion of largely unidentified ‘available for sale’ assets also moved into a newly-created accounting basket of ‘held to maturity’ assets as part of the “fair value unwind”. This is a good move as such assets don’t need to be marked to market, which can also improve the accounting view.
There are many definitions of profit.
HSBC has faced similar questions about taxes from US authorities and UK activist groups, whilst Royal Bank of Scotland doesn’t have to worry about profits right now – they made a £1.1 billion loss – but they don’t have to worry about taxes either: “RBS finance director Bruce van Saun also admitted today the bank would pay no corporation tax again in 2011 as it has deferred tax assets of £6.3bn it can use up from previous losses before paying any tax.”
All in all, this new dialogue is quite concerning as transparency in bank accounting is hard – there are differences between USA and International Accounting rules for example, between GAAP and IFRS, and then there are all these complexities layered on top between mark-to-market, fair value, liabilities and impairments, on balance sheet and off balance sheet, and so on and so froth.
Which finally brings me to Basel III.
Basel III is a subject I generally try to avoid, but it has raised its ugly head this week with a report from the Matrix Group, published online by David McKibbin.
Why does this report worry me?
Checkout the management summary:
“We believe that changes in regulations for bank capital are a ‘game changer’ for the sector.
“The proposals from the Basel Committee published in December 2009 will increase the quantum of capital in the system, improve its quality, force out complexity from balance sheets and ultimately drive down ROE.
“We undertake a thorough analysis of what happens to the banks’ capital in an attempt to replicate as closely as possible the anticipated findings of the Basel Committee’s own impact study, due H2 2010.
“The results are very interesting.
“The UK banks Lloyds and HSBC are significantly impacted by the proposals.
“We see Lloyds, in particular, having a new Core Tier ratio of only 4.4% by the end of 2012.
“The fall is mainly due to the full deduction from common equity of investments in other financial institutions of £10bn (mainly insurance), which under the present FSA transition rules, is only deducted at the total capital level (not 50:50 from Tier 1and Tier 2 capital as for most other banks).
“Basel III is essentially crystallising the problem that Lloyds has been able to get away with for years of double counting the capital in other financial entities on the group balance sheet.
“We also see HSBC’s Core Tier 1 ratio falling to 6.0%, significantly below peers and in line with what we would deem to be an appropriate regulatory minimum.
“The reasons for the substantial fall in the Core Tier 1 ratio are more varied than for Lloyds and arise mainly from the deduction of negative AFS reserves, the deduction of minorities, the increase in market risk weights and the deduction of investments in other financial entities.
“For the last point, HSBC has, like Lloyds, taken advantage of the FSA transition rules currently in force and opted to deduct investments in financial entities at the total capital level rather than 50:50 from Tier 1 and Tier 2 capital.
“We believe that management may ultimately desire to raise more common equity to obtain a capital buffer and regain parity with peers.”
Be assured that bank accounting rules are under intense scrutiny, and will be more so in the future.
But no bank is going to appreciate Basel III adding layers of excess capital requirements to their already over-burdened balance sheets.
For example, take note of this quote from Karen Fawcett, Senior Managing Director and Group Head of Transaction Banking with Standard Chartered Bank (pdf of SIBOS Issues, October 2010): “If the regulations are implemented as they are currently written, we could be seeing a 2% fall in global trade and a 0.5% fall in global GDP.”
What the banks are really saying is that if Basel III is implemented as it is currently written, and if banks ever move to accounting practices where apples can be compared with apples, then global trade will decrease because the lubricants of trade – leverage and risk – will be curtailed.
A long conversation about digital worlds and social banks yesterday.
I was asked what is a ‘social bank’, and had to explain two or three times to really get the point across.
That worries me, as social banking should be a simple concept.
The issue is that it gets confused with social work and social media.
Firstly therefore, a social bank is not a charity.
Second, it is not getting the bank onto Facebook or other social media.
There.
Now that that’s out of the way, what is a ‘social bank’?
A social bank is a bank that focuses wholeheartedly upon engaging their community of customers on an equal level, peer-to-peer, in a fully interactive and immersive conversation about money that is informative, enjoyable, open, honest and transparent.
It is a complete turnaround on the way banking was done in the past, which was a single channel of communications, take it or leave it, and it is meant to reflect the change we’ve seen in society.
What is that change?
The change from olden days, where everything was tightly controlled through limited communications via a small number of TV and radio stations and print media.
Back then – we’re talking quarter of a century ago – there were extremely limited ways to be informed and it was a one-way channel of communication.
Just a decade ago, it had changed but not much.
A decade ago, you had far more channels of communication – the internet, cable and satellite television – but even then, it was limited by usage.
The key a decade ago is that if you wanted to be informed, you had to find the information.
You had to Google for it, you had to find the TV channels, you had to pay for them too.
Suddenly everything changed.
It all changed around 2002 when blogging and YouTube were emerging.
But it was a slow burn.
Then Facebook arrived and Twitter, and it exploded.
What exploded?
Human content.
Not just a few humans, but a whole world of human content as every person on the planet became a potential media channel.
Every human on the planet has the potential of generating news, views, creativity, content.
Sure, some of them may be only read by one or two friends, but the fact that we are now surrounded by content is brought home nicely by this article ( Download 3MB PDF: 'Tweet Freedom' or read online, pages 36-40) from Stylist Magazine:
“The benefits of using new communication technology– now as second nature to us as breathing – are indisputable. Tap into Twitter, Facebook, Google and wherever you are in the world – from a sun-drenched island in the Maldives to a Virgin Atlantic flight to New York – and you’re guaranteed to have your finger on the pulse of what’s going on in the lives of your friends, celebrities, and politicians. Stephen Fry shares his pictures of Sydney harbour via a TwitPic. Ashton and Demi let you know they’re having a fabulous time in St Barts on Twitter. Indeed, as a nation we’re so consumed by technology that the average multi-tasking Briton crams in eight hours and 48 minutes of media (from Twittering while internet shopping to Facebooking while downloading) into the seven hours they spend online each day.”
In other words, our influence is now generated by a random community of friends, family, colleagues and their communities of influence.
Not by traditional channels of communication.
If our friends, family and colleagues are anti-something, then often so are we.
And if our friends, family and colleagues are influenced by others who are anti-something, then that filters into our consciousness too.
And if our friends, family or colleagues happen to get something inflammatory to expose injustice, wrongdoing or other issues - such as bank's misdealings with customers - then they will share it and expose it in real-time.
And, before you know it, everyone will know it.
This potential to socially connect with almost everyone is radically altering society and the way we think, as we now demand and challenge everything.
This is part of the reason we no longer trust anyone or anything, as the Wikileaks world means that everything is open to question.
Again, this has been brought home clearly by the recent uprisings in Tunisia, Egypt, Bahrain, Libya and across the Middle East where people have finally woken up to their oppression.
“Who among the first evangelists of the internet foresaw this? When they gushingly described the still emerging technology as ‘transformational’, it was surely the media or information, rather than political, landscapes they had in mind. And yet now it is the hard ground of the Middle East, not just our reading habits or entertainment options, that is changing before our eyes – thanks, at least in part, to the internet.
“Take the Tunisia uprising that started it all. Those close to it insist a crucial factor was not so much the WikiLeaks revelations of presidential corruption that I mentioned here last week, but Facebook. “It was on Facebook that the now legendary Boazizi video – showing a vegetable seller burning himself to death – was posted, and on Facebook that subsequent demonstrations were organised. Who knows, if the people of Tunis one day build a Freedom Square, perhaps they'll make room for a statue of Mark Zuckerberg. If that sounds fanciful, note the Egyptian newborns named simply ‘Facebook’.”
So I said that a social bank is not based upon social media, but it is social media that has spawned the social bank. And the reason I say ‘it is not based upon social media’, is because that immediately makes everyone think I’m talking about a bank based upon just Facebook and Twitter, and that’s not what I mean.
Facebook and Twitter may be replaced by MyTime and Lifestream tomorrow (just made up those two btw), and so the social media platforms are transient.
What is here to stay is the transformation these transient platforms and technologies have created, which is the truly connected global planet of content generation by individuals.
The social planet now needs social banks.
The premise therefore is that, in the first generation internet, those businesses that relied upon people coming into stores to buy things that could now be found electronically would go out of business.
That was true.
Travel shops, book sellers, music stores and more all disappeared.
In the second generation internet, those businesses that rely upon control, secretiveness, confusion and ignorance will go out of business.
And that will be the challenge for banks where complexity of fees and charges, control of the customer’s access and secretiveness about financial movements have been the core capability of making money in the past.
That complexity, control and secretiveness has disappeared and the future way is therefore to be open, honest and transparent.
What does this mean in practice?
It means becoming a social bank.
A social bank is one that engages the customer by making discussions about money interesting, informative and fun.
They educate and illuminate, respond and converse, engage and experience customers with real interaction.
The social bank does not provide ‘statements’ and does not expect the customer to ‘check their balances’. Instead, they are really friendly as part of the community of interest of the customer.
They rank as the customer’s friend, along with their other colleagues, family and friends.
That is the community they inhabit.
How can a bank become a friend?
By being open, honest and transparent and, therefore, trusted.
Banks trade on trust, but the trust is not in the bank but in the bank’s ability to look after money securely.
The trust we are talking about here is in banks doing the right thing.
A bank will do the right thing in the future mainly because, if they do the wrong thing, they will get found out and taken down.
That is what the WikiLeaks world is about.
That is what the social network has inspired.
That is what banks of today face in their dealings with everyone and everything.
So a social bank will be immersive.
It will tell me what I can and cannot afford.
It will advise me of better deals as and when they come out.
It will show me alternative providers of financial products, and tell me why it’s not a better deal to move over there.
It will give me rewards for being loyal.
It will know every detail of my financial behaviours and transaction history, and will help me to behave better.
It will respond to my questions in real-time in the way I want.
It will educate, inform, illuminate and engage.
It will be my friend.
And, as a friend, it will help me save money and treat me to rewards when I’ve been good.
Hmmm … a truly open, honest, transparent bank that really has a relationship with me.
The latest example of zero fault tolerance is Bank of America, whose website went down over the weekend.
For a major bank website to go down for even part of a busy workday is bad. For that website to be Bank of America’s, used by 29 million people, was headline news.
The key is that this illustrates how essential it is for a bank to be 100% available, 100% reliable and 100% accessible.
It is the reason why a bank has huge issues if their ATM network can’t be used for half a day; or their POS systems go down so merchants can’t process payments; or their payments transactions are incorrect; or ...
The bottom line is that banking is a business that people expect reliability and accuracy and, in fact, take it for granted.
Checking your online statement, how many people notice or thank a bank for processing all of their payments automatically and accurately?
None.
How many notice when one transaction or charge is applied?
Everyone.
And the point here is that banks primarily exist as record keepers and transaction processors.
The hygiene factor for a bank is to be able to process accurately on time, every time, and to keep a record to that transaction.
The banks that don’t are the ones that get the complaints.
This is illustrated well in the UK by the arrival of Santander, which has been getting huge levels of complaints:
“Santander has emerged as the bank with the highest proportion of customer complaints in the UK, with gripes about its banking service flooding in at the rate of one every minute during the first half of this year.
“The Spanish-owned bank received 216,158 complaints in the six months, making it the institution with the highest ratio of complaints to the number of customer accounts. Barclays was next with 195,956 ...
“Complaints about banking services made up the vast majority of consumer grievances. They ranged from minor issues such as chequebooks not arriving and long queues in branches, to more complex problems such as international payments not arriving on time.”
These levels of complaints did little to stifle business however, with market share in bank accounts and mortgages rising steadily throughout the last two years.
So maybe there is some fault tolerance.
Fault tolerance over small things, like chequebook delays and branch queuing, but no fault tolerance over bad behaviour that impacts customer funds.
So I guess there are some big questions here, such as:
What would make a customer walk?
What does it take for a customer to switch their main bank account?
What disaster would the bank have caused to befall the customer to make them walk?
Or, more importantly, what would a competitor bank have to offer the customer to encourage them to switch?
Is it just a rate churn ... or does transaction processing and service make a difference?
These questions have not been addressed adequately, but there have been some attempts to analyse the issue of switching accounts.
For example, an excellent report was produced by Consumer Focus, a UK governmental organisation, in autumn 2010.
What this found is that most people don’t think about switching bank accounts, with three quarters of consumers never thinking of switching and just 7% who did in the last two years.
Compare that with other industries. For example, 31% of consumers switched energy supplier in the past two years, 26% their telecoms provider and 22% their home insurance company.
What is it about banking that causes people to never move their account?
Most of it appears to be related to the fact that consumers think it’s too much of a hassle to change and, if they did, that the other providers are just the same.
So there is no perceived competition in the industry and, if there is, that it’s too difficult to take advantage of these competitive offers.
Much of this is just in people’s minds, as it is actually quite easy to switch, but consumers just do not see a strong enough reason to switch.
For example, of the 7% who did switch, most were mainly motivated by a better deal (58%), rather than bad service (47%) or charges (36%).
So the real fault tolerance in banking is that you have a service where 93% of consumers will tolerate almost anything, as long as the bank is generally reliable.
3.5% will walk each year (7% over two years), and less than 2% will walk because the service or charges are bad.
Hmmm ... no wonder most banks don’t care too much about competing on service.
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