The Financial Services Club's Blog

Forget cashless and branchless, it’ll never happen

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.

 

Banks don't need Big Data ... just PFM

I had a revelation when being shown a presentation from one of the Personal Financial Management  (PFM) solutions firms yesterday.

It was when we were talking about how consumers use PFM for peer comparison purposes.  If you’re unfamiliar with such stuff, it’s the ability to see how you stack up against similar people to yourself, in terms of how you spend, save and live with money.

You might ask: what do people of my age typically spend their money on? and find that most of them are drinking vodka or something like that.

But you can do more complex analysis through PFM solutions, such as asking: someone earning my income, living in my area of London, with two kids and a dog, what sort of retirement planning profile do they have on average, and how does my investment in pensions compare?

Now you get the idea.

You can get into some really complex stuff.

And it’s all simply at a point and click.

This sort of user profiling sounds useful for the customer, but the revelation for me is that it even more powerful for the bank.

This is because your customers are sorting out all their transactions, signing up for budgeting and alerts and building their own demographic parameters but, as they do this, the bank can build really powerful marketing campaigns using the same date.

Send a campaign to all people earning this level of income in this area of London who have asked about pensions, a pension’s promotion offer next time they log on.

If you have any 25-34 year olds who have clicked on short term loans, give them an ad for a five-year term loan at 1% below usual rates next time they are online.

Identify all people with two kids in this income bracket and offer them a child protection bond …

You get the idea.

In fact, what’s really classy about this is that the bank doesn’t even have to drill big data to get this sort of campaign to work – the customer does all the work.

All the bank needs to do is to be intelligent enough to leverage the customer’s efforts.

Just a thought …

 

What the Facebook IPO means for banks

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

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

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

Eight years.

$100 billion IPO.

Not bad, Mr. Zuckerberg.

But what Zuckerberg has really done is more important.

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

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

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

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

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

This is being proven again and again.

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

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

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

The story speaks for itself:

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

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

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

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

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

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

In banking, we see these changes occurring rapidly too.

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

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

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

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

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

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

… and garnered 200,000 signatures a week later.

That’s how fast things happen.

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

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

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

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

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

Be at least a little bit afraid.

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

 

 

 

 

Consumers will pay for better online banking

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

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

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

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

That’s no shock is it?

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

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

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

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

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

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

Download The new digital tipping point (2.25MB PDF)

 

2012: a banking outlook

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 29^th 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.

Visa Europe endorses this view:

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.

 

This is one of three 2012 outlook pieces:

• 2012: an economic outlook
• 2012: a banking outlook
• 2012: a bank technology outlook

 

SPECIAL NOTE

Make your own mind up about my predictions.  Here's what I said would be the big ticket items for 2011 a year ago:

• Trying to gain clarity from the regulatory mess;
• Restructuring to maximise opportunities to arbitrage regulations;
• Reducing cost by moving to variable cost infrastructures;
• Maximising returns through creating high frequency intelligent trading (H-FIT) via algorithmic automation with real-time newsfeeds; and
• Creating differentiation through secure mobile financial services.

 

Taking a wallet onto a mobile doesn't work

I discovered a fascinating report from Mobey Forum this morning.

It was released this week, and says that “providing consumers with the convenience and functionality of mobile wallet technology will not be sufficient to drive mass-market adoption”.

Mobey Forum – which describes itself as “the global bank-led industry association defining a prosperous mobile financial services ecosystem” (try saying that one at a drinks party and enjoy drinking on your own) – make it clear that simply taking a traditional wallet and sticking it into a mobile app is a waste of space.

They assert that, instead, the mobile wallet needs to leverage value through loyalty schemes, coupons and offers to be more relevant to the consumer than their old wallet.

In fact, the paper claims that of the three factors that motivate mobile wallets – convenience, security and value – it is the last one that is the most important, even though it is the last well defined.

They also note the confusion created by terminology, with most of using phrases like mobile money, virtual or digitised or electronic or mobile “wallets” or “purses”, and make a clear definition of what is a mobile wallet.

“A mobile wallet is functionality on a mobile device that can securely interact with digitised valuables.  Mobile wallet may reside on a phone or on a remote network / secure servers. It may be only accessed via a mobile device, and also managed and used with it.  Most importantly, it is controlled by the user of the wallet.”

They also make clear that “a mobile wallet without payments means is not a working wallet”.

They then make a call to ensure that mobile wallets are offered as open platforms where the user is in control, rather than anything system limited by the provider.  An interesting concept, and one that will be intriguing to see how it plays out, e.g. will Citi, BNP, Deutsche, HSBC et al be happy to co-reside in an open platform ecosystem?

Finally, they have a lovely little chart in there that shows the mobile wallet ecosystem and attributes (doubleclick chart for bigger verson):

Here’s the full paper for a download if you’re interested, and this is the first in a series of papers from Mobey Forum to “provide the industry with a new level of thinking on what is required of stakeholders to facilitate widespread market adoption of the mobile wallet”.

The other papers will look at the control points, industry stakeholders, security and value propositions for mobile wallets, all of which will be found at www.mobeyforum.org.

Meanwhile, I’ve been receiving a few more nudges of mobile videos of financial apps, so here’s a few of my favourites.

This is the best lifestyle version I’ve seen lately, from my mates at Banco Sabadell, Spain:

This one, from OCBC in Singapore, allows you to scan your bills to pay them with a swipe (checkout one minute into the video):

But my favourite is this one ‘cos it’s incredibly cheesy:

If you like these, then you can find more of the best mobile financial videos on the web here.

 

Banking is a land of extremes

There are evangelists and dogmatics across the banking spectrum.   On the one hand, I have regular debates with mobile extremists who believe cash is dead; on the other, there are those who are still fighting to keep the cheque in existence, and even lobbying to bring back cheque guarantee cards (they were phased out in June).

Somewhere in between is reality.

The reality for most people is that they want a branch, in order to be able to see someone if they have an issue.

They want cash, because there is no realistic alternative.

They are happy to consider new things, like mobile banking, but won’t be converted until it feels safe and easy and appropriate.

That’s a summary of the mainstream retail bank user.

There’s then an extreme bank user. 

They want mobile wallets, contactless payments and cashless living and they want it now.

There’s then another bank user who rejects any new form of operation.

They don’t use internet banking, would never consider mobile banking –they may not even own a mobile telephone! – and even resent having to use an automated call centre service to find out their balance.

What we have to bear in mind is the balance between the extremes and the mainstream, and chart our banking customer base across a spectrum of technology adoption extremes.

As we do this however, we reinforce stereotypes.

For example, our tech user appears to be a Gen Y geek, but they aren’t necessarily Gen Y or a particular demographic; they’re just massively comfortable with technology and believe that, if it screws up, the bank will be responsible.

Meanwhile, our anti-tech customer is stereotyped as a grumpy old man, but this is not necessarily the case.

Our anti-tech customer could just as easily be a young person, who just doesn’t feel comfortable trusting their hard-earned money to an e- or m- channel.

And this is where many get it wrong.

They assume things about humanity and attitudes which are often not proven or justified.

This was brought home to me when discussing branch banking with one retail bank, and they had developed an iPod room for the youngsters and a Library room for the seniors.

Once the branch was launched, the seniors all wanted to use the iPod room to be young and cool again, whilst the juniors wanted to meet in the Library room as money matters should be taken seriously.

So there’s lesson one: develop your channels and designs for the customer of choice, but don’t assume that customer is a monolithic stereotyped group.

The second lesson is that you cannot please all of the people all of the time, so focus upon who you really want to please.

Most banks design for the mainstream.

However, there is room for banks that target the thousands rather than the millions.

Building societies, credit unions and community banks do well catering for the anti-technology, community based branch user.

Internet-only and branchless banks can thrive serving the anti-branch, hi-tech user.

The third lesson is that we must learn to tolerate the extremes and not ostracise them.

Too often the anti-tech's are viewed as being useless, representing the past, whilst the pro-tech's are the future, and are progressive.

Not necessarily.

You could just as easily say that the anti-tech group is cautious, conservative and often proven right when the pro-tech user's identities are stolen and accounts compromised.

So we just need to learn to live with the extremes.

I know all this is obvious, but no harm in reiterating it every now and again.

 

 

Should a bank be called a bank

After Richard Branson's Virgin Money successfully acquired Northern Rock, loads has been written about the takeover.

Much has been negative, saying that the Chancellor did a bad deal and ‘gifting’ the bank to Virgin, losing £400 million in the process.

A lot of other dialogue has been positive, saying that the Chancellor got fair value by selling for £1 billion which is the book value of the bank.

You can read all you want, there’s copious amounts, but what many failed to notice is that the Chancellor made a follow up statement after the headlines hit the fan, stating that the previous government under Gordon Brown had agreed with the European Commission that, under competition rules, the bank would be returned to the private sector before 2013.

Therefore, with all bank shares halving over the past few months, now was the best time to get a deal.

Meanwhile, Richard Branson is being outspoken himself, saying that he wants to drop the name "Bank" from their business.  

Bank is a tarnished word he believes, and blogged about it as such: "should a bank be called a bank". 

The Bearded Wonder says he’d rather call it Virgin Rocks.

The majority of over 200 comments appear to agree, although they prefer the name Virgin Rock, and it’s interesting to note some of the commentary. 

For example, Lynn Madeley says:

“I don't think it matters what you call it. Look how much effort went into calling Orange Orange, when it was originally launched as Rabbit. The Virgin Brand is not meant to be average and ‘Bank’ is a very average word. HSBC has banking in its name but no-one calls it Hongkong & Shanghai BANKING Corporation. So Virgin Rock is pretty cool. Love the fact that you are asking peeps about this, not a very banky thing to do, all the more reason not to have it in the name.”

The power of the social web.

Meanwhile, Robert Mochart responded with:

“When we first were thinking of a name for ING, we asked the same question. Knowing people were adverse to the word bank, we chose to use bank for its official name but for marketing and functional purposes, we used ING Direct.”

Maybe this is why Banksimple has been renamed Simple, which I hate as it implies Stupid, and why we may see many other banks without bank names.

Mind you, we have many already: First Direct, Cahoot, Smile  … it’s nothing new.

Meantime, I’m loving this week's Private Eye which is full of Virginal fun:

The best comment they picked up on was a blooper from Peter Allen on BBC Radio 5 Live, who said: “It has been announced that Northern Rock has been sold to Virgin Mary”.

He meant Virgin Money I’m sure, but the Virgin Mary, Father, Son and Holy Ghost may be just what British Banking needs to get it back on its feet.

Or Richard Branson maybe.

 

 

Seeing the wood for the tree branches (again)

We had a discussion last night about branchless banking, with two retail bank leaders telling me I was wrong about the idea.

The argument was not actually about the concept of branchless banking, but less branch banking.  Even so, these retail bankers feel adamantly that the average human being wants a branch to bank.

I argued that mobile, internet, call centres and such like would eradicate the need for most branches.

They disagreed.

I said that the idea of walking into a branch and queuing for a transaction was ridiculous in the 21^st century.

They disagreed.

I argued that a teller who is paid under $20,000 asking me if I wanted mortgage advice was not something I would even contemplate discussing.

They disagreed.

I argued that the cost of having transaction centres was an unsustainable overhead when far more efficient systems were in play.

They disagreed.

Their core argument is that the average customer in most countries wants to touch someone, talk with someone, visit somewhere and be with people.

They like branches, branch people, talking with people about money and being assured they are doing the right thing.

They argued that the average person is afraid of money; they don’t like thinking about it; they want someone to tell them they are doing the right thing and to give them support and help.

They argued that I am not the atypical customer; that I am far more educated and assured in my dealings with money and technology; that I am not the typical person in a branch and that branches are there to provide advice and support.

Interestingly, there was an outspoken discussion about how banks got it so wrong in the 2000s, that branches were referred to as ‘stores’, that banks became retailers and that this was wrong.

Banks are not retailers, they are advisers.

They shouldn’t sell credit, but they should provide credit where credit is due.

If loans and mortgages are affordable they should be available to that customer, but they shouldn’t be pushed like a drug on every person whether they can afford such credit or not.

The latter part we all agreed with; the former we didn’t.

I disagree that every human wants human contact and service for banking.

That human contact and service for banking should be available is important, but not on every high street corner.

That most people are happy to use technology for self-serving and don’t need to go to a human for transaction processing.

This last piece was the most debatable point of all for me, as the retail bankers argued that technology can never replace human service for more complex processing.

Like the idea of doing investment services on an ATM, it just won’t work.

That last comment is where these guys shot themselves in the foot.

My argument is nothing to do with mixing transactions with advice; self-service with service; administration with sales.

Transactions and administration is where self-service is key.

Customers – whether educated or not – will perform the majority of their transactions and administration through self-service in the near future.

Like the ATM got rid of cash dispensing tellers, the mobile internet will get rid of the transactional branch.

That leaves advice and sales, where service with humans is required.

Complex products like mortgages and investment services will still be serviced by humans in branches.

Just, as I’ve argued for a long time, the non-transactional sales branch of the future will demand far less of a footprint than today’s transactional administration branch.

That’s the point.

The future branch will be limited in number - about a tenth of today's number - but unlimited in comfort, branding, service and advice.

And it will avoid having humans employed to do administration of customer's transactions.

Will they ever get it?

 

 

We need the iPod of payments

I felt vaguely irritated today when an analyst from a major research firm was asked to position why NFC contactless payments haven’t taken off.

He said they had analysed the worldwide global market for mobile payments, the demographics of takeup, the likelihood of using contactless payments, the audience for new forms of payments, etc, etc, and had identified a global market of just 1.8% of consumers who would be receptive to such an offer.

What complete nonsense.

The fact is that there is no ‘market’ for contactless payments, mobile payments or mobile contactless payments.

There’s just a need that is as yet unfilled.

Another person in the panel discussion said that he didn’t get NFC, and felt that “contactless is just a solution looking for a problem”.

More nonsense.

I mean, I’m sorry, but NFC contactless mobile payments are intuitively obviously going to take off at some point.

The problem is that it's in a card form right now, and not integrated into a mobile contactless form and, even if it was, there's zero places that accept NFC contactless payments (that are obvious to consumers anyway).

But this will change ... we just need an Apple (in Steve Jobs lifetime of Apple) to focus upon this and make it happen.

Apple have a knack of taking solutions looking for problems and working out how to build the solution in such a way that people see what problem is being solved.

For example, in 2003 I went into a store and asked for an MP3 player.

The store manager said they used to stock them, but stopped as “who wants to download music off the internet?”

That store doesn’t exist now – it’s just a website – and the iPod decimated the music market from its launch in 2001.

Markets were redefined by a visionary taking an obvious product and making it cool.

A visionary who could see the unfulfilled need, the solution, and match the two together.

These visionaries did the same with the iPad – everyone pooh-poohed the tablet market before the iPad’s launch – and yet this was another technology that had been around for over two decades.

In other words, it takes a visionary to see a technology or technologies that are disparate and fragmented, and bring them together into an integrated whole that is blindingly obvious to those who need it and completely compelling.

That’s what is needed for NFC contactless and mobile payments.

An iPod for mobile contactless, rather than the MP3 player we have today.

The iPod for mobile contactless was rumoured to be the iPhone5 but that hasn't appeared.

Mind you, if you look at the new Android details, the iPod for payments might already be here:

Incorporating Near Field Communication (NFC), technology behind Visa's PayWave, Android Beam enables select Android devices to share videos, apps, maps, contacts and other data through slight physical contact.

So, for those who think the market for mobile contactless is zero, go and talk to the trees.

“I’m doing a (free) operating system (just a hobby, won’t be big and professional like gnu) for 386 (486) AT clones.”  Linus Torvalds, father of Linux

“There is no reason for any individual to have a computer in his home.” Ken Olsen, CEO, DEC

“I’d shut it down and give the money back to the shareholders.” Michael Dell, CEO, Dell on Apple Computers

“640k should be enough for anybody.” Bill Gates, CEO, Microsoft

“I think there is a worldwide market for maybe five computers.” Thomas J. Watson, President, IBM

 

 

Mobile banking and PFM is so last decade

Another conference focused upon financial innovation today, and all the talk is about mobile stuff, Google Wallets, mobile stuff, Banksimple, mobile stuff and Movenbank.

I’m regularly stressing today that we must::

1. stop talking about mobile; and
2. talk about the point-of-life.

First, stop talking about mobile stuff.

The fixation with mobile is because it’s finally come of age, as has Personal Financial Management (PFM).

Now it’s come of age, all the banks and providers of services to banks are leaping into these two buckets head first and swimming deep in the water.

Give it five years and they’ll be swimming in the next water.

And that water is not mobile and PFM, but connectivity and SFM.

Connectivity

Connectivity is the realisation that it’s not mobile we should be focused upon, but the chip in the mobile that enables it to connect to the network.  That chip is going to be in so many other devices in five years, that the consumer’s mobile wallet will no longer be relevant.  What will be relevant is how the chip connects to other chips to transact.

The consumer’s chip may be in their mobile telephone, but may just as easily be in their wristwatch, earring or clothing.  The consumer will choose how they wear their chip. It might even be embedded in a tooth.

The chip may enable telephone calls and communications, access to wireless electronic services and more, but will also be a fundamental transactor of commerce.

It will transact with chips in merchant stores; chips through QR and NFC; chips in walls, pavements and doors; chips in cars, caravans and casinos; chips in anything and everything in fact.

Some reckon there will be ten billion mobile connected devices in 2020. 

I reckon there will be more than one hundred billion wirelessly connected devices in 2020.

And with everything as a connected transaction engine, banks will be looking to leverage wireless connectivity at the point-of-life of their customers rather than thinking about mobile as a channel or device.

This leads to the second fundamental around the point-of-life and SFM.

SFM is Social Financial Management

PFM is already out-of-date. 

PFM talks about personal, as though it’s private, and yet everything has shifted to social, as in sharing.

Sharing financial information is not what consumers want, but they do want banks to be part of their lives rather than the bane of their lives.

What this really means is that banks must proactively leverage far more about their customer’s data to intimately understand their lifestyle preferences and shopping habits to become more relevant.

It means taking Big Data and mining it deeply to gain Big Ideas about customer needs and then proactively reaching out to the customer to gain Big Relationships.

Examples are already out there, such as the new video for Google Wallet that demonstrates coupon offers and spending integrated with payments and transactions.

What this is really showing is that Google will be analysing the data from the digital footprints of each individual to provide relevant offers at their point-of-life:

• using geolocation allows you to locate where the individual is physically present;
• using that location allows you to automate contextual offers proactively to the individual;
• using data allows you to make sure the offers are both relevant and not in breach of permissions and privacy; and
• using the combination of banking, retailing, searches and devices allows the operator to integrate spending and saving with shopping and living.

And that’s the point-of-life (not the meaning of life, another story).

It’s the point of where I’m living at that moment in time and being relevant to that point-of-life.

That’s what SFM will be all about, and that’s what banks will be focused upon in the next wave of implementing stuff.

Being relevant at the point-of-life through wireless contextual connected devices, rather than mobile and PFM.

 

Postnote

In August 2011, EFMA published a report after surveying 150 European banks with McKinsey on mobile banking.

Their findings are that banks believe mobile will fundamentally change retail banking within five years, and yet the majority have under ten employees working on mobile and have yet to make any change in their operations to exploit this capability.  Although most have mobile web and apps under way, they have made no significant commitment to this service.

Download their report here.

Sad to say that I'm already on the next generation of banking whilst most banks are yet to catch up with the one that's already over.

Proof that the branch (of old) is dead

The Finanser’s mate Brett King – Chris Skinner “taught me everything I know” - was in a webinar yesterday, talking about the future of banking with some good stats to back up ideas.

A key one is that the average number of in-branch transactions has declined by a quarter in the last four years, from around 11,400 transactions per day on average in 2006 to 8,550 in 2010.

This is a theme I’ve talked about over and over and over and over again.

In fact, if you missed it, I had a huge spat about this and explored it fully in depth on the blog back in 2007:

• Bank strategies are fundamentally flawed 
• To dump or not to dump the branch 
• Bank designs versus architecture 
• Branches - the last word?
• The conclusion of the debate about IP versus bricks 

And it comes up again and again and again, most recently when Brett blogged about same subject in March this year (it’s one of his favourite hobby horses too).

Finally it’s happening: bank branches are disappearing.

In some cases, they are disappearing fast – like Iceland and Denmark – whilst in other countries it’s a slow burn still – like the UK.

In the latter link, I was quoted by the BBC as saying: “four out of five branches will just disappear” ... and I do.

After all, you want service centres for branches in future – like Apple stores – not old transaction centres with tellers.

I should also stress that this is true for all developed economies – branches are dead … as transaction centres – although this does not apply to emerging markets in the same way.

The point is that for economies living in the Web 2.0 world, customers self-serve so they don’t need branches.  They need online electronic services.

As paper disappears too – cheques, paper orders, passports and driving licences as identities (yes, we will move to e-identity) – then the decline will be even faster.

And emerging markets are in Web 1.0 and will soon be in Web 2.0 over time.

The Web 1.0 world wiped out any goods that were being distributed physically as products that customers sought to consume – such as books, records and movies – and electronified these markets.

This is why Borders, Tower Records, Blockbuster Video and more struggled through the first decade of the 21^st century.  Trying desperately to hold onto a 20^th century business model, these businesses are going bankrupt or have already done so.

Now, in the second decade, Web 2.0 is doing the same to any services companies, where transactions that historically had to be done physically can now be self-served electronically.

Already, most monetary movements, orders for new functionality and processes enabling financial transactions, are being served by the consumer.

But the biggest transformation is in how we think.

We used to click-to-order, now we click-to-serve.

We used to have to push companies to send us stuff; now we expect companies to pull us in.

We used to have transactions and then interactions, now we want experiences and soon augmented realities.

Web 1.0 was all about product.

Web 2.0 is all about service.

This is why it’s revolutionising service businesses like banking, and why we are seeing so many big changes in the banking world.

 

NAB’s latest ad campaign – getting nasty?

Originally NAB came up with a brilliant campaign to differentiate themselves from the other mainstream banks in Australia with a campaign called “The Breakup”.

I really liked it, but they haven’t really followed it through as their next campaign was good, but completely unrelated to The Breakup. 

This one was all about trying to get a viral campaign going thorugh using honesty as a theme.

Having said that, their Breakup website does reinforce the theme and message.

So I’ll be interested to see what their latest campaign’s impact is, when it premiers on Monday.

It’s theme is Being Lockedin, and targets mortgages specifically where, once taken, they’re very hard to break out of.

This is illustrated by the first of two ads, where first time buyers are shown what it’s like to be locked in ...

… literally. 

It seems a bit nasty and miserable, but nowhere near as nasty as the creepy sensation you get as watch the other ad, called The Job Interview.

I get the message with these two ads, but wonder whether folks might find them a bit too creepy to want to see a bank that literally locks them in, even though they’re trying to send the opposite message.

We’ll see. 

 

Bickers over Vickers: the right stuff?

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:

• Search for new approach to banking has begun - Financial Times
• The complexity of bank reform cannot be underestimated - The Telegraph
• Ring-fencing will dent growth, says forecaster - The Independent
• ICB to admit its reforms will cost banks billions - The Telegraph
• David Cameron in push to dilute ICB ring-fence reforms - The Telegraph
• Oxford Academic Becomes Key for U.K. Banks - Business Week
• 'Shadow banks' move in amid regulatory push  - Financial Times
• Grab some bargain banking shares while you can - The Telegraph
• The wrong reforms will break the banks - The Telegraph
• Banks 'at risk from devaluations' - BBC

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.

Here’s a summary of the key points on ring-fencing:

• 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.

This is corroborated by the views polled by City AM and Politics Home.

“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.”

 

 

 

Iceland: where banks are becoming just PFMs

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

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

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

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

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

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

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

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

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

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

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

What intrigued me during the visit were the banks themselves.

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

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

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

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

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

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

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

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

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

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

Or so it seems.

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

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

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

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

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

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

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

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

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

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

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

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

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

This may be the reason why: excellent user engagement.

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

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

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

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

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

According to Íslandsbanki:

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

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

In other words, PFM is their online bank.

I suggested that PFM is their bank.

They smiled.

This tells me another thing.

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

Now there’s a thought!

 

Bank branches again ...

There’s been quite a lot of coverage recently of the British Bankers Association’s (BBA) report about bank branch closures in the UK.

Based upon the stats, UK banks are closing three branches a week.  That still leaves over 9,000 branches out there, but they are shrinking.

The reasons are many – cost efficiency, movement away from remote locations, operational overheads, etc – but the clear trend is away from branch and towards automation.

That being said, there are still branches out there and, as folks who read this blog regularly will know, a debate about their value always ends up saying that banks will need branches, just not so many.

But the reason for posting this is two-fold.

One is to repeat the BBA’s stats.

The big names – Santander, Barclays, HBOS, Northern Rock, Royal Bank of Scotland and NatWest – had 9,496 high-street outlets between them in 2009 but 187 closed last year, cutting the total to 9,309.

HSBC closed the most, with 58 of its 1,369 branches disappearing last year; the trend has continued this year bringing this down by a further 79 to 1,290 branches today.

Part of the reason for this is that there are 44 million internet banking users registered in the UK, according to the BBA’s stats.  As more and more people are engaged in self-serving online, less and less use branches and hence they are not needed.

That does not quite stack up with the Office for National Statistics (ONS) figures however, which show that around one in four households still does not have internet access:

"In 2010, 30.1 million adults in the UK (60 per cent) accessed the Internet every day or almost every day. This is nearly double the estimate in 2006 of 16.5 million.  The number of adults who had never accessed the Internet in 2010 decreased to 9.2 million, from 10.2 million in 2009. There were 38.3 million adults who were Internet users."

Even worse are the demographics, which imply it’s the young and wealthy that the banks now reach whilst ignoring the old and infirm.

For example, among the over-65s, just one in three use internet banking compared with two thirds of those aged 25 to 44.

This stacks up with my recent analysis of the ING Direct acquisition by Capital One, which shows that ING Direct’s demographics are skewed heavily to the young and wealthy, whilst traditional banks are directed more towards financial inclusion and the elderly.

 

What this means long-term is that some banks will want the old and wealthy, the young and the poor; whilst other banks will want the young and wealthy, the old and the digital.

These aren’t simple demographics however. 

Banks will appeal to different audiences based upon their channel mix, service offer, customer engagement in person and remote.  Some will be heavily branch oriented whilst others remotely focused, but they will each find a niche.

The only change will be that there will be far more niche players, rather than the homogeneous branch based grouping we have today.

 

The real rip-off culture ... is not Wonga? Part Two

One of the more outspoken reactions to my post on payday firms came from Wonga.

Not surprising as my original headline was that “Wonga will wrestle with regulators”, and they will as the markets are pretty unregulated today.   A point I made last Friday. 

I also mentioned last Friday that the original reason I wrote this was because of two statements in a Wired Magazine cover on Wonga from May.

The first said that “within a year, Wonga had issued 100,000 loans, worth £20 million, earning about £15 million by charging interest at an eyewatering headline rate.”

The second was a letter from Steve Perry in Wired in June that said:   “When I could no longer repay a Wonga loan, it took 50 days of ringing and emailing to get through – an £800 loan became a £1,700 repayment.” 

Both lines made me angry, and hence led to this debate.

So, just to set the record clear, let’s look at Wonga in depth.

First, what is the Wonga business model?

Their business runs on super flexible, short-term loans, delivered via the internet in minutes.

The offer is made using a simple calculation system on their homepage that lets you put in how much you want to borrow – up to £400 (or £1,000 for repeat customers) – for how long – up to 30 days maximum.

The interest is made clear to you as you enter this information.  For example, £300 over 7 days racks up £26.59p in interest and fees whilst, over 30 days, this would be £95.89p.  Bear in mind that £5.50 of these amounts are the transmission fees to move the money to your bank account in real-time, and the rest is the actual interest rate.

In other words, the real interest rate is around 360% APR or 1% per day average.

Although the APR on the homepage states that it is 4214%, this is purely a number required by law to show how much the loan costs over a year.  As a result, the interest rate is compounded to represent how the Wonga loan period would look if spread across a year, even though the company does not offer annualised loans.  So the fee and interest is compounded and added as a mathematical view of APR, rather than real view.

360% interest rates per annum may seem high, but it’s not competing with those long-term loans.  Wonga doesn’t offer long-term loans although, if they did, it would be at 360% interest rates, which they admit themselves: “Even if we were to launch a year-long loan at the same interest rate we charge now, the APR would be much lower than the current figure, more like 360%, because there would be no artificial compounding involved.”

But Wonga doesn’t offer annual loans. Their maximum lending period is 30 days and, in that context, Wonga’s rates are a fraction of those charged by high street banks for unsecured overdrafts and credit cards, which are the markets they are most interested in taking business from.

So Wonga specialise in short-term loans to give you coverage for a few days when you most need it.

Their team shared some interesting stories with me in this context and it’s generally for people who don’t want a bank loan – as such loans tie you up for a long period of time with amounts that are reasonably fixed – or can’t get one due to poor credit history or a recent change of job or address, or need cash fast and it would take too long in the bank.

A few examples included a customer whose dog needed emergency treatment and they needed cash in minutes, and a guy who had lost his job and needed to buy a car to become a minicab driver but couldn’t buy the car through the bank as he was jobless.  The latter is a Catch 22 – how can I start work if you don’t give me the loan?

The loans are incredibly short – typically  a few days – and are high interest due to the costs of acquisition and processing.

Although the company does not publish public records – they are a private firm with £90 million of venture capital backing [Wonga Company Number is 06374235] – they point to similar firms in the USA such as Cash America and Advance America, who have to provide transparent reporting of returns under SEC filings.

What this shows is that Cash America makes less than 10% net income on revenues of over $1 billion …

… whilst Advance America made a net income of $35.8 million on revenues of more than $600 million

This is because the business costs are high with cost of customer acquisition being the highest, followed by default rates which are also significant.  Wonga say they have theirs under control by using sophisticated technologies to avoid high risk customers, but one US study found that as much as a quarter of a payday firm’s revenues can be attributed to defaults.

This does not even include marketing and processing costs, with the cost of data being a major overhead in the process too. 

For example, Wonga use Experian and other credit agencies to real-time check customers during their online acquisition processing.  That’s all at a cost and many other payday firms don’t use such sources for this reason. A typical payday firm would just ask to see your last salary and bank statements and would then approve.  This is why their default rates are high and Wonga’s are lower.

But it makes the point that this is high risk, high volume, low margin business that is hard to make money unless you’re good.

It is also why Wonga claim they do not target vulnerable customers.

Why would you?

Vulnerable customers are more likely to default and less likely to pay back, so that’s not the market they want.  Wonga make the specific point that, being a private firm backed by venture capital, it’s their money they are putting at stake, so they only want to target the right customers?

Who are the right customers?

Wonga want customers who sit between core bank lending markets and the unbankable markets.

These are often customers who have never used a payday loan firm – 75% of the customers have never used an online payday loan before – and they are often bank customers – every customer has a bank account and access to full banking services.  This means that they also have access to traditional credit products, such as loans and credit cards, but often don’t trust themselves with such products.  They would rather pay high interest on a short-term loan they can manage than lower interest on a long-term loan.  This is because the short-term loan is easy and manageable, rather than escalating and invisible credit on a card or fixed for years on a bank loan.

Here’s a few more facts:

• 59% of Wonga’s customer are male, whilst 41% are female
• They are average wage earners (£22,000 per year) and aged typically between 21 and 40 years
• Most are tech savvy and are regular broadband and mobile users
• 14% of Wonga’s customers use an iPhone
• The average first-time loan is for £160 and the average loan across the customer base is £230
• As long as you demonstrate you are a responsible borrower, you can increase your maximum loan to up to £1,000 over time
• Wonga serviced their first customer in October 2007, and is now estimated to be making more than 100,000 loans per annum
• 3 years after launch Wonga.com had made in excess of 1.5 million loans to customers

These customer demographics prove that the customers aren’t necessarily the vulnerable and needy, but the sophisticated and informed.

They use the internet and mobile connectivity and like the flexibility of a short loan that avoids bank overdraft fees.

From a risk perspective, Wonga ensure the select the right customers, not the vulnerable ones, through their technology analytics and algorithms again, and means that most Wonga customers are actually not the normal payday loans customers.

In fact, as mentioned, the technology is something that impresses.

Not only does it credit check and money transfer in real-time, but it goes further by completing the whole process in under fifteen minutes typically.

That’s why Wonga actually describe themselves as a technology firms that offers financial services, which gives you a clue to their positioning right from the start.

They are also very transparent.  Everything is clear up-front.  For example, they calculate the total amount repayable upfront, showing the figures clearly and including all interest and fees.  You might say that’s better than a bank?

There’s also a good guide to ‘responsible lending’ that’s accessible from their home page .

They also make it clear that “the only way costs can increase is if you fail to honour the agreement.”

So what happens if you fail to honour the agreement, like Steve Perry did?  What’s your maximum liability?

Well, it appears Wonga are also semi-flexible on this point too.  If they get a customer who is in trouble, they don’t just keep hammering them with fees and charges, but will apply penalties to a maximum of 360% interest.

At that point, it stops until some form of agreement or compromise can be made.  For example, in Steve Perry’s case, Wonga waived the outstanding balance with Wonga’s head of communications, John Moorwood, saying to me:

“We lend our own money and we’re completely incentivised to make selective decisions and help people who can afford the service and are likely to repay a loan quickly. A typical loan is around a fortnight and a quarter of our customers repay early every month, which they can do without any catches.

“We decline the majority of first-time applicants and we also decline some returning customers, or limit their access to credit, based on the same checks and prior use of the service. Again, we have nothing to gain from helping someone who can’t afford the loan or is in serious financial difficulties. We don’t claim to be perfect, but we believe we are doing everything we can to make the best decisions possible, which has seen us win a number of respected risk-based awards judged by industry experts.

“The fact we’re achieving this aim of making the best possible decisions is supported by the very low rate of arrears and positive feedback from most customers, whom we survey and speak to regularly.”

Now, I can find loads of other complaints against Wonga that are similar to Steve Perry's from Debt Line, the Review Centre, UK payday reviews and more.

Most of the complaints are down to people who failed to payback on  time, didn’t read the rules or ignored them, have been declined as a repeat customer due to their credit getting worse and related issues.  The worst one is that Wonga charges rollover fees if funds are not in the customer's account on the morning of the due date, even though funds may be in the account later in the day.

Even so, none of these complaints appear to be about Wonga not doing what it says on the tin: we will lend you a short term loan at high interest rates and not charge you excessive fees unless you don’t pay back on time.

If you want more on this part of the operation, read the Payday Loan Master write up on the Wonga Scam from June 2011.

My conclusion on Wonga is that they are hard on customers who don’t play by the rules, but they make the rules clear upfront and it’s down to you to absorb or ignore them.

It's all about transparency.

In fact, Wonga regularly survey their customers on what they think and, in the last survey performed by Populus in January 2011 of 15,200 people, Wonga’s customers thought:

• Wonga is better than a bank overdraft, bank loan, credit card or other payday loan
• 77% thought Wonga’s service easy to use, compared to 7% with the banks
• When asked: “how well or poorly is information communicated when you use Wonga’s service?”, 66% think ‘very well’ and 30% ‘well’ – only 1% rated communications poor
• The Financial Ombudsman Service received 30 complaints in 2010 about Wonga, equivalent to 0.003% of their customer base of a million customers; by comparison, Barclays bank had 276,000 complaints which, with around 14 million customers, equated to 2% of their customer base

If you want to read more about Wonga, here are their documents:

• About Wonga 2011 (400KB)
  
• Wonga.com code of practice (2.7MB)

Finally, I asked Wonga their views on interest rate caps, loan caps, and more qualification of the borrower and their other financial exposures, particularly for repeat customers.

They actually agreed with these recommendations, saying that more payday loan firms should be responsible lenders to ensure they don’t get a bad reputation.  For example, they use Experian and credit scoring to ensure they avoid vulnerable and poor credit based customers.  If every payday loan firm did, then they would all qualify borrowers better.  The fact that most don’t, due to the costs of data access, makes this a vulnerability.

Wonga don’t agree with interest rate caps, as they think competitive market forces rule.  As a result, they promote transparency of overall costs as being the way to go, as per their homepage, rather than regulatory limits on lending.

This is in line with a recent analysis by PriceWaterhouseCoopers of consumer credit – “UK consumer credit in the eye of the storm” – which states on page 19 that: “in the case of payday lending, an APR is fundamentally misleading.  Annualising the interest cost of a product that is only offered as a short-term facility confuses the purpose of the loan and misrepresents the true cost.  It’s similar to suggesting that the typically annual cost of a rental car might be close to £15,000, rather than a daily rate of £40.  The total charge for credit may be a more beneficial measure for the consumer in this instance.”

The report goes on (page 16) to say that “while rate caps could reduce the cost of borrowing for some, there are a number of potential arguments against rate caps that should be considered:

• Reduce access to credit;
• Migration of interest rates towards the rate cap;
• Reduced competition and diversity of products;
• Introduction of, or increase in, ancillary fees and charges; and
• Growth in the unregulated market.”

 

The Office of Fair Trading came to a similar conclusion a year before:

“The OFT has also considered the case for price controls for pawnbroking, payday loans, home credit and rent-to-buy credit and concluded that they will not address the problems identified in the high-cost credit sector, which stem from both limited supply options and consumers' lack of ability to drive competition. The OFT is concerned that such controls may further reduce supply and considers there to be practical problems with their implementation and effectiveness. These problems include the potential for suppliers to recover income lost through price controls by introducing or increasing charges for late payment and default.”

Finally, going back to Wonga, they recognise that payday firms can rip-off customers and cite examples in the USA where some firms would actively try to rollover customers at least four times to ensure they recoup their customer acquisition costs.  Wonga claim they do not do this but, as demonstrated by the Payday Loan Master, the most serious disputes between short-term lenders and their customers are when firms add fees claiming that funds were not in the customer’s account on the due date when the customer claims there were funds.

In this instance, Wonga has a zero tolerance approach to late payments and this is why they do have issues with customers who fail to meet the criteria of making sure they payback on payday.

In summary, I’m sure I’ll come back to this discussion again at some point, but Wonga fill a gap in the market for those who need short-term cash, want to avoid banks for various reasons and understand how the system works.  They have very high customer satisfaction and recommendation levels, depend upon repeat customers, and have no interest in poor credit vulnerable customers as they will not pay back.

The net:net is that Wonga does not see themselves as bad company.  However, they live with bad company in a too lightly regulated part of the financial markets.  Regulation is required therefore, and we both agree that regulation needs to be clear, fair and to ensure that customers are effectively protected.

All in all, a good dialogue and much greater clarity about this market, its challenges and issues.

 

The real rip-off culture? Part One

Further to my write-up about Wonga the other day, I have been contacted by author and campaigner Steve Perry, who has been on the wrong side of the payday loans industry.

Now don’t get me wrong. 

I am NOT against payday loans firms or their operations (I actually admire Wonga's technology ops). 

I AM against the uncapped interest these firms charge on their vulnerable customers.

However, this also needs to be qualified in terms of who are 'vulnerable customers' and who actually charges 'rip-off' rates and how.

For example, Wonga have also contacted me to put their side of the story and made clear that they do not target 'vulnerable' people with 'rip-off' rates.  

Read Monday's blog to see what their take on the world is, particularly as my original piece was kicked off by the Wired magazine coverage of Wonga.

In that coverage were two issues.

First, the line in the article that stated: “within a year, Wonga had issued 100,000 loans, worth £20 million, earning about £15 million by charging interest at an eyewatering headline rate.”

I had a fundamental issue with a firm making those sort of rates of profits on loans, but Wonga tell me their margins are nowhere near these levels and, having met with them, I will take that as fact.

Second, the star letter that followed in Wired the following month saying:   “When I could no longer repay a Wonga loan, it took 50 days of ringing and emailing to get through – an £800 loan became a £1,700 repayment.”  Steve Perry

As mentioned, Steve contacted me following the blog entry and I discovered that he is a person who got into serious trouble using payday loans.  Wonga tell me they are not a payday firm, which again I will explain on Monday.

But let's look at Steve's story.

Steve borrowed £15,000 in a year from payday loan firms.  This led him to be in serious schtuk, and having to pay back £22,000.  In other words, even though he tried hard to manage it, he was being charged extortionate interest rates and, having nowhere else to turn, spiralled into debt by borrowing off one payday firm to pay back another,.

In one instance, he borrowed £1,390.00 from PayDay UK between June 2009 and February 2010; he paid back £2,852.50 over 15 months. 

Due to losing his job and trying to manage his commitments to payback PayDay UK, Steve unfortunately then borrowed from another payday firm to pay back the first payday firm.

In July 2009, he borrowed £160 from Payday Express. By the end of his borrowing with them – October 2010 – he had taken a total of £1,225.00 in payday loans and had to pay back £1,975.00.  This is over 15 months. 

Again, the uncapped interest on payday firm operations is illustrated well as, so far, Steve has borrowed £2,615.00 over 15 months which, with a bank, would incur interest payments of around £650 max but, through payday firms, incurred interest of £2,212.50.

It’s the difference between average APRs of around 19% versus 90%.

One of the points Steve raises is that the payday firms do not take into account your other financial commitments, whereas banks do.  If you have borrowed to the hilt, a bank will take this into account and refuse you a loan.  Payday loan firms do not ask about your commitments and this means that you can borrow off all of the payday firms to pay back each one.  In so doing, you just become more and more of a victim, and that’s what happened to Steve.

He ended up borrowing off other firms to keep up and make the payments to the first.

So then came Lending Stream.

Steve borrowed £200 off Lending Stream in June 2010 and, by November 2010, owed them £1301.10 on borrowings of £640.00.

The interest was more than double the borrowings in just under five months.

He borrowed from several other firms and found each had nuances by which they made more or less money.  

Over a period of 21 months, Steve ended up borrowing from 12 payday loan companies, who made and approved 64 individual loans to him with no knowledge or interest in each other’s activities or his other financial commitments.  The result was that he had to repay £21,707.49 on loans of £14,886.00.

Now Steve admits he was a mess … but he became a much worse mess due to the unregulated state of the UK’s payday loans markets.

As Steve says: “It has been apparent throughout, a fact in which I have never denied, that I am the chief architect of my own demise.  Whilst I felt I had no other avenues to take, the harsh reality is that I chose on each of those occasions to take payday loans and sign agreements stating immediate repayment on the set payment dates.  However, responsibility of borrowing of this magnitude, on this scale cannot possibly lie totally at the feet of the desperate borrower.  A fact that cannot be ignored is that on 64 separate occasions, over the period of just 21 months, a total of 12 different payday loan companies were more than happy to instantly approve loan payments to me, with no questions asked.”

So what should be done about this?

For me, the #1 issue is uncapped interest rates.

Most countries  impose limits on the interest payday loan firms can charge.

• 37 American states allow payday lending, whilst 13 have made it illegal; 
• In those American states where it is legal, there are hard interest rate caps;
• In Canada, any rate of interest charged above 60% per annum is considered a criminal act, according to the Criminal Code of Canada; and
• The Australian states of New South Wales and Queensland have a 48% APR maximum loan rate, including fees and brokerage.

In the UK, 1.2 million people took out 4.1 million loans in 2009, four times the level of 2006,with total lending of £1.2 billion.  The average loan size is around £300, and two-thirds of borrowers have annual incomes below £25,000.

And there are no restrictions on the interest rates payday loan companies charge.

Steve makes many more recommendations which you can read in his 70-page overview of the UK industry (provided on request). 

These include:

• More qualification of the borrower and their other financial exposures, particularly for repeat customers;
• Capping of the amounts that an individual can borrow, not just from a single lender but from across the industry; and
• Better structuring of rollover of interest and transparency so that the vagaries between lenders is clearer.

The net:net is that as Vince Cable talks about the banks' “rip-off culture”, maybe he ought to look here a little too?

Meanwhile, I won't damn the industry completely as Wonga have proof that sets them apart from the payday pack.  That proof shows that they are not one of the bad guys, which I'm pleased to hear as I've watched them from their first days of operation and was surprised to hear they were making eye-watering margins.

They're not.

I will explain more about Wonga's operations on Monday.

Nevertheless, the core debate here is whether these markets are working well and whether customers are being protected from potentially damaging practices by some of these firms.

My view is that they are not in the UK.

This means that these markets need regulating and regulating fast.  

And that is a fact.

 

Postnote:

Follow Steve Perry on Twitter and/or  join his campaign - Say No To Pay Day Loans.

 

Honesty? Strewth, I'd rather steal from an Australian ...

I got a nudge today from NAB.

No, it’s not a disease.

It’s NAB, National Australia Bank, who recently pulled the pants down on their competitors by telling them they were all dodgy in a national advertising campaign framed around the theme: “it’s over between us ”.

The aim was to set NAB apart from the pack of banks, and it worked.

According to the Australian newspaper, the campaign has led to NAB seeing a 50% boost in credit card applications, a 20% increase in mortgage applications, a 35% increase in interest from customers of other banks in moving over to NAB, and a 1% increase in NAB's share of the mortgage business.

Pretty impressive stuff and how do you follow that?

With something not quite as buzzy, but still interesting.

Let’s test honesty.

On Sunday, the bank is launching a whole set of viral social stuff themed around: “An Honesty Experiment”, looking at how honest are Australians.

It comes with some cute videos and my favourite is the third in a series, where some tosser Bruce drops cash all over the pavement …

And all the Sheila’s and Bruce’s give it back to him!

It’s all on YouTube, Facebook and Twitter and is coupled with research that reckons the average Aussie tells less than three lies a week.

That’s a great message, and indicates that most Aussies are honest

Obviously, not the ones who play cricket, but that’s another story.

So then it got me thinking about honesty elsewhere, and I found an interesting survey  from Synovate, who set out to test the honesty of 2,640 survey panellists in the US, Germany and Thailand, and found that US respondents are more likely to provide truthful answers than Germans and Thais.

Hmmm … a Basil Fawlty moment almost loomed, but I shall refrain.

Now us Brits are obviously totally above board.

We just bribe our police to give us info about the Queen, the Prime Minister and anyone else we need to know about.

On a less serious note, a recent survey of 15,000 Brits found that over two-thirds of people admit that they have steal stationery from work, copy CDs for friends, or kept quiet when undercharged in shops.

Apparently, we are far more honest when there is someone watching, which includes CCTV cameras.  Maybe that’s why we have 1 CCTV camera for every 32 people as you cannot trust any of us!

So here’s the rub.

An Englishman, Thai, German, American and Aussie walk into a bar. 

The Aussie pays.

 

Massive innovations in payments ... not?

Just been through a meeting on payments and all areas of payments from SEPA to Basel III, corporates and trade, risk and liquidity, innovation and change and more.

My role was to talk about all things that I see as innovative in payments right now.

That’s a long list and so, in the interests of brevity, here’s my summary:

• Jack Dorsey’s Square which launched over a year ago, and is now processing over $4 million in payments transactions per day, compared to $3 million in  May, $2 in April and just a million a day in March. That’s a hockey stick curve if I ever saw one, and is the reason why Visa made a strategic investment in the firm back in April.

• Google Wallet was an industry milestone when it launched in May.  It was a milestone because it gave the seal of endorsement for the tipping point of mobile contactless.  It has since led to wild speculation about Google’s long-term plans, especially as Chairman Eric Schmidt has recently predicted that 1 in 3 merchants terminals will support NFC next year, thanks to the card providers upgrading merchant terminals.  The result is the Mr. Schmidt expects such a development will prepare the ground for a “trillion dollar” industry of mobile advertising and payments.

• Mobile remittances is still bubbling away nicely, as M-PESA’s lead is copied into multiple geographies.

• Virtual currencies, such as Facebook Credits, are nibbling away at the bottom-feeding end of the market and may well be mainstream soon.

• PayPal is finding itself under attack from the card firms, as AMEX, Visa, MasterCard and the banks with iDEAL and ePayo are targeting their schemes.  As a result, PayPal are fighting back with their own direct merchant offerings and the delineation between the banks and the disruptors are becoming blurred.

• Small bank innovations, like those seen with Bank Inter with their biometric iPhone app, are going to be notable as payments developments move forward.

• New payments processing capabilities developed on these ideas by innovative Payment Service Providers, such as those of Voice Commerce, are also well worth tracking.

• Personal Financial Management tools, like Standard Chartered’s Breeze which is best-in-class imho, are taking off big-time this year.  It’s like Corporate Cash Management Dashboards of Treasury Workstations meet Retail Consumer Service, thanks to innovative software solutions.  A space to watch.

These are but a cream off the cake of the extensive list of innovations in payments that have been covered on this blog over the last year.

The only question I asked at the end of this list is: when will all of these innovations in retail payments hit the wholesale payments markets?

Apart from Voice Commerce, there’s a not a lot of change in the core processing of payments that’s out there yet.

This was the question we covered in our recent research: Are payments infrastructures fit for purpose?, and the answer came back that wholesale markets will focus far more on cloud computing and scalability than sexy things like mobile internet.

Not so sure myself.

I think the whole area of mobile internet can revolutionise the corporate-to-bank and bank-to-bank space  as much as the consumer-to-bank space, especially in the area of Treasury Apps for tablet PCs by way of example.

Would anyone else agree?