The Financial Services Club's Blog

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.”

 

 

 

 

Bitcoin: immersive or subversive?

I’ve written a few bits about Bitcoin but it still confuses folks, as was clear from the debate we had about it at the Financial Services Club the other night.

Donald Norman, co-founder of the Bitcoin Consultancy, presented the latest state of play in the currency ...

... and it led to one of the liveliest Q&A sessions we’ve had at the Financial Services Club for some time.

Let’s start with the basics of Bitcoin.

Bitcoin is a fully encrypted, digital currency which, when you have some, can be used globally as easily as cash.  It has no central issuing authority and, if you trust it and can use it, means that you can trade anywhere, anytime with anyone, with no interference.

Described as the WikiLeaks of money by some, and as the most subversive development on the internet by others, it’s an interesting space to be involved in and to watch.

Bitcoin must be doing something to catch attention just by the amount of media coverage it gets.

For example, the fact that the tor-based drugs market Silk Road accepts Bitcoins has created plenty of media coverage, but most of this coverage is ignorant, incorrect and misguided.

As swalter718 replies to this PCPro article Paying for your crimes with Bitcoin:

This article was decent, in that it contained honest, factual information about Bitcoin and the Bitcoin network. However, I think its journalistic value and integrity is questionable when continuous links between Bitcoin, and the illicit anonymous marketplace, Silk Road, continue to exist and draw media attention.

The point of swalter718’s comment is that Bitcoin does not fuel crime, just as the internet does not fuel crime.

Crime exists wherever there is commerce and crime will exist in a cash form and in any form online that enables crime to be transacted.

But just because the internet enables links to drugs, gambling and pornography, doesn’t mean that you need to ban the internet.

In the same way, if Bitcoin allows criminals to trade in drugs, gambling and pornography, it doesn’t mean that you need to ban Bitcoin.

And you can’t anyway as, like Wikileaks, Bitcoin is a decentralised P2P service that exists globally through any Bitcoin user’s PC.

Tough.

Live with it.

So what exactly is Bitcoin?

Technically, it’s just an open-source payment tool.

Like BitTorrent - a peer-to-peer file sharing protocol – Bitcoin allows the peer-to-peer sharing of value securely globally.

Here’s a 100 second video primer if you want to understand the concept fully:

Simple.

The problem is that folks don’t like open source P2P services like BitTorrent and Wikileaks as it undermines traditional forms of commerce.

This is why services like Pirate Bay and Megaupload get shutdown, although it’s pretty much impossible to close down fully P2P services like Wikileaks or Freenet.

I could write more, and have already, but the point of writing this blog entry is not for me to debate the pro’s and con’s of Bitcoin but to cover our last Financial Services Club meeting on the subject.

As mentioned, Donald Norman who co-founded the Bitcoin Consultancy, presented the ideas behind Bitcoin for forty minutes.  We then engaged in a further forty minute Q&A.

Here’s the recording of the evening, if you have time and interest to want to hear it.

Donald starts his presentation at 5 minutes 45 seconds into the video after an introduction of the Financial Services Club from yours truly (including laptop fail and move of microphone, hence first thirty seconds of Donald's  speech has a few sound issues), and the Q&A starts at 37 minutes 45 seconds.

Download the full recording of Donald Norman's presentation [MP4]

Meanwhile, if you can’t spend time listening to this stuff, you can get a good primer in Bitcoin in this series of discussions from Javaworld:

• Bitcoin for beginners, Part 1: The economics and use of Bitcoins
• Bitcoin for beginners, Part 2: Bitcoin as a technology and network
• Bitcoin for beginners, Part 3: The BitCoinJ API

 

 

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)

 

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.

10% of lending via P2P?

I joined an interesting webinar yesterday about P2P Lending alongside:

• James Gardner, author of "Innovation and the Future Proof Bank"
• Gijsbert Koren, author of "Crowdfunding - The New Investing"
• Rhydian Lewis, CEO of RateSetter

What was new to me was Rhydian’s take on P2P Lending.

Rhydian is a career investment banker and set up Ratesetter with colleague Peter Behrens of RBS in 2009.

I had assumed it was another Zopa, but Rhydian distinguishes between the two by saying that in Zopa’s model the investor (or saver) chooses the borrowers they want to accept based upon risk profiles.  Ratesetter is just a pure S&L (Savings & Loans) platform, and they pool funds and allocate to borrowers on a purely commercial, rather than social offering.

Here’s the low-down on Ratesetter from their blog of October 7^th:

“RateSetter today celebrates our first full year in business. One year ago today, we launched RateSetter on an unsuspecting world, with the vision of creating great value Savings and Loans products between creditworthy Borrowers and smart Savers.

“In that time, we have reached some terrific landmarks. We have matched just shy of £9m (now £9,800,645 with an average loan size of £3,695), across 2,400 loans, and 65,000 members. We regularly match more than £1m a month, and have helped create over £165,000 in interest for our Savers.”

And from May 26^th:

“The Provision Fund (PF) is what makes RateSetter different from any other P2P lender. It is a pot of money that shields Savers from defaults from Borrowers. If a Borrower is late on a payment or defaults altogether, the PF steps in to compensate whoever lent the money. If/when that money is recovered, it returns to the PF.

“The easiest way to understand the PF is as a company. Credit Rates are like revenues, and any late payments or defaults are like costs. RateSetter acts as the management for the PF, managing both revenues and costs. It’s important to note we have no direct financial interest in the performance of the Fund (though naturally we have a substantial indirect interest).

“The reason that the PF exists is because we believe that this is a better way of mitigating the risk for Savers – it drastically reduces the element of “luck” that loans will go bad, that Saver returns will be less than expected. We have a very stringent credit policy, which at the moment declines over 85% of the applications made to it. So it’s important to recognise that the PF makes us no less cautious than if we were lending our own money (which incidentally some of us are).”

So this is a very different offer from social P2P lending, as it removes the social context and makes it pure crowdfunded lending via a third party risk manager.

For example, here’s how Zopa talk about their style of operation:

“Peer-to-peer lending is a smarter, fairer and more human way of doing money. It's like borrowing and lending with your friends and family - except there are thousands of people you can lend and borrow with.

“Both lenders and borrowers get better rates, because peer-to-peer lending is more efficient than the traditional banking model. Banks have massive overheads, with thousands of employees to pay and hundreds of branches to maintain. So they have to take large margins on the money that passes through them.

“There's no smoke and mirrors here. Banks use your money to make even more money for themselves. They lend some of it out, gamble some of it on the price of tin or the Yen depreciating, and invest the rest in any other money-making schemes they can think of.

“Whereas at Zopa, people who have spare money lend it directly to people who want to borrow. There are no banks in the middle, no huge overheads and no unethical investments.”

A key point Zopa make on their website is that “Lenders make lending offers - 'I'd like to lend this much to A-rated borrowers for this long and at this rate'”; and “borrowers size up the rates offered to them, and snap up the ones they like the look of. If they don't like the rates today, they can come back tomorrow to see if things have changed.”

Ratesetter fixes rates and risk, Zopa allows the lenders and borrowers to match as a community structure.  There are also other P2P operations in the UK, such as Funding Circle, Yes Secure and Quakle.  Each is slightly different, e.g. Funding Circle focuses upon SMEs, and there are equally other examples of new models such as CrowdAboutNow in the Netherlands, Smava in Germany, Communitae in Spain and Kickstarter and Prosper in the USA.

Either way, Rhydian made the point that the consumer credit P2P market was purely competing with banks on rates.  He did qualify that service came into it too, and brand and trust, but that the social aspect was meaningless and purely played to some investors who liked the philanthropic returns of such activity.  

He claims P2P lending is nothing new, not innovative and purely an alternative source of funds in the S&L markets.

This is demonstrated by comparison sites like moneysupermarket.com, where the P2P offers appear.

So I went to moneysupermarket to have a look and wasn’t that impressed, as a search for a £7,500 three-year loan resulted in Zopa and Ratesetter coming in at rates 1.4% and 1.8% respectively higher than the equivalent from a mainstream building society and other competing retailers like Sainsbury and Tesco.

It made me question Rhydian's claims as, if it was purely rates, why would Zopa have grown so dramatically in cumulative lending levels:

In 2010, Zopa processed £70 million ($100 million) in enabled lending – about £6 million per month ($10 million) – and hope to increase this to £140 million this year.  Ratesetter is so far under £10 million and growing, but Zopa can claim more brand and trust as they’ve been around longer.  Maybe that’s why their list of active lenders is up from 9,000 in 2008 to 16,000 in 2009 to over 22,000 last year, and an expectation of around 35,000 this year.

I think the figures reflect the community orientation of Zopa – where savers and borrowers connect with each other to set rates and match – versus Ratesetter’s model which is purely to crowdfund and compete with banks on narrower margins.

Rhydian claims that the community aspect of Zopa’s business model is the part that’s unsustainable.  We shall see.

After all, it may be that credit is so tight with the banks that finding a loan is now only available through alternative markets.

Either way Rhydian then went on to say, wearing his other hat of part of the P2P Finance Association, that the average age of funders in P2P networks is 55 years old and borrowers are 39 years old.

The P2P lending market in the UK has sourced over £200 million in funds, with £100 million funded this year.  This is a similar experience to the USA, where Prosper and Lending Club are seeing significant growth in funds managed:

Lending Club issued a total of $24.9 million in loans in September, up 8.3% on a month-over-month basis from its August total of $23.0 million in loans. Lending Club has issued $373,473,595 across 35,918 loans since it launched its service in 2007.

Comparatively, Prosper has now issued a total of $262,342,733 across 43,950 notes as of September 30th, 2011 since launching its service in November 2005. The company issued a total of $7.4 million in loans, up 7.1% on a month-over-month basis from its August total of $6.9 million in loans.

What this tells me is that, in the scheme of things, P2P Lending is now grabbing a good slice of the USA and UK market for consumer and small business lending.  This is demonstrated by the Bank of England’s stats for lending which shows unsecured consumer credit pretty much disappearing off the radar since 2008:

It’s a good time for these guys to be in the market and the prediction of 10% of all unsecured retail lending being in the hands of P2P lenders by 2010, made by Gartner in 2008, may have been precipitate but is not far off the truth of today.

As always, we anticipate the speed of change to be too fast and the impact to be far less than realised.

For more on P2P Lending, follower the twitter stream of P2P Lending News.

 

Postnote: Simon Deane-Johns, a mate of ours, has written a good piece on regulating these markets too, A New Regulatory Model For Retail Finance

 

 

 

 

How Facebook Credits could replace traditional banking

I just made a comment this week about Facebook Credits being bigger than Amazon by 2020.

This was on the back of my favourite stories about Zynga becoming the biggest PayPal merchant in under a year on the back of Facebook games, and how QQ and Second Life currencies have been examples of how virtual currencies can and will work.

But I suspect Facebook might screwup this opportunity as they stiff their community with the 30% fee base and mandatory usage of credits.

It seems like restrictive practices that a monopolistic firm would apply, and does not fit the nature of community-based practices.

So, as I haven’t blogged in detail about this, here’s a quick round robin on what’s hot in the virtual currency world of Facebook.

From Facebook’s overview: “Facebook Credits are a virtual currency you can use to buy virtual goods in all games on the Facebook platform.  You can purchase Facebook Credits using your credit card, PayPal, a mobile phone and many other payment methods powered by PlaySpan.”

The basic idea is simple.

If you are playing games in Facebook, such as Zynga’s Farmville or Cityville, you can quickly and easily buy additional fun using the Credit system.

This interview with John Silverman, chief executive officer of Ifeelgoods Inc on Bloomberg on 1^st July, puts it all in context:

The reason July 1st was a big day is that this was the day when Facebook made it mandatory to use Facebook Credits for any games or apps on Facebook.

Now this is where it gets interesting, as Facebook take a 30 percent cut from any payment made using Credits.  That’s a whacking big slice of the action.

By way of background, the 30 percent cut was introduced in February 2010, nine months after the Credits system was launched in May 2009, with the idea that 70 percent of the payment stays with the developers of games whilst the 30 percent allows Facebook to develop the games ecosystem.

Zynga is the biggest gaming firm on Facebook, and therefore critical to the success of Facebook Credits.

Zynga are the fuel that created a sustainable gaming system on the social network.

This is illustrated by the documents Zynga just filed for their IPO, with many believing their business will reach a valuation of around $20 billion.

Not bad for a firm that deals in virtual nothings.

But then read the numbers:

“From 2009 to 2010, Zynga’s revenue increased 392 percent. In 2010, Zynga made $27.9 million profit on revenue of $597.5 million. In the first quarter of 2011, the company had revenue of $235.4 million, a 133 percent increase from the previous year, putting it on track for well over $1 billion in sales this year.”

So you can see why Facebook needs Zynga and Zynga needs Facebook but, with Facebook stealing taking 30 percent of Zynga’s revenues, there would be some issues here surely.

And of course, there were until a deal was struck in May 2010, where Facebook and Zynga agreed a five year partnership for the use of Facebook Credits in Zynga games.

The deal would obviously be a sweet one, but what does it mean after 2015 for Zynga?

They’ve already thought of that.  From their IPO filing documents:

“In 2010 Facebook adopted a policy requiring applications on Facebook accept only its virtual currency, Facebook Credits, as payment from users. As a result of this change, which we completed in April 2011, Facebook receives a greater share of payments made by our players than it did when other payment options were allowed. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform, change how the personal information of its users is made available to application developers on the Facebook platform or restrict how Facebook users can share information with friends on their platform. Beginning in early 2010, Facebook changed its policies for application developers regarding use of its communication channels. These changes limited the level of communication among users about applications on the Facebook platform. As a result, the number of our players on Facebook declined. Any such changes in the future could significantly alter how players experience our games or interact within our games, which may harm our business.”

In other words, Zynga’s business is TOTALLY reliant on Facebook.

It is why Zynga filed documents with the Security and Exchange Commission last Friday, saying that it generated “substantially all our revenue” from Facebook and that a breakdown in the relationship could “harm business and adversely affect the value of our Class A common stock”.

Maybe Facebook should buy Zynga or something, but this is not the point of this piece.  The point of this piece is that Facebook is on course to generate $1 billion in revenue this year from social gaming.

If that is the case, the social gaming market on Facebook alone is worth at least $3 billion, as they’re taking a 30 percent cut.

This is an ecosystem that is only a couple of years old.

And it's just for gaming and not commerce.

Now think how it might play out further.

Facebook Credits are not just for games and apps in Facebook, as they are now being used to vote in reality TV contests and as rewards from American Express.

And sitting on Facebook is an Amazon-styled embryonic retailer called Payvment. 

Described as ‘the mall of the future’ , it has 60,000 retailers in its social store, with about 400 new etailers added every day.

So here’s why I think Facebook Credits is big news.

If Facebook gets its act together for using Credits for Commerce, then they could be bigger than PayPal and Google.

This is because, by 2020, Facebook – or it could be Google Circles or something else – will  be the internet.

People will go there first and stay there, visiting all of the destinations these ecosystems offer and trading with them in their currencies.

These social sites will house millions or even billions of people in a social ecosystem that embraces music, relationships, ideas, creativity, business … life basically.

And where there’s life, there’s commerce.

As a result, the dominant internet-hosted world of 2020 will encourage their credit system as the de facto standard.

Just like PayPal did for Web 1.0, Facebook or Google will try to become the de facto payment service for Web 2.0.

It may be in partnership with PayPal (Facebook) or a bank (Google), but all the user will see is their internet-hosted world.

The way Facebook could get into this space is by offering Credits as bonuses to retailers who transact through their service.

They may do this in partnership with someone like Payvment, and offer 1 Facebook Credit as a bonus for every $10 spent.

The credits can then be used by retailers to advertise on Facebook and so on and so forth.

In other words, it becomes a virtuous virtual circle.

Rather obvious really.

So the vision a bank should be considering, if they want to be relevant to this future life, is that if there’s a next generation world where everyone lives virtually, exchanging virtual goods and services with virtual credits, where is the relevance of the bank?

Right now, in the context of social worlds and virtual currencies, banks are irrelevant except as dumb pipes beneath.

After all, Zynga sits on Facebook Credits which sits on PayPal which sits on banks.

Everyone’s taking a cut to reinvent the system for the future world.

But what if the future world says “no”.

Tomorrow, Amazon just sits on Google Circles, and who needs anything else?

 

A mass of social media and web 2.0 stats

I like numbers and haven't posted any for a while.

So I was pleased to find a bunch of useful social stats while crawling the net the other day.  

These stats starkly put into context why social networking and social media is important.

It's important in all walks of life, especially finance which is so integral to commerce and to society.  

So here's a few numbers to keep you thinking today:

• Time on social networks represents 16% of all the time people spend on the internet, or one out of every six minutes, compared to one out of twelve minutes in 2007.

• Spending on social network advertising is around $6 billion this year, according to research firm eMarketer. 

• Mobile advertising is growing fast thanks to smartphones, and will reach $3.3 billion this year but grow to $20.6 billion by 2015, according to Gartner.

• There are 150 million blogs on the internet with 1.6 million posts generated daily.

• Tumblr, a blogging site, deals with over one billion page views a week and 10 million posts per day, an increase of 8 million daily posts compared to March 2010.   

• 60,000 websites are added to the Internet every day.

• YouTube users upload 35 hours of video every minute, or two million uploads a day.

• Facebook handles 1.5 billion updates daily from 600 million active users, with 73% of all American internet users on there.

• Zynga, the gaming firm on Facebook, garnered 100 million users on Cityville in just 6 weeks and generated $7 billion globally in commerce last year, according to InStat research. 

• Twitter handles 155 million tweets daily, compared with 50 million a day a year ago.

• Flickr has five million images uploaded daily, or 60 pictures a second.

• Consumer subscriptions for premium levels of online service, such as additional storage for personal photo collections and similar new “cloud” services, are likely to reach $6 billion by 2016 according to Forrester Research.

And if you didn't think this was Internet Bubble 2.0, here's a few other stats:

LinkedIn

Founder Reid Hoffman, the serial investor.

What is it? The site that takes the 'social' out of social networking – a place for professionals and businesses to interact. LinkedIn is the first pure social networking site to go public, hence the astronomical price-tag.

Value: $11bn; Turnover in 2010: $243m

Groupon

Founder Andrew Mason – bargain hunter with an interest in politics.

What is it? The source of money-off vouchers for every product and service you care to think of. It has grown quickly and already has a big international presence. IPO announcement is thought to be imminent.

Projected value: $15bn. Turned down $6bn bid from Google this year; Turnover in 2010: $760m

Zynga

Founder Mark Pincus the entrepreneur who turned us all into farmers.

What is it? The producer of games such as Farmville for social networking sites including Facebook. A float could be announced as soon as November.

Projected value: $10bn; Turnover in 2010: $850m (estimated)

Facebook

Founder Mark Zuckerberg – the college dropout who wants us to share.

What is it? Not the original social networking site or necessarily even the best, but Facebook has ruthlessly bulldozed its way to world domination. When Goldman Sachs sought investors for a $500m fund raising for the company earlier this year, it was inundated. During that exercise, Facebook said it would float next year.

Projected value: $50bn; Turnover in 2010: $2bn (estimated)

Twitter

Founder Jack Dorsey– the software architect and innovator.

What is it? A chance to share your thoughts with the world in 140 characters or less – as 200 million users already do. A fund-raising last year valued Twitter at $3.7bn, but since then both Google and Facebook have been linked with a bid for the company, sending its value soaring. If no offer materialises, an IPO is likely next year.

Projected value: up to $10bn; Turnover in 2010: $45m (estimated)

Yelp

Founder Jeremy Stoppelman, Russel Simmons – software engineers and friends turned business partners.

What is it? A social networking site that allows users to search for and review local businesses and services. Yelp's co-founder Jeremy Stoppelman announced in late April that the company would go public, but did not say when. Google and Yahoo are both said to have made offers of around $500m.

Projected value: $500m; Turnover in 2010: $50m (estimated)

Pandora

Founder Joe Kennedy.

What is it? Similar to Spotify, it's an online music service that allows you to create personalised internet radio service and find new music based on your old and current favorites.

Value: $4bn; Turnover in 2010: $119m

Yooku

Founder Victor Koo, former President of Chinese Internet portal Sohu.

What is it? A Chinese version of YouTube.  Youku's video library includes many full length, popular films and TV episodes from the West which other popular sites, such as Youtube, cannot display because of copyright restrictions.  These laws either do not exist in China or are poorly enforced, enabling Youku to broadcast copyrighted content without license.

Value: $7bn; Turnover in 2010: $60m

Renren

Started in December 2005 by University of Delaware graduate Wang Xing with Tsinghua University graduates Wang Huiwen, Lai Binqiang and Tang Yang.

What is it? A Chinese version of Facebook.  In Feb 2011, Renren made a pre-IPO announcement that it had 160 million registered users. Then in April 2011, it had to modify that statement to "a total of 31 million active monthly users." 

Value: $9bn; Turnover in 2010: $76m

 

Sources: “Why Women Rule The Internet”, Techcrunch, March 2011; “How Much Daily Content Is Published To Twitter, Facebook, Flickr?” Scribbal, April 2011; “Investors beware: is the new dotcom bubble going to burst?”, The Independent, May 2011; “Facebook, Twitter, LinkedIn, Tumblr Grab Record Visitor Numbers”, Scribbal, June 2011; “Technology: the internet bubble”, Financial Times, June 2011

 

Will we ever have social security?

No, not the state benefits version, but the online version.

I've been blogging a lot lately about cybercrime, identity theft and the do's and dont's of social networking.  This was in part due to a seminar that took place this week where we were debating the risks related to social networking and mobile finance.

There is a risk.

The risk is this: as we proliferate devices and provide more and more identity information online that can be accessed and shared by all friends, foreigners and strangers, we are in a position where the world of financial management is potentially compromised.  In fact, it's fatally flawed.

Our keys in the past to holding our identity were a card, a PIN and, more recently, a password.

None of these work anymore, as they are too easy to find, compromise and break.

Other keys were our date of birth, mother's maiden name and similar personal information.

That doesn't work anymore either.

So how can we protect ourselves.

With two-factor authentication, one-time password machines, biometrics and more.

Possibly.

But it's getting harder and harder to manage this all the time, and the views of the panellists in our debate were intriguing.

They all felt that the concerns we were airing were irrational.

Yes, there are worries - but we had the same worries about email leakage and internet banking and yet we're all happily using email and online finance today, so what's the big issue?

It's just a case of evolution and, over time, social networking and sharing via mobile devices and more will just become the fabric of how we do things, including mobile banking and payments.

It sounds like it makes sense.

But it doesn't.

The reason it doesn't is that email was controllable.

You can monitor email easily.

It's harder to monitor all the ways we communicate these days from facebook chat to skype chat, and from text messages to tweets.

This point was actually made by one panellist who one minute was saying "it's not an issue", and was then saying how his children had evolved from text messages to using facebook chat.

What he didn't realise is that they do this, not because facebook chat is cheaper and easier but because it's not auditable.

After a facebook conversation, it disappears.  Parents can't audit the conversation therefore.

They can with texts, if the kids forget to delete them.

That's the point.

So sure, conversations can be tracked but, by cleverly using personal and company mobiles at work and loading them both with apps that allow quiet communication, you create a real minefield for data leakage.

Data leakage is the key issue.

Data leakage used to be controlling emails and chatrooms; then it was policies for laptops, home working and devices that cross-over work and play from mobiles to blackberries; then it was issues related to using USB ports and portable hard drives ...

... now it's the data leakage points exploding by channel - facebook, twitter, skype - and by device - mobile, blackberry, laptop and tablet.

The fact is that data leakage points are out of control.

For example, add all the ways we can communicate then layer on top of that the ubiquity of devices.

We have moved from a few hundred thousand data device leakage points to several billion, and from a few channels of leakage to channels that leverage the strengths, and weaknesses, of each device.

And we have then layered on top of this all the social communication online that allow us to be socially engineered by any criminal fraternity into being socially manipulated to do things that are antisocial.

So there is no social security in our socially networked world and it's not just a controllable evolution, as the panellists proferred.

It's a mad explosion of mess that mixes our social with our work, our personal with our professional, our online with our offline.  Mix that with the billions of channels and devices and you have a melting pot of data leakage that will mandate a number of new roles within a bank.

The Data Risk Officer.

The Chief Leakage Officer.

The Social Police Officer.

The No Idea How To Stop This Mess Officer.

Oh, and if you don't believe this is a mess, you have to read this story ...

 

Why banks should worry about Google, Apple, Facebook ...

I've talked for a while about:

• money being meaningless, as data is now key;
• the battle over information, and how information warfare is the new game;
• the fact that banks should move from being safekeepers of money to being safekeepers of data;

and so on and so forth.

So when I read Venessa Miemis's article on the Bank of Facebook today, part of her Future of Facebook Project, it inspired me to think of things a little differently and look at:

• who are safekeepers of data today;
• what are their attributes; and
• what does it mean for banks?

The answer surprised me, as it explains why we should be worried about the likes of Google, Amazon, Apple, Facebook, Zynga and more entering the financial data space, because it's all about information warfare.

What is information warfare all about?

It is put best by this comment and quote from the Economist last year:

"'What we are seeing is the ability to have economies form around the data, and that to me is the big change at a societal and even macroeconomic level', says Craig Mundie, head of research and strategy at Microsoft. Data are becoming the new raw material of business: an economic input almost on a par with capital and labour."

It's all about viewing data as though it were capital or labour. A raw material for business.

Banks have long held the view that they are data managers.

For example, I regularly quote Walter Wriston, who was CEO and Chairman of Citibank from 1967 to 1984. Walter was famous for a visionary statement he made that: "Information about money has become almost as important as money itself."

He was/is so right.

If you're interested, there's an interesting Wired Magazine interview with Wriston in Wired Magazine in 1996 where lots of other visionary quotes ring out:

• "Technology has overwhelmed public policy. People keep predicting this will lead to a crisis, but I don't think it will."
• "Money that can move. It's the opposite of patient money. But money really has no volition of its own. It all depends on the people who own it and use it."
• "The increased velocity of money gives you a difference in kind - not just degree. It's like a piece of lead: you put it on your desk, it's a paperweight; put it in a gun, it's a bullet. Same piece of lead. Big difference."
• "This is the first time in the history of the world that every major country has a flat currency that is not based on gold or silver or some commodity. Today, the value of money is hooked to nothing other than the information that flows through it."
• "Today, intellectual capital is at least as important as money capital and probably more so."
• "We originally said that land was wealth. Then we thought it was industrial production. Now we realize it's intellectual capital. The market is showing us that intellectual capital is far more important than money. This is a major change in the way the world works."

Amazing interview, amazing vision, amazing person*.

Admittedly, this was during the height of the information revolution discussions of the 1990s, when Microsoft was rocking the world and mainframe moved to desktop.

But he formed this view - that the basis for wealth has evolved from land to labour to information - back in the 1970s, when technology first hit the banking system and moved us to an information economy.

Today, this vision is realised and businesses exist as information economies.

And they fight based upon information.

A good example is Google.

There are plenty of search engines around - Ask Jeeves, Lycos, Altavista, Bing, etc - but Google won this game early on by making algorithmic analysis of data more relevant and organised.

And they continue to do this today by making searches contextual and geographically localised.

And Google is not a monopoly. They have competition - Wolfram Alpha, an answer engine - and can only maintain their leadership by being just that: a leader in semantic answers.

Facebook is the same.

Facebook has had plenty of other players before them - Friendster, Friends Reunited, Bebo, MySpace, etc - and we forget very quickly these other players when one wins out.

However, Facebook is not a monopoly. They have competition - Diaspora - and only maintain their leadership through continual innovation and enhancement of their information management capabilities.

Apple is another example.

Apple were almost out of business when John Sculley ran the business.

Steve Jobs returned and it is through his leadership and vision of continuallyand elegantly innovating that they bounced back - oh yes, and recognising that the MP3 player would be the core of a lifestyle revolution.

The iPod has really been the making of Apple.

It gave them back their heart and meant that the legion of Mac users, who loved its simplicity and ease, could now be used as a music machine.

Then the vision of Apple was to introduce iTunes, and iTunes is the real engine as that's their information advantage.

The iPod can easily be substituted, as can the iPhone, but iTunes is a unique hold over information.

And that's where real information warfare begins.

Information warfare is all about continual evolution and leverage of data advantage over the potential and unrealised competition.

Which leads me to Amazon.

Amazon was all about books, we thought.

Sure, that's where it started, but it soon moved from books to music, films and more.

The company then got really smart and started to make data mining its core art form.

Data leverage by looking at dataprints - like fingerprints, the unique way in which each of us search, buy and consume - and then relating our dataprints to each other to find relationships.

By doing this, Amazon built its business on finding offers that you might buy, because people like you buy it and they know this thanks to our unique dataprints.

Soon, Amazon was more of a behemoth of data, moving into selling anything from white goods to televisions.

And it is easy to sell online, when you know how to leverage data relationships which is why even this was not enough.

Recognising its information leadership, Amazon opened Amazon Web Services (AWS) to become the largest cloud computing firm out there.

Amazon now adds server systems to AWS every day that would have been the equivalent of the complete server architecture required to run the total retail business two years ago.

That's information warfare - leveraging systems expertise to get more share of wallet, expansion of market, growth of proposition, and development of the offer into a range of services with no dependency on one.

If Amazon was still just an online bookshop, it would be dead.

Amazon is, instead, an information guerrilla and gorilla.

They win in the information as capital stakes.

Which brings me back to banking and the issue we face.

The reason we worry about Amazon, Google, Facebook, Apple and others is because they all know how to use information as capital.

They are all now pointing their information leadership at money.

• Amazon attracts over 700 million visitors to its .com domain annually, and has around 65 million customers just on its US website each month
• Apple has over 200 million active accountholders details on iTunes
• Facebook's 600 million users like gaming - Zynga's Cityville reached 100 million users in just six weeks - and all gaming will find that it is mandatory to use Facebook credits from 1st July 

I could go on, but here's the point: these guys know how to use information as ammunition.

Can you name a bank that does?

 

From Geek Culture

 

* note that later in the interview he also says: "Who wants to do their banking at eight o'clock at night after a tough day in the office? The jury is out on that." Comments made about home banking which, in 1996, was not really available.

 

Banks will absolutely be disintermediated

OK, so I said that banks would absolutely not be disintermediated last week, and it sparked some interesting debate and dialogue.

A few folks were incredulous that I could say this; others thought it made eminent sense; some noted that the movement of money could be disintermediated, but the holding of money could not; whilst others were up in arms over the fact that I could possibly believe any of it.

Well, for those who know me, it was written with a deep sense of irony and disbelief.

I absolutely believe that banks will be disintermediated and have believed it for a long time.

However, I also believe that some of the system will be protected and will never be destroyed or replaced.

This is the part that governments are regulating, protecting, licensing and calling too big to fail, or 2B2F.

The 2B2F area is the core of the monetary system, and needs to be protected.

If your social media account is compromised, it doesn’t matter too much that someone sends a status update saying: “I’m flat on my face in a flap” or worse from your account.

Sticks and stones will break my bones, but names cannot hurt me.

Losing money can hurt though, so it does matter if they steal all your worldly wealth.

This is the part that will never be disintermediated, and I guess that’s the part that Nancy Pierce of HSBC and Mark Buitenhek of ING were saying is core.

• “We will absolutely not be disintermediated … who’s better to move the money than the banks?” Nancy Pierce, Head of Product Management for Payments and Cash Management Europe, HSBC

• “Banks need to reinvent themselves as they will be disintermediated by other banks, because we are the only ones that are trusted for secure transaction processing.” Mark Buitenhek, Global Head of Payments and Cash Management, ING

But it’s open season for the rest of the financial system and yes, there are companies that claim they could replace VISA, MasterCard, SWIFT and other infrastructures.

In fact, as discussed on Monday, it’s warfare between the banks, card processors and PayPal.

The iDEAL system originating from the Netherlands gains more traction for banks across Europe as an alternative to PayPal; this is in the same moment as AMEX opens a P2P platform, as does VISA, as an alternative to PayPal; and this is in the same breath as PayPal stretches out towards physical store paypoints to compete with VISA, AMEX and MasterCard, as the online world merges with the offline.

A similar story can be seen in capital markets where the rise of Chi-X, from upstart electronic trading platform to the biggest trading system in Europe, took place in just two years (doubleclick image to see full size version):

Source: Monthly MiFID Monitor / Thomson Reuters Equity Market Share Reporter

A similar story can be seen with BATS in the USA, which is why BATS is buying Chi-X.

So disruption can occur.

In the latter case, it’s down to deregulation.

In the case of PayPal, it’s down to disruptive innovation and the dilemma of something that appears to be innocuous at first but soon becomes mainstream, e.g. with $4.2 billion revenues forecast for 2011, PayPal is now almost half the size of Citigroup’s Global Transaction Services business.

The real issue of disintermediation therefore, is not around the core of banking – the holding money area that is protected by banking licences – but around the boundaries of banking.

The thing is the boundaries is where all the profit lies.

The boundaries is everything from savings to investments, cards to loans, trade finance to treasury dashboards, insurances to wealth management, foreign exchanges to bond markets, pensions to mutual funds, swaps to futures, mortgages to marriages …

In fact, everything in a bank can be broken down into components of functionality and then traded in and out by new competitors.

Source: ACI Worldwide

This is the picture I’ve talked about for a while, where all of the processes and functions of a bank can become apps that users can download and integrate to build their own bank.

The Build-Your-Own-Bank (BYOB) is the new generation of banking.

It’s the generation where anyone from a banksimple to a Mint can step in and take out a piece of core banking.

That’s what disintermediation is really all about.

Taking out the parts of banking where there is not enough competition, and leaving the bits of banking that aren’t worth competing against … which is the part that is protected by licence because it’s too big to fail.

BYOB will absolutely be disintermediating, whilst 2B2F will never be disintermediated.

That’s the real bottom-line.

• “Could we see a wholesale version of Zopa or PayPal? Yes, I think we can.” David Birch, Director, Consult Hyperion

• “Disintermediation is well under way, and will happen very quickly.” Daniel Marovitz, Head of Product Management, Global Transaction Banking, Deutsche Bank

 

AMEX enter the P2P payments war

I got an interesting link last week to a new website called Serve.com.

It’s the website spawned from the takeover of Revolution Money by American Express for $300 million last year, and goes live today with a marketing blitz across the USA.

The service is basically Revolution Money’s MoneyExchange, Version 2.0.

If you’re not familiar, MoneyExchange is a payment service that allows users to easily send and receive money to and from friends, family and colleagues online, in a secure, free and instant way.

It’s a P2P service in other words, and one that could displace PayPal as an online and mobile direct payment platform.

Here’s what the Serve home page says about it:

“Wherever you need to move money, Serve makes it easy. It is your virtual wallet, accessible 24/7 online and on your mobile phone via the Serve mobile app. And you can even use your prepaid reloadable Serve card to make purchases in stores where American Express Cards are accepted.

“In addition to making purchases, Serve is a fast, simple and secure way to send and receive money to and from your friends and family. All you need is the recipient's email address to quickly send and receive money.”

It also has some interesting new features over and above the old MoneyExchange, such as subaccounts:

“You can extend your Serve account to others by creating subaccounts. With subaccounts, you control how much of your money to distribute, who to distribute it to and how they can use it. You decide which transactions they can perform with their subaccount, can set daily limits on transaction amounts, limit their purchase capabilities and more.

“You can create a subaccount for virtually anyone you choose, thirteen and older. Create a subaccount for the babysitter so they can order pizza, create a subaccount for your son to receive his allowance, the possibilities are limitless. And managing your subaccounts is easy. You can set and change your subaccount privileges from anywhere at anytime.

“Whatever the reason and whenever you choose, you can quickly transfer money to and from your subaccounts online or via the Serve mobile app1 available for iPhone and Android making it simple to get money to the people who need it without slowing you down.”

The service  allows you to add money via a debit or credit card and has limits of $1,000 per day or $2,500 per month of transactions, which is quite low, but enough for basic usage.

In the first instance, AMEX is also waiving fees.  This waiver applies for the first six months, after which it costs 2.9% + $0.30 per load to put money into accounts and $2 for ATM cash withdrawals.

It’s interesting to see AMEX doing this and yes, it has all the obligatory stuff related to blogs, facebook and twitter.  It also has a mobile component for the iPhone and Android, as well as access via Facebook.

This is a serious gambit by the card firm, and I hear that AMEX is investing heavily with 200 people working in their Florida office on Serve, along with more developers in New York where all of the marketing is based.

This division is all run by Dan Schulman who joined AMEX as Group President, Enterprise Growth, in 2010 and is responsible for the company’s global strategy to expand alternative mobile and online payment services, form new partnerships and build revenue streams beyond the traditional card and travel businesses.

Previously, he was President of Sprint’s Prepaid Group and was the founding CEO of Virgin Mobile USA, where he led the company from its concept stage and national launch in 2002 to become one of America’s top wireless carriers, with more than 5 million customers and $1.3 billion in annual sales.

As can be seen, there is real substance behind all this and, like the Visa attack on PayPal – did you know that Visa has splashed out $2.2 in acquisitions in just the last six months? – the card companies have finally recognised that they have to cannibalise themselves and offer P2P services or PayPal will take over.

This push into P2P occurs just as PayPal push the other way, and target to open a physical network to complement their online services in a bid to displace Visa and MasterCard.

Interesting times indeed.

 

Banks should advise customers on the do’s and don’ts of social networking

Banks miss a trick in not advising customers how to network socially with safety, so here’s my top do’s and don’ts for social networking. It’s not exhaustive, but just those that are top of mind and banks would do well to send such advice to their customers in writing, online and always when they logon to their bank accounts (in an engaging user experience way – not just by cut and pasting the words below).

Do

• clear any sensitive information from all of the electronic devices that you use, especially your mobile
• use all the tools you can to be safe online such as free antivirus software like AVGfree, and plugins to browsers such as NoScript
• share your life and lifestream, but restrict this to only those who deserve to know you and who you really know
• keep everything private and think that anything you’re posting to a website could be seen by your parents, partner or boss
• watch what your children are doing online and that they are not giving away information about themselves or the family that could be sensitive or dangerous – examples would include “going on holiday for two weeks” and connecting with adults they don’t know
• consider that everyone online is the equivalent of everyone you meet offline, as would you really trust “Bitcha Armoff”, the gorgeous and mysterious person who just poked you, in real life?
• think about opening two accounts on all social sites: one where you link to work colleagues and another where you link with friends and family – that way you can manage the work/life balance and keep personal separate to professional
• make sure that your privacy settings in both sites are set correctly and remember that by joining groups no matter how innocuous can result in many strangers seeing your profile, status updates and lifestream

Don’t

• use passwords and usernames similar to your bank logon details anywhere other than with the bank
• store your password and username on devices such as your mobile, netbook or laptop, or keep such information anywhere near them
• click on any links from people you don’t know or to something that sounds exciting but could be fishy, such as a Facebook link to see “Justin Bieber Gets Boner” can often link to a download of malware
• accept an invitation to link with just anyone – it may make you feel more popular, but any of those so-called ‘friends’ may be gangsters and murderers
• use location co-ordinates in your status updates as that’s asking someone to rob your house when you’re out
• mix work and play on your profile or social network
• put your birthday, telephone number, email address and particularly your work situation on any social networking site, as that’s a real giveaway
• link with mum and dad or most family members in any network with potential non-family or work members, as parents particularly post crap on your updates and might give away your mother’s maiden name or similar information
• talk about what you’re doing in the future except with those you trust, as this gives a perfect opportunity to ‘groom’ you for crime, e.g. “going to be at the Dog & Duck for Joe’s stag do is a real invitation”

Why do I say the above?

Because the number of times I’ve targeted people to coerce them into doing something they don’t want to do by knowing where to find them and when; who their friends, family and work colleagues are; what their tastes in music, books, films and sushi are; and more … oh, did I just say that?

On a more serious note, Facebook is being blamed for one in five divorces in the USA, and employers and potential employers are using these sites to see how fit for work you are. If your partners and employers are checking up on you, do your really believe that criminals aren’t?

I would urge every bank to post some sort of advice on their website, mobile and internet service, as it seriously worries me that customers aren’t getting this education and are probably giving away their identities as we speak.

I would also, as a bank, underscore that if a customer is found NOT to have followed these policies and procedures then they may not be covered for fraudulent account access and identity theft.

That way, the bank has protected itself, helped the customer and moved our new Bank 2.0 world a step forward.

Whilst banks ignore such perils, their customers are at risk.

 

Banks "will absolutely not be disintermediated"

We got into another fine debate this week about bank disintermediation, a term used liberally throughout the 1990s and early 2000s when Web 1.0 came around, and then was dropped just as fast.

Disintermediation – taking the bank out of the customer delivery cycle and displacing it with a new provider.

As if that could happen.

We thought it might happen a decade ago and a decade later, nothing’s changed.

Sure, we have more banks competing with each other through these channels but Netscape, Intuit or Microsoft opening a pucker bank has not happened.  Even Virgin and Tesco's threat of disintermediating the banks has failed.

Sure, we now have bank net and mobile channels, but there is no big new bank anywhere in the world.

Sure, there’s PayPal, but PayPal is just a layer on top of the old system. They’ve not replaced anything.

Maybe I’m just being a realist, but banks don’t need to worry a jot about the new payment providers.

PayPal will never be a serious player: Visa and MasterCard will crush them.

The threat of a BT or Earthport offering a secure transaction alternative to SWIFT is just a fallacy.

And the idea of Google, Facebook, Amazon, Apple or any of those guys becoming a serious contender in the financial servicing space is just smoking dope. They’re not in that space. They’re search engines and IT shops, not financial servicing processors.

As Nancy Pierce from HSBC put it yesterday: “we will absolutely not be disintermediated … who’s better to move the money than the banks?”

Or as Mark Buitenhek of ING put it: “banks need to reinvent themselves as they will be disintermediated by other banks, because we are the only ones that are trusted for secure transaction processing.”

So, for all my bleating about change and new entrants, don’t worry about them.

They are irrelevant.

 

Banking on Angry Birds

Ever since I got my iPhone, I’ve been hopelessly devoted to Angry Birds, along with about 75 million other people.

75 million!

That’s 75 million playing a game on their smartphone.

That’s more than the whole population of Britain all playing Angry Birds.

Wow!

How did that happen and what’s it got to do with banking?

Well, the story is covered in depth by Wired Magazine this month, and it’s fascinating stuff.

The whole history of Rovio, which means “bonfire” in Finnish, is fascinating.

Rovio is the Finnish company that created Angry Birds and redefined the gaming industry.

And it’s relevance to banking is that every day 200 million minutes – or 16 years per hour – is spent playing the mobile game. It is the number one best seller on iTunes in 68 countries, as well as the best-selling paid app of all time.

In total the brand has taken over $70 million in revenues for a game that cost just $150,000 to develop.

And it starts at a cost of just 59 pence ($0.90) to download.

That’s the relevance to banking.

Money.

Little bits of money that, combined, make millions and billions of dollars.

There are millions of sub-$1 downloads taking place worldwide every second now.

So that old idea of paying $0.50 to read a page of a newspaper was the fallacy of a decade ago when we talked about micropayments.

That's Rupert Murdoch's dream, but it's a lame one if you ask me.

Paying $0.50 for a game that entertains for weeks ... that's real value.

And the stats column along the bottom of the Wired article gives me the ammunition I’m looking for as to why gaming and apps are a key area for future revenues sources:

• For the initial outlay of $150,000 to develop Angry Birds, Rovio has seen 40 million downloads on the iPhone, iPod Touch and Android;
• The average iPhone user spends $4.37 per month in the App Store (Gigacom);
• $2.11 billion will be traded in virtual goods this year in the USA alone (Inside Virtual Goods);
• There will be 970 million app users (Research2Guidance) and 1.82 billion smartphones worldwide by 2013 (Gartner);
• Mobile gaming will be worth about $4.5 billion in 2013 (Electronic Arts), whilst the app economy is estimated to be worth about $30 billion by 2015 (Juniper Research);
• 59% of smartphone owners have downloaded at least one app in the last month (Nielsen);
• 26% of apps downloaded in 2010 on all operating systems were played just once (Localytics); and
• Apple takes 30% of all app revenues and downloads from iTunes.

The article talks extensively about the Rovio business model, how they started, their errors and opportunities, lessons and learning’s.

It talks about Angry Birds being more than a game now, with soft toys and YouTube and other reach.

It talks about the fact that Angry Birds popped up in an ad for Rio, a new movie, during the Superbowl this year.  

That's serious stuff, as each advert during the Superbowl costs $3 million for 30 seconds.

So finally, if you’re thinking this is irrelevant, take note of this quote from Rovio’s CEO Mikael Hed:

“We’re building an integrated entertainment franchise where merchandising, games, movies, TV, cartoons and comics all come together. Like Disney 2.0.”

That's why I'm banking on Angry Birds ... or rather, I'm banking on apps to be exact.

 

What is a ‘social bank’?

A long conversation about digital worlds and social banks yesterday.

I was asked what is a ‘social bank’, and had to explain two or three times to really get the point across.

That worries me, as social banking should be a simple concept.

The issue is that it gets confused with social work and social media.

Firstly therefore, a social bank is not a charity.

Second, it is not getting the bank onto Facebook or other social media.

There.

Now that that’s out of the way, what is a ‘social bank’?

A social bank is a bank that focuses wholeheartedly upon engaging their community of customers on an equal level, peer-to-peer, in a fully interactive and immersive conversation about money that is informative, enjoyable, open, honest and transparent.

It is a complete turnaround on the way banking was done in the past, which was a single channel of communications, take it or leave it, and it is meant to reflect the change we’ve seen in society.

What is that change?

The change from olden days, where everything was tightly controlled through limited communications via a small number of TV and radio stations and print media.

Back then – we’re talking quarter of a century ago – there were extremely limited ways to be informed and it was a one-way channel of communication.

Just a decade ago, it had changed but not much.

A decade ago, you had far more channels of communication – the internet, cable and satellite television – but even then, it was limited by usage.

The key a decade ago is that if you wanted to be informed, you had to find the information.

You had to Google for it, you had to find the TV channels, you had to pay for them too.

Suddenly everything changed.

It all changed around 2002 when blogging and YouTube were emerging.

But it was a slow burn.

Then Facebook arrived and Twitter, and it exploded.

What exploded?

Human content.

Not just a few humans, but a whole world of human content as every person on the planet became a potential media channel.

Every human on the planet has the potential of generating news, views, creativity, content.

Sure, some of them may be only read by one or two friends, but the fact that we are now surrounded by content is brought home nicely by this article ( Download 3MB PDF: 'Tweet Freedom' or read online, pages 36-40) from Stylist Magazine:

“The benefits of using new communication technology– now as second nature to us as breathing – are indisputable. Tap into Twitter, Facebook, Google and wherever you are in the world – from a sun-drenched island in the Maldives to a Virgin Atlantic flight to New York – and you’re guaranteed to have your finger on the pulse of what’s going on in the lives of your friends, celebrities, and politicians. Stephen Fry shares his pictures of Sydney harbour via a TwitPic. Ashton and Demi let you know they’re having a fabulous time in St Barts on Twitter. Indeed, as a nation we’re so consumed by technology that the average multi-tasking Briton crams in eight hours and 48 minutes of media (from Twittering while internet shopping to Facebooking while downloading) into the seven hours they spend online each day.”

In other words, our influence is now generated by a random community of friends, family, colleagues and their communities of influence.

Not by traditional channels of communication.

If our friends, family and colleagues are anti-something, then often so are we.

And if our friends, family and colleagues are influenced by others who are anti-something, then that filters into our consciousness too.

And if our friends, family or colleagues happen to get something inflammatory to expose injustice, wrongdoing or other issues - such as bank's misdealings with customers - then they will share it and expose it in real-time.

And, before you know it, everyone will know it.

This potential to socially connect with almost everyone is radically altering society and the way we think, as we now demand and challenge everything.

This is part of the reason we no longer trust anyone or anything, as the Wikileaks world means that everything is open to question.

Again, this has been brought home clearly by the recent uprisings in Tunisia, Egypt, Bahrain, Libya and across the Middle East where people have finally woken up to their oppression.

From today’s Guardian:

“Who among the first evangelists of the internet foresaw this? When they gushingly described the still emerging technology as ‘transformational’, it was surely the media or information, rather than political, landscapes they had in mind. And yet now it is the hard ground of the Middle East, not just our reading habits or entertainment options, that is changing before our eyes – thanks, at least in part, to the internet.

“Take the Tunisia uprising that started it all. Those close to it insist a crucial factor was not so much the WikiLeaks revelations of presidential corruption that I mentioned here last week, but Facebook. “It was on Facebook that the now legendary Boazizi video – showing a vegetable seller burning himself to death – was posted, and on Facebook that subsequent demonstrations were organised. Who knows, if the people of Tunis one day build a Freedom Square, perhaps they'll make room for a statue of Mark Zuckerberg. If that sounds fanciful, note the Egyptian newborns named simply ‘Facebook’.”

So I said that a social bank is not based upon social media, but it is social media that has spawned the social bank. And the reason I say ‘it is not based upon social media’, is because that immediately makes everyone think I’m talking about a bank based upon just Facebook and Twitter, and that’s not what I mean.

Facebook and Twitter may be replaced by MyTime and Lifestream tomorrow (just made up those two btw), and so the social media platforms are transient.

What is here to stay is the transformation these transient platforms and technologies have created, which is the truly connected global planet of content generation by individuals.

The social planet now needs social banks.

The premise therefore is that, in the first generation internet, those businesses that relied upon people coming into stores to buy things that could now be found electronically would go out of business.

That was true.

Travel shops, book sellers, music stores and more all disappeared.

In the second generation internet, those businesses that rely upon control, secretiveness, confusion and ignorance will go out of business.

And that will be the challenge for banks where complexity of fees and charges, control of the customer’s access and secretiveness about financial movements have been the core capability of making money in the past.

That complexity, control and secretiveness has disappeared and the future way is therefore to be open, honest and transparent.

What does this mean in practice?

It means becoming a social bank.

A social bank is one that engages the customer by making discussions about money interesting, informative and fun.

They educate and illuminate, respond and converse, engage and experience customers with real interaction.

The social bank does not provide ‘statements’ and does not expect the customer to ‘check their balances’. Instead, they are really friendly as part of the community of interest of the customer.

They rank as the customer’s friend, along with their other colleagues, family and friends.

That is the community they inhabit.

How can a bank become a friend?

By being open, honest and transparent and, therefore, trusted.

Banks trade on trust, but the trust is not in the bank but in the bank’s ability to look after money securely.

The trust we are talking about here is in banks doing the right thing.

A bank will do the right thing in the future mainly because, if they do the wrong thing, they will get found out and taken down.

That is what the WikiLeaks world is about.

That is what the social network has inspired.

That is what banks of today face in their dealings with everyone and everything.

So a social bank will be immersive.

It will tell me what I can and cannot afford.

It will advise me of better deals as and when they come out.

It will show me alternative providers of financial products, and tell me why it’s not a better deal to move over there.

It will give me rewards for being loyal.

It will know every detail of my financial behaviours and transaction history, and will help me to behave better.

It will respond to my questions in real-time in the way I want.

It will educate, inform, illuminate and engage.

It will be my friend.

And, as a friend, it will help me save money and treat me to rewards when I’ve been good.

Hmmm … a truly open, honest, transparent bank that really has a relationship with me.

Now wouldn’t that be something?

 

A new banking system for social life

Some time ago I was having a debate about social networks and the problems of where they overlap with professional networks.

For example, when I first registered on Facebook, I connected with everyone I knew – family, friends and business acquaintances.

The result is that I have a completely messed up Facebook life, where I daren’t post anything personal as most of my network is business colleagues, but my extended family post things about me which all of them can see.

It’s just plain embarrassing.

As a result, I now have two Facebook profiles: a business one and a personal one.

Similarly, I’ve moved towards clear delineations between my personal and professional life, and hence use LinkedIn for business purposes and Facebook for personal life.

Similarly with Twitter, where I have two accounts – one for my more irreverent comments as Chris Skinner, and the other for purely business focused news through the FSClub.

This clarity of keeping work and personal lives apart is summarised well by this hugely popular presentation from Google's Paul Adams on the real life social network:

View more documents from Paul Adams.

The presentation clearly shows that in the first phase of Web 2.0 we got confused, and mixed up our buckets of friends, family and work in one massive heap.

The next wave of change will separate these into compartments that are firewalled, and we determine what information and when is allowed to overlap or filter across the walls.

If we want our work colleagues to see our partying on New Year’s Eve, then we tag those entries accordingly; if we want to stop our work mates seeing our holiday photos, then that’s easily protected for privacy through a tag too.

The reason I mention this is that this challenge of keeping business and social needs apart in our individual networking applies to banking.

Right now, banking deals with one area of value management: commercial trade.

It’s all about trade and commerce, but nothing about community and life.

It’s as though money is life, whereas life is about far more than money.

Most people will say that life is about family and friends. When you die, it’s not your work colleagues that will cry, it’s your family.

It won’t be your boss that misses you when you pass on, apart from your contribution to profits, it’s your partner, children, parents and mates.

That’s why money runs in a parallel stream to life.

But it’s not life.

Money enables things, but the best things in life are free.

OK, so I’m going off on one again, but you see the point.

And the point is this: just as our network of contacts needs organisation and compartmentalisation; so does the exchange of value mechanisms.

Right now, we have a very well organised, regulated, sometimes fragile but generally strong system for money ... but we have an extremely nebulous, disorganised, poorly managed and little understood system for exchanging social value.

Sure, there’s been experimentation with community currencies, as I’ve referenced before, but these are all very local in nature and often short-lived.

And yes, we have a welfare state, but such states differ country-by-country and often depend on governments to organise them ... and, as everyone knows, governments are there to create the state not to manage it.

Therefore, in most examples, the welfare system is better run, managed and organised by private or public-private cooperations, than by pure nationalised or governmental systems.

What this means is that the management and exchange of welfare and community systems should have a system that runs like the banking system, but in parallel.

It might even be run by the banking system, with compartmentalised firewalls allowing some commercial trade to filter into community services and some community services to filter into commercial trade.

This is what I think we were getting at in the lengthy debate I had with Venessa Miemis last year, and it is something that struck me today as I talked about social networks and professional networks.

In other words, we need a parallel banking system for trading social currencies that is as well organised, regulated and managed as the banking system is for trading commercial currencies.

You may or may not agree, but now it gets interesting and I’m sure there’ll be a lot more written about this in 2011.

Watch this space.

 

Inspiration for #Wikileaks DDoS hive

I was following the Distributed Denial of Service (DDoS) attacks on Visa, MasterCard and PayPal closely during the supporters campaign to target those financial firms who had cut any ties with Wikileaks.

The group amalgamated under a twitter hashtag #operationpayback, and posted a variety of notes about who to target when and how, with clear instructions as to how to download and use the javascript that would operate the DDoS against the target website.

They also issued other instructions, and one particular notice caught my eye.

Written by a Dutch citizen, based upon the English grammar, the notice reads as follows:

It’s the first time a big-deal Cyberwar is going on, and for that, the whole community should be proud of those efforts. We also know we're just warming up, DDoS is nothing comlex at all.

The point is: why stopping here?

We know we live in a system rotten to the core, and no country is exception ...

I’m not saying Capitalism versus Communism.

Every form of Government is basically corrupt, doesn’t matter the system, for all of those depend on money to work.

The sh*t we live in, corruption, lack of transparency, greed are just by-products of an outdated system.

Even if our mission is successful, all of this will come back if we don’t go for the root causes.

Let’s face it people, there’s not fix for this system. We need serious update, redesign it from the ground up.

And that’s the root problem: the monetary/financial system.

It goes on to point to an interesting 30-minute programme about “How Money is Created”.

The programme is on YouTube in three parts.

Part One

Part Two

Part Three

A call to revolution?

Or just a call in the wild?

Probably the latter, as the note finishes by saying: “so, the first Christmas in long years without Consumerism would be a fresh start. Internet Heroes? Let’s prove it.”

Don’t think so: “comScore's latest ecommerce figures show that around $5.5 billion (£3.5 billion) was spent between December 11th and 17th, an increase of 14 per cent on the same period last year.”

 

2010 Review: Retail Banking

So this week I thought it worth posting a few reflections on 2010, the year that was, and begin with some thoughts on retail banking (tomorrow will be payments and Wednesday, capital markets).

Surprisingly, retail banking has not had any really startling changes.

Branches are still the focal point, as evidenced by Santander who increased their branch density across the UK this year by a half, to 1400 branches, to become a bigger branch based bank service than HSBC.

Santander, like most banks, believe the branch based model is the key point of customer interaction and building trust. It’s also the place that banks believe customers want to see first, when they consider opening a new account.

Whatever the social media decriers believe when they say that branches are dead, they’re wrong.

Nevertheless, there have been a few innovations in branches, led by Citibank of all banks.

Citibank have been trialling the branch of the future in Hong Kong and Singapore and, after being received well there, launched the first new branch in New York last week.

The branch features wi-fi, touch screens, interactive videokiosks and all sorts of other nifty features.

Even tellers!

Pictures from PSFK and the Business Insider

Trialling branches of the future is no big new thing, Barclays did it last year  ...

 

... but it is interesting, considering the recent history of the bank, that Citi would embark on such a venture when it’s going to cost them billions to refit branches across flagship cities in the USA and worldwide.

So they obviously believe there’s something still in the branch network.

Mind you, lots of banks believe in branches such as BNP Paribas, Umpqua, our own Metro Bank.

One bank, DBS, even ran a competition for customers to design their branches – a great crowdsourcing initiative – with the winner being a 27-year old design student.

What I really liked here is that 80% of the entries came from people aged 26 years or younger, such as this one designed out of lego bricks.

Lovely.

And there are loads of other case studies on branch designs out there now, particularly notable being the summaries of designs from folks like Jeffry Pilcher  and Brett King.

Nevertheless, as a post-branch modernist, I’m not convinced about branch gadgets which all of the above represent for me.

Giving out sexy iPads to staff in branches or telling them how to dress is all well and good, but the branch is still a broken cog in the bank retail distribution model.

First, because branches are on the decline long-term, whatever Santander and their cohorts believe.

Second, because modern bank branches with whizz-bang electronics will always lose to an old and dingy branch with a great team.

In other words, branches are all about humans.

The best branches will be those with a great branch manager. The manager inspires the team – people leave managers, not companies – and so a bank with 2,000 branches needs 2,000 great branch managers to be truly different and high performing.

Whatever the technology.

And what banks really need is probably about a tenth of the branches they currently sustain, and staff them with amazing managers.

Nevertheless, most banks still believe in expanding the branch network, as that's where they believe the customer experience, engagement and relationship starts and ends.

Equally, ATMs are still alive and well.

This was ably demonstrated by the Spanish bank BBVA, who launched the ATM of the Future earlier this year: 

The Future of Self-Service Banking from IDEO on Vimeo.

Created by BBVA with design firm IDEO and ATM manufacturer NCR, the new design is like an iPad stuck on a wall that dispenses money.

Neat.

Mind you, there are lots of things happening in the remote retail space with iPads that are really changing the game.

Although the iPad only came out in Easter this year, it’s already pervasive with three million sold in just 80 days and around 13 million units sold this year since the launch last April.

Phenomenal.

And, interestingly, financial services dominates this space, with 36% of iPad activations this year from the finance sector according to a survey from Good Technology:

 

What are they doing with it?

There’s lots of high net worth and investment banking usage for a start, with JPMorgan giving iPads to all of their investment bankers.

But we’re focused upon retail here, and there have been several interesting retail developments, with banks across the world launching apps.

Chase were one of the first to release an iPad app, and most US banks are offering some form of iPad app usage.

Spanish banks got into iPad banking early in Europe, whilst Bank Hapoalim was one of the first I heard about in the Middle East.

Some banks even launched complete iPad branches, and there are new ones every day (today's is Charles Schwab), but it’s still questionable about where all of this is going.

After all, iPad’s good for banking for dummies, but it’s still an iFad.

So what’s been really important this year, if all the gadgets are just dull?

Social media?

Not really.

There’s been some good things launched as social platforms, such as those of First Direct, but not a great deal of radical bank activity in blogging, YouTube, twitter or ...

... oh, hold on, there is one notable experiment: the Facebook bank from ASB, New Zealand.

 

Launched in September with a team of eight staff to answer customer questions and engage them online, it’s a good example of an experiment.

But then again, it is just that: an experiment.

Will all banks move to branch services on Facebook online?

No.

To me, it’s similar to the Second Life bank experiments ... interesting, but not for the long-term.

It’s another iFad.

So what has been the biggest change in retail this year?

It has to be mobile.

Mobile is THE change in 2010.

Mobile is everywhere.

And yes, I know the detail brigade will say: well, isn’t iPad apps mobile Chris?

Yes ... ish.

But mobile - from NFC contactless to smartphone apps, from P2P payments to bank/telco partnerships, from text alerts to using the mobile to track fraud - has come of age in banking in 2010.

It’s been bubbling away for at least seven years, when I first talked about mobile banking, and it’s finally and definitely here and now.

I’m not going to cite specific mobile usage or illustrations as you can find loads by clicking here.

Let’s just say 2010 was the year mobile really hit banking.

In fact, if I were making a prediction, it would be this: within the next decade, bank account numbers will be portable across banks.  Like mobile telephone numbers, if you change your provider, you can take your number with you.

Add on to this the fact that the mobile is your main number, the bank account number will incorporate the mobile for account details.

The mobile will be an authentication, verification, validation and identification system.

Mobile with voice biometric and potentially other identity checks built into the phone - a fingerprint or eyeball check - will be the #1 device for all bank activity.

Just you wait and watch.

Meanwhile, if it took the mobile telephone seven years to move from possibly being disruptive to being mainstream, then social media will come of age around 2012-2014 as this first hit my radar in 2005 as a potential for bank distribution.

Interesting.

If that is the case, then the debate I’ve been having with Venessa Miemis about the future bank may be in our heartland sooner than we think.

 

 

The Establishment is just PANTS!!!

I was quite intrigued to hear a speech by Ben Ramsden, Founder and CEO of Pants to Poverty.

Ben's talk was all about social business which, when combined with social finance, creates a completely different and new form of commerce that, if the next generation has any say, will compete with and potentially merge with traditional finance and business over time.

Ben began his talk by saying how he used to be motivated by money, like most of us.

His career launched into a trajectory in telco’s before the dotcom implosion, at which point he decided to try something different and travelled out to Guyana to see how other people lived.

It changed his life, and he ended up getting heavily involved with Amnesty International and, through that work, the “Make Poverty History” Youth Movement of 2005.

This was the event, wrapped up with Live8 and lots of other NGO (Non-Governmental Organisations) pressure groups changed the world, or was meant to, by getting the G8 to sign up for relief for African nations from debt.

Only five years ago, but a very different world.

At this time, Pants to Poverty was launched and sold 11,000 pairs of pants in just five months.

After a while, Ben realised this could be a business and created it as a social business.

What is a ‘social business’?

There are lots of definitions of social business, with many mistaking such businesses as charities. They’re not. They are businesses, but they are there to deliver against social and environmental needs, as well as financial ones.

The core of such businesses therefore is that they redefine the profit and shareholder view of the world.

Profits are based upon contributions to the environment and society, as well as the bottom-line, and shareholders are all of the stakeholders, not just the investors. So the farmers, shippers, staff, customers, investors and community all get a share of profit here, not just the business investor.

It may sound airey-fairey, but it works in practice as Pants to Poverty sources cotton from fair-trade farmers, turns it into pants at ethical factories in the developing world, and sells them in ways that raise awareness as well as making money.

And Pants to Poverty is very good at creating awareness. For example, the business holds the Guinness world record for the most people gathered in pants in public ...

 

... as well as the biggest pair of pants ever created!

The point that Ben made is that this had started as a social movement – to Make Poverty History – and had moved to being a social business – Pants to Poverty.

By being a social business, every stakeholder in the supply chain has a stake. The cotton producers get pesticides; the factories have inspectors to avoid any labour misuse such as child labour; and the distributors get rewards in both cash and kind.

For example, Pants to Poverty is going through a round of funding right now, to try and get £250,000 in order to build the brand and capabilities of the firm.

In order to raise the £250,000, the company has issued 100 convertible bonds valued at £2,500 each. The bonds last ten years and are designed to sell to friends and family, and anyone else who might buy them.

And interestingly enough, Pants to Poverty is finding a lot of High Net Worth Individuals are interested in taking the bonds.

Why?

Well, apart from the philanthropic virtues and the fact they are helping the world, there’s actually a really interesting triple bottom-line financial product on offer here.

What is the product?

For your £2,500 per bond investment, you get 8.65% annual interest.

The interest however, is paid in three ways via quarterly instalments consisting of:

• 12 pairs of Fairtrade and Organic underwear (inclusive of delivery)
• £21.63 paid in cash to offset tax at source
• £50 donation to the Pi Foundation, a charity set up by Pants to Poverty to help develop sustainable business models in the fashion industry

In other words, you actually only a small amount of real interest, the £21.63 cash, but add in the other components and it’s worth a lot more.

No wonder Pants to Poverty is gaining ground.

But what really intrigued me is the likes of Ben, Venessa Memis, Nicholas Negroponte and others, because they’re doing something for the world.

Changing it for the better.

Some in small ways and some in big ways, like Bob Geldof, and though the majority of us capitalist banking community might think they’re all a bunch of tree-hugging hippies, there’s something that struck me as Ben talked.

You see we have this old world, let’s call it the Establishment, and the new world, let’s call it the People.

The Establishment affirms the views of old, and believes that management of the People is through control mechanisms of which a key part is the traditional media.

The People represent the views of the next generations, and believe that anything can be achieved through crowdsourced change.

The Establishment has trashed the planet whilst the People want to change the planet.

And there’s the rub.

There is a real friction between Old World and New World.

This is what has occurred to me more and more as I think about Wikileaks, the rise of social networks and media, the ability for P2P to crowdsource globally and to think differently.

I thought it worth illustrating, and so created a few slides to illustrate the point ...

Future trends

 

If the key drivers of change accumulate to force old bubbles to burst, then the new outcomes will be different.

And the key drivers of change are accumulating today to force the old bubbles to burst:

• Political: the belief in our political leadership has been undermined by the Iraq War, expense and other scandals, with Wikileaks leading the charge to expose corruption and weakness;
• Economic: there is a loss of trust in the capitalist system, with leaders of the world striving to find new ways to rebuild whilst global socials build new financial models;
• Society: as the ageing population become a burden on the young, Gen Y will be the next generation of leaders who will have to manage the books to support the boomers and Gen X retirees whilst nurturing the Millennials; and
• Technology: is transforming the world by linking everyone P2P globally.

Not sure where all of the above leads, except that it is becoming more and more obvious, and some form of hybrid model will need to be created.

Otherwise, when two tribes go to war, a point is all you score.