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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.
I haven’t written much about social media lately. The reason is that it’s now mainstream and dull. When you're scanning future views, you’re not as bothered about Facebook and Twitter when everyone’s familiar with and using such services.
Facebook's pervasiveness is well illustrated by the Facebook IPO announcement, which gave a raft of good stats about how the service has matured as it enters its eighth year of existence:
Facebook has a total of 845 million monthly users and 483 million daily users.
Of its monthly users, half have used Facebook on their mobile.
The company has 3,200 employees.
Facebook is an advertising company. Of its total revenues of $3.7bn in 2011, 85% came from advertising. And that is down from 98% and 95% in the previous two years.
The company makes $1bn in pure profit.
Zynga, the games maker behind CityVille and FarmVille, single-handedly accounts for 12% of its revenues.
The majority of its money comes from the US, but the majority of the users are outside the country, and the majority of its non-US revenues comes from western Europe, Canada, and Australia.
The company generates 2.7 billion "likes" and 250 million uploaded photos everyday.
Eight years.
$100 billion IPO.
Not bad, Mr. Zuckerberg.
But what Zuckerberg has really done is more important.
It shows in Facebook’s mission statement: “Facebook was built to accomplish a social mission - to make the world more open and connected”.
Job done and, in so doing, it has unleashed the Power of One.
We saw the Power of One rise when MySpace launched the musical careers of folks like Lily Allen, Kate Nash, Sean Kingston and more.
The social network allowed artistes to attract interest without having to find major music moguls or clubs to perform.
The Power of One began in a world where the social aspects of the global network allow anyone to vote on anything, and make it mainstream if enough voters gather.
This is being proven again and again.
Recently, we have seen the Power of One through Tumblr.
In this month’s Wired Magazine, the front page article is all about David Karp who has created a $500 million empire through the blogging platform.
And the opening is all about a young chap called Chris Brown who created a photoblog “We are the 99%” on Tumblr.
The story speaks for itself:
On the evening of August 23, 2011, Chris, a New Yorker who wishes his surname to be withheld, created a Tumblr account. His aim was to raise awareness of the Occupy Wall Street march planned for September 17. The idea was simple: he asked users to submit a photograph of themselves holding a sign explaining their economic circumstances. He called the page We Are The 99 Per Cent, and promptly forgot about it.
Four days later, Chris returned to his flat, after spending time preparing meals for protesters, and checked the We Are The 99 Per Cent tumblelog. When he had left, there had been two photos in the inbox. "I thought, I'll have five or six more submissions," says Chris, now 29. "The inbox was overflowing. I spent that night reading through the submissions. By the time I was done, I had barely dented this thing."
One photo was from Priscilla Grim, a 36-year-old activist working on strategic communications for the Occupy Wall Street movement who has been "protesting one way or another for about 20 years". Grim noticed that, two weeks after submitting her image, the blog hadn't been updated, so she emailed Chris and offered to help to edit the blog: "It struck me that this was the perfect organising tool of today," she says. Together, they started posting the submissions. Some were short: "I served in the US Army. Served 16 months in Iraq. Now I deliver pizza. I am the 99%." Others were longer, from the jobless woman prevented from donating a kidney to her friend because she didn't have health insurance, to the 19-year-old single mother who said she went without food for days to buy formula milk for her four-month-old son. But they all kept the same format, with signs often obscuring the creators' faces. "We posted 100 photos before it went big," says Grim. The New York Times covered the blog. "After that, it went all over the place."
The blog became a meme and the meme went viral. As Wired went to press, 3,000 photos had been posted; the tumblelog receives more than 100 submissions a day. Protestors adopted "We Are The 99 Per Cent" as a slogan, writing it on signs and banners. "We're standing there with thousands of people screaming [the phrase]," Grim says.
Occupy Wall Street and many other social movements would just not exist in the same way without Facebook, Twitter, YouTube and the Power of One.
The real revolution of these networks is that they allow critical mass of new movements to be linked globally within days, as demonstrated by the We are the 99% story.
In banking, we see these changes occurring rapidly too.
Just look at Molly Katchpole, the young lady who posted a petition on change.org to get Bank of America to reverse policy and waive the $5 per month fees they were going to impose if people used their debit cards.
The fee was to recoup losses due to the implementation of the Durbin Agreement, part of the Dodd-Frank regulatory changes in the USA. This agreement wiped out profits from interchange on debit card transactions and many US banks decided to add a fee therefore, in order to recoup losses (note: Bank of America were not the only bank to do this, just the first to get the headlines).
The move proved so unpopular that Molly’s petition rapidly gained traction, was promoted by change.org and then was picked up by major national media like the New York Times.
When the online petition reached 300,000 votes, Bank of America reversed policy.
It resulted in the program being voted the biggest PR gaffe of 2011 by most marketing magazines and CEO Brian Moynihan admitting that it resulted in a surge of account closures.
Note the speed of this change however, in that Katchpole posted the petition with 100 signatures on 1st October …
It’s a bit like Zynga getting 100 million users of the CityVille game in just ONE MONTH, and is still the most popular game on the internet today with over 10 million daily players.
The Power of One is all illustrated by speed, global connectivity, leverage of the individual voice and the nature of the network.
There are many other examples of how the Power of One is impacting banks – such as the Wikileaks and Anonymous impact on PayPal, Visa and MasterCard via Twitter, and the UK Students who made HSBC reverse policy on fees after a Facebook protest - and they show that banks should be afraid of the Voice of the Customer today.
After all, the connectivity of the Power of One fuelled the Arab Spring through Facebook and Twitter.
Who would have thought that Gadaffi, Mubarak and others would have been deposed due to the fire of Mohammed Bouazizi, a Tunisian market stall holder and his note left on Facebook?
Be at least a little bit afraid.
Josef Ackermann, CEO of Deutsche Bank and head of the Institute of International Finance which represents the world's banks: “we have a social responsibility, because if this inequality increases in income distribution or wealth distribution we may have a social time bomb ticking and no-one wants to have that.”
Just had an interesting banter about the future of technology with a technologist.
We like to think that technology is special.
It is.
In the words of Arthur C Clarke: “any sufficiently advanced technology is indistinguishable from magic”, and he’s right.
It is why I’ve spent my life being in awe of the speed of technology change.
From old mainframe systems with punched card programming to the steady march of computing into the home and now the hand, I’ve loved seeing how magical technologies change the way we live, communicate, relate and think about our world.
It’s amazing impact on all industries, particularly entertainment, is another magical change in living that we’ve been lucky enough to observe and live through.
Downloading a newly released movie to watch on an iPad in an airport lounge whilst waiting for a delayed flight would have been inconceivable just a few years ago, but is now simple.
And with this change, we have seen roles, structures, industries and organisations change dramatically: from the luxury of air travel to its steady commoditisation; from music in stores to music over the air; from the idea of collecting groceries to having them delivered; from the book to the kindle; and more.
Our lives are dramatically altered by such change, and our banking services are too … more gradually, but they are changing too.
Through this generation of change, we have also seen a gradual change in the role of the technology wizards who wield their magic.
From head of data processing to information processing to information technology to information, the chiefs of technology have gradually evolved from administrators of automation to strategic board advisors.
And yet all of this is about to change, and change dramatically, for the managers of technology will be made redundant in the near future.
Who needs technologists at board level when the technology is being made as easy as electricity?
When you can give all your processing to cloud-based services and when all technology is as easy to use as an electricity point, who needs a highly-paid manager of such magic?
In other words, when the magic becomes mainstream, the magicians become redundant.
This was a point we were both musing over as we talked about telephones and electricity.
When the telephone was first deployed, it was put into the mailrooms of companies as it was seen as a replacement for post.
Later on, heads of networking and telecommunications became commonplace, and some still are, but the head of telephone sanitisation has disappeared.
Similarly, the head of electricity has disappeared.
In the land of long ago, most manufacturing firms had a head of electricity as they had to move from steam and water power, to this new-fangled voltage stuff.
They would need wiring and planning of wires; assistance on which voltage classifications to use; and consultancy about the layout of points to which machinery could be attached.
All of this was complex stuff … but it’s now not magical or even of interest.
We just live with it and use it, and the electricity firms handle all the issues of how to get it our plug points.
That’s what will happen with compute technology of 2012.
Today, we have magicians who organise it all for us but, already, we can see cloud computing, HTML5, apps, smartphone and table PCs eradicating the magic and making it something that we just enjoy as part of life.
So very soon, the magicians will disappear as the technology firms handle all the issues of how to get the magic to our touch points.
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.
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.
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.
For most of my life, I’ve been aligned to the financial services industry as a supplier of technology.
Throughout this time, my role has been as a solutions person, providing technologies that solve financial processing problems.
And, throughout this time, I’ve dealt with technology companies that struggle with moving from being horizontal to vertical, from generic to specific, from platform to solution.
It cropped up again yesterday, where a company that is well established has now realised they need to be vertically aligned to the financial industry rather than generically offering products.
Before I go any further, I should point to the differences between solution versus product from an earlier blog:
Product people are myopic. They are short on everything. Short-sighted, short term, short on time and short on developing relationships ... Solutions sellers are different, as by their very nature they want to know your problems first.
The discussion went from horizontal providers offering generic products to the need for vertically aligned firms providing specific solutions to specific markets, and the challenges of how to get from A to B.
Banks provide a specific challenge in this context as they are so complex, with so many lines of business and so many regions of interest, that nothing can provide a single solution to all the problems of the bank worldwide.
They are not one-dimensional, which an enterprise solution would imply. They’re not even two- or three- dimensional. A bank is more like a Rubik’s Cube, with so many dimensions, facets, structures and operations.
That is why there is no such thing as an enterprise approach … unless it’s one-dimensional.
What is one-dimensional?
The rollout of an operating system or a communications tool, such as a mobile telephone.
Once the central decision is made, a bank can roll-out a standard single dimensional product to all people.
Other examples include email, word processing, payroll and more.
This is well illustrated by the decision by one bank to adopt Google cloud services for example.
The headline states that “Spanish banking giant BBVA is switching its 110,000 staff to use Google's range of enterprise software.”
It’s Google’s biggest deal for cloud computing ever, but Google aren’t vertical.
They’re a horizontal product company.
So you read further and find that all the bank specific things in BBVA stay within the bank. It’s just the horizontal collaboration tools such as email, calendar, docs, chat and video conferencing, that are moving to the enterprise cloud.
It illustrates the point well that enterprise solutions are purely standardised tools – like email, spread sheets, telephones – as well as systems that can be used in shared service operations like HR, Marketing and IT.
This is why I would say that payroll and CRM are enterprise solutions, as they can be implemented without alignment to the industry specific needs.
Anything that needs to be tailored, organised or deployed in a specific way to suit a line of business or regional operation, is not enterprise.
It’s not horizontal; it’s vertical.
That’s why firms find they have to move to vertical when they move away from a generic, mass market offering to a specific offer aligned to a specific need in a specific industry.
Then it gets challenging.
The best way to illustrate this is through personal experience.
I worked for a firm that offered an office automaton system.
It integrated word processing, spreadsheets, presentations and more into a standard desktop application.
Call it Microsoft Office if you like.
Once a bank decided it wanted Office, it could rollout the product easily to all staff worldwide.
No major tailoring, change or adaptation needed.
This company then came up with a system that provided process automation and workflow as part of the Office suite.
As soon as they did this, their product was no longer generic but specific.
As a result, they rapidly had to move from product pushers to solutions sellers, and from horizontal to vertical market alignment.
That proved incredibly difficult, as the sales organisation was geared towards short-term targets for product sales, had no knowledge of their customer’s business practices or processes for that matter, and typically spoke to middle management in IT.
The process automation system needed solution sellers who were intimate with the whys and wherefores of their client’s businesses and could engage in a decent conversation with C-level people within the lines of business.
As can be seen, there is a complete dichotomy of approach between these worlds of sales and structure, and is the reason why technology firms struggle between their horizontal and vertical alignments.
In conclusion, it is also clear that enterprise is generic and horizontal, whilst any change to that generic offer to make it industry focused turns it into specific and vertical.
The challenge is that firms don't always realise when they've taken their generic products and solutions into specific offers and, when they do, they don't realise how difficult it is to turn their generic product sellers into specific solutions advisors.
If anyone's interested, we can spend days talking about this as, you guessed it, I've got a few solutions ;-)
Last year, I stumbled across predictions from a century ago, and responded by making some predictions for a century ahead. Strangely enough, there was also a moment to look back over the last fifty years of technology developments around that time too.
So it must be whilst sitting around on holidays that these things come out as, during the last holiday, I found another interesting set of predictions from 1962 in a book by Arnold B Barach called 1975: And The Changes To Come.
These predictions were looking out to 1975, thirteen years ahead, and included a few interesting ones that have come true.
For example, Barach predicted translating machines where typists could copy stories from, for example, the Russian newspaper Pravda and a special machine would convert the Russian letters to punched holes in paper tape.
This tape could then be inserted into another machine, which would produce translation.
He forecasted that, by the 1970's, automatic translation of practically all foreign publications and books would be routine.
This came true a bit later, but certainly Google Translate gives translation of most text, albeit not always brilliantly as Google uses English as a base language, so German to Spanish is actually translated as German to English to Spanish. This can lead to some amusing mistakes.
Similarly, Google has solved the reference finder dilemma, with Barach realising that approximately 2,000 pages of books, newspapers, or reports are published somewhere in the world every 60 seconds, day and night, and the output is increasing by leaps and bounds (how right is that?).
Libraries will ultimately be forced to use computers for locating documents and references, since it will be so difficult otherwise to keep up with the printed material.
He goes on to more practical areas, like the kitchen in the average home.
Most devices will be under the floor in Barach’s future vision, with an ultrasonic dishwasher that cleans using sound waves.
Mind you, the attitude of the 1960s was rather different. Take this extract as an example:
Push a Button, Get a Meal.
Among tomorrow's "wife-savers" is this working model of a combination electronic oven and food freezer. Meals are prepared in advance and stored in the individual freezer compartments, each one labeled on the corresponding push buttons. At dinner time, the housewife pushes the appropriate buttons; and in less than half an hour, the full meal emerges at the rear end of the appliance, hot and ready to serve (lower picture).
from 1975: And the Changes To Come by Arnold B. Barach
Having said that, he was pretty much spot on when it comes to the future TV set:
What's On Delhi-Vision Tonight?
This is the ultimate in proposed television sets for a decade hence. It can receive television signals bounced from circling satellites, bringing programs from any city on the globe. The spot of origin of the program is indicated by a light on the world map in the upper panels. Round dials are clocks showing the hour in four major time zones. Dials at right are for tuning and sound control. The set is only three inches thick. On the reverse side it is equipped with an international stereophonic radio.
Anyways, quite a visionary book. I'll add it to my forecasts of the future media which includes Star Trek, Minority Report and War of the Worlds amongst its leading references.
Meanwhile, anyone fancy predicting thirteen years ahead to 2025?
What’s hot in tech in 2012 is a continuation of what’s hot in tech in 2011: cloud, smartphones, tablet PCs, contactless mobile and more.
Rather than just repeating all that again, let’s be more specific:
Contactless mobile will reach a tipping point in retail payments
Social media will become a core communications tool
PFM, combined with social media, is going to enjoy a boom year
Tablet PCs with financial apps will be pervasive and ubiquitous
Risk management will be a key area of software development
FPGAs and GUIs will be deployed across investment markets
“Data as an asset” will be the most common phrase used
The last item is the most important one, and the preceding items show why.
Contactless mobile will reach a tipping point in retail payments
I covered this yesterday and could repeat it again, but suggest you checkout yesterday’s entry if this is of interest to you (it is repeated at the end of this blog entry if you don’t want to click through).
Social media will become a core communications tool
There were a number of major PR gaffes during 2011, where banks were caught short over social media usage.
The biggest one was from Bank of America, who tried to introduce a charge of $5 a month to use debit cards.
Customers didn’t like it and one – Molly Katchpole, a 22-year old nanny – forced the bank to change its position purely by using Change.org to create a petition that garnered over 300,000 signatures.
This was voted one of the greatest PR blunders of 2011, although there were several others, such as Chase donating $4.6 million to the NYPD the day before Occupy Wall Street started; and Citibank getting caught beating customers to death in their branches in Indonesia.
These were some of the more shocking stories of 2011, and the only reason I know about them is via Twitter and Facebook, blogs and YouTube.
Social media has reached the level of naming and shaming firms in real-time.
It’s had this power for years, but now the customer knows how to leverage such technologies to achieve real change.
That’s what the year of the Protester has been all about – a world where a whisper can be heard as a wail, with word of mouse racketing up the roar.
Customers – both retail and commercial – now want banks to be honest and, if they screw up, to admit it fast and retract their mistake.
Banks will therefore work hard to use social media to create conversations and communication that is customer centric and transparent in 2012.
If they don’t, they risk alienating and losing business across the board.
PFM, combined with social media, is going to enjoy a boom year
PFM, or Personal Financial Management, has been discussed for a while in innovation meetings, but will enjoy its most successful year of implementation in 2012 as banks get the message.
I got the message when I visited Iceland last summer, but it has been an area that has been creeping up on us all.
This is because most bank internet access is old hat – just an online version of the old mainframe transaction systems.
PFM provides a far richer customer experience, moving the bank’s online services from being just a record of transactions to one that shows the customer’s lifestyle, with proactive budgeting and alerts, is a no-brainer.
Combine this with improving the use of social tools as a communications mechanism – linking PFM into Facebook, Twitter, YouTube and Banking Blogs – and we will see banks make significant moves in these areas this year (if they haven’t done so already).
Tablet PCs with financial apps will be pervasive and ubiquitous
Almost two years ago, I said that iPads will take over treasury ops. Everyone looked at me as though I was from another planet.
A year later, many banks have launched treasury based iPad apps for their clients.
For example, in November 2011 BNY Mellon launched the TreasuryEdge app designed to provide “timely information on the client's cash accounts, with information related to decision-making on cash flows, balance and investment levels; an activity feature that allows clients to report and take action on various payment activities; transaction tools that allow clients to create, verify or release intra-company transactions; and reporting tools that allow for the generation and delivery of basic TreasuryEdge reports to the mobile device”.
J.P. Morgan launched their cash management ACCESS mobile app around the same time.
“J.P. Morgan ACCESS Mobile features include the ability to view multicurrency cash balances, transaction details and alerts for J.P. Morgan ACCESS and third-party bank accounts in the United States, Mexico, Canada, Latin America, Europe, Africa and many Middle East locations; a one-of-a-kind Quick Decision feature. Clients can add anticipated transactions and set target balances – at the account level – for an instant projected cash position; customizable business critical alerts (for example, alerts notify clients when balances fall below a preferred level, or when a credit posts to the account, with links to supporting detail).”
As can be seen, apps and iPads have come a long way.
When these things are no longer toys for consumers but tools for business, it becomes seriously pervasive and ubiquitous.
That’s why, building on the simplicity of PFM for consumers and Treasury apps for corporate, the Tablet PC will be everywhere, mainly because Tablet PCs simplify everything.
You don’t have to think with an app – just touch and go.
Combine the simplicity of apps, tablet and smartphone with the ubiquity of contactless mobile communication 24*7, and you can see the bank of the future has arrived in 2012.
There are a few other key things occurring too though.
Risk management will be a key area of software development
During summer 2011, our annual European payments survey found that risk management is an area that is very underserved by technology and software solutions.
First, we asked whether the banks would know their future financial exposures in the case of another liquidity event.
73% are able to do this but only 39% of banks were able to do this with technology – 34% were using administrative processes to find their positions – and only 17% could do this in real-time.
More importantly, we asked whether a bank would know their unsettled transactions if a clearing and settlement disruption occurred. 91% would be able to do this but, of these, only 29% could do it in real-time.
Do banks know their exposures to specific individual counterparties intraday? Two out of five banks can do this through automation, but only one in five in real time.
And do banks know which assets are in play in a “liquidity event”, such as a Lehmans crash?
Only a third of banks (37%) could do this with technology.
That’s an area ripe for automation and support, and so risk management will be a key area of technology focus in 2012.
Interestingly, American Banker sees nine key trends in risk management developments:
Adoption of enterprisewide risk management software among smaller banks;
Adjustment of credit risk models for Procyclicality;
Looking beyond the credit bureau report to assess consumer creditworthiness;
The use of new methods of calculating product pricing based on risk;
Risk model validation;
Creation of keep-it-simple dashboards for bank board members;
Real-time and intraday risk monitoring, alerts and reports;
The bringing together of different risk systems, such as commercial loan risk and trading risk or fraud and anti-money-laundering; and
Bigger risk data sets leading to the use of performance- enhancing technologies such as in-memory computing.
FPGAs and GUIs will be deployed across investment markets
Towards the end of 2011, I gained some insights into the use of new hardware processing capabilities in the investment banking community, specifically the use of FPGAs – Field Programmable Gate Arrays – for Graphical User Interfaces (GUIs) to model risk and provide real-time analytics.
This is a big area of focus in the capital markets community, particularly as risk modelling is becoming so complex.
For example, Monte Carlo simulations involve fifty year or more scenarios with roll back, querying, resets and roll forward all built into the modelling.
That’s complex and involves massive amounts of data analytics, taking petabytes of data and churning through it in real-time using complex formulae.
Using FPGAs, banks are finding performance levels 30 times better than doing this through a CPU and 175 times better in efficiency terms.
That’s why this is a big deal in 2012 for the low latency, high frequency trading community.
“Data as an asset” will be the most common phrase used
And all of this comes full circle in the end, and back to data.
Banks are data businesses.
Everything they do is bits and bytes, networked in real-time.
Exabytes of data are churned every day, and data is a key raw material for a bank.
Again, it’s stuff I talk about all the time, but this year banks will really start to get into data as an asset if, for no other reason, the risks of data.
Data risk is illustrated for me by three articles that hit my desk as I came back to work this week.
First, a report by Forrester into the potential for personal identities to be compromised or leveraged as individual get to manage their digital footprints better.
He’s wrong, as every Bitcoin transaction is traceable throughout its lifetime usage. The shadow economy works on anonymous transfers and transactions, not auditable ones, but it’s an interesting idea.
The real point is that Bitcoin is interesting as an encrypted digital currency. It’s not like PayPal or Facebook Credits, as it has no centralised control authority, but all of these demonstrate that the new form of value is in data.
Data management, data security, data audit trails and data exchange as a form of value transfer is what 2012 is all about.
Finally, the Economist had a fascinating article on The War on Terabytes. Here’s the essence of the article:
America’s defence secretary, has suggested that a cyberattack on financial markets, the power grid and government systems could be “the next Pearl Harbour”. In a move that received surprisingly little attention, Barack Obama signed an unprecedented executive order in July declaring the infiltration of financial and commercial markets by transnational criminal groups to be a national emergency.
The article moves on to discuss Lehmans crash as a game of data.
A paper prepared for law-enforcement officials by a group of anonymous moneymen … analyses trading data from American exchanges. It shows that a handful of small and midsized regional brokers saw their market share in equities trading skyrocket in 2008 to the point where some were, for a while, doing more business than giants such as Goldman Sachs and JPMorgan Chase …
The bulk of the trading appears to have been “sponsored access” agreements, under which established brokers can in effect rent their identities to other traders so that the latter do not have to jump through the usual regulatory hoops … these trades were heavily concentrated in big, troubled stocks such as Citigroup and Wachovia, the survival of which was seen as critical to the stability of the financial system. They were mostly short-selling, the paper concludes, and a good deal of the shorting may have been of the illegal “naked” kind, where the short-seller does not bother to locate and borrow the shares first.
Supporting this conclusion is a huge spike in trades that failed to settle at the time—in Lehman’s case, the number shot from tens of thousands to tens of millions.
Nervous?
Sponsored access is not the only way that a determined assailant could create havoc. The “flash crash” of May 6th 2010, in which American equities spectacularly nosedived, showed the damage that can be done by high-speed algorithmic trading. It is much easier to drag markets down when they are already reeling, by the use of such things as short-selling, options and swaps, points out James Rickards of Tangent Capital, an expert on financial threats. This is what the military would call a “force multiplier”.
Worried?
You should be.
According to experts, flash crashes are commonplace and we’ve done well to avoid another massive one … but it’s likely to come.
I could talk about data issues and opportunities for ages, but the bottom-line is:
Banks are technology firms who provide financial management solutions.
Banks can take opportunity by combining the simplicity of apps, tablet PCs and smartphones, with the ubiquity of contactless mobile communication 24*7.
Banks biggest threats come from risk created by the mismanagement of data, and data is therefore the banks greatest asset and weakness.
In 2012, this is going to be the year banks focus radically on locking up these opportunities and risks, through investing wisely in technochange.
Make your own mind up about my predictions. Here's what I said would be the big ticket items for bank technologies looking out to 2011 a year ago:
More social media developments as firms like Foursquare, Groupon and Quora add functionalities not seen before;
More bank mobile apps, with clever structures and device-specific security;
The creation of new retail payments structures, as Apple and Google get into mobile payment wallets and PayPal and Facebook push credits to the extreme;
The maturing usage of internet and mobile television, along with video communications for dialogue on the move;
Cloud computing becoming acceptable as a service for financial applications;
Major investments in creating agile infrastructures and platforms to respond to regulatory requirements.
Finally, if you can't be bothered clicking through, here's a repeat of the contactless payments piece from yesterday as promised:
Contactless mobile will reach a tipping point in retail payments
Speaking of new business models, the one that most retailing banks will move towards is contactless mobile and contactless tablets.
The experience is highlighted well by various firms, but my favourite contactless illustration is from Discover Card and Square:
The reason why I use this one is that everyone assumes contactless = NFC chips. It doesn’t have to be. Contactless in my world, is any payment that is simple, automatic and wireless.
That’s what the Discover video shows.
However, NFC is a key part of most contactless plans, so it is also a key part of the process of evolution.
Contactless chips have been around for ages but, on their own, are relatively useless. We then put chips in cards, but these again are not great.
But put a contactless chip into a mobile and then we’re rocking.
That’s again illustrated well be Google.
The tap-and-go experience is good one, and one that provides major convenience for the customer – whether the customer is a corporate who wants to drive higher sales through their checkout points, or the consumer who wants speed, ease, convenience and value.
It can focus upon not just turning phones into higher volume purchasing points, but into point of sale points too, and all geolocated as contextualised point of focus.
That’s why Movenbank is launching in 2012, as the first cardless and cashless bank.
So, if the major conversation of 2010-11 was mobile, the focus in 2012-13 will be contactless mobile.
2012 set to be the tipping point for mainstream contactless adoption
77% of contactless owners across all three markets agreed or strongly agreed that contactless technology would ultimately become more commonplace than cash as a payment method (UK: 73%, Poland: 79%, Turkey: 79%)
87% also agreed that contactless will be instrumental in bringing mobile contactless payments to market in the near future (UK: 84%, Poland: 89%, Turkey: 89%)
And, just in case you want any further detail, checkout this infographic from NFC rumors:
I discovered a fascinating report from Mobey Forum this morning.
It was released this week, and says that “providing consumers with the convenience and functionality of mobile wallet technology will not be sufficient to drive mass-market adoption”.
Mobey Forum – which describes itself as “the global bank-led industry association defining a prosperous mobile financial services ecosystem” (try saying that one at a drinks party and enjoy drinking on your own) – make it clear that simply taking a traditional wallet and sticking it into a mobile app is a waste of space.
They assert that, instead, the mobile wallet needs to leverage value through loyalty schemes, coupons and offers to be more relevant to the consumer than their old wallet.
In fact, the paper claims that of the three factors that motivate mobile wallets – convenience, security and value – it is the last one that is the most important, even though it is the last well defined.
They also note the confusion created by terminology, with most of using phrases like mobile money, virtual or digitised or electronic or mobile “wallets” or “purses”, and make a clear definition of what is a mobile wallet.
“A mobile wallet is functionality on a mobile device that can securely interact with digitised valuables. Mobile wallet may reside on a phone or on a remote network / secure servers. It may be only accessed via a mobile device, and also managed and used with it. Most importantly, it is controlled by the user of the wallet.”
They also make clear that “a mobile wallet without payments means is not a working wallet”.
They then make a call to ensure that mobile wallets are offered as open platforms where the user is in control, rather than anything system limited by the provider. An interesting concept, and one that will be intriguing to see how it plays out, e.g. will Citi, BNP, Deutsche, HSBC et al be happy to co-reside in an open platform ecosystem?
Finally, they have a lovely little chart in there that shows the mobile wallet ecosystem and attributes (doubleclick chart for bigger verson):
Here’s the full paper for a download if you’re interested, and this is the first in a series of papers from Mobey Forum to “provide the industry with a new level of thinking on what is required of stakeholders to facilitate widespread market adoption of the mobile wallet”.
The other papers will look at the control points, industry stakeholders, security and value propositions for mobile wallets, all of which will be found at www.mobeyforum.org.
Meanwhile, I’ve been receiving a few more nudges of mobile videos of financial apps, so here’s a few of my favourites.
This is the best lifestyle version I’ve seen lately, from my mates at Banco Sabadell, Spain:
This one, from OCBC in Singapore, allows you to scan your bills to pay them with a swipe (checkout one minute into the video):
But my favourite is this one ‘cos it’s incredibly cheesy:
This week is a trading technology week, chairing panels at two trading technology events.
The first is focused upon trading architectures and I’m surrounded by engineers.
Forget strategists, technologists, programmers or developers.
Engineers.
The reason is that it’s all about FPGA’s.
What the hell?
FPGAs – Field Programmable Gate Arrays.
This is basically a chip that allows you to place a program on the chip for processing at lightspeed.
It links with low latency, high frequency trading, except that the debate about low latency was all about speed of processing; FPGAs are now all about using massively parallel processing (MPP) to analyse what is being processed.
It’s a data flow analytic, rather than a process flow throughput service.
And yes, it’s the next evolution of debate about trading architecture, after high frequency trading (HFT).
Strangely enough, I’d given up on these things years ago as I thought MPP was done and dusted.
Instead we moved onto discussions around cloud, grid, virtualisation and such like.
The big conversation in fact was about colocated data centres and getting massive amounts of processors to crunch through data in low latency volumes.
Now it’s moved from processing to analysis, which is why parallelism is back on the agenda, or concurrency as some call it.
The reason it’s become important is that if you can run an analytic on the chip, then it can be done far quicker than through the CPU.
This means you can run risk analytics of high frequency data throughput in real-time, rather than after the event.
You can also run complex simulations of massive amounts of data quickly, easily and cheaply.
FPGA is back on the agenda because it’s also far simpler than ten years ago.
Ten years ago, these systems needed hard coding and sat firmly in the telecommunications sector.
As an engineering technology, it was incredibly complex but now the level of tool support from vendors is much greater than ever before, and has made it far easier to use.
In other words, the design issues are no longer part of the problem.
These things can now just be programmed into the system.
It is important as effectively FPGAs allow a compute cycle of data to be programmed onto a cahip or, in this case, a processing board.
The result is savings in heat and power usage, but also a massive increase in raw compute power.
For example, one bank was talking about Monte Carlo simulations that showed performance levels 30 times better than doing this through a CPU and 175 times better in efficiency terms.
Bear in mind that Monte Carlo simulations can involve fifty year or more scenarios with roll back, querying, resets and roll forward all built into the modelling and now in real-time.
That’s complex and involves massive amounts of data analytics.
A little like taking petabytes of real-time data and churning through it all in real-time.
Forget batch and overnight. It’s all real-time.
This is why FPGAs are being used extensively for scenario modelling of real-time risks, calculating positions for the traders of the world in their positioning against Greece, Italy and each other in real-time.
And all of this is achieved with far less power and far faster clock times than traditional CPU processing.
This is because FPGAs are actually SoCs.
WTF?
SoC – System on a Chip.
What this means is that you can put a board into the computer processor, and on that board is all the analytical system requirements to run fast cycle analytics.
So the software and hardware are married as one on the chip – a complete System on a Chip (SoC).
Imagine therefore that you have massive amounts of data flowing in high frequency and high volume across low latency engines throughout the world’s markets looking to trade.
Then you have lots of FPGAs deployed across those processes, looking at the data and tracking risk, opportunity, collateral, liquidity, credit and more.
Each FPGA is given a specific analytical function as a SoC, and it allows you to run huge volumes of trading without concern about the processing power limitations of old, or analytical delays due to hitting CPU limits.
This is why FPGA is big news in trading, allowing traders to take huge amounts of streaming data flows, analysing the data concurrently, and all with easy implementation and deployment.
So we’ve gone from the technical low latency discussions to how to analyse these streams of data – these massive volume, high speed systems – and working out how to analyse all that data in real-time using FPGAs.
We’ve gone from process and processing to analysis and data flow.
I blog a lot about the disruptions of new technologies on bank structures, but only in the last few weeks had the chance to reflect upon what this means overall to a bank’s strategy.
A bank is a digital business, as mentioned so often before.
As a digital business, all banking can be broken down into pure bits and bytes but, more than that, a bank can be seen as three digital businesses in one.
It is a manufacturer of products; a processor of transactions; and a retailer of services.
In this context, the digitisation of banking becomes more interesting at a strategic level.
First, the products have been deconstructed.
Every bank product can be deconstituted into its lowest common denominator of components, and then reconstituted into new forms of use and structure.
This component based bank demands that every bank capability is put into a basic widget form, or object form if you prefer, and then offered to customers to put together as they see fit.
In other words, there are no integrated product sets any more, but just banking as apps that customers put together to suit their needs.
Bank products are just a bunch of apps, manufactured in such a way that customers can put them together to suit their lifestyle.
Moving onto processing, we build upon the app-based product view and begin to consider processes as open source code.
The open sourcing of digital processes is rife and has disrupted and changed everything from how operating systems operate, vis-à-vis Linux, to how Google develops its omnipotent reach.
Learning from such open source processing PayPal launched X, a developer based service for PayPal processes as APIs, Application Program Interfaces.
APIs allow anyone to pick up and drop PayPal into their systems and, like banking products as apps, allow PayPal to be reintegrated by third parties into any code and operation desired.
The result is that PayPal’s relevance increased massively overnight and led to Citi following a similar approach, when they announced that their transaction services would be offered as APIs at SIBOS this year.
In other words, all banks processing is just open sourced coding, offered to anyone to plug and play with their offerings through APIs.
Finally, the customer relationship has also changed.
The customer relationships used to be human, one-to-one. Then it became remote, one-to-many. Now it is digitised, one-to-one.
This is where Big Data comes into its own, as we are now trying to manage remote relationships leveraged through mass personalisation.
Mass personalisation can only be achieved by offering contextual servicing to each and every customer at their point of relevance.
This means analysing petabytes of customer data to identify, on a privacy and permissions basis, what contextual service the customer may need as they live their lives.
If they are walking past a car showroom, do you promote cheap motor insurance or a car purchase scheme?
If they are leaving the casino, do you offer a loan or a referral to an addiction clinic?
If they are leaving the maternity clinic, do you offer child investment services or a referral to an abortion clinic?
Some of these may seem controversial, but we are already seeing contextual offers through finance coming into play in the form of Google Wallet.
And the aim of such contextual offers is to track your digital footprint, using Big Data analysis, to gain intuitive service offers relevant to your point of living.
For example, as Google track your searches for Plasma TVs, you get an offer for £200 off the TV you spent the longest time studying online as you walk past the electronics showroom today.
But the offer is only good for an hour, and only as you are in proximity of that electronics showroom.
This is the new augmented reality of customer intimacy through Big Data analysis, and bank retailing will be based upon the competitive differentiation of analysing mass data to deliver mass personalisation.
In summary, the digitisation of banking is now mainstream, and all bank capabilities will be packaged as digital structures where products will be apps, processes will be APIs and retailing will be contextual, delivered through mobile internet at the point of relevance.
Meantime, what happens to the physical structures of banking, as the digitisation of everything takes over, will be the biggest challenge of all.
I felt vaguely irritated today when an analyst from a major research firm was asked to position why NFC contactless payments haven’t taken off.
He said they had analysed the worldwide global market for mobile payments, the demographics of takeup, the likelihood of using contactless payments, the audience for new forms of payments, etc, etc, and had identified a global market of just 1.8% of consumers who would be receptive to such an offer.
What complete nonsense.
The fact is that there is no ‘market’ for contactless payments, mobile payments or mobile contactless payments.
There’s just a need that is as yet unfilled.
Another person in the panel discussion said that he didn’t get NFC, and felt that “contactless is just a solution looking for a problem”.
More nonsense.
I mean, I’m sorry, but NFC contactless mobile payments are intuitively obviously going to take off at some point.
The problem is that it's in a card form right now, and not integrated into a mobile contactless form and, even if it was, there's zero places that accept NFC contactless payments (that are obvious to consumers anyway).
But this will change ... we just need an Apple (in Steve Jobs lifetime of Apple) to focus upon this and make it happen.
Apple have a knack of taking solutions looking for problems and working out how to build the solution in such a way that people see what problem is being solved.
For example, in 2003 I went into a store and asked for an MP3 player.
The store manager said they used to stock them, but stopped as “who wants to download music off the internet?”
That store doesn’t exist now – it’s just a website – and the iPod decimated the music market from its launch in 2001.
Markets were redefined by a visionary taking an obvious product and making it cool.
A visionary who could see the unfulfilled need, the solution, and match the two together.
These visionaries did the same with the iPad – everyone pooh-poohed the tablet market before the iPad’s launch – and yet this was another technology that had been around for over two decades.
In other words, it takes a visionary to see a technology or technologies that are disparate and fragmented, and bring them together into an integrated whole that is blindingly obvious to those who need it and completely compelling.
That’s what is needed for NFC contactless and mobile payments.
An iPod for mobile contactless, rather than the MP3 player we have today.
The iPod for mobile contactless was rumoured to be the iPhone5 but that hasn't appeared.
Mind you, if you look at the new Android details, the iPod for payments might already be here:
Incorporating Near Field Communication (NFC), technology behind Visa's PayWave, Android Beam enables select Android devices to share videos, apps, maps, contacts and other data through slight physical contact.
So, for those who think the market for mobile contactless is zero, go and talk to the trees.
“I’m doing a (free) operating system (just a hobby, won’t be big and professional like gnu) for 386 (486) AT clones.” Linus Torvalds, father of Linux
“There is no reason for any individual to have a computer in his home.” Ken Olsen, CEO, DEC
“I’d shut it down and give the money back to the shareholders.” Michael Dell, CEO, Dell on Apple Computers
“640k should be enough for anybody.” Bill Gates, CEO, Microsoft
“I think there is a worldwide market for maybe five computers.” Thomas J. Watson, President, IBM
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::
stop talking about mobile; and
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.
Talking with some of the Financial Services Club sponsors last week, it is clear that there is still a debate raging about the future of cash. Like the future of branches, which both Brett King and I discuss endlessly, cash is one of the other traditional bastions of the old guard of financial servicing.
Yet with mobile wallets, ebanking, contactless everything and real-time transactions, does cash really have a future?
Some say ‘yes’, due to the unique attributes of cash, as noted in a recent Payments Council report on “the Future of Cash”:
Cash circulates, and is reused limitlessly.
Cash is always valuable.
Cash provides full and final settlement of a transaction.
A cash payment is anonymous.
Once issued, the circulation of cash is uncontrolled.
It is regarded as a public good by its users.
These attributes have never been completely substituted by new forms of payment and, until they are, cash will always be prescient.
The most recent attempt to provide a good alternative, that gained significant traction too, is Bitcoin.
Bitcoin is a digital currency designed to be controlled through encryption rather than a centralised authority. Operating in exactly the same way as cash, Bitcoins are fully exchangeable as an anonymous form of currency in real-time across the internet and, shortly, at Point-of-Sale.
accessed from anywhere with an Internet connection;
anybody can start buying, selling or accepting Bitcoins regardless of their location;
completely distributed with no bank or payment processor between users (this decentralization is the basis for Bitcoin's security and freedom); and
transactions are free (for now, this will change).
Now I’m not going to get into the whole debate about whether Bitcoin is a good or bad thing, as there are plenty of other currencies attempting to displace cash out there, but it is the one that has garnered the most media attention in the past year.
‘Bitcoin. Oh, man, where to begin. Its Hype-O-Meter got cranked to 11 this week, and breathless histrionics are everywhere. Death and Taxes called this new currency “a seismic event“; Adam Cohen says it’s nothing but a giant scam; Jason Calacanis calls it “the most dangerous project we’ve ever seen”.’
‘I last wrote about Bitcoin less than a month ago. Since then the value of Bitcoins has quadrupled—and then halved. The founder of Sweden’s Pirate Party moved all his savings into Bitcoin (which disappoints me; I had hoped they were buried on Oak Island) just as US Senator Charles Schumer attacked it as “an online form of money laundering.” Malware designed to steal Bitcoin wallets has been seen in the wild, and in possibly related news, 25,000 Bitcoins were stolen a few days ago. Meanwhile, the virtual currency’s long-term stability has been seriously questioned.’
And now everyone is writing the same story: the end of Bitcoin, as their value has fallen below the level at which it makes sense to trade.
The value of Bitcoins peaked in June 2011 at $33: now they are worth between $1 and $2.
The black line = the closing price for Bitcoins on the MTGox Exchange where they are traded; the red and green lines = volumes of coins sold and purchased.
Tim Worstall at Forbes says that this is because Bitcoin lacks key attributes.
A currency not only needs to be “a medium of exchange, a store of value, we’d also like to it be liquid and security is important as well”. He doesn’t believe it offers much in any of these dimensions.
So where are things headed?
Well, there will always be a war on cash with lots of attacks from providers of alternative means and technologies … but cash is our oldest form of exchange of value.
Unlike cheques, cards, chips and everything else, cash has had durability and even with the best placed attempts to displace its usage, cash still wears well throughout the world.
Having said that, my friend who read my article about Icleand did go thjere and travelled with just cards … he had a very nice cashless week on holiday.
So you never know.
Postnote 1:
We will be having a meeting focused upon virtual currencies including Bitcoin and Ven Currency at the Financial Services Club on 25th January 2012, as well as a seperate debate about the Future of Cash in Q1.
Postnote 2:
One of the more contentious points about Bitcoin is that there are only 21 million of them, but they are infinitely divisible.
The aim is to limit the number of coins in existence because, unlike fiat currencies issued by government agencies, there is no centralised issuing authority in Bitcoin … just users.
This is why the cap was placed and is one of the more contentious points as those who own a whole Bitcoin today might be billionaires downstream, if it becomes a mainstream currency.
Oh yes, and you may also wonder whether the cap means that this will never become a mainstream currency, but don’t worry as the divisibility of the coins is a key point too.
Each Bitcoin can be divided to eight decimal places giving you a total of 2.1 quadrillion units eventually (today, of the 21 million coins to be issued, just over 7.5 million have been issued).
Postnote 3:
Although cynics may be promoting the idea of the end of Bitcoin, Bitcoin has been doing some other interesting stuff. For example, they’ve just rolled out a Point-of-Sale (PoS) system with Verifone that will allow Bitcoins to be traded on merchants terminals in stores.
The system is based upon QR codes – digital barcodes for mobile – and these are printed by the Verifone terminal. The customer can then scan this into their phone. Equally, they can make a Bitcoin payment by presenting the QR code on their phone for the merchant to scan.
Postnote 4:
Bitcoins have also now moved into reality so, if you want to order some physical Bitcoins, you can.
The code required for each coin is kept in a hologram inside.
Postnote 5:
A really good overview of Bitcoin's rise and fall from the Economist, June and October 2011.
I just spent the day in a payments conference focused upon operational excellence.
We talked about Basel III, SEPA, the PSD, Mobile … the usual stuff, but there was a particularly intriguing presentation from Olivier Denecker of McKinsey in the morning session on what operational excellence in payments is all about.
I took a whole bunch of notes, and here’s a few of the key bullet points:
EU banks RoE went from 13.5% in 2007 to 3.9% in 2010 = increase revenues or decrease costs to survive
Payments = 30% of the €150 billion cost base of EU banks
Although payments is well automated for STP, half of all costs are still people-related
IT application costs in payments vary by a factor of up to 3x between the best and worst in class providers
IT spend varies between 5.7% and 11.7% of operating income between best and worst in class performers
Outsourcing in EU has DECREASED for the issuance of credit and debit over last decade (increased for acquiring)
McKinsey recommend banks become more like car makers and common source components, outsource more and use standard metrics for benchmarking
What struck me as Olivier talked is that banks don’t view payments as a separate product stream.
It’s not an individual product line.
For most banks, it’s an integral part of the bank operations.
It’s the glue that hooks the customer to the bank.
It’s the core of their offer.
That’s why banks find it so hard to think of payments neutrally, objectively, dispassionately.
Payments are not objective, they are emotional.
For most banks, they are very emotional.
Ask a banker to outsource core payments processing and they’ll give you a look like you’re the devil’s spawn.
It’s just not done.
And yet, this is changing.
Payments is no longer the glue for bank, but more like the foundation and even bulilders don’t always drill the foundations.
They bring in specialists.
That’s what Olivier was driving at: bring in common component providers and develop value on top of their services.
This is where it gets interesting as banking has historically been a vertically integrated industry, providing an end-to-end service that is wrapped around the customer and is incredibly difficult to unlock.
And yet it will be unlocked if Olivier’s message comes true and banking is driven into a componentised industry where you have a payment app, a balance app, a cashflow app, a budgeting app, a fraud app and so on and so forth.
Oh, wait a minute.
That’s Banking-as-a-Service if I remember rightly (presentation from February 2009!).
… jeez, there are 100s of these startups and established disruptors out there doing stuff as I’ve not even mentioned what Facebook, Google, Amazon, Apple, Bitcoin, Ven Currency and others are doing here.
Suffice to say that the componentisation of banking and shift from vertical integration to horizontal components that can be put together as you like, is happening and happening fast.
At #Eurofinance2011, I chaired another panel on innovations in payment channels with MasterCard, Coca-Cola and the UN World Food Programme.
My opening piece talked about mobile channels and a lot about virtual currencies, including Facebook Credits, Ven Currency and Bitcoin.
The mobile stuff garnered lots of nods and acceptance; the latter on virtual currencies seemed to cause more bewilderment and confusion.
I am used to such looks.
I got the same looks in 2004 when I talked about mobile payments as the next wave of banking innovation and disruption.
No-one believed me then, when I said that the idea of using the mobile as a wallet was going to be business as usual.
Now, MasterCard talk about Google Wallet and everyone seems to see this as the new normal.
In 2004, I asked when mobile payments would be workable and most people said not in the near future. Some even thought they would never see this in their lifetime.
Most of those people are still alive, and mobile is taken as read.
It's even used in the extremes of poverty, with the UN World Food Programme using mobile wallets via SMS text messaging to deal with crisis in disaster and war-torn territories for aid.
Over 70% of populations in the most extreme, hard-hit and greatest poverty areas have access to these mobile technologies apparently.
Mobile is here as demonstrated by this week's Economist which shows the true state of affairs …
…. mobile connected devices and tablet computers are mainstream.
The Economist’s figures show how such devices are rampantly taking over and as I talked about tablets and apps for treasury ops, the audience all nodded in agreement and acceptance.
And yet, at Eurofinance Asia just 18 months ago, I felt like I was being accused of being a heretic for saying that treasury ops could be redefined through simple apps on tablet PCs, and would be because it allowed any organisation to deploy treasury apps for idiots.
So now I talk about Facebook Credits, alternative currencies and hybrid banks that manage virtual and real monetary exchanges.
The audience thinks I’m a heretic but, just as mobile took over as a core channel over the last decade and tablet PCs have established themselves in the heartland of banking and treasury services in the last 18 months, virtual currencies will soon be the new stomping ground of innovation in payments.
I was just reading through my notes as Chair of the #TradeTech conference last week, and found a bunch of interesting notes and quotes.
Rather than assembling them into a sensible blog post, I’m just going to write them up ad hoc and you can make your own mind up about the meaning, context and implications.
However, for FSClub members interested in these areas, we have a Club meeting on 2nd November with Dr. Kay Swinburne MEP on: "Dark Pools and HFT: Good or Bad". See the end of the blog for details.
Chairing the #tradetech architecture conference today - get the impression markets are still struggling with same issues as 2010
One big issue is clearing and settlement, another is risk, a third is regulators not knowing what the hell they're doing
Average equities trade on exchange is now under €1,000 - how do you do x-asset mix of high value and low
In cross-asset classes, the lack of meaningful reference data to track mixed instruments is a big issue
How do you get back office and front office aligned when the back office is always a step behind
Could ask same of regs: how do you get regulations and FSIs, aligned when regulators are always a step behind
With SWIFT, you can settle within 15 seconds so T+0 is feasible - the issue is the FSIs internal inability to exploit this tech
Wow - the Large Hadron Collider produces 15 Petabytes (15 million Gigabytes) of data annually http://bit.ly/cGr8Bi - most in a millisecond
“CERN is collecting millions of data points in milliseconds … markets need to do the same.” Peter Legizinski, former CIO, Allianz Investment Bank
An equity trade across 8 exchanges in different global cities, including price discovery and execution, would take about 2 seconds
Latency harmonisation is meaningless as exchanges always find a way to make some more equal than others
Another issue raised by Iran Hutchinson: "60% of the world's order executions are on mainframes"
Someone just asked me what the difference is between HRT and HFT at #tradetech lol ... must be the hormones
Prediction from Clem Marsh, BATS Europe: if the EU transaction tax is implemented, all HFT trading disappears in EU & firms move
Just look at Sweden’s experience: "90%-99% of traders in bonds, equities and derivatives moved out of Stockholm to London", Anders Borg, Sweden's Finance Minister
But is this true if transaction tax is only applied to filled orders?
“Over-regulation should be avoided because it slows down financial innovation & undermines economic growth” Jacques de Larosière
“I fear we have lost the momentum that was created at the start of the financial crisis”, Diego Valiante, CEPS
“We are using regulation as a substitute for supervision …. and regulation cannot substitute supervision”, Diego Valiante, CEPS
“Pre-crisis markets were shaped by customers; post-crisis by regulators. We have to ask if that is right.” Anthony Belchambers
“Somebody’s got to bring back proportionality to this and take away the regulator’s punchbowl.” Anthony Belchambers, FOA
“There’s no point in locking up capital in a capital-intensive business.” Anthony Belchambers, FOA
"MiFID1 was close to a farce with dates moving all the time. We can’t allow that to happen again.” Anthony Belchambers
UBS say that one City FSI lost millions when someone flicked the wrong switch and added 20ms per transaction, so latency does matter
"Volatility is built into the markets and is advantageous for some whilst disadvantageous for others" Marcus Hooper, Pipeline Financial
“Long-only asset managers trading has slowed for several years as it’s too difficult to find alpha that way.” Marcus Hooper
"If you become clever at moving between algorithms, people will not be able to follow your algorithmic behaviours." Marcus Hooper, Pipeline Financial
"If you can't manage and measure transaction costs, you might as well not bother." Marcus Hooper
"The question is whether you can make orders out of thin air, as that's what we do." Marcus Hooper
"MiFID2 should create a level playing field but will just encourage regulatory arbitrage as happened with MIiFID1." Marcus Hooper
"The things that need to be regulated are not well understood by the regulators, let alone the politicians." Marcus Hooper
Dr Kay Swinburne, MEP, UK Conservative Spokesman - Economic and Monetary Affairs will speak at the Financial Services Club on the theme of: “Dark Pools and HFT: Good or Bad?” on 2nd November.
Kay Swinburne has been instrumental in moulding the principles of the revisions to the next generation of investment markets regulations, thanks to her report ¬ “The regulation of trading in financial instruments: dark pools etc” ¬ from summer 2010. The revised version of the paper was adopted by the European Parliament’s Committee on Economic and Monetary Affairs (ECON) on 9th November 2010, and means that all broker dark pools are reclassified as multilateral trading facilities (MTFs) or systematic internalisers (SIs), and that dark executions should be subject to size restrictions.
Looking at MiFID II and beyond, are such changes to dark pools and regulations restricting High Frequency Trading a good or a bad thing? To find out, we’ve asked Kay to tell us her current thinking.
Kay was elected as the Conservative MEP for Wales in June 2009. This saw the Conservative Party top the elections for the first time in Wales in modern history. A successful career in investment banking has equipped her with in-depth knowledge of the global financial markets. This, combined with her experience advising businesses in Europe and the US, has led to her appointment on the Economics and Monetary Affairs Committee in the European Parliament.
At present, Kay is deeply concerned about how quickly the European Union is responding to financial service regulation without having properly looked at the impacts of what it is doing. She believes that the EU should work within a global framework as the crisis that we are facing is global; therefore it needs to work with the United States and so a global co-ordinated strategy needs to be implemented that is in line with the agenda of the G20.
As mentioned, I was chairing a conference on trading technologies and one technologist told me that, in theory, it would be technically possible to send an order around the world in 400 milliseconds or less today.
Most people disagree with this, talking about time lapse, speed of light and more, and that the order would have to be a neutrino to be that fast.
But I did ask another panellist in a session on low latency how fast an order could be filled that looked across nine world exchanges for fulfilment.
The idea being that I might want to trade in HSBC stocks for example, that are listed in London, Frankfurt, Mumbai, Shanghai, Sydney, Tokyo, San Paolo, Mexico and New York.
How fast, in principle, could that order be processed through these nine exchanges, filled and returned completed for settlement to London, I asked.
About two or three seconds was the answer.
That’s taking into account latency between systems and exchanges, time to cross match and complete, globally circuit and return filled.
Wow!
Such a feat would have been impossible just a year or two ago, and even now seems conceptual, which it is.
In concept, this would be feasible.
In practice, such things are unlikely in the near-term and, for real visionary trading across assets, unlikely in the long-term.
There are many reasons for this.
First there is too much latency dropout between platforms and systems.
Half of the debate over speed is purely concerned with who’s order is filled first on the target execution platform.
This is because the first to be filled is the only one to be filled.
You hear various numbers, but let’s say that 99% of orders on exchange are unmatched and therefore lost.
This means that only 1 in 100 are completed, and the winners of those that complete are the ones that are fastest to platform.
A wee bit like the end of an eBay auction, the only winner is the final person to bid.
In the low latency race, the only winner si the first person to complete.
But that’s only important once the order needs to be executed.
In the meantime, you have all of your algo strategy formulation, trading and portfolio projection and internal arbitrage and hedging capabilities,.
Execution is just a thin veneer on the layers of trading, and is purely the varnish of speed for whne you have a strategy requiring execution.
Therefore, the idea of ploughing across the world’s exchanges at high speed finding best price is unlikely right now, as the majority of trading strategies are localised.
But let’s say someone does start going down this route, we then got into another debate about cross-asset class approaches and this also proved to be not true.
The idea of mixing FX and equities, or equity derivatives, in a cross-asset class HFT strategy is do-able, although still small beans right now.
But the idea of mixing bond trading instruments and derivatives in a complex spread of FX and equity arbitrage trading that is automated and high frequency is a fallacy and will be for some time.
Why?
In part, because the size and speed of trading of bonds and treasury gilts is very different to equities and FX.
In part, because the need to arbitrage and mix such spreads of instruments in high frequency is not a real requirement right now.
And primarily because even if such need existed and were required, the reference data around such trading capabilities and systems is just not there.
The reference data and silo systems are there for historic reasons, as all of these asset classes were separately traded instruments and markets.
The platforms are structured in different ways, regulated in different ways and automated in different ways.
In particular, the data is captured and stored, transacted and matched, collateralised and settled in different ways, and this is the bit that would need a radical overhaul for cross-asset class trading to be mainstream, let alone HFT of cross-asset class instruments.
So let’s not delude ourselves.
We live in a world of HFT today, but it’s very precise and focused upon highly liquid stocks in localised markets, not globalised across-asset class HFT as is the dream of some and the long-term vision of more, but not many.
In fact, we had a lot of discussion during the conference about even faster speeds, with one wag asked if orders could be filled before they are sent based upon neutrinos.
You may already know about neutrino’s but, if not, it was the big news of a week or so again when scientists working on the Large Hadron Collider experiment found the atom, called a neutrino, can travel faster than the speed of light.
It’s a ground breaking piece of news as it means that basic science is turned on its head when something can arrive before it leaves.
Here’s a good summary of what the scientists found:
“Neutrinos fired 454 miles from a supercollider outside Geneva to an underground laboratory in Gran Sasso,Italy, took less time (60 nanoseconds less) than light to get there. Or so the physicists think. Or so they measured. Or so they have concluded after checking for every possible artifact and experimental error. The implications of such a discovery are so mind-boggling, however, that these same scientists immediately requested that other labs around the world try to replicate the experiment. Something must have been wrong to account for a result that, if we know anything about the universe, is impossible. And that's the problem. It has to be impossible because, if not, everything we know about the universe is wrong.”
Everything is wrong, because it does mean that time travel is possible as atoms are arriving before they are sent, according to the speed they are travelling which is faster than light?
Could such technology be applied to trading? was the big question last week.
There are already predictions that some exchanges can process orders in under a nanosecond.
That’s fast.
Can they get much faster and what does it mean?
This was the big chat of last week, which I’ll cover in more depth in my next blog entry.
Meantime, here’s my favourite quote of the week:
A bartender says: "I’m sorry, we don't serve neutrinos here".
I got an email last week saying that Google Wallet had launched.
Strange ... I thought it launched last May, but no this is not the launch.
This is take-off.
Here's what I actually received:
Google Wallet now available*
Get ready to tap, pay, and save
Google Wallet, a mobile app that makes your phone your wallet, is now rolling out through a software update to Nexus S 4G by Google, available on Sprint. Set up Google Wallet with Citi MasterCard or the Google Prepaid Card in just a few minutes.
As a thanks for your early interest, we’ll give you $10 on the Google Prepaid Card if you activate it in Google Wallet by the end of the year. You can then reload the Google Prepaid Card using any of your plastic credit cards. Google Wallet will be automatically pushed to Nexus S 4G phones on Sprint as part of a software update. You can pay with Google Wallet at thousands of merchants across the United States.
This is just the beginning for Google Wallet, so stay tuned.
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