I was sitting at my PC today, drafting my blog whilst skirting over the news
headlines on my iGoogle homepage.
There were a few other windows open on my PC.
One for Wimbledon live on the BBC, which I can now watch through live
streaming video. I like to listen to the radio commentary, so I also had BBC
Radio 5 Live on my internet radio player, rather than listening to the BBC TV
commentators.
I have a TV in my office as well and, as usual, I had that tuned into
Bloomberg News to track the business and stock markets, with the sound on
mute.
Anyway, I was happily clicking between iGoogle news, Internet TV-Radio and TV
News whilst clattering away on the keyboard drafting this blog when my Skype
phone went off.
The Long Tail in banking would be a mass market of
niche microgroups that incur no cost overheads to manage but, for each
transaction, creates a small profit. As the mass of niche transactions build,
the small profits become big profits. This is not far off what banking does
anyway – processes massive volumes of small transactions – but, right now, we focus upon making money out of account management.
Account management involves staff to deal with the
customer onboarding process, KYC and AML requirements, service on the telephone
and in branch, as well as transaction processing and account maintenance.
However, in the case of the long tail of banking,
there are no accounts. You want to reach people who were previously
underserved, because it would not be profitable. Using technologies
such as the internet means that, today, you can serve them. You can serve them because there are
no people involved, no account onboarding process, no branches or telephone
support services, and no account maintenance costs.
So, are we talking about the unbanked?
Yes, but a whole lot more.
We are talking about children, students, the
unbanked, the underbanked, the grey market, the welfare market, the pensioners,
the migrant workers and more. And we are talking about social lending
and saving, PayPal, prepaid and mobile.
Social lending sites, such as Zopa and Prosper, are
connecting the long tail of savers and borrowers. This is best
demonstrated by Kiva, where
anyone can invest a few dollars in microfinancing people globally. A
global connection of niche players. I've blogged about these sites before, but they show one aspect of internet financing that
is based around a long tail model.
PayPal is an even better example of showing a
great way to create profits out of the Long Tail, although its reach goes far
beyond the long tail.
As mentioned yesterday, PayPal provides a method of moving money between
people globally in multicurrency at low cost. PayPal claim to reach out to over
160 million registered users, with one in three requested at least one payments
transaction every quarter. PayPal make their profits and revenues by charging a
$0.30 flat fee per transaction as well as a variable percentage of 4.9%,
reducing to 1.9% or 2.9% for Premier and Business Accounts respectively. There
are also fees for cross-border transactions.
The real secret of PayPal’s operation is that:
(a)
it builds on the existing bank network, as you have to have a bank account to
use PayPal; and
(b) an email saying “you’ve got money” makes people open
accounts.
The overall result is that PayPal’s model has
increased reach and breadth immensely by linking people to money using viral
networking. They do reach the long tail through this structure but, in terms of
the long tail, they also have a major restriction. You have to have a bank
account and proof of identity to move monies around with PayPal.
So there’s a barrier for some of the children,
students, unbanked, underbanked, grey market, welfare market, pensioners and
migrant workers.
So we need to look at prepaid and mobile for these
folks.
Prepaid provides a great way to reach the unbanked
and underbanked, as mentioned last week.
In one of the best examples of a prepaid programme,
migrant workers in the United Arab Emirates, working on their massive
construction projects, are receiving their weekly and monthly wages on prepaid
cards.
They can get cash and pay for stuff around Dubai without a bank account,
and the beauty of this card programme is that it comes preloaded with one
cross-border money transfer per payment period for free.
Migrant workers can receive their monies and send
money home painlessly.
Prepaid for kids as gift cards, or for students as a
budgeting method due to weekly restrictions on balance limits of usage, or for government
welfare and company benefits is seen as one of the strongest markets for
reaching the long tail of finance.
However, there is still a restriction here.
To get cash, you have a habitual movement of people
that creates a criminal focus.
I only discovered this one recently, and it was the
idea of moving monies around on cards that highlighted an issue.
The issue is that in countries where the criminal
fraternity are represented typically by gentlemen with large muscles or big
guns, receiving money on a card is a problem. The problem is that you have to
go somewhere to get the card, and then convert the card into cash.
Apparently, for example, many people would know that
they were getting a prepaid card on a Friday morning from their offspring
overseas. So they would toddle down to the Post Office on a Friday morning,
pick up their post with their prepaid card, and then go straight to the cash
machine and convert the card into cash. As they walk out of their Post Office
with their lovely lolly, the men with big muscles and large guns jump out from
behind the nearest lamppost and nick the dosh off them.
Whoops. I apologise as I’m getting a little
colloquial here.
The point, I am told, is that card payments create
physical movements that can be tracked and targeted by criminals.
And so we come to mobile.
Mobile overcomes the
issue because you do not have to go and physically get a card and then
translate that card into money. You can receive a mobile payment anytime,
day or night, and then use the money flexibly either on your mobile account or
as cash, but not by always going to the same place at the same time, every week
or month.
Mobile overcomes these issues because:
almost everyone has one, or can get access to one,
you do not need to have a bank account to have a mobile,
mobile technology is cheap to access and easy to use,
mobile builds upon internet technologies to become even cheaper to access through VOIP
you can move monies wirelessly, silently and easily between people
the money movements do not create physical movements that are necessarily habitual and tracked by criminals
mobile is global
... one could go on and on.
Whether you prefer mobile or prepaid as your
focus, they combine to create the real long-tail of banking. Mobile
and prepaid can reach one and all, with micropayments that do not add
overhead to the bank infrastructure, but can build volume for small transaction
fees on each transaction.
Suddenly, the billions of unbanked and underbanked,
the long tail of society, can be served through the financial system at
virtually zero cost overhead, with margins that are attractive
enough through micropercentage fees on microtransactions. Billions
and zillions of microtransactions.
Think about it.
If Amazon and iTunes can make 40% of their profits
from the zero overheads of stocking the zillionth book and song, then banks can
make profits from the zero overheads of processing payments transactions
through internet, prepaid and mobile on the banking network.
That’s something that rings of the long tail of
banking isn’t it?
I attended a long discussion yesterday about High Value Payments (HVP).
I wondered why we even bothered to discuss and delineate between Low Value
Payments (LVP) and HVP these days. Surely, we should just talk about Real-Time
Payments (RTP), near RTP (sub two hours) and D+n. Alternatively, urgent versus
non-urgent with T+n, dependent upon your view of the world.
Having introduced enough acronyms in my opening paragraph to confuse a rocket
scientist, I think I can see why we talk about HVP versus LVP … it makes us
sound more interesting and knowledgeable.
According to a press release from the International Association of Money Transfer Networks, Zimbabwe's economy keeps going thanks to mobile remittances, even with an economy where inflation is
currently running at two million percent and is expected to reach six million percent by the end of June.
Less than 10% of the population is employed and a huge food
crisis looms ahead.
The answer is that the remittance market has been the
lifeline for thousands in Zimbabwe.
A remittance company operating in Zimbabwe says that up to US$1.5m a day moves into
the country in remittances. Western
Union is the principal company but can only operate with the blessing of the
Reserve Bank. The rest operate on the
'parallel' market, meaning the financial market running at the true value of
the Zimbabwean dollar, rather than the declared Government rate of exchange,
which today is running at 50% of the market rate.
The parallel market has been allowed informally by the
Government to function being a useful source of badly needed foreign
exchange. Remittance operators sell
their foreign exchange to the Reserve Bank in exchange for Zimbabwe dollars at
exceptionally good rates - in effect colluding with those who seek to destroy
them.
Not surprisingly normal money transfer channels have
suffered - as huge swathes of regular clients have moved to the unregulated
systems. Apart from the fact they get a
better rate of exchange, under the normal KYC rules they have also been fearful
that their identities would be passed to the Government which at a time of
intimidation and retribution could bring danger to themselves and their
families.
A year ago, Wired magazine had the front page headline: Get
Naked. It made me buy the magazine and turned out to be a
fascinating article all about how the world is now transparent. Nothing can be
controlled or hidden anymore. You cannot keep anything secret. It will all get
out there somehow, some way.
Since this article, I’ve noticed how true this is. Embarrassed politicians,
corrupt traders, covert chief executives and their cohorts should all be afraid.
Very afraid.
You cannot hide anything anymore. Information will out, whether it be through
Facebook, blogs, emails, instant messaging, chatrooms, text messages … you name
it. Information will out.
Here are a few examples of how disruptive these trends are proving to be.
EBAday, or is that days as it is now
2 days, is upon us next week. This is the annual jamboree for the Euro Bankers
Association to celebrate the arrival of SEPA, after much anticipation since EBA
days started three years ago.
This year it is in Helsinki on Wednesday and Thursday of next week, and I
have the honour to chair the plenary session with Werner Steinmüller, Head of
Global Transaction Banking at Deutsche Bank, and Mark Garvin, Chairman of
JPMorgan Treasury & Securities Services International. Coincidentally, these
are the two sponsor firms of EBAday this year.
In planning this plenary session, we have discussed a few ideas and decided
to get away from SEPA specifics, as that’s covered in all the other sessions,
and talk about the big picture. And the big picture focuses upon how the markets
have changed since the last EBAday in Rome last year.
Picking up on one of the points made in the debate this week about identity and authentication that it is the government’s
responsibility to manage identities, I was kind of surprised by this view. This
view stated that banks have no control over identities because governments issue
identities in the form of passports, driving licences and social security
numbers. Therefore, it is the government’s role to protect identity and ensure
that unique identities are provided to citizens.
This was called a ‘cop-out’ during the debate, namely that we are abrogating
our responsibilities if we think that it is governments who should manage
identities.
But I think there is a more important point being made here.
Governments are forcing us into biometric banking.
Last night’s debate, “This house believes our current authentication and
identification methods are good enough” was a healthy one, focusing primarily upon card authentication in retail
transactions.
Today is a day that’s all about authentication, identification and
verification.
First, I have been asked to make a speech at a payments conference all about
how to minimise risk; and, second, we have a meeting of the Financial Services Club this
evening, in the form of an Oxford Society style Debate with the motion: “This house believes our current authentication and
identification systems are good enough”.
I’ll report on the latter topic tomorrow, but thought I would write a summary
of my speech just to see how it plays out.
With oil prices falling to as low as $10 a barrel in 1998, rising to $72 in
2007 and now hitting $139
on Friday, what is happening? Forecasters are now saying that oil may break
over the $200 per barrel price barrier before the end of the year. Will this
bubble never burst?
Sure it will, but in the meantime everyone is laying blame on someone
else.
UK Prime Minister Gordon Brown blames the Organisation of the Petroleum Exporting Countries,
OPEC. What a load of baloney. OPEC were responsible for price-fixing and
shorting production in the 1970's, which caused the last crisis, but now these
countries produce only about 4 in 10 barrels. If anything, OPEC has tried to
maintain fair pricing for the past three decades, rather than fixing.
OPEC therefore blames the Federal Reserve's policies on the dollar in light
of the credit crisis. Did Greenspan and Bernanke mess up this badly? Some would
say yes, as the price of oil bounces unendingly upwards on each day of bad news
USA. Friday's spike up was caused by the sharpest one-month rise in American
unemployment rates since 1986.
But then the Fed and other investors, such as George Soros, blame speculators and hedge funds. Everyone's trying to make a
quick buck out of commodities such as oil and gold in light of the credit
crunch.
Front Page of Business Week today: Banks versus Consumers - who wins?
The focus is upon credit cards and debt collections and, with American credit-card debt hitting a record high of $957 billion in Q1 2008, up 8% from the previous year, according to Federal Reserve data, this is a growing market. One of the market leaders in debt collections is the National Arbitration Forum (NAF), used by many banks to chase up
delinquent accounts.
The article then goes into a few statistics:
NAF handled 33,933 collection arbitrations in California, from January 2003
through March, 2007; of the 18,075 that weren't dropped by creditors, otherwise dismissed, or
settled, consumers won just 30, or 0.002%, of these cases;
NAF employs 1,700 freelance arbitrators - mostly moonlighting lawyers and
retired judges - who handle some 200,000 cases a year, most of them concerning
consumer debt; and
NAF’s presentation to clients tells them that, in cases in which an award or
order is granted, 93.7% are decided without consumers ever responding and that
only 0.3% of consumers ask for a hearing (the rest just tussle through the
debate via mail).
As a result NAF is becoming the target of a legal action with
consumers claiming that rather than arbitrating, they are purely acting on
behalf of banks. For example, 1,400 Virginia residents claimed that they had
been promised, in writing, that they could appear at hearings before an NAF
arbitrator but that the law firm representing NAF, Wolpoff & Abramson,
failed to arrange the hearings. The case was settled in favour of the
residents.
In the theme of dialogue about our changing world, the conversations
continued with my USA friends about how hard it is to get the marketing right
these days. They lamented the fact that their marketing team are so traditional
that they still wait until the brochure is perfect for mailing before posting
details on the internet.
The problem with this is that the internet costs you nothing, and you can
post anything immediately, and then change and evolve it in real time. Who needs
brochures?
John Cleese: And yes, all right, but apart from the sanitation, medicine,
education, wine, public order, irrigation, roads, the fresh water system and
public health, what have the Romans ever done for us?
In the eight years since George W Bush came to office, America has suffered
9/11, a costly war in Iraq, a period of economic growth that has come to a
plateau and surprisingly speedy end, and a business climate where the next wave
of growth is unclear.
America is a former superpower. This power is no more.
But, before you think this is another America-bashing column, let’s just take
stock.
I've said for a while now that Robots would eventually look after all my banking needs, and with the Semantic Web and Artificial Agents, we're almost there. But then I see these developments coming out of Japan:
and I realise that the future is real robots.
I particularly like the way that Robina signs her name. I wonder if she can steal my identity too?
But these bots are not a joke. They are incredibly important to Japanese society to cope with their aging population. That's why Toyota and Honda are investing billions to lead this market, as are other firms such as Microsoft who want to set the standards for these systems.
Another excellent collection of folks at the annual Gateway conference, a
meeting of British American Business leaders.
Sir Wim Bischoff, Chairman of Citigroup, gave the keynote speech all about the impact of Sovereign Wealth Funds
(SWF). Although they have been around for decades, it has only been the recent
experiences with Middle Eastern, Chinese, Russian and other nation's funds
buying big chunks of foreign businesses, that this has really appeared above the
radar.
Bearing in mind their lack of transparency and potential threat to national
interests, the idea of Chinese or Russian funds buying up large swathes of
American and British businesses is something that many are wary of, and Sir Wim
asked the question: should we be?
We had a great conversation today about bank brands at the Asian Banker’s Retail Excellence Program (I'm an advisor to the program and sit on the judging panel for their Awards).
It started with Nielsen sharing some data about a branding analysis project they ran over the last year, across 179 bank brands across Asia. The results looked at the Brand Equity Index (BEI) for each bank, with BEI being comprised of various features such as awareness, consideration, confidence, preference, recommendation, trust, reputation and so on.
As a result of looking at these factors, each bank is given a score between 1 and 10 based upon consumer surveys, e.g. if the consumer is aware of the bank brand, it gets 1; if they would consider that brand, it gets a score of 2; if they are confident of the brand, then a 3. You get the idea, e.g. a score of 10 is a really good score where you not only have a loyal customer, but an advocate who would recommend you to their friends and family.
Only 3 banks out of 179 across Asia scored more than 4; half scored less than 1; and the average score was 1.37.
The Financial Times has been writing about the end of the credit crisis this week, saying that BlackRock's $15 billion deal to buy a portfolio of distressed subprime mortgage debt from UBS, for 75 cents on the dollar, shows things are picking up.
Also, Deutsche and Citi have sold $20 billion of similar debt products to private equity houses such as Blackstone, Apollo and TPG recently.
Add to this that the US private-equity firm, Cerberus Capital, are quoted as saying: "The banks need to unload their inventory or they cannot do deals. The market has started to move and we have bought quite a few of the loans", and might all of this be pointing to the end of the bad times?
It is Beethoven's Ode to Joy, with the lyrics removed.
The original
German chorus has been removed to respect the fact that we don’t have a common
language in Europe, yet.
Strange that, as I thought that most us speak a version of English. For example, the French Eurovision song contest entry this year has most of
its verses in English.
Since technology first appeared in the financial world, we have worked harder and
harder to use automation to reduce costs and increase efficiency. We
successfully made the back office a processing machine, whilst trying hard to
create a front office where customers serve themselves.
Well, we have succeeded.
We have managed to get customers out of branches and transform them
into data entry clerks, who serve themselves through ATMs and the
internet.
However, what this has resulted in, is disconnected banks. Banks
have disconnected from relationships, and are perceived to be
‘faceless’ and ‘remote’.
A recent quote was on a UK poster. The quote was from Jeremy Clarkson, the biggest bloke (translates into yob, lout,
brute) in Britain, and it said: “money and rumpy-pumpy are the twin engines powering everything we do”.
... in other words, money and sex make the world go around.
Now, there is some truth in this phrase, as I’ve blogged
before, and this is why the psychology of money is a critical discipline
that banks possibly undervalue or even misunderstand.
This was a comment I made during a panel at the ACT Conference in Edinburgh, where I joined esteemed
speakers in a BBC Question Time style debate, chaired by Andrew Neil,
the political journalist and writer.
The other speakers on the panel were:
Angela Knight CBE, CEO, British Bankers’ Association;
Robert Waugh, Head of UK Equities, Scottish Widows;
Sahar Hashemi, Co-Founder, Coffee Republic; and
Trevor Williams, Chief Economist, Lloyds TSB.
Questions included:
“Are
business ready for stagflation – the nightmare of low growth and high
inflation?”
“Should
the UK take advantage of the weakness of sterling today and join the euro?”
“Dubai,
Mumbai, Shanghai, Goodbye? Will China and other economies offset recession
in the USA?”
“After
China’s success, which countries would you look to invest in next?”
“Will
the turmoil in the credit markets spread to the equities markets?”
“Can
the panel name any organisation or institution that they think is responsible
for this crisis?”
“Can
anyone on the panel name one bank product that they wish had never been
invented?”
I’ve been reading a range of articles about the next generation internet, or
the semantic web as it is called by those in the trade.
Semantic is a method of looking for the meaning and relationships between
things, and the semantic web effectively moves us away from files and downloads
to databases and integration. In practice, this means that rather than going on
to the internet to pull things out and push emails and files around, the
internet continually monitors you and your tastes and finds things to push at
you which match your electronic lifestyle. In other words, it makes everything
online much more relevant to you as an individual, and moves us away from having
to search because the semantic web will find for you.
The best story
of the week is the leaked email from Der Spiegel of Deutsche Bank's instructions to employees to give up their sex and drugs and rock 'n' roll.
As the credit crunch hits, no more market excesses are allowed, with Deutsche's staff to shave and shower at airports (instead of booking into hotels), travel by second class train (instead of gold plated limousines) and stop billing lap dancers as restaurant meals (and eat proper meals instead).
Ah well ... at least the crisis has crunched their credits a little bit :)
Reading the PayPal blog is worthwhile, particularly as this item appeared the other day. It’s all about stamping out
phishing with Michael Barrett, chief information security officer, blogging
about the ways in which PayPal were attacking this issue. As PayPal and eBay are
the target of three-quarters of all phishing attacks, according to Sophos in
July 2006, they should know what they are talking about.
The reason why Michael’s blog is relevant to you, me and all the bankers and
citizens of the world, is that he thinks they have found a way to stamp out
phishing losses. Between July 2006 and July 2007, the phishing rate targeting
PayPal and eBay dropped from peak rates of over 80% to under 10%.
The fourth Foresee
online financial services survey came out today, benchmarking banking
websites for their engagement and satisfaction with the user.
What
it finds is that online banking websites score 82 in overall
satisfaction, a 12% improvement since 2003, and the best of the
websites for financial services available online. This is a great
score, as e-retailers only benchmark at 83. According to the report,
online banks are getting the balance just right between convenience,
value, information and transactions.
Apparently, where
customers are ‘highly satisfied’ in their banking experiences, 31% are
more likely to purchase more, and 57% are more likely to use the
website as their primary channel for the bank.
Whilst the banking websites get a rating of 82, investment and credit card websites score 75.
Highly
satisfied investment website users are 68% more likely than others to
recommend the investment service to their friends. Similarly, highly
satisfied online credit card users are 47% more likely to use this card
as their primary credit card and 66% more likely to recommend the card
to others.
The headline I keep coming back however is that 12% improvement to a benchmark of 82. The
fact that banks have improved 12% in five years to be on a par with the
Amazon’s, iTunes and eBay’s of this world is definitely saying
something. You can download the full report here.
You do wonder about the extremes here though. After all, you can
have highly satisfied customers online, but what about all the other
surveys that come out every day saying that people are fearful of
online finance, such as this one saying that 1 in 5 Americans have had their account details compromised online.
I guess the balance between online bank lovers and internet financial haters is about 50:50?
Except that the survey from Gemalto is actually a big PR gaff as 1
in 5 Americans compromised would mean 60 million Americans have had
their internet accounts accessed by hackers. That is far and away more
than the numbers reported anywhere else.
Therefore, Bank Technology News
chased up and discovered the numbers were a bit 'jumbled' ... in other
words, wrong. The actual number of Americans who have had issues is
about 27 million or 11% ... and their issues have been some form of
loss of personal data, not banking data.
The Global Ivy League is the scenario of truth for the future banking markets. More globally harmonised regulation creates less innovation, but more security, amongst the major league players who we feel we can trust. Or rather, our politicians feel we should trust.
I saw this blog from a VC in NYC
today. It's entitled: "We Need A New Path To Liquidity" and I had to
read that as I thought it would be all about how to trade out of
recession or something. But no. It's about Microsoft, Yahoo!, Google,
AOL, News Corp/MySpace and all these other players dickeying about with
the internet as though it was a toy.
The problem our VC friend is
grappling with is the fact that internet entrepreneurs spend years
building their platforms. If they take off, they then "need a way to
get paid for that effort. And those of us who finance their efforts
need to get some return on our investment" and "without a path to
liquidity, all the innovation that is being created by the
entrepreneur/VC equation will stop happening."
OK. So just IPO.
Ah.
There's the rub. The IPO market has apparently shut down, and so that
is the issue - how do you monetize your investments when you cannot
bank them anymore.
The leads him into dark pools, and Goldman
Sachs' TrUE ("GS Tradable Unregistered Equity OTC Market") system. A
great blog on this from Roger Ehrenberg in May 2007, almost a year ago.
His point is that you then do not need to IPO anymore, as these dark pools allow you tap directly into private liquid markets.
Not really, but there is a lot more debate about its pro's and con's amongst the tech community, with at least some saying it is not that bad. Not many, but a few.
I reckon that 95% of Vista users have not had the issues I have had, and are happy. They may not have old hardware and lack the drivers. They may not find things locking up, hanging up or just not running. They may not have software spam filters that are incompatible with the newly included filters that Outlook 2007 and Office 2007 builds in.
So yes, there are some who love it.
Like this blogger, Preston Gralla, on Computerworld. He says it's better because it runs more software, is safer, cheaper and more openthan a Mac and, most of all, is not managed by the vindictive Steve Jobs. Many others disagree with this opinion, with Chris Pirillo providing a very articulate rebuke. Even Gartner have joined the bandwagon by saying "Windows is collapsing".
Most of you know my own views. I've never owned a Mac, have always used Microsoft and just feel disillusioned with the way they've managed this roll-out, all the glitches, things not working and, overall, that Vista has been out for 15 months and it is only now that it is starting to become stable thanks to update after update. So I'm in the 5% who are unhappy and have been kicking up a stink. In fact, I sometimes worry that I have started to sound like a broken record, but this is important. After all, it could determine the future shape of computing if Microsoft really did go kaput.
Regardless of all of these arguments however, the process has been a real pain for me, the others affected, Microsoft and the business world. And to show what an own goal it has been, is demonstrated brilliantly by this advert for the Mac:
OK. After all my cynicism about Second Life becoming mainstream, mainly due to the Wild West nature of the Linden Labs offer, I take it all back.
My issue
was related to mashups, bombing, cyberterrorism and more. It was also
related to the Second Life banking crash after they outlawed Gambling.
As
Neil Katz, chief technology officer of IBM’s Digital Convergence
business, states: “The internet, not just Second Life, is the Wild West
once you get beyond the corporate firewall.”
Today however, IBM announced
a strategic agreement with Linden to create a corporate virtual world
that is secure, firewalled and enterprise ready in Second Life.
