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.
After my blog entry about Germany losing Euro 2008 due to Twitter, Techcrunch are reporting a new service, Tipit, that allows you to make payments with Twitter. It actually doesn't though ... it just sends you a message to send the money you promised via PayPal.
Even so, money via social apps are growing rapidly. For example, at the turn of the year Facebook was reporting developing Payments Applications and, guess what?
There are now quite a few, with the most popular being Spare Change.
Spare Change has almost 5,000 daily users today, and describes itself as: "the first integrated
payments application on Facebook. Put a little money in your Spare Change
account. Spend it on your favorite applications all over Facebook."
Actually, it's the other way round: Germany lose Euro 2008 thanks to Twitter, according to CNet News.
If you're not familiar with Twitter, it's a great way to communicate short messages and links and views, using SMS texting on mobile, blackberry, as well as short updates via Facebook or the internet to Twitter.
It's an aggregation of thought streams for the great and the good.
CNet take it a step further with the idea of Angela Merkel providing advice to the German team during the game in real-time, such as "Tell Torres, he's a girl".
Unfortunately, Twitter's reply service was down at the time, so the team got confused about why they should call him a girl and that allowed him to get past Lahm and dink the ball over Lehmann to score the only goal in the game. The winning goal that is.
They take this on to illustrate other ideas, such as Gordon Brown twittering to our Olmpic racers that they should "imagine they are being chased by Margaret Thatcher". That'll make them run faster.
I'm just wondering what Alan Sugar of The Apprentice: You're fired would Twitter to Gordon Brown?
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 wrote an indepth analysis eighteen months ago about PayPal’s 100 months birthday and now they’re celebrating their official tenth anniversary, so I thought I would add a small addendum. Although I say it’s a small addendum, it’s quite an interesting one.
Basically, I was updating some old slides about PayPal and thought
that I should track their number of users over the years, as they do
publish these numbers. First of all, I looked up the last published
quarterly results from PayPal on the eBay website.
In their latest company presentation, published June 16th, they have these figures:
PayPal operates in 190 markets using 17 currencies
Anita Elberse has created a great discussion in the Harvard Business Review this week about the Long Tail, the theory expounded by Chris Anderson, editor of Wired Magazine.
The theory goes that you can make as much money as an online retailer from the 80% of specialised products that sell occasionally, the tail, as retail merchants make from focusing upon the limited best-sellers in the head of the sales line.
Anita states:
"In 2006 just 20% of Grand Central’s (book publisher) titles accounted for roughly 80% of its
sales and an even larger share of its profits."
She also goes on to look at Rhapsody, the online music store, and finds:
"The top 10% of titles accounted for 78% of all plays, and the top 1% of titles
for 32% of all plays."
As a result, she concludes that:
"For Chris Anderson, the strategic implications of the digital environment seem
clear. 'The companies that will prosper,' he declares, 'will be those that
switch out of lowest-common-denominator mode and figure out how to address
niches.' But my research indicates otherwise."
Chris Anderson has already posted a response on his blog:
"She finds the top 10% of titles (out of more than a million in that data
sample) accounted for 78% of all plays, and the top 1% account for 32% of all
plays. That sounds pretty concentrated around the head, until you reflect, as
she notes, that 'one percent of a million is still 10,000--[...]equal to the
entire music inventory of a typical Wal-Mart store.'
"This is a good moment to remind everyone of the normal definition of 'head'
and 'tail' in entertainment markets such as music. 'Head' is the selection
available in the largest bricks-and-mortar retailer in the market (that would be
Wal-Mart in this case). 'Tail' is everything else, most of which is only
available online, where there is unlimited shelf space.
"So in the data she cites, the head of the online music market represents 32%
of the all plays, and the tail represents 68%. That's certainly no challenge to
the Long Tail theory; indeed, it's even more tail-heavy than the data I cited in
my book (probably because I used a more generous estimate of 50,000 tracks for
Wal-Mart's inventory)."
Nothing like a good argument is there?
Why am I bothered?
First, because the Long Tail is an important theory about modern retailing.
Second, because it plays to the heart of online channels and why we virally network socially through blogs and virals in a networked world.
Third, and most important for readers in banks, is that there is a Long Tail in banking that's emerging through prepaid cards and mobile telephones. Take note of the views of both Anita and Chris, as they are crticial discussions in how to make money in these markets.
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.
Conclusive proof that mobile phones do fry the brains ...
... or is this a viral video to promote popcorn eating?
In case you're wondering why I posted this, it's because this video has been copied around the world. There are videos on YouTube that show similar experiences in Asia and America.
The original French video has been watched by over 3 million people in 10 days.
It's making headline news in the media too and shows that you really must be more aware of using the mobile and, ideally, wear a wireless headset.
The trouble is that if you try to pop popcorn using your mobile at home with your mates, then nothing happens.
Maybe that's because this is just a spoof video made by a wireless headset manufacturer called CardoSystems.
It is like the old discussion of the businessman in the hot-air balloon who
is lost. He spies a chap on the ground and asks if he knows where he is.
The guy looks up and says, “you are about 35 feet in the air, supported by a
vehicle comprising cloth and ropes, and filled with helium.”
The business man looks puzzled and says, “you must be a technologist.”
“Wow”, the guy says. “I am. How did you know?”
“Because what you have told me is technically accurate, but of absolutely no
use to anyone.”
“Ah”, says the guy. “You must be a businessman.”
“I am”, says the businessman, “but how did you know.”
“Because I was minding my own business and you asked me to help you out, so I
gave you assistance in the best way I could, and now you blame me for the mess
you’re in.”
Ouch. Business and technology folks really don’t get on well.
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 so many websites, blogs, voicemails, emails, text messages, adverts,
media, feeds and chatrooms twittering at the poor individuals who inhabited
earth in 2008, the citizens of the world found it impossible to keep up with
everything.
Everything had become so fragmented, that workers of the world were drowning in an
information overload. As a result, they rebelled by using consolidation
services, alternatively known as aggregation, to overcome the overload.
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.
It’s a question that came up yesterday in discussion with a group of bankers and I often find myself challenged to discuss ‘world class technology’ with folks. This is because they want to be leading edge, innovative, seeking new ways of doing business and driving the engines of the bank with best in class.
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’.
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.
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.
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:
Nothing to do with banking and technology you may say, but this actually has everything to do with banking and technology as it is all about Marketing in the Digital Age and the way we use new channels.
To start with, I was intrigued to spot that some very old rockers have been hired as mouthpieces for online entertainment channel, most of which is user-generated: YouTube. Mick Jagger and Keith Richards launched YouTube's Living Legends today, with the idea being that you can ask them any question you want ... and you may even get an answer. Just go see what the word is:
Then there is another advert creating quite a stir using old media broadcast channels - what is known as Television - to market a car. The car is the new Citroen C5. It is very irreverent about Germans, so much so that it's almost unbelievable. For example, the tagline is "Unmistakably German ... Made in France". Worth a look:
Finally, there is the recent brilliant Cadbury's advert with the Gorilla. It started as an online viral campaign, and later moved to mainstream TV and created another hit for Phil Collins re-release of "In the Air". Have a look at it, if you haven't seen it already, as it is rumoured to have resulted in a 5% increase in sales for Cadbury's, specifically as a result of this ad:
The Gorilla ad has now been followed up with this, not quite so inspired affair (depending on your view):
The reason for posting these three advertising campaigns, is that they all demonstrate the wonders of marketing in the digital age, and banks and technology firms can learn something from them ... bearing in mind how bank brands suck.
First, you have YouTube spending a load of dollars to attract more volume - the Stones don't come cheap - and they are not even putting the Stones on TV. It's all viral. Yet the video has over thousands of comments, viewings, favourites and links already ... in other words, folks are asking questions and loving it.
You then have humour working well to create a debate about nationalities and borderline racism. The fact that an advert can create a debate online about it, when the old days of one-way media meant some of us would laugh whilst other would fume and have no voice, shows how powerful it is to have YouTube in this world.
Finally, you have lavish productions and expense that again, can be debated, critiqued, loved or hated online. In other words, you create your campaign and the world can now converse with you about how good or bad it is.
With viral working well for some, quality for others, and big ideas brilliantly or poorly implemented by a few more, the fact is that the world of marketing in the digital age has never been more vibrant or more challenging.
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.
Is it just me or is the sight of an advert for PayPal in a newspaper a bit like some form of colonic irrigation?
I don't know why, but travelling along on the tube this morning, I saw a half-page advert for PayPal in the free Metronewspaper. It jarred for two reasons:
First,
I could not see why PayPal is advertising in dinosaur media - a printed
newspaper - when they're so well-known online. They only operate
online and through mobile and so anyone who hasn't heard of them by now
is obviously a luddite ... or is that the reason for going with
dinosaur print media, to get the luddites paying online?
In
which case, second, why run an advert which shows a typical internet
payments area of a website, with people in silhouette holding
binoculars and looking at the payment area. Underneath is the
headline: "Are you concerned about people seeing your financial details
online?"
It just sits wrong.
If (1) is the objective, then why unsettle the luddite by using headline (2) which makes them feel even more nervous?
If
item (2) is the focus, then it's probably tech users who are already
paying online that is the target, so why advertise in print media (1)?
Either
way, it just didn't work for me. I can't link to a picture of the ad
because it's in print, but sorry PayPal. Turn around and do it again.
According to the Byron review of social networking in the UK, Facebook, Bebo, MySpace and others sites are to be censored, and Google, Yahoo, MSN and others must show SAFE SEARCH in clear options from the home page. This is because some parents do not supervise their children's use of the Internet.
Next, we intend to bring riot police into any home that accesses any undesirable websites, whether there are children in the home or not. Sorry, that was my joke ... or was it?
Following on from my comments on Vista, this one is not my comment ... but Infoworld's. This was followed by this blog and it's worth reading the over 100 comments that follow that.
Funnily enough, I'm now seeing 2-3 articles a day with similar sentiments.
Yep, you guessed it. We're all going to get rolled back to XP!
I've
been trying to get into Xobni's (inbox backwards) plugin for Outlook
for a few weeks, but they're blocking me out as they've been overloaded
with demand even though the product is only in Beta test mode. This is
because Bill Gates referred to them as the “the next generation of
social networking” and touted them as a great plugin for Microsoft
Outlook.
Checkout the video on YouTube and you'll be desperate for it too ... Xobni that is.
Most of you know that America's fifth largest bank, Bear Stearns,
was sold at bargain basement prices to JP Morgan over the weekend. The
price? $2 a share. That's 90% less than the bank's valuation last
week, and a fraction of the $117 per share value for the bank last
October.
So, JPM pays $240 million for an 85-year old institution
that, until recently, had been one of America's financial leaders. Why
so cheap? Because America wanted to avoid the embarrassment of another
Northern Rock, as investors withdrew $17 billion from Bear Stearns in
just two days last week.
What gets me, to put this in context, is that a bank can be worth less than a few web pages.
Take
the three year old firm Bebo. Bebo, with its 22 million unique
visitors who spend 40 minutes a day socially networking and sharing
tips about hair, health and celebrities, sold to AOL last week for $850
million. That makes this website worth almost four times more than
Bear Stearns, even though Bear Stearns made over double this value in
profits in 2006.
The real shocker is when you see sites like Meebo,
an Instant Messaging aggregation service that launched in September
2005, creating more valuation than Bear Stearns. Meebo, worth only
$60-$70 million this time last year, is raising funding and looks to
achieve a valuation this year of around $250 million. Slightly more
than America's fifth largest bank.
These points are discussed in depth by Matt Marshall in VentureBeat and almost made me spill my coffee this morning.
In banks today, technology strategy is the essence of business strategy.
In
capital markets, where algorithmic trading analytics can make the
difference between success and failure, technology is critical to
competitiveness. If you cannot compete with another bankâs new
derivatives capabilities, which are driven by technical excellence, you
might as well give up the ghost. If you lose a millisecond of speed in
the investment markets, you are dead. That is why low latency is at
the core of capital markets today and technology strategy is at the
core of latency.
This is why an exchange said to me, âIf it
takes more than 500 milliseconds to process then it is of no value
because it is out-of-dateâ. Technology strategy is the core focal
point for the exchange.
This is why an investment firm said
to me, âWe moved servers to Moscow because it takes 60 milliseconds to
route a trade from London to Tokyo via Moscow compared to 240
milliseconds if we process the trade via New Yorkâ. Technology
strategy is the core focal point for the bank.
This is why
investment firms are co-locating their servers within exchanges. It is
also why we are seeing market blips occurring on a regular basis,
because markets move in real-time.
In capital markets, technology strategy is at the core of business strategy.
This is also true in commercial banking.
For
the commercial banker, faster payments are all about real-time
payments. SEPA is all about replacements of technology
infrastructures. And the supply chain for the corporate client is all
about straight through processing.
In corporations,
especially manufacturers, you can now transport goods as cheaply from
Guangzhou to Grantham as you can from Gillingham to Grantham. How
come? Because mass container shipping has made the transport of
skyscraper-sized boats full of goods a reality. Hence, the cost of
shipping a box of shoes from Guangzhou is now as cheap as shipping a
factory full of shoes.
This is due to standards. And the standard is a container box.
In
the financial support of that supply chain, there are no standards.
Therefore, banks are scrambling to work with SWIFT on SCORE, MA-CUGs
and TSUâs; with ISO on ISO20022; and with TWIST on implementing
einvoicing standards, bank services billing standards, and other
standardised processes for straight through processing.
All of
this is about making the bank easy to do business with, which means
plug-and-play connectivity, real-time reporting, and value-adding
information services for the corporate client. In other words,
technology strategy is at the core of business strategy.
This is also true in retail banking.
Many of us believe that retail banking is all about branches.
Rubbish.
Branches
are just sales stores today, as transaction services have moved out of
the branch to the ATM and the internet. In other words, retail bank
customers serve themselves online through automated systems, and in
real-time.
This self-service culture is going to be even more
pervasive as retail banks offer more services across electronic mobile
channels, as well as introducing new payments channels using chip
technologies. New payment channels are critical to the war on paper:
cash and cheques. Yet, paper is the only reason customers go into
branches these days, purely because they cannot process paper, cash and
cheques, electronically so they cannot serve themselves.
The result is that retail banks purely have electronic connections with their customers. In other words, technology strategy is at the core of
business strategy.
So, technology is at the core of the
strategy deployed in retail, commercial and investment banking. It is
the foundation of banking in the 21st century. You cannot reduce and
downgrade the import of getting technology right or wrong.
Now the challenge.
Bearing
in mind that technology is fundamental to client relationships, is
obsolete the day you buy it, is disruptive and changing at a speed that
is hard to keep up with, then the bank has to place technology as the
cornerstone of their business strategy.
It is the most important aspect of the bankâs business strategy.
Put it in the context of a bank being like a human body.
The brain of the bank is the executive management, who set strategy.
The heart of the bank is the people, the organisation structure, the front line staff.
The skeleton of the bank is the buildings, bricks and mortar.
And technology is the nerves, veins, muscles, tissues and blood for the bank. It keeps the bank body connected.
The brain is the IQ of the bank, with some being more intelligent than others.
The heart sets the culture of the bank, and it is hard to copy a culture.
The skeleton is rarely broken but has to be on occasion, as branches are moved and new markets opened.
But
if the nerves, blood and veins of the bank are clogged, blocked or
hardened, then the bank will die. It is not the brain that stops
thinking; it is the blood to the brain. It is not the heart that stops
beating; it is the blood flowing through the heart. Bones do not
disappear; it is the blood and tissue.
A bankâs blood flow is itsâ technology, as thatâs the only thing that connects all of the disparate pieces of the bank together.
This is why technology strategy is the bank strategy in todayâs world.
I have had the contention for a while that Technology needs to be
seen as disposable. The day you buy it, it is out-of-date. No sooner do you invest in new technology, than you find your investment is
obsolete.
It has always been this way ever since the PC revolution took over. Should I buy an Intel 80386 processor when the 80486 is on the way, and then the Pentium chip and the Celeron, the Xeon and the Atom ...
This
is the point of the IT industry: to change, to adapt, to innovate and
to continually get us to upgrade. In so doing, technology has moved
from being a long-term investment to a short-term hike.
As
consumers, we know that this point is obvious. We get a new mobile
telephone every eighteen months. No sooner have we bought a new iPod
than the iTouch or iPhone appears. You just bought an HD-DVD player
when the world settles on Blu-Ray. You invest in a Sony Bravia TV and
a new one comes out a week later.
Do banks get this?
Not
really. Many banks still work on net present value depreciation
models. They still want cost-benefit analysis and 18-month return on
investment business cases. They need to settle and agree by committee
the decision to purchase, and the committee meets once every quarter,
so wait for your investment requirement to appear on the business radar
before you can even think of a sign off.
The trouble is, bearing in mind the speed of technology change, these are the processes and structures of yesteryear.
Yesteryear,
banks made massive investments in technology that required huge
consideration because of (a) the cost, (b) the risk of getting it
wrong, (c) the time it would take to implement, and (d) the time you
intended to use it for.
Two to three decades ago, you would be buying into a lifetime’s investment.
A
core system would be expected to last … well, a lifetime. That’s why
so many are still around today. That’s why so many banks are worried
about changing core sys
