The Financial Services Club's Blog

To dump or not to dump the branch

I never knew how much debate could be created by making the mere statement of placing IP-enabled networks at the core of the bank and re-engineering to exploit this as the basis of future banking.  This is instead of placing branch networks at the core.

Some people believe this is purely academic as we have branches today and can't get rid of them, so the question is how to use the branches we have today.

My contention is different. 

As I have stated many times before, branches are critical sales centres and, in the future, they will not be transaction centres.  Historically, they have been transaction centres.  This is what everyone is struggling with today: how to turn tellers into sellers and branches into sales operations.

Personally, I don't think you can turn tellers into sellers.  It's a bit like turning credit risk officers into customer service reps ... it may work with a few, but most would rather be credit risk officers and tellers.

So you firstly need to rehire.

If you are going to do that, then you also need to ask in the transformation process, that if you are going to turn your old transactional branches into sales operations, do you need so many of them?  If you get rid of the transaction focus and move it to machines on the high street or in a branch lobby, how many branches do you then need?

Equally, if you are moving branches away from transactions, which are now managed through remote telephone and internet connections and other self-service machines, all of which are IP-enabled systems including the branch ATMs, then how do you rethink the network?

This was the point of  Wednesday's blog on bank strategies being fundamentally flawed, and those who think branches are the start point will throw good money after bad.  Those who think IP-networks are the start point, and then build the end-points (which include branches) on top, will be much nearer the right strategy for the future.

I'm sure folks will carry on arguing this point -- after all, I run workshops on this stuff and make a good living out of it (as do many others) -- but I know for a fact that those who think IP-networks are just layered on top of old infrastructures, networks, distribution strategies and organisations are wrong.  Afer all, having been around re-engineering bank processes for over two decades, this is why we have ended up with silo structures, painful processes and inappropriate skills.

So, in summary, my point is that the strategy needs to start around an IP-enabled bank.  If you were designing that bank, then here's the question I would ask around the branch focus:

• How many branches would you layer on top? 
• How many of those would be self-service automated branches and how many would be sales centres? 
• How many staff, and what sort of staff, would you hire for those sales centres? 
• What would be the customer demographics for each sales centre, and how would those staff skills fit with those customers? 
• What happens to the existing staff and who do you need to reskill or offer severance? 
• What are the technological aspects of the IP-enabled branch in this context, and how much technology do you put into the branch? 
• What is that technology doing and how does it profile against the staff skills and customer demographics?
• Is the techology future-proofed and how engaging is this going to be, versus putting that service into other channels such as online or through contact centres?
• How does the underpinning of the new IP-enabled branch fit with the IP-enabled alternative contact points?
• Are they fully consistent with a single electronic IP-enabled service?

These are all questions retail banks are asking, and some are answering ... and it ain't easy.  But it has to start with the network being the IP (that's Internet Protocol) network of the 21st century and not the high street bricks network of the 20th and before.

A month after MiFID and 'nothing happened' - who says?

OK so it's not quite a month since MiFID came into force on 1st November, and I got a flurry of emails over a statement made by one of the research firms* that, "It's been remarkably quiet. I don't think there've been any big issues ... I think everyone can be pleased that they've complied." 

Now, to be honest and fair, I think this firm is trying to indicate that the big explosion, the big bang, the major revolution has not happened.  So I'll agree with that.  Most of us refer to MiFID as the long moan rather than the big bang.

As a long moan though, a lot has happened. 

We have many new market players in trading (Chi-x, Equiduct, Smartpool, PlusMarkets, Turquoise …) and trade reporting (Omgeo, Boat, ICMA’s TRAX2, as well as new systems from LSE, Deutsche Bourse and Reuters).

We have had issues with LSE's new systems reached breaking point shortly after MiFID's launch.  That was a shock and, in part, relates to the fact that trade reporting issues, which were never fully resolved, are creating duplicate reports and false flags.  The result is that there is confusion about what was traded with whom and where. As is the fact that there are now over 190 execution venues trading across Europe creating a data bubble.

We also had the Property Investment Market suspending business because they could not get a license from the FSA as an MTF, as reported by John Cant the other day.

I don't think "everyone can be pleased that they've complied" is quite true however, as I hear lots of firms are non-compliant, including some of those involved in the big projects. 

For example, the fact that the firms publish their “best price” but that those prices aren’t firm is, in my view, non-compliance.  These prices are not firm as, by the time the retail investor tries to get in there, the price has changed.  This price change happens to be due to delays between pre- and post- trade reporting systems.  The delay allows the directly connected professional investor to get best price, but retail investors connected to retail service providers do not. 

Now these delays may be purposefully built into those systems of course, and I am told that this is ok because the FSA has ruled that such prices are allowed to pass through as the “negotiated price”, so that’s ok.

To me, this is non-compliance.

Equally, the fact that no-one has been taken to task yet is primarily because no-one has been tested for compliance yet.  The FSA and European Commission are instead watching very carefully to see how firms are behaving and which are misbehaving.  Those caught in flagrant disregard, watch out.  Around April 1st, you will be made to look like fools for your in flagrante delicto disregard.

For example, I just attended a nice presentation this morning from the European Commission giving an update on MiFID.  Their comments included:

“We have continued infringement proceedings against those who have failed to transpose which currently focuses upon four member states: Czech Republic, Spain, Hungary and Poland.  Spain is voting today to transpose level 1 of MiFID by mid-December, and Hungary did so last week.  But we will be naming and shaming those countries that fail to implement and the Commissioner is regularly on the telephone to their finance ministers as a result.”

In this update, they also mentioned that in Q1 2008 the Commission will make rulings around bond markets and other non-equities markets and their coverage under MiFID, and Q4 2008 a statement on commodities markets.

Equally, they will be updating transparency rules to cover delay tables and the availability of execution data quality, as well as bringing back telephone recording as a requirement of reconstituting trades.

Watch this space.  MiFID is by far and away unfinished.  More to come later.

 

* one of my friends has it in for this firm so I promised not to mention that it was Gartner again.

Bank strategies are fundamentally flawed

   

For half a millennia, retail banks have worked on the basis of physical distribution.  For half a century, that model has been challenged to move towards electronic distribution.  At the end of the first decade of the new millennium, we have finally reached the point where electronic distribution has matured, works and is proven. Unfortunately, most retail banks are stuck in the twentieth century. It's time for retail banks to turn their model on its head and focus upon electronic platforms where physical distribution is the cream on the cake, rather than the other way around.

This view was prompted by a debate I was having yesterday around the future of retail banking.  The discussion went around: "so are things like Second Life and Facebook just passing fads, or are they really important to the future of retail banking?" 

My response was that the question was flawed as it showed the questioner was a digital alien.

Duh?

Digital aliens and digital natives are terms coined by Marc Presnky.  The people who are digital natives, Generation D, the i-Pops ... whatever you call them ... are people who don't think of the Internet.  They just get on with their lives and see online, mobile and all other digital channels as being seamlessly integrated into their world ... these folks do not think about branches, call centres, internet and so on.  They just think of these things as life.

And this is where retail bankers are getting it wrong because they are run by digital aliens or immigrants who do not get the digital life.

For example, retail banks have a historically strong branch network. 

They added ATMs in the 1970's, call centres in the 1980's, the internet in the 1990's and are now adding mobile in the 2000's.  Each channel is added as an extra layer on the foundation of the branch distribution cake. 

Branch networks are the foundations - electronic distribution is the cream on the cake.

This is why retail banks talk about multichannel strategies where they try to integrate their call centre channel with their internet channel; they attempt to deliver mobile banking interoperable with the call centre channel; they mess about with CRM to ensure consistency across branch and internet channels.

My problem is this: banks only have one channel. 

They do not have multichannels, call centre channels, internet channels, mobile channels and so forth.  They just have an electronic channel that underscores and provides the foundation for all end points: mobile, telephone, internet and branch.

The electronic channel is based upon internet protocol (IP) technologies, as is the branch as it happens.  And this is the big change.  Just as I referenced that mobile telephony is wrong as it should be IP telephony, banks should stop thinking of channels and just recognise that they are IP-enabled.  Call centre, ATMs, branch, internet, mobile ... everything is IP-enabled. 

Thinking this way then demonstrates the fundamental flaw in retail banking today because many banks still have everything built in layers of complexity and legacy.

The ATM, call centre and internet channels were all built as layers of cake created when the physical branch was the foundation.  The electronic channels were built as ancilliary to the core branch channel.  That is why they were often separated and have this chasm of non-integration between each other, as banks were built on a physical distribution model where electronics were layered on top.

However today, and certainly tomorrow, the population has moved to a world where the majority are digital natives.  As the Digital Generation grows up and matures, and as the world becomes one populated by digital natives, what role will there be for banks that have been built upon the basis of a physical distribution model with electronics layered on top?

It's time to turn this on its head.  It's time to think about banking as an electronic structure.  It's time to bite the bullet and admit that retail banking is not a physical distribution structure with electronic channels on top, but an electronic distribution structure with electronic and physical channels on top.

How does that change thinking?

It would mean wiping the slate clean and starting afresh. 

How would we build today's bank if IP-networking is its foundation; and call centre, internet, mobile and the branch are just the cream of the cake on top?

Where would you build branches, and how would you build them, if the branches are ancillary and perfunctory to the electronic foundations?

Who would you employ, and how would you employ them, if the core differentation of the bank is its' IP-base rather than its' branch structure?

The fact is that any bank that launched today as a green field operation would think this way and, with the right leadership and implementation, it would thrash the weak competition that exists in most markets who are based upon legacy structures and legacy thinking.

Start thinking about the bank being an IP-network at its core, with layers of distribution on top and branch as the cream on the cake.

It's time for change.

Bank strategies are fundamentally flawed

For half a millennia, retail banks have worked on the basis of physical distribution.  For half a century, that model has been challenged to move towards electronic distribution.  At the end of the first decade of the new millennium, we have finally reached the point where electronic distribution has matured, works and is proven.  Unfortunately, most retail banks are stuck in the twentieth century.  It's time for retail banks to turn their model on its head and focus upon electronic platforms where physical distribution is the cream on the cake, rather than the other way around.

This view was prompted by a debate I was having yesterday around the future of retail banking.  The discussion went around: "so are things like Second Life and Facebook just passing fads, or are they really important to the future of retail banking?" 

My response was that the question was flawed as it showed the questioner was a digital alien.

Duh?

Digital aliens and digital natives are terms coined by Marc Prensky.  The people who are digital natives, Generation D, the i-Pops ... whatever you call them ... are people who don't think of the Internet.  They just get on with their lives and see online, mobile and all other digital channels as being seamlessly integrated into their world ... these folks do not think about branches, call centres, internet and so on.  They just think of these things as life.

And this is where retail bankers are getting it wrong because they are run by digital aliens or immigrants who do not get the digital life.

For example, retail banks have a historically strong branch network. 

They added ATMs in the 1970's, call centres in the 1980's, the internet in the 1990's and are now adding mobile in the 2000's.  Each channel is added as an extra layer on the foundation of the branch distribution cake. 

Branch networks are the foundations - electronic distribution is the cream on the cake.

This is why retail banks talk about multichannel strategies where they try to integrate their call centre channel with their internet channel; they attempt to deliver mobile banking interoperable with the call centre channel; they mess about with CRM to ensure consistency across branch and internet channels.

My problem is this: banks only have one channel. 

They do not have multichannels, call centre channels, internet channels, mobile channels and so forth.  They just have an electronic channel that underscores and provides the foundation for all end points: mobile, telephone, internet and branch.

The electronic channel is based upon internet protocol (IP) technologies, as is the branch as it happens.  And this is the big change.  Just as I referenced that mobile telephony is wrong as it should be IP telephony, banks should stop thinking of channels and just recognise that they are IP-enabled.  Call centre, ATMs, branch, internet, mobile ... everything is IP-enabled. 

Thinking this way then demonstrates the fundamental flaw in retail banking today because many banks still have everything built in layers of complexity and legacy.

The ATM, call centre and internet channels were all built as layers of cake created when the physical branch was the foundation.  The electronic channels were built as ancilliary to the core branch channel.  That is why they were often separated and have this chasm of non-integration between each other, as banks were built on a physical distribution model where electronics were layered on top.

However today, and certainly tomorrow, the population has moved to a world where the majority are digital natives.  As the Digital Generation grows up and matures, and as the world becomes one populated by digital natives, what role will there be for banks that have been built upon the basis of a physical distribution model with electronics layered on top?

It's time to turn this on its head.  It's time to think about banking as an electronic structure.  It's time to bite the bullet and admit that retail banking is not a physical distribution structure with electronic channels on top, but an electronic distribution structure with electronic and physical channels on top.

How does that change thinking?

It would mean wiping the slate clean and starting afresh. 

How would we build today's bank if IP-networking is its foundation; and call centre, internet, mobile and the branch are just the cream of the cake on top?

Where would you build branches, and how would you build them, if the branches are ancillary and perfunctory to the electronic foundations?

Who would you employ, and how would you employ them, if the core differentation of the bank is its' IP-base rather than its' branch structure?

The fact is that any bank that launched today as a green field operation would think this way and, with the right leadership and implementation, it would thrash the weak competition that exists in most markets who are based upon legacy structures and legacy thinking.

Start thinking about the bank as being an IP-network at its core, with layers of distribution on top and branch as the cream on the cake.

It's time for change. 

 

 

Here's to the success of the UK's Fraud Review

   

Last night we entertained Steve Wilmott, Head of the Economic Crime Unit for the City of London Police, at the Financial Services Club.  He was presenting the implementation of the results of the UK's Fraud Review, which combined the efforts of the Serious Fraud Office,  the Police and Government departments, after being kicked off by the Attorney General, Lord Goldsmith, in late 2005.  The results are that there is a new regime for detecting, investigating and prosecuting fraudulent activity.  The report, for example, recommends:

a) that fraud should be measured on a consistent basis across the economy;

b) that the government should establish a National Fraud Strategic Authority to devise a national strategy for dealing with fraud and ensure that it is implemented;

c) the establishment of a National Fraud Reporting Centre for businesses and individuals to report fraud;

d) that the Home Secretary should consider making combating fraud a policing priority with law enforcement agencies encouraged to develop plans which
include local performance targets for fraud; and

e) the maximum sentence for fraud should be increased to 14 years with extended sentencing options available to the court, as well as cases being handled by a specialised Financial Court jurisdiction with more alternatives to full scale criminal trials made available.

You can read the full 377 page report along with other updates if you want but that's it in a nutshell.

The intriguing aspect here are some of the things Steve mentioned.  For example, on point (c), creating a National Fraud Reporting Centre, Steve pointed out how difficult it is for the average person to walk into their local police station and report:

"I invested £200,000 in a South African Diamond operation, which came through a Spanish Agent, representing an American company, with a Netherlands Antilles bank account.  The money appears to be lost, could you help to get it back?"

when the person in front of you is reporting a lost cat and the person behind you is trying to tell them that they just got spat at by a yob on the street.

Equally, if you were found with £200,000 of cocaine you would be liable for up to ten years in jail, whereas if you duped Joe Public into giving you £200,000 ... you'd be surprised if you got more than a ticking off, "You very naughty fraudster you".

This is the reason for change.

Steve talked about the Nigerian 419 scams and lottery emails, and said that 1% of people still respond to these mass mailings.  You may think these people are idiots, but often they're not.  For example, he's had people who were CEO's of major firms caught out in scams. 

The reasons these folks get caught out is that the fraudsters are very professional.  They send out glossy brochures about the South African diamond mines and then call you up and ask if you've read the brochure.  These scamsters are often set up in a boiler room style operation, where 10-12 chaps make hundreds of calls a day.  When they get a hold of you, all you hear is a very professional dealing room ... which is the tape that's playing in the background of the boiler room to make it sound like a financial trading room.

The City of London Police broke up one of these boiler room style operations just last week in Germany.  There were several young guys in their early 20's in the room calling across the UK all day.  The guys were all Brits, as people don't trust strangers with foreign accents (unless it's your banks offshore call centre of course).

Another aspect of the fraud trends is that ten years ago, 10% of fraud cases involved a bank insider.  Today, it's 40%.

No wonder the figures are major with anything from £14 billion to £20 billion a year being reported as lost in fraud.  Compare this to the £26.5 million a year funding for the Serious Fraud Office, and you can see why fraud is a difficult nut to crack.

Having said that, Steve's Economic Crime Unit has had it's budget increased to £25 million over the next three years, and he now has 150 officers increasing to 200 by the end of the decade to investigate fraud.

My walk away is that the UK has treated fraud as a petty white-collar crime for too long.  Most banks and businesses do not report fraud because of the embarrassment if it were made public.  Even if they do report it, it's not easy to get a case built that goes to trial and conviction.

The result is that if you really want to make money illicitly then rip-off people's money through intelligent siphoning of their bank accounts, rather than robbing banks or drug-running. You're far more likely to get away with it and far less likely to be jailed if you're caught.

I hope the Fraud Review changes this position.

 

Workers' Remittances - a huge opportunity

I had a good debate today with Citibank who, as we know, are heavily focusing upon taking a slice of workers' remittances following their February announcement when they teamed up with Vodafone to offer mobile payments for migrant workers.

Most economic migrants do not trust banks as banks do not cater for the low-wage worker who may not be able to write, may have no proof of identity and who is often fearful of the very formal processes in banks.  This is why most economic migrants use money transfer networks such as Western Union or, more informally, Hawala where they deal with cousins of cousins to move money around the world.

The reason why this has come to the fore though is that there are almost 200 million migrants worldwide shifting around corridors of work between India and the Middle East, Philippines and the USA, China and Africa ... in fact, you name anywhere in the world and I'm sure someone will want to migrate to there or emigrate from there.  It's all about getting up the economic ladder, improving one's lot and getting to earn more than crust, e.g. let's get the whole loaf.

These migrants actually have quite a large loaf with the World Bank and others estimating that somewhere between $250 and $300 billion is moved around every year between the migrant and their families and friends at home.  And that's just the official numbers as there's another $250 to $300 billion moved around outside the banking networks through Hawala and other informal networks.

Around $600 billion or more is therefore being sent around the world between 200 million migrants, growing at 8 percent per annum.

Who's sending stuff where?

Accoding to Western Union, six countries represent half of all the worldwide remittance receipts:

• India             15%
• Mexico           8%
• Philippines      8%
• China             8%
• Turkey           6%
• Egypt            5%

In other words, by just enabling these six countries to receive high volume distribution and processing of worker's remittances, a bank or money transfer network can facilitate half of the global market for wiring money home, worth at least $100 billion, and probably $300 billion a year. 

Take a commission of 1% off that and you've got a $1 to $3 billion business.

No wonder Citi teamed up with Vodafone to roll out the m-pesa mobile remittance programme worldwide.

CLS break the 1 million transactions record

I was fascinated  to see an update on how CLS, the Continuous Linked Settlement system for FX, has progressed. 

CLS was founded in 1997 to eliminate settlement risk in the foreign exchange markets and now handles fifteen currencies: the US Dollar, the Euro, UK Sterling, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish Krona, Danish Krone, Norwegian Krone, the Singapore Dollar, the Hong Kong Dollar, the New Zealand Dollar, the Korean Won and the South African Rand.  Two more are coming on stream in 2008 with the addition of the Mexican Peso and the Israeli Shekel.

CLS is now handling over $3.8 trillion daily peaking at $8.4 trillion representing an average 492,000 instructions per day peaking at over 1,140,644 payment instructions last week on 13th November, the day after Veteran's day in the USA.  This is the first time CLS has processed more than a million instructions in a day, and is 235,166 more instructions than the previous peak record of 905,478.

CLS processes 55% of all foreign exchange transactions and links to 285 banks, 1693 fund accounts, 49 brokers and 21 corporates.

For a full analysis of the onwards and upwards march of CLS, read a recent report from July 2007 published by the Bank for International Settlements: "Progress in reducing foreign exchange settlement risk".

How many bankers does it take to change a lightbulb?

Eight of course.

One to change the lightbulb.

A second to assess the risk of the light bulb changing process.

A third to ensure the light bulb changing process adheres to the internal compliance regime for health and safety during light bulb changes.

A fourth to ensure that the internal purchase order procedures have been adhered with for light bulb change orders.

A fifth to audit the supply of the light bulb following the internal purchase order procedure.

A sixth to report back to the compliance and risk functions that the supply and audit divisions had complied with the light bulb change risk and compliance procedures.

A seventh to monitor that the light bulb was changed by a member of staff who was cleared by the banking union to be authorised with light bulb changing management.

And an eighth of course.

This person is responsible for costing the light bulb changing process and being creative enough to incorporate the pricing of the eight people into the customers' monthly billing statement without the customer noticing.

That's processes folks ...

A Wahoo to WaMu

Leaving Las Vegas is always a bitter pill.  On the one hand, you're leaving behind all the bright lights, shows, drinks, girls ... you name it - what goes on in Vegas, stays in Vegas ... on the other, my pocket is a few thousand dollars lighter and so it's nice to escape before bankruptcy or Chapter 11 or whatever it is occurs.

The BAI Retail Delivery show has been top heavy with big hitters: Geldof, Greenspan and Forbes; and the message seems to be one where America's cup is either half-full or half-empty.

The half-full would say that America's just going through a minor market hiccup.  What's interesting there is that it used to be that when America sneezed, the world got flu.  Now, if America sneezes, it's just Europe that gets the Lemsip, for the half-empty glass watchers are saying that China, India and the BRIC economies are fast rising and America is no longer the resilient currency.  That's why the dollar is weak and the subprime is being offset by Europe and not Asia.  Asia is meantime investing in the next BRIC economy: Africa.

Whether your cup is half-full or half-empty, my real highlight of the week was visiting one of Washington Mutual's, now called WaMu for short, Occasio branches.  These are branches that were launched in the early 2000's with a completely new model of branch banking based upon open counters, bright lights and welcoming branding, children's playrooms and happy staff.  And it works.

On Friday morning, twenty Europeans and International attendees bowled down to one of these branches and the first thing that strikes you is how bright and welcoming they are.  No tellers.  No windows.  No queues.  No dim lights and grey people.  It's all smiles.  That's WaMu's slogan by the way: "simpler banking, more smiles".

The culture of smiles is inspired by the bank's CEO and Chairman, Kerry Killinger, who also happened to be a keynote at this year's BAI Show.

Now Kerry has been at the helm of WaMu for seventeen years, and has grown the bank to be the sixth largest in America.  It's culture is very much his culture.  Irreverent, fun and different.  That's WaMu.

A culture founded on core values that are based around being fair, caring, human, dynamic and driven.  These values shine through the WaMu culture from their head office in Seattle, which I've visited and enjoyed (watch out for the golden pig at the entrance - long story), through their branches such as the Las Vegas Occasio branch we visited last Friday.

An example of Kerry's style is that he introduced the Wahoo a couple of years ago.  This is to show that you appreciate a fellow worker's efforts, which may sound cheesy but do remember that most people leave firms because they feel unappreciated. 

The Wahoo, or WaMu Wahoo to give it the proper vernacular, is an electronic appreciation card that employees send to each other to recognise each other's work.  Managers can join in too, and can include gift cards or other value and gift tokens if appropriate.   In less than two years, 140,000 ecards have been sent between staff and, according to internal measures, each person receiving one is half as likely to leave WaMu as the general population, so it works.  Cheesy or not.

Another key aspect of WaMu is being innovative and, as Kerry says, "some people look at business and say: 'if it ain’t broke, don’t fix it'.  I prefer Henry Ford's approach when he said: 'If I‘d asked people what they wanted, they’d have asked for faster horses'."

As a result, Kerry's always looking for innovation and he defines innovation as a three pronged approach: research, risk-taking and culture.   He shorthands this to being the brain, guts and heart of innovation where research is the brain, risk shows if you have the guts and culture demonstrates whether you have the heart for innovation.

Personally, I like their style.  Quirky and different, funny and irreverent, welcoming and easy.  That's WaMu.

Funny enough, one of the guys who visited their branch last Friday said, "well of course, it's easier over here in America as they have so much space to do this".  My comment would be that it's nothing to do with space.  It's to do with culture.  And it's far harder to copy a culture than a product, programme, technology or system.  That's why banks should focus upon differentiating cultures first.

Operational risk - it’s not just for banks

A quick reminder, if any were needed, that it is not just banks that can suffer from an operational risk event. Governments can too. The difference, of course, is that you can change your bank at any time.

More Poor Journalism

I have been out of contact over the last few days due to the fact I am moving house, so when I finally got my podcasts to listen to there were a few. I saw one from the BBC’s Today program on Northern Rock (warning - multi-megabyte MP3 file) and I thought this may be a good one, in light of my previous experience with them. I was gravely disappointed.
In what is now a continuing meta-story, the journalistic coverage of Northern Rock is showing just how little even financial journalists understand banking.

The errors in this particular piece revolve around a mis-understanding of one of the absolute basics of banking - liquidity risk. The premise of the argument in it was simple - Northern Rock was unable to meet calls on deposits meaning Northern Rock is insolvent and therefore worth nothing.

A basic understanding of banking would show this up as not a logical argument. As discussed in the post on liquidity risk linked to above, banks borrow short and lend long. This gives rise to liquidity risk, which means that if more than a certain amount of deposits are withdrawn in a short period a bank will not have enough physical cash to pay them. This can be, and must be, separated from the overall worth of a bank.

To put it in simple terms (and turn it around a bit) -  let’s say I borrow money from a bank to buy a house. I manage to service the loan for a few years, during which time the value of the house goes up by 50% per annum - making me very wealthy (in part due to the leverage effect). Unfortunately, I lose my job and, during the period where I cannot find another one I cannot meet the repayments on the loan.

Am I financially worthless? Clearly not - there is a lot of value in my home. Can I meet the bank’s demands to pay my mortgage? No.

The Today piece confuses these when the journalist and the talking heads pulled in for the piece argue (at some length) that the failure to pay the demands of depositors means that Northern Rock is  worthless.

Be sure to cancel your credit cards before you die

There’s a true story circling the internet that I’ve seen twice in the past few months and so I thought it worth sharing.

A lady died in January, and the bank billed her for their annual service charges on her credit card for February and March.  When these were unpaid, the bank added late fees and penalty interest fees on top of the monthly charge.  The balance had been $0.00 and is now over $60.00, and increasing every month, so her nephew calls the bank:

Nephew: “Hello there.  My aunt died recently, and I am calling to tell you that she died as you keep mailing charges to her.”

Bank: “Well, the account was never closed and the late fees and charges still apply.”

Nephew: “Maybe you should turn it over to collections.”

Bank: “Since it is over two months past due, it already has been.”

Nephew: “So, what will they do when they find out she is dead?”

Bank: “Either report her account to the frauds division or report her to the credit bureau, maybe both.”

Nephew: “Do you think God will be mad at her?”

Bank: “Excuse me?”

Nephew: “Did you just get what I was telling you . . . The part about her being dead?”

Bank: “Sir, you’ll have to speak to my supervisor.”

Supervisor gets on the phone.

Nephew: “Hi.  I’m calling about my aunt and am trying to tell you that she died in January.”

Bank: “Well, the account was never closed and the late fees and charges still apply.”

Nephew: “You mean you want to collect from her estate?”

Bank: (Stammer) “Are you her lawyer?”

Nephew: “No, I’m her nephew.”

Bank: “Could you fax us a certificate of death?”

Nephew: “Sure.”

After they get the fax.

Bank: “Our system just isn’t set up for death, sir. I don’t know what more I can do to help.”

Nephew: “Well, if you figure it out, great! If not, you could just keep billing her. I don’t think she will care.”

Bank: “Well, the late fees and charges do still apply.”

Nephew: “Would you like her new billing address?”

Bank: “That might help.”

Nephew: “Rookwood Memorial Cemetery, 1249 Centenary Road, Plot Number 1049.”

Bank: “Sir, that’s a cemetery!”

Nephew: “Well, what do you do with dead people on your planet?”

Bob Geldof calls bankers a bunch of ?!:'!!!?

The third keynote at this year's BAI is Bob Geldof. 

I was a bit concerned about him being here as I know there's a six-figure speaker fee and thought: "has Bob sold out and gone onto the speaker circuit on the back of Live Aid or is he being philanthropic and giving this money to Africa too?"

This was based upon the fact that he is speaking at two other conferences I'm going to in the next six months, so I'm already thinking I'm going to get Geldoffed out.

I shouldn't have been so concerned as what Bob is doing is taking the message from the world leaders - Davos and the G8 Summit - to the business leaders who are represented at the largest industry business gatherings.  He doesn't care about the money - how many of us know that he runs a major media and publishing company and is a multimillionaire businessman alongside his philanthropic activities - he just cares about people who are disenfranchised and without hope, as that's how he grew up in 1960's Ireland.   

In a long, rambling, emotional speech, as the guy wears his passion on his sleeve, Bob was here to talk about innovation. 

What does he know about innovation?  Well, he's had to invent and reinvent himself many times.  He grew up with a mother who died when he was very young and a father who had to travel away from home five days of the week to raise cash, so he fended for himself.

After striking out over and over again, he eventually found his vocation firstly through music, with the Boomtown Rats, and latterly with Africa.

The first time he tried to change the African situation, LiveAid, he was dealing with the symptoms and the outcomes.  The starvation of twenty years ago was addressed by music being the fund raiser.  It didn't cure the issues though, it just treated the disease.

The second time, Live8, he was dealing with the causes and the reasons for the disease, which meant dealing with the politics and the economics.  The starvation of today is being addressed by changing the rules of trade and government.  It is the celebritisation of politics, not politics of celebrities.

As Bob spoke he paced the stage like a caged tiger.  At one point he said "now, let's get back to you f***ers" ... meaning the bankers.

"After travelling for a few years, I returned to Ireland and went to the bank with friends of my schoolmates parents - a lawyer and accountant.  I needed a loan with an idea I'd already proven worked overseas.   I kept quiet as my lawyer and accountant made the pitch then, at the end, the bank manager turned to me and said 'So how old are you Bob?'

"'20'.

"'Ah, come back when you're 40.' 

"F***ers."

The last word accompanied by a flick of the v-sign to the audience, who by the way loved this and clapped and laughed (how funny is that?).

Then he got to the point.

There are 900 million people in Africa.  If those people have no hope, they have no future.  Since 1985, Live Aid and subsequent campaigns have raised 350 million Africans out of poverty and placed 20 million children into schools.

This means that Africans now use technology and are educated. 

Masai Mara guys come out of a discussion with their loin cloths and boot up their laptops to email their friends.  Mrs Hetty who used to get her meat from the shop over three visits with each visit taking a day, can now text message her order and pick it up at her convenience in under a day.

This is revolutionary and all it takes is to give people hope.  Take the disenfranchised and give them the tools to work and it wil unlock their minds to achieve their dreams.

If you can unlock minds and give people the ability to think for themselves and manage for themselves, they will not just survive.  They will prosper.

This is a bit like the old Bible story of St Peter, the fisherman.  Give a man a fish and he will eat for a day.  Teach a man to fish and he will eat forever.

Now that Africans are fishing, rather than starving, they are going to become productive.  A little like Greenspan's thoughts on a billion people moving from West to East China to work, this is what's happening in Africa.

This is why China and India are investing in Africa.  Africa has the raw materials, commodities, especially oil and copper, for the future.  So, if you want to know where the next BRIC economy will be then invest in Africa. 

That's what China is doing big time, because they see it.  They see that Africa will be the next generation of economic release and growth.  That's why 85,000 Chinese have moved to Africa this year alone.  This is why China's ICBC has invested in Standard Bank.  This is why China is giving African nations billions of dollars, and those dollars are unconditional.

Do we see China and India investing the same dollars into the USA or Europe.  No.  That's because they are just focused on getting themselves out of poverty and investing in countries with the lowest cost source of materials to do that.  That is Africa.

America and Europe, if you want a piece of the future and to make your fortune, invest in Africa now.  No longer feel pity for them because they don't need that anymore.  That was twenty years ago.  Today, Africa nees foreign direct investment (FDI) and those who can see the future are giving it to them.

An emerging economy needs FDI at the rate of 40% or more per annum to flourish.  Today, Africa receives 2% and, if you take out extraction of commodities from that figure, they get less than 0.5% FDI per annum.

C'mon.  Wake up.  China and India have.  Invest in Africa.  It is the future.  Miss the future at your peril.

The message makes sense for the long-term investor and Bob got a standing ovation.

A little like Negroponte's speech at SIBOS, these two guys are creating a future where poverty will be history.

Good for them, and rock on.

US Basel II Implementation - Final Rules

One event I missed posting on at the time was the final agreement of all of the US regulators on the way that Basel II will be implemented in the US that happened 10 days ago. After some seriously silly obstinate argument from the FDIC, I was please to note at the time that the Fed largely got its way in the end, and now those rules have now been given final agreement.

To those of us watching from the outside this has been a painful process. I can only imagine how difficult it must have been for the US banks. The end result was close to the right one - the one I suggested a full year ago. In this, at least, the delay was worthwhile. Going with the FDIC's original position would have been close to suicide for the whole US banking system - and a long, slow suicide it would have been.

Randall Kroszner's speech on the matter is worth a read. The way he delicately steps around the blithering idiocy errors of the FDIC and the local bank lobbyists is almost artful. One bit irks me, though - at the bottom of page 5 of the speech he is seeming to say that the US regulators will be coming up with a "standardised"  method of implementing Basel II. Amazing - I wonder what paras 50 to 210 of the New Accord are?

In most of the rest of the world the process has been fairly sedate - well, as sedate as a nearly complete change to the bank regulatory framework can ever be. What am I going to talk about in this way again while we wait for Basel III?

Google Maps - Result

I am glad to see someone takes me seriously. Amir from Austrolabe took my suggestion on a Google Maps mash-up and ran with it. The result can be seen here.

He has taken up to nine news feeds and the map then takes a pretty fair guess at where the story relates to. The locations are not always perfect, but most are spot on. The feeds are user selectable, with the BIS feed being the default.

If you have any feedback, suggestions etc., feel free to email using the link on the page or just post them here. If you know of good news links with reliable place names embedded within them he may be open to adding them in. In the mean time, enjoy - if you find it useful, bookmark it.

Your challenge is to find out what building the map considers to be the centre of the world...

Steve Forbes versus Alan Greenspan, Round One

So yesterday we had Alan Greenspan in the morning at the BAI Retail Delivery Show.   

Caesar's Palace if they were put in the ring together so I guess they don't like each other very much.

Forbes, who is chairing Rudy Giuliani’s campaign for the Presidential office this year, was outspoken and funny. 

His role was to put a positive spin on the current black clouds in the market and so he began by saying that America was doing great.  America’s growth rate over the last four years was equivalent to the total GDP of China this year. Worker productivity is twice the rate of a decade ago.   Corporate inventories are tightly controlled and corporate balance sheets are well structured, even though they have $2 trillion of cash floating on their balance sheets, which is not ideal.

When you take what people own in terms of life policies, bank CD’s, 401k’s, etc, and take away their liabilities of credit cards and mortgages, etc, American households are a net positive nation to the tune of $29 trillion.  That is more in savings than the rest of world saves in total.  This does not even take account of their main asset – a house – which would add another $25 trillion.

America is still also creating many new jobs and income, so what’s not to like?

The subprime?

Subprime is a $3-400 billion, so yes it’s a big number … but stock markets lose that in a day, so what’s the problem?

Sure, it’s headline news but subprime is more like someone finding ecoli in a lettuce bag.  The media gets a hold of it and suddenly the whole nation stops buying lettuce, even though it was just one bag out of millions that had the issue.

As you can see, Steve was giving the US domestic audience a positive view which was pretty much the opposite of Greenspan’s gloomy inflationary predictions. 

So Forbes is not a fan of  Greenspan.  This was clear when he made the statement that Alan had spent twenty years speaking in strange foreign languages that no-one could understand, then he leaves office and suddenly learns English and speaks clearly.  A reference to the fact that Greenspan never answered any questions directly in his twenty years in the Federal Reserve, but now he's out of office he writes a book that everyone reads and can understand clearly.

Equally, Forbes does not agree with Greenspan's views on the root cause of the subprime crisis.

The Federal Reserve created the subprime crisis by creating excess liquidity back in 2003.

Now who was in office back then I wonder?

The other big news of the day is that with the dollar at an all time low and house prices crashing, the USA is a very good market for overseas property investors ... my Miami beach house is under offer.

As we walked into the conference theatre, there were big signs everywhere saying: “no media”.  Apparently Dr. Greenspan’s people had been very strict about this and so anyone with a media badge, which were bright green this year, were barred. 

L’il ol me is not media you see.  I just happen to be a blogger.  That’s social media, not mainstream media, so that’s ok. So I speed typed and caught the whole speech on my Sony Vaio. 

This is an example of old school PR, where the company think they can control the message, as in you can ban media access to private meetings.  Unfortunately, in the new world, everyone is media.  Anyone can publish what transpires in an email, on a blog, in a podcast, through a chatroom.  So the fact is you can’t control or hide anything, as I blogged about the other week.

The other reason this amused me is that Alan was engaged in a meeting style discussion with Gerard Baker.  Mr. Baker is the U.S. editor of the Times newspaper that is head officed in London. 

Now the Times newspaper ... isn't that media?

Gerard also made the joke of the day when he referred to the subprime crisis as being caused by the mass sales of "NINJA loans which are made to people on the basis that they have No Income, No Job and no Assets”.

Anyway, the next keynote came from Steve Forbes in the afternoon. 

Forbes and Greenspan are two guys who are polar opposites.  Forbes … the charismatic publisher with a fortune in the bank who ran for President.  Greenspan … the banker.

At one point  a reference was made to the fact that these two guys would sell out

Hacking into social networks

Fascinating report in today's Forbes around social networks being easy fodder for hackers and therefore criminals.  The firms at stake include everyone from Google through Facebook, and it is all due to the fact that the more open these communities become for developers to provide common applications, the more flawed they become to vulnerabilities. 

Here's some of the text to give you a clue:

A hacker known as TheHarmonyGuy exploited a flaw in an OpenSocial application on the business social networking site Plaxo within 45 minutes of the application's launch. A bug in an application called "Emote," which adds smiley faces and other "emoticons" to a page, made it possible for TheHarmonyGuy to insert emoticons and text into the profile of Plaxo's vice president of marketing, John McCrae. The application has since been removed from Plaxo's site.

Three days later, the same hacker exposed a vulnerability in an application called iLike that allows users to list favorite music tracks on the social network Ning. TheHarmonyGuy was able to change users' track listings. Ning quickly disabled iLike and re-enabled a patched version six hours later.

TheHarmonyGuy's hacks are far from life-threatening. But they illustrate the vulnerability of Google's new platform, and raise the question of who's responsible for OpenSocial's security: application developers, social networking sites or Google itself?

Read the whole article here.

Greenspan and the credit crunch

Two of the keynotes at this year's BAI Retail Delivery Show are Bob Geldof and Alan Greenspan. 

Bob Geldof, the liberating freedom fighter for justice for Africa, wiping out third world poverty and forcing politicians and bankers to give him their f***ing money, whose six-figure pay cheque for his speech is obviously going to Africa ... or is it his f***ing pocket.

Alan Greenspan, the sage and dour federal banker who oversaw one of America's most prosperous periods in history before handing over to Bernanke, whose name kind of rhymes with stank ... or is that the steaming pool of sub-prime credit that Greenspan left him with?

Now that I've completely blown my chances of either keynote speaker even talking to me, I can enjoy the show, free from any sense of awe.

What we are seeing is a moment in history however.  This moment is related to banks that have blown over $300 billion in bad loans over the past decade, some estimate it may even be $500 billion, and yet they've only declared $30 billion of those losses so far.  That means there's another $470 billion to be declared at max, and banks that include great names from Citi to Merrill, from Barclays to WaMu, Morgan Stanley to BNP Paribas, are all being forced to admit that they have been caught in this storm ... and yet they are all declaring themselves at a loss as to how this could have happened.   

Well, Greenspan presented his views today and it was interesting.

First, the subprime market was unavoidable.

Second, it won't happen again.

The subprime market was unavoidable because Dr. Greenspan stated that it dates back to the end of the cold war.  This was the trigger that led to the subprime issue.  The reason is that all those countries that had had central planning regimes - Russia and China in particular - began to move to the American capitalism model in the 1970's and threw away their central planning model in the 1990's. 

Suddenly a huge release of people who were previously not motivated by capitalism were.  We're talking two billion people or more.  Just look at the movement of people from West to East China for an example.

This huge release of people led to a production revolution that created lower and lower prices.  That’s why we enjoyed twenty years of low interest over the past decade.

Whenever you have a long-term low-interest environment, you have a low-cost environment for real estate.  As a result, a housing boom occurs and, as the boom swept across America, it meant that banks were being pushed harder and harder to find new mortgage business.

The hedge fund managers were therefore putting pressure on mortgage securitisers to deliver results, who then put pressure on the banks to deliver mortgage market growth, who then reduced risk measures to allow subprime through the door en masse.

From 10% of the loan book to over 20% in five years, subprime built the asset bubble but it was hidden as there were few foreclosures.  After all, you can remortgage when you have an increasing asset price. 

But then that asset price stopped increasing because inflationary forces are afoot.  China's prices of imports to the USA have been decreasing for two decades but have now plateaued.  The low interest rate environment has therefore plateaued with it, and is now on the rise.  So your house was no longer a money creator but a money burner.  It is no longer an increasing asset but a decreasing one for the next few years.

Result: the subprime kicked in.

This was unavoidable from a Federal Reserve viewpoint because it couldn’t be regulated.  Regulators understand risk models and interest rates, but the subprime model was criminal and fraudulent mis-selling of loans to deliver returns.  Hence, the issue lies more with the Attorney General than the Federal Reserve. 

Equally, the Fed tried to increase interest rates to slow things down, but that didn’t work either. To the extent that you can judge house price rises in the USA, the Fed thought it was based on long-term mortgage rates and those went down over the last decade.  The thing is though that the Fed does not control those rates.  The Fed had complete control over the spot markets, but their impact on the long-end was not there. 

The ultimate test of that was at the end of 2004 when they tightened the long rates from 1% to 5%.  Greenspan thought the impact would be significant but what happened is everyone went net short and the long-end of the market collapsed instead.  The result is that the USA moved into 2005 with things still going higher on long rates. That’s when he realised they’d lost control of the long end of the market and that’s when subprime, through a mixture of criminal lending activities combined with no control capability centrally, became an accident waiting to happen.

It won’t happen again because we’ve all learnt our lesson so CDO’s, SIV’s and other exotics are now off the table.  Something else will come along but not another subprime.

It won’t happen again because we’ve all learnt our lesson so CDO’s, SIV’s and other exotics are now off the table.  Something else will come along but not another subprime.

He said loads of other stuff that was interesting too, but that’s for me to know and you to find out … by buying his book I guess.  Alternatively you could read this Blog from the Price of Everything.  A very good read it is too.

   

Beware the e-bomb

As many know, I'm a great fan of science fiction and the future.  So I get an email today from Forbes where Arthur C. Clarke has given his vision of 2500 A.D.  It's an interesting story, not a new one in some ways, about the biggest danger to the planet being an e-bomb.  An e-bomb creates an electrical pulse that blows away systems and services.  Worth a read though, if you're interested.  Just click through here, and note there's lots of other good future stories to link through to from Mr. Clarke's contribution.

Forget branch transformation - spend a few dollars on people

 

So this week I'm in Las Vegas, land of Elvis Presley impersonators.  Funnily enough, it's a line I use in many presentations.  What line you ask? 

Well, it kinda goes: "Hi, I'm Chris Skinner.  I'm not an analyst as analysts tend to talk in numbers.  By way of example, there are 39,000 Elvis Presley impersonators around the world growing at a CAGR of 19% per annum which means that, by 2020, 1 in 3 of us will be impersonating Elvis ... it's a one for the money ..."

So anyways, I'm in Vegas.  Hubba-hubba and viva Las Vegas and all that good stuff.

Why am I here?  On business obviously at the BAI Retail Delivery Show.  This is the retail bank's equivalent of SIBOS, with over 5,000 people gathering from around the world to hear the latest and greatest views on retail bank and retail payments technologies and trends. 

This year I'm hosting a group of senior bankers from around the world and, over dinner, we start talking about branch transformation.  I can't help asking: "how much does a branch transformation actually bring in, in terms of new business?"

What triggered the question is that my local bank branch is pretty seedy.  It always looks untidy as though there is no pride in the branch appearance, the staff are agreeable but administrators hidden behind large glass teller stations, and it generally feels like you're walking back in time when you go in there as there's always queues.

Meanwhile, 200 metres down the road, a nice new shiny branch has been opened up by a competitor bank.  It's bright and airy, with loads of space so I never see queues, and it just looks welcoming. 

Has it made me think of switching my bank?  No. 

Has it made anyone I know switch?  No. 

So, was it worth it?

The retail bankers looked at me warily, thought through the question over a few bites of food, looked back at me, and said ... "No.  It's not worth it."

The general take was that for all the spending on technology, lights, refurbs and so on and so forth, it didn't make a jot of difference to their competitiveness.

So what does?

People.

All of them said a good manager with a good team makes all the difference.  Obviously giving that team a nice work environment helps, but it's the people that make the difference.  Spending an extra few thousand a year hiring, training and keeping good, motivated, results-oriented and customer-focused people will always win, they said.

Funnily enough, that's what I always thought service was all about - people dealing with and being good with people - but then what do I know?