The Financial Services Club's Blog

Microsoft in 2008 -- The Predictions

            Despite Chris Skinner’s prediction, in an intelligently provocative recent piece, that 2007 was the year that Microsoft committed suicide, even he didn’t say the process would be quick – he predicted the company’s first lost to appear in 2012.

            Meanwhile Microsoft continues to play a big role in banking and insurance, while its importance in capital markets beyond Excel on the trading desk is significant, but just how significant is subject to some debate.

            Still, there’s no question the company’s plans are important to financial services firms, so I read through reports from a few leading predictors with interest.

            Bink.nu from the

Netherlands

is one of the leading Microsoft watching sites. It is ""Watching Microsoft Like a Hawk, in its phrase. Its predictions consist of a list of product releases including IE 8 beta in the second half of 2008, perhaps a new host and integration server, and R2 of Commerce Server 2007?

            Steve Bink’s site carries comments and links to other sites, such as Wictor Wilén, who comments on Microsoft and other topics of interest. He who expects IE 8 to be out by next Christmas.

Mary Jo Foley’s “All About Microsoft,” which appears on ZDNet is much more conversational with a list of 10 predictions, explained in a couple of paragraphs, based on inside sources. A few samples:

Windows 2007 is underway but nothing will be released in 2008

Business Intelligence will be available in some versions of Office

A Zune Phone

And she thinks that Bruce Chizen, Adobe's CEO who abruptly resigned in 2007, will join Microsoft to run the Expression team in the new year.

“As Microsoft watchers know, Adobe and Microsoft are competing head-to-head in the design-tool space. If the sources are right (and there are no non-competes in the way), Chizen may have a new roost to rule soon.”

She also has a long string of interesting comments coming off her blog. Steven Bink and Mary Jo Foley are definitely worth bookmarking if you want to keep up on Microsoft.

http://blogs.zdnet.com/microsoft/?p=1054

FT Business Book of Next Year?

I know we aren't quite to 2008, but I wanted to get a jump on the FT's nominating committee with "Options, the secret life of Steve Jobs." Written by Fake Steve Jobs, who produces the wonderful Fake Steve blog and by day uses the name of Daniel Lyons and is allegedly a senior editor at Forbes. But you can't be sure.

He's hilarious with his depiction of the Steve Jobs ego, and his accounts of Steve sitting around gettting stoned with Oracle's Larry Ellison, and his accounts of venture capitalists ring true as well. At least they do to someone who has read about them.

A conversation with Virgin's Richard Branson:

Richard Branson

            
"We’re going to create a new section on Virgin Atlantic, right behind Upper Class, and call it iPod Class. The walls, the seat backs the seat cushions, the carpet, the bathrooms, everything in bloody shiny white, like you’re sitting smack inside an iPod. We throw in some fake Champagne and cheap sushi and bang up the fare prices by thirty percent…”

            “Richard, I don’t get it. What’s the iPod connection?”

            “Hrm, well, uh, yah, whatever, who knows, but it’s marketing, innit?”

On Bono

“He’s the only person I know who’s more self-absorbed than I am….But give Bono credit. He figured out something that I didn’t. One word: Africa. The place is like a miracle worker shrine, a whole continent filled with absolution. Touch it, and you’re healed.”

On Hollywood -- film and music.

“These aren’t engineers or inventors. They don’t create anything. They don’t build anything. All they do is make deal. They’re criminals, basically…These guys are like a cross between Tony Soprano, Bill Gates and the monster from Alien. Even when you catch them cheating they don’t apologize, they just move onto the next swindle. And they’re really good at it because they’ve bee doing it for so long. They’ve spent decades practicing on recording artists and actors and screenwriters…They’re like guys who steal purses from old ladies. It’s not that hard to do, but kind of person does it?”

It's a fun read, a pretty good plot, but it's the sections on a crusading prosecutor who wants to become governor, on Hilllary doing a fund-raising visit, on Al Gore trying to squirm his way off the board, that make the book so provocative and weirdly informative. Well, maybe just provocative.

Merry Christmas or Season's Greetings

Merry Christmas or Season's Greetings, depending upon your personal preference.

To finish 2007, I thought I'd share with you a few of my nice little collection of Christmas ecards:

SWIFT

Eiger Systems

LogicaCMG

Sybase

Diamond Consultants

Vocalink

If I missed you out, it's either because:

(a) you sent me a real card, in which case thank you, I like people who live in the real world; or

(b) because I didn't get your email or didn't rate your ecard, in which case better luck next year; or

(c) you didn't send me anything, in which case I think you might be considered to be a complete banker by me now.

Anyway, I thought I'd end the year with a small personal highlight which was a letter published in The Times* this year, received from an elderly lady and sent to her bank manager.   He thought it funny enough to send to the paper. 

Here it is:

 

Dear Sir,
   
I am writing to thank you for bouncing my cheque with which I endeavoured to pay my plumber last month.  By my calculations, three nanoseconds must have elapsed between his presenting the cheque, and the arrival in my account of the funds needed to honour it.  I refer, of course, to the automatic monthly deposit of my Pension, an arrangement which, I admit, has been in place for only eight years.

You are to be commended for seizing that brief window of opportunity, and also for debiting my account with a £30 charge, by way of penalty for the inconvenience caused to your bank. 

My thankfulness springs from the manner in which this incident has caused me to rethink my errant financial ways.

I noticed that whereas I personally attend to your telephone calls and letters, when I try to contact you, I am confronted by the impersonal, overcharging, re-recorded, faceless entity which your bank has become.

From now on I, like you, choose only to deal with a flesh-and-blood person. My mortgage and loan payments will therefore and hereafter no longer be automatic, but will arrive at your bank by cheque, addressed personally and confidentially to an employee at your bank whom you must nominate. Be aware that it is an offence under the Postal Act for any other person to open such an envelope.

Please also find attached an Application Contact Status which I require your chosen employee to complete.  I am sorry it runs to eight pages but, in order that I know as much about him or her as your bank knows about me, there is no alternative.  Please note that all copies of his or her medical history must be countersigned by a Solicitor, and the mandatory details of his/her financial situation (income, debts, assets and liabilities) must be accompanied by documented proof. 

In due course, I will issue your employee with a PIN number which he/she must quote in dealings with me.  I regret that it cannot be shorter than 28 digits but, again, I have modelled it on the number of button presses required of me to access my account balance on your phone bank service.  As they say, imitation is the sincerest form of flattery.

Let me level the playing field even further.  When you call me, press buttons as follows:

1. To make an appointment to see me.
2. To query a missing payment.
3. To transfer the call to my living room in case I am there.
4. To transfer the call to my bedroom in case I am sleeping.
5. To transfer the call to my toilet in case I am attending to nature.
6. To transfer the call to my mobile phone if I am not at home.
7. To leave a message on my computer (a password to access my computer is required, which will be communicated to the Authorized Contact at a later date)
8. To return to the main menu and to listen to options 1 through 7 again
9. To make a general complaint or inquiry.  The contact will then be put on hold, pending the attention of my automated answering service.

While this may on occasion involve a lengthy wait, uplifting music will play for the duration of the call.

Regrettably, but again following your example, I must also levy an establishment fee to cover the setting up of this new arrangement.

May I wish you a happy, if ever so slightly less prosperous, New Year.

Your Humble Client   

 

On that note, see you back here on 7th January, and here's to a great 2008.

Your Humble Client-Server, Chris

 

 

 

* for the true story about this letter, click here.

2007 in review: Corporate needs and Mobile Payments

From a technology perspective, I think 2007 has seen the biggest changes in the payments world.  From mobile and contactless payments proving themselves to come of age, to new currencies in the form of Linden dollars and Chinese QQ, to corporates demanding change, to new infrastructures and the introduction of SEPA, to banks moving from silo structures to integrated payments factories with global hub and spoke operations, this year has been incredibly fluid and dynamic.  

A good example were two reports I produced earlier in the year.  The first, on new retail forms of payment, concluded with the idea of sticking chips inside people for payments and immigration and identity purposes.   I actually ended up thinking this through further to realise that you can actually stick a chip anywhere.  Now there’s a thought for Christmas.

The other paper was on PayPal.  The PayPal story is particularly interesting in that they have moved from being an 8-year old upstart, to being an 8-month old bank and a mobile payments processor.   Maybe that is why one of my most popular blogs this year was the one that discussed how banks are forcing their customers to move revolving debits onto PayPal, thanks to the bank’s anti-fraud measures.  This is something that will need to be addressed I guess, and authentication and identity will be an area of long discussion through the rest of this decade I believe.

We also need to watch PayPal as an example of best-of-breed payments innovation, especially as they’ve written a chapter for my new book on the Single Euro Payments Area (SEPA) with the emphasis on PayPal being able to already provide a SEPA.  In fact, they provide a global capability to transact in almost any currency, and have a user base that has expanded from just over 100 million accounts a year ago to over 170 million today.  Now that’s what I call success, and that’s we all really want today isn’t it?

That is not to say that PayPal has no competition, as others are moving into this space including Google and Amazon.

Another payments area that has taken off this year is prepaid.  Prepaid cards provide a real alternative to cash for the first time, as they can be used truly anonymously.  In other words, I can transact electronically for the first time with a prepaid card without anyone being able to track my identity.  No wonder it’s popular amongst young males and hence why the Sun newspaper launched one.

Meanwhile, the real success area of 2007 must be mobile payments , with hundreds of announcements and trials in this space.  For example, in the last month, Finextra has covered twelve stories on this very subject:

• 10/12/07  Cyphermint chairman Kuznetsov to lead Russian m-payments task force
• 04/12/07  Indian m-payments outfit PayMate eyes North American remittance market
• 30/11/07  Western Union and Bharti Airtel to pilot mobile remittance system
• 28/11/07  Barclaycard to launch public mobile payments trial
• 23/11/07  PayPal launches mobile checkout service in Australia
• 23/11/07  RBS trials mobile debit payments technology
• 23/11/07  Mobile payments gather momentum
• 22/11/07  DnB Nor, MasterCard and Telenor in mobile payments trial
• 15/11/07  Tyfone and i-flex form m-banking partnership; sign West Coast Bank
• 14/11/07  Mobile banking start-up Firethorn acquired by Qualcomm
• 14/11/07  Mobile operators to trial NFC payment services
• 13/11/07  MasterCard to launch mobile phone payments in Japan

Mind you, when you add onto this the fifteen stories covered on mobile banking:

• 20/12/07  Mobile operators look for value in m-banking and payments
• 13/12/07  Nacha forms mobile banking work group
• 29/11/07  Gemalto reports mobile banking implementation in Colombia
• 28/11/07  Bank of America clocks up 500,000 m-banking customers
• 27/11/07  Monitise launches mobile financial services offering in US
• 21/11/07  FirstBank introduces mobile banking services
• 15/11/07  KeyPoint CU introduces account access via Facebook
• 15/11/07  Tyfone and i-flex form m-banking partnership; sign West Coast Bank
• 15/11/07  Diebold showcases mobile banking technology
• 15/11/07  Microsoft trumpets smartphone operating system for m-banking
• 14/11/07  Jack Henry releases mobile application
• 14/11/07  Mobile banking start-up Firethorn acquired by Qualcomm
• 14/11/07  USAA implements Firethorn's mobile banking application
• 14/11/07  CheckFree outlines mobile banking strategy
• 14/11/07  US m-banking numbers to soar - TowerGroup

You can see why mobile in 2007 is hot, hot, hot, as Bruno Tonioli of Strictly Come Dancing fame might say.

Note here that mobile payments is separate to mobile banking and, as mentioned yesterday, I thought I’d cover this point here. 

Mobile payments – whether by SMS or ‘wave and pay’ NFC and RFID contactless chips – is a convenience service and has proven to be worthy.  That’s why there are so many examples of mobile payments in action from PayPal Mobile, to the NTT DoCoMo Edy wallet, to the trials this year of mobile in New York and London. 

Mobile banking is more about transactional checks on balances and electronic self-service. 

The difference is that the former is easier to secure than the latter, which has far-reaching implications over and above a simple tap-and-go payments device.  For example, paying by mobile can be easily managed as the telephone chip, SIM card and number are all identifiers of the user.  As a result, a lost mobile is just the same as a lost wallet. If you lose your wallet you call and cancel your cards, and you do the same with a lost mobile telephone.  You just call and suspend the account. 

Mobile banking however, may be surfing your banking service using a smartphone internet-based access.  This means you might store account numbers and passwords on the phone.  These could obviously be used regardless of SIM card and account numbers if someone finds such information.  Therefore, concerns over security in mobile banking are greater than for mobile payments amongst many, and why increased security needs to be placed onto the telephone for mobile banking. 

I also wonder whether banks and others really understand the mobile world, when all it will become is VOIP which goes back to the IP-enabled debate.   Maybe that is why some bankers debate whether mobile banking is worth it at all. 

The result is that some would say things like Barclaycard's OnePulse are this year's best payments innovation but, at the end of it, the partnership between Citi and Vodafone gets my vote.  It's in play, it's proven, it has a clear business logic and it's going to win them business.  That's why this won the Banker’s Award for Technology Innovation of the Year.

There's an awful lot more we could talk about in this space: real-time services, supply chain, payments factories and so on and so forth.  But it's Christmas and therefore I'll leave these until next year's blog starts.  However, before leaving the world of payments, we do need to briefly mention the infrastructures.

First, SWIFT.  SWIFT struggled with their corporate community at SIBOS.  The whole low-down on the SIBOS Boston Tea Party can be found through the blog of that week, and this one summarises the event well.  Nevertheless, SWIFT are demonstrating a clear increase in take up, alongside a clear commitment and growing acceptance within the corporate world.   

Secondly, TARGET2 which is now live, and TARGET2 for Securities (T2S) which is to come, are all well and good.  However, until the European Commission solve Europe’s clearing and settlement barriers, which DG for the Internal Markets Commissioner David Wright claims they will in 2008, Europe will be challenged to be competitive with the rest of the world. Therefore, although the Payment Services Directive was agreed  back in March and the Single Euro Payments Area (SEPA) is almost here, the overall cost benefit of SEPA and the Europlan is still proving elusive.   

This is something that you can read a lot more about in March when the book, The Future of Finance after SEPA, comes out and will be a continuing source of focus as 28th January 2008 starts the SEPA process, with the launch of SCT's, the SEPA Credit Transfer.

After all that range of chat and infrastructure and change, you may want to get away from payments. Funnily enough, you can, as there are many ways to pay for things without the banking system.  For example, by using community currencies. 

Maybe that’s what SEPA is all about at the end of the day: a European Community currency.

 

How much for lunch with the CEO of Barclays Bank?

I've been watching eBay this week as the London Evening Standard has been running a nice little charity auction in there for Plan UK, an international humanitarian, child centred development organisation who work in 46 countries across Africa, Asia, Latin America and the Caribbean.

Two of the prizes that particularly intrigued me were:

(1) a rare opportunity to go head-to-head by playing table-tennis followed by lunch with John Varley, CEO of Barclays, at the  bank's Canary Wharf headquarters; and

(2) a chance to meet one of the  City's richest self-made men, Michael Spencer, boss of  broking giant ICAP.  This gave you a day at ICAP, with lunch with him and his senior staff.  Mr. Spencer knows his stuff as his performance bonus last year was nudging £6 million.

So I was intrigued when the auction closed at 12:00 today and Pinkjay127 won both items.  Pinkjay127 appears to be a lady as most of her eBay purchases are for dresses and Avon makeup, and her mainstay of eBay purchases seem to be for under £10.  Either that or he might be one of the many bankers who secretly wears fishnet stockings underneath his trousers and likes to be called Mrs. Tiggywinkle in the evenings.

Anyway, I was going to bid for these two items myself, but couldn't quite reach the heady heights of Pinkjay127 who paid £10,500 for lunch with Mr. Varley.  That's a lot more than a £5 lipgloss, so maybe she's transacting on behalf of another?

She then also won the day with Mr. Spencer at ICAP for £11,778.  I'm guessing therefore that she's an Executive Assistant to a high-flying investment analyst or someone looking for a job with Barclays or ICAP, you never know.

Either way, it's a merry old Christmas for Plan UK, which is the main thing isn't it?  And interesting to note that Michael Spencer's worth more than John Varley for lunch too.

2007 in review: retail banks back to basics

For most retail banks, the credit crunch's knock-on effect has made it a fairly depressing end of year too, with tightening of policies for mortgages and lending. Mind you, considering the debt mountain in the USA, it is not surprising that the economy is grinding to a halt.  In fact, the American debt mountain has long been forecast to burst, as this white paper from the Daily Reckoning of 2005 makes clear.  So 2008, according to all economists, looks pretty recessionary and inflationary in those markets that romped away with debt, such as the USA and the UK.  After all, growth has been fuelled through booming consumer spending over the past decade, and that consumer confidence has burst in the USA and the UK.

Ho-hum, that's cheered me up.

For most retail banks, this has really therefore been a year of back-to-basics:

• What are our branches there for? 
• What are we trying to achieve with them? 
• How can we move from transactional focus to sales focus? 
• How can we move customers towards self-service, both in-branch and online? 
• If we splash out on branch updates, what does this mean and how do we maximise our bang for the buck?

This has been the source of some debate, as those who read my blog saw just in the past couple of weeks. It's also been the source of some heartache, as bank retailers struggle with what retailing financial products really means.  For some, it's all about innovative branch designs, such as Deutsche Bank. For others, it's more about customer servicing through socially networked financial experiences online and through branch, such as Wells Fargo.  For some, it's all about people and culture, such as WaMu.  For others, it's all about understanding the customer's psyche and gaining their trust.

Whichever strategy or mix of strategy is adopted, bank retailing gets more and more difficult as digital natives, those who grew up with technology and the internet, change our behaviours.  That's why this year has been all about social networking, and why the deployment of IP (Internet Protocol) as the technology foundation for consistent delivery across channels has become so critical.

In particular, this has been the year where mobile banking and social networking has become a key phenomena.  I'll cover mobile banking tomorrow when I talk about payments and so, today, will concentrate on social networking instead.

The main reason this has come to the fore is because social networks are now being adopted by adults through Facebook, rather than Bebo and MySpace which tend to appeal more to teenagers generally.  Equally, commerce is being transacted in virtual worlds such as Second Life, drawing attention amongst the banking fraternity and technologists for this reason.

 

Facebook gained attention because it opened itself to non-student fraternities in the middle of 2006 and, as a result, has seen a massive rise in membership.  In November 2006, Facebook had 12.9 million unique visitors a month; a year later, they received 29.1 million a month, rising at 21% per month!   In October 2006, Second Life (SL) had 1.2 million residents;  today, they have 11.5 million.

Both of these sites are educating the world, the markets, the technologists and the financiers, about the next generation of connection: the virtual social. 

The virtual social lives seamlessly alongside the physical social.  I meet you face-to-face; I meet you virtually.  It's one and the same.  I shake your hand, I poke you.  I party at night, I cut and paste by day.  It's seamless interactions physically and virtually for the digital natives.

Is this the real life (RL), is this just SL Fantasy? 

Nope, I'm just a poor boy and nobody loves me, as Freddie Mercury would have said.  This is one of the reasons why social networking works: it enables shy folks to find virtual friends to love them.  That's one of the reason why it works so well.   Many of us would never reveal the personal and intimate information we reveal in Facebook in the real world.  That's why Facebook is so fascinating.

Unfortunately, it also creates many dangers. After all, a physical interaction is limited to the physical space. The virtual interaction can potentially be seen by one and all, with your identity revealed to friends and strangers.

That is why banks are becoming ever more stringent in their online retailing, and need to be tough on potential criminal activity, as the opportunity to commit online fraud is everywhere.  The criminal fraternity have stepped up their efforts to always be one step ahead of the bank's security guards in the globally connected markets we operate today. From a fraud perspective, PayPal appear to understand this threat, whilst the banking reaction is always about a year or so behind.  From the money laundering perspective, I think banks and governments will be severely challenged by AML in the virtual world in the near future, and all of these themes will be a source of concern and focus for the next year.

Equally, retail banks have got caught up in the Bebo, MySpace, Facebook frenzy ... but they are also learning a lesson that we all need to bear in mind.  These things are possibly transitory.  Just as the big burst of new players came onto the internet scene ten years ago, such as Amazon, eBay and Google, there were also many that disappeared just as fast. Who remembers Boo.com, Flooz.com, Pets.com, Webvan and the many other failed internet ventures back then?

There will be many of these as we go through the Web 2.0 boom and bust, and therefore I wouldn't bet the farm on some sites, such as Second Life (SL).  For all of their hype cycle of growth, the actual number of SL users (those who logged-in within the last sixty days) is just under 1.5 million.  Compare this to six months ago, when SL had 4.458 million users (those who had registered with the site) and 1.68 million users, and you see what I'm getting at.  So maybe Entropia will be the flavour of 2008, who knows? 

What it does mean is that, in the rush to seek the goldmine treasures of the newly networked social worlds, banks must use these developments as experimental adventures to discover how to deliver customer experiences through these worlds.  Sure, there will be some that will take off big time, as Facebook appears to be, but don't bet the farm on all of the hyped worlds just yet.

Meantime, keep your eyes on the security issues.  I'm pretty sure we'll some major blips in this area over the course of 2008.

Ah well, it's been a fun year to get yourself known out there in the land of the virtual living.  Back here tomorrow for the more practical issues of how to pay for stuff, as payments has seen a fairly fluid year of change too.

2007 in review: will Capital Markets survive?

The end of the year is nigh and not a day too soon for some investment bankers.  Some say, with the $500 billion of subprime losses this year, this has been a major downer for the markets long-term.  Others say

that $500 billion is what the stock markets can lose in a day, so don't worry about the credit crunch of 2007 ... it's only a blip.

I blogged about the ups and downs of the credit crunch, the bonus season, algorithmic trading going through strange hiccups and all sorts of other stuff.  It's a bit of a far cry from the start of year, where the discussion was all about the search for alpha and how brokers would start using complex algo to bridge across multi-asset strategies. That is not to say they are not doing this, just that they will be doing it with far more risk management focus than ever before. 

After all, in the investment markets, it has been quite a year.  In particular, the summer's turmoil in the financial markets, the like of which has not been seen for over two decades, meant that Citigroup, Merrill Lynch and others posted major losses and ousted CEO’s.  Meanwhile, we had one of the most shocking runs on a UK bank, Northern Rock, for years.  Some people thought for hundreds of years but actually a similar event occured less than twenty years ago with Town & Country Building Society in 1991, a small UK community-style bank.

With all of these upsets, and half a trillion dollars thrown down the tubes, we all wonder what is going on.  Has the world gone mad or did someone just pull the plug on the financial stabilisers we learned to live with in recent memory? 

No, nothing has gone mad.  We just happen to be seeing one of the major explosions erupting in financial markets that occur on a fairly regular basis.   

After all, think back a few years and we had a bad few days in 2001 when the internet investment boom ended and many lost millions.   Equally, America has had a subprime style mortgage crisis before in the 1980s.  In fact, the financial markets seem to boom and bust on a fairly cyclical basis, and some would say that you should view it this way, e.g. investment banks boom and then bust and then boom and then bust.   

What does this mean for all of us today?  It means being circumspect and thoughtful.  It means thinking very carefully about the knock-on effects of what we do and how we invest. 

For example, the credit crunch and subprime crisis was incredibly obvious in the way it brewed ... just that no-one was watching the kettle.  What was so obvious?  Well, lending to people who could ill-afford to pay back on the basis of a piece of collateral called a house.  Now, the house price was rising, but only because of al the irresponsible lending. All of this lending was then wrapped up in complex derivatives in the investment banking operations and laid off to the capital markets through structured investment vehicles (SIVs) and collateralised debt obligations (CDOs).  The fact that the debt had collateral that was worth half of its book value, inflated through the very SIVs and CDOs that funded it, was never known or considered.   

So the point is this.  You create an artificial bubble through bank processes that, on the one hand, inflate the market through unsubstantiated loans and borrowings whilst, on the other, offset the risk through wrap-around products that hide the true credit risk laying underneath, is something the markets and regulators and governments never want to see again. 

And how do you avoid this ever happening again?   

Through an enterprise risk view of course.  Sounds easy, but this is very hard to deliver in practice.  What this means is that for each risk you lend against, you clearly understand the underlying picture and exposure it creates for the bank.  This is sound economic and investment theory but it was thrown aside in recent times, as clearly demonstrated by the credit crunch financial crisis.  Only by managing total risk from the end borrower or investor through to the collective investment vehicles used in the investment operations, can a bank truly manage its enterprise risk.  That is the real point: enterprise risk.   

Show me a bank who can manage the totality and I’ll show you a sound bank. Now, there’s aren’t a large number of those around these days, are there?

Meanwhile, from the technology perspectives, this year has been all about low latency, high throughput. We've seen increasing moves to manage latency and make this a differentation, with my favourite story of the year being the bank that moved their routing for Tokyo deals that originally went from London via servers through New York to using servers through Moscow, as it saved them 25 milliseconds.   Will wonders never cease?

Another technology that keeps evolving is the algo stuff.  Last year, it was simple black box algo trading starting to get a bit sexier with cross-asset class instruments.  Equally, the idea of simluated trading strategies and real-time illustration through graphics of the success or failure of the trading strategy.

This year, the hot topic has been news algorithmics and the idea of embedding any news related to a stock ticker into the real-time trading arena through automated reference data is becoming a hot topic.  It doeesn't mean humans ever go away, but it does mean that we see a market that is very different in structure and volume and value thanks to low latency, highly sophisticated, algo-automated markets.

Finally, we can't forget that 2007 was the year of MiFID. It's here and we're all going yippee, aren't we?  Some analysts who aren't that familiar with the markets think it involved hardly any issue or impact, whilst the markets have worked with me to write a book about the subject, and seem to be saying it's been quite an upheaval.

This is why we have new exchanges like Turquoise, Chi-x, Equiduct, Virt-x, Smartpool and company.  Then add the existing and newer dark pool and algo systems, e.g. Goldman Sachs Sigma, JPM's Aqua and Arid, Credit Suisse's Crossfinder etc, and you can see we have many new trading venues across Europe to interface, integrate, work with and deal with.

The MiFID monologues are well mantained on Finextra and now I just look forward to the first Best Execution trial of 2008.  More on this next year.

Anyways, back to the question: will capital markets survive?  Of course they will.   I think they've seen more volatility and change this year than in the past five years, but change is good.  It makes us move on. Meanwhile, as the economist Paul Samuelson stated, stock markets with all of their ingrained volatility are not the best recessionary indicator as, if you'd followed their advisory trends, they predicted nine out of the past five recessions.

Back here tomorrow for a review of Retail Banking 2007.

 

 

 

Is 2007 the year Microsoft committed suicide?

This is my final week of blogging for 2007, and so I thought I'd spend it looking back over the year.  Tomorrow and the rest of the week, I'll focus upon retail and investment banking and payments.  Today, I thought I'd start with a slow burn with the prediction that, unless they urgently change their ways, 2007 was the year that Microsoft committed suicide. 

By the way, I know that suicide is an emotive word but I'm picking up on this year's most successful song Beautiful Girls by Sean Kingston, which has the cheerful refrain "That's why it'll never work, you'll have me suicidal, suicidal, suicidal..."   

I also need to warn you that this blog entry is long, but it needs to be in order to explain my logic.  Therefore, if you've clicked on this blog for a one-minute read, you may want to go away and come back when you've got ten minutes.  Just warning you. 

Lastly, before we start, I need to make clear that these are just my views, not Finextra's or anyone else's, just in case a legal eagle somewhere wants to take issue.

OK, here we go.

The reason 2007 is the year that Microsoft committed suicide is down to the release of Vista and Office 2007, both of which are more holey than a block of Swiss Cheese.  However, this blog is not ranting about how awful these products are, but to explain why they are going to be the death of Microsoft Corporation.

Vista has lots of issues, such as forcing its users to reconfigure, relearn and repurchase all of their existing PC accessories.  This is because most of those accessories were developed pre-Vista and Vista has rendered them useless as they are only compatible with Windows XP and before.  I've blogged about this before.

Howsabout Office 2007 then?

Office 2007, which incorporates critical business accessories such as Outlook, Word, PowerPoint and Excel, has also proven to be a source of annoyance.  Mind you, only for those who have used Microsoft systems in the past: their loyal customers in other words.  It is fine for anyone who's never had a PC before: the iPod user, who might just buy an Apple Mac.

Office 2007 irritates because it has a totally different interface to previous versions of Office.  Therefore, you lose all of your familiar commands and menus and have to learn a new way of working completely.  Bear in mind that my system, which came from Dell, arrived with no Office 2007 manuals either, just online directories.  Hence, it has been frustrating to use, as you often find yourself stuck in Word or PowerPoint with no access to the internet to find the answer.  More on this later.

Then you find that this is just the start, as Office 2007 is totally incompatible with previous versions of Office. In practice, this means that anyone not using Office 2007 is unable to read or even open and access your documents, unless the receiver has downloaded a Microsoft conversion file beforehand.  The result is that Office 2007 users have to convert every single document they send out via email to Office 2003 beforehand, if they want to guarantee widespread access. 

Even then, Office 2007 is not reverse compatible.  For example, PowerPoint 2007 presentation formats get messed up when using Slide Show. Practically, this means that every time you make a presentation, even when you've converted the PowerPoint 2007 file to a PowerPoint 2003 file and loaded Microsoft's conversion software, all the slide fonts auto-enlarge and make the presentation look like a load of shitaki mushrooms.

For all these reasons, you can see why Microsoft, like some banks, has moved from trusted platform to untrusted in 2007.  In fact, Northern Rock looks positively good by comparison.

Now you may say "Chris, you're being a bit harsh", but look at (a) Peter's comments on his Mac; and (b) my original and follow-up blogs about Vista, which forced me to buy a new iPod, Router and other hardware and software.  So yes, I am being harsh and would make allowances if I were a beta tester or early adopter, but this product has been available as a full release for a year and should not be in this state.

The final straw, and the reason for this blog stating that 2007 is the year Microsoft committed suicide, is that the new Vista PC hangs on a regular basis.

I've kind of gotten used to this as it just means that you have to wait patiently until it sorts itself out, which often takes minutes.   I've found a good cup of tea, making Loster Thermador, reading Lord of the Rings from cover-to-cover, followed by a short double marathon jog around the block, is long enough for Vista to usually resolve such issues. 

CTRL-ALT-DEL and crash the program is a good alternative. 

What has proven to be more concerning is that Vista regularly just stops accessing the internet.

For example, you arrive at the desk in the morning and all seems fine.  Then click.

"Windows Explorer cannot access the internet ... diagnose the problem". 

No idea.

"Firefox cannot access the internet ... try again". 

Nope.

Reboot.

All is fine.

Trouble is that not everyone wants to be forced to reboot every day, as it's not only a pain but you lose links and things you were working on.  So ever since I got my new PC, I've  been reconfiguring, reloading, disabling and re-enabling, doing the hokey-cokey and turning around to fix this problem, but still no joy.  It just always decides to drop internet access at least once a day.

Even worse, this problem can actually occur during the day in the middle of a critical work moment, such as when you're on eBay and about to nab that beautiful little plastic donkey, y'know the one with the purple polka dots and big ears, as a present for Niece Annie in Aberdeen.  Then clunk and there's no click.  Just a message: "Windows Explorer cannot access the internet".

So I googled "Vista internet stops daily" over the weekend and, after going through various technical support threads, I found this one that referred me to Microsoft page: http://support.microsoft.com/kb/927168, which was updated at the end of November.

Now, as Michael Caine would say not a lot of people know this, I started my life as a programmer on an IBM mainframe system, learning JCL, PL/1, BASIC, COBOL and all sorts of other ancient programs.  I was a programmer and technical support engineer in my early life.

After a few years in the programming dungeons, I was certified to be released to rejoin society and the big wide world of human beings and, although a little rusty, my technical know-how is not bad.  Even so, here's a summary of what this Microsoft page says:

TCP traffic stops after you enable both receive-side scaling and Internet Connection Sharing in Windows Vista

   

SYMPTOMS

 

After you enable both receive-side scaling and Internet Connection Sharing, TCP traffic stops. For example, the ping command does not work.

   

CAUSE

 

This problem occurs because receive-side scaling and Internet Connection Sharing are mutually exclusive.

   

RESOLUTION

 

To resolve this problem, disable either receive-side scaling or Internet Connection Sharing. Do not enable both receive-side scaling and Internet Connection Sharing at the same time.

   

STATUS

 

Microsoft has confirmed that this is a problem.

   

MORE INFORMATION

   

To determine whether receive-side scaling is enabled in Windows Vista, type the following command at a command prompt:

   

netsh interface tcp show global

   

Output that resembles the following will appear:

   

             Querying active state...

   

             TCP Global Parameters

 

            

110 billion? Same as my bonus

The news yesterday that the ECB, Fed and Bank of England were working together to release $110 billion of funds to buck up the markets for end of year and give the banking system confidence again was great.  Hopefully, this will work and we all will live happily ever after ... although the markets don't believe it.

More importantly and irreverently, $110 billion is about the same figure as the 2007 bonus pool being paid out to all the bankers in the City and Wall Street.   This was a point made in yesterday's Times by columnist Patrick Hosking.  So it got me looking at the bonuses released so far.

Bearing in mind it's early in the season, the first to announce is Lehman Brothers. Lehman is expected to make a profit this year of around $4.13 billion. That is after writing off $700 million of sub-prime losses, bringing the total so far across all banks to around $77 billion of mortgage-related securities losses declared to date. 

Nevertheless, by avoiding massive losses and making a profit, Lehman's CEO Richard Fuld gets a $35 million bonus and five other executives received a share of $58 million, including $29 million for the bank's President Joe Gregory, and $9 million for the Vice Chairman Thomas Russo.

Similarly, Goldman Sachs is one of the few other firms having a jolly old Christmas as they also made a profit, even though they also reported major losses of $1.7 billion for the sub-prime and $1.5 billion through algorithmic explosions during the summer.  Luckily, like Lehman, Goldman achieved their profit through a successful hedging strategy to offset the mortgage related losses, meaning that they came through the credit squeeze in far better shape than their competition. 

Goldman CEO Lloyd Blankfein is therefore expected to be the highest paid banker this year,  with a 30% increase in pay, bringing his all-up package to be worth around $70 million.

Meanwhile, the overall bonus pool for Goldman Sachs is estimated to be over $20 billion for end of year, $3.5 billion more than last year and equating to an average $600,000 for each member of staff. 

No wonder it's the Joy of Sachs with high spirits among the big swingers, with a Christmas bash where staff have made videos taking the mickey out of various executives and managers.  I'd love to get hold of one of those vids, but apparently they are all approved by the HR and PR departments beforehand.  This is because so many escape onto YouTube, and they wanted to avoid any damage to reputation.

For most other banks it appears to be bad news however, with dark clouds meaning that many are giving out zero bonuses and throwing staff into the job queues.

For example, investment analysts expect profits to be wiped out for many banks, such as Morgan Stanley and Bear Stearns, and we should remember that Citi's chucked out Chuck and Merrill's made O'Neal bail out.  The news from Bank of America on Wednesday that it expects disappointing fourth-quarter results and provision for losses of at least $3.3 billion is just one of many to come through. 

The Financial Times summarised it all pretty well:

"Weaker-than-expected investment banking activity in November has also left analysts and executives concerned.  One senior Wall Street executive, who declined to be identified by name, said: 'The credit environment in November was the worst we’ve seen in 20 years.  There will be serious hits on subprime and near-prime residential holdings and commercial mortgage-backed securities portfolios. Everyone is going to take a hit,' he added."

This is why I'm told that UBS has capped all cash bonuses to a maximum $700,000 and is laying off 1,600 investment bankers. 

It'll be lonely this Christmas without you ...

8 million people at risk from new business disease

I got an email from BNET, the management website, with the title "8 Million Business People at Risk from Dreaded New Ailment", which made me open it, as you have here.  The actual news item was all about people who "work at a company where Blackberries are standard perks? Never mind the tired debate over whether or not your Crackberry makes you more productive. The real questions is, are you at risk from 'Blackberry Thumb'?"

Next to this was "Management wisdom from Despair".  It made me click it open to find a fascinating report on how to manage a business from leading satiritist Dr. A L Kersten, author of "The Art of Demotivation".

There's a whole load of videos on the BNET site from Dr. Kersten.  In a series of videos, he offers sage advice for the pessimists, underachievers, and chronically unsuccessful workers of the world including:

Problem Employees? It's Not You, It's Them
"Dr. Kersten shows how to manage three types of problem employees. Whether you're dealing with the 'perpetually offended employee', the 'aggrieved superstar', or the 'egomaniac', the answer is simple: they need to be grateful for what they have."

Battle Bureaucracy with Fake Crises and Caffeine
"If your company is at all established and successful, it's probably already become a bloated, uninspiring workplace. Here's how to take back your company by overcaffeinating your workers, limiting their contact with the outside world, and teaching them that the need for 'fairness' is petty and weak."

Why Workplace Communication is Overrated
"The source of workplace conflict is often misdiagnosed. What's seen as a simple 'misunderstanding' or 'failure to communicate' really runs much deeper: Your coworkers don't actually like you. Dr. Kersten helps clarify the situation by translating what they're really saying."

Get More from Your Compensation Plan
"Dr. Kersten shows how to improve your compensation plan by applying radically different pay philosophies for different types of workers."

The Benefits of a Demotivated Workforce
"Do your employees have low self-esteem and feelings of powerlessness? Do they believe they are victims of a hostile fate? Here's why these attitudes can actually benefit the bottom line."

An Honest Org Chart
"What does the traditional organizational chart really tell us? Nada, says Dr. Kersten. Here he explains how a 'salary-sensitive' chart can do more to show employees their true value."

 

My favourite item, found as a result of going to Kersten's website www.despair.com, is the build your own demotivational calendar for 2008.  Go on, make someone's year.

The conclusion of the debate about IP versus bricks

Someone asked me this question: "Chris, why are still arguing?" about the debate I have been having for the last week.  It is because one reader fundamentally disagrees with my views about IP being the foundation of today's bank.

I've been having it because I wanted the debate to reach a conclusion and it has. The conclusion of the debate is that this reader thinks you should build a bank around bricks and mortar first, and then think about technology afterwards. 

I think you should start with customers, employees, processes and organisation structure first, then look at how to build the optimal technology architecture with IP as its underpinning to support those processes, and finally build with bricks and mortar to manage the organisation structure at the end.   

Banks are trying to do the latter and, with greenfield operations, could do so.   Instead, due to the fact that they started building the other way years ago, they are having to find a path to marry the two worlds.

And yes, I'm passionate about the bank being built around IP foundations today as, to me, it is like a discussion about rewiring a house that has faulty wiring or a building with subsidence.  If you had a house built in the 1920s with old-fashioned and out-of-date wiring and crumbling foundations, then you would rewire it and rebuild it for today's national grid.   And today that's a wireless IP grid. 

So, in this posting, I'm going to reveal something totally different.

What's been more interesting is the blogging and social networking aspect of this debate. 

This reader is entitled to his views ... as am I.

So I've had emails saying "Chris, stop it", "you're above all this", "ignore him "leave it out" and so on and so forth.  Well yes, I could stop but I didn't. Why?

(a) I like a good debate, when it's worth having;

(b) the nature of today's social internet should allow social dialogue and debate;

(c) I'm not "above anything" - I'm just a guy with online opinions like anyone else, and the fact that I am pretty opinionated myself puts me out there ready for a debate; and

(d) there really should not be any censorship of this debate, as that's not the point of blogs is it?

In other words, the beauty of the internet is that anyone can have a debate with me.  I may be right or I may be wrong.   However, the very fact that we can have this debate online is the beauty of blogs, social networking and the internet.

For this, I thank Tim Berners-Lee and the fantastic world of the IP-enabled 21st century.

Government fraud, bank fraud, and the rest ...

Further to my comments about the UK's Fraud Review, I enjoyed a discussion with Ken Farrow of Control Risks. Prior to joining Control Risks, Ken was the Head of Fraud and Financial Crime for Lloyds TSB and, before that, a police officer with the City of London Police, as well as overseas with the New Zealand Police and Royal Hong Kong Police.  He worked in a wide range of CID roles for over thirty years, including the Fraud Squad as a chief inspector specialising in computer crime investigations.   In other words, he knows his stuff.

The first thing Ken mentioned were the recent headlines about the UK Government losing 25 million citizen's data records. Apparently, the government has spent over £500,000 trying to find the two lost discs but to no avail ... I guess they need to buy a more expensive tracker dog then.  Ken's point was that this is nothing compared to the overall leakage from government departments. 

For example, the Department of Work and Pensions (DWP) issues of 2005.  This was a scam based upon an easy ability to siphon off tax credits.  All you needed was a validated bank account and application, and the money came rolling in.  As the BBC reported at the time:

"The attraction of the system to fraudsters has been relatively low levels of up-front checking of the accuracy and honesty of applicants ... the sheer scale of demand, and a system designed to focus on processing claims and recovering overpayments later, left the door wide open to abuse.  The temptation was just too hard for organised crime - always looking for the best return for the lowest risk - to ignore ...

"The main attack has been on the online portal, which the Revenue closed on 1 December.  Fraudsters were making multiple applications - using false or stolen identities and claiming for non-existent children - from internet cafes as early as two years ago."

Now this is old news, I know, but Ken did surprise me when he said that the losses reported at the time by the DWP were estimated to be around £15 million.   More like £1 billion, he reckons.

You think that's bad?  Have a look at banks.

Ken's adamant that most financial fraud could be stamped out, if only there were better checks and vets of employees.  When you take on staff, do you really checkout their background properly?

How about the hedge fund manager who's first degree from Cambridge looked impeccable.  His interviewing style was wonderful.  His appearance and CV were second-to-none.  Six months after starting with the firm, he was losing them billions and wanted a massive pay-off.  No First degree.  And an interview based upon reading "Quant Analytics for Dummies" (maybe we should write this one).

Checkout someone's CV properly, and that's not just calling up a referree.

Then check staff regularly for any signs of unusual or erratic behaviours. Or just check full stop.  After all, fraudsters find staff easy to sway.

The story of the young bank teller down the local pub being targeted by a gang.  "We know where you live and your mother.  If you don't help us, then your lovely mam may just have a bad fall."

Or the middle-aged bank manager who feels passed over and resentful.

Or the professional investment manager who happens to be having such a good time at Peppermint Hippo that he doesn't notice the photographer.

All stories which Ken recounts with personal knowledge. 

The results are rather startling.  Here's just a few from recent times:

• ‘Rogue Trader’ – conducts unauthorised trades causing losses of £5 million and compromises a trader working for a counter-party organisation
• Payroll Officer – auditors discover discrepancies dating back over a 10 year period totalling £250,000+
• PA to two Senior Executives of a major financial institution misappropriates personal funds  -  £3 million
• 3 Female bank clerks access confidential client files and provide information to professional criminals - £1.75m lost to UK bank.
• Bank employee uses his authority to generate loans amounting to £50k  then pays away money to accounts controlled by his relatives
• Bank employee uses the opportunity of a bank merger to steal share certificates valued at £150k and tries to negotiate their sale.
• 2 security printers ‘steal’ confidential information for an ‘insider dealing ring’
• Personnel Officer creates her own ‘fictitious’ employment agency and submits invoices for ghost ‘temps’
• Key executive working for insurance company uses collusive companies to carry out emergency administrative work at grossly inflated rates to steal substantial sums of money.
• Accounts Clerk leaves genuine invoices on desk – unidentified employee replaces them with four false duplicate invoices - £800k paid away to Latvia.
• $15 million paid away to Turkey on a handwritten instruction within Forex department of a major bank.  Second attempt to transfer £14.2m to Germany narrowly averted.
• Group of employees working within a call centre monitor dormant client accounts and transfer away £12 million to illicit accounts
• Insider steals cheques from a public utility company. These are then used by criminals posing as buyers of high value motor vehicles on e-bay.
• Compliance Officer uses his position and knowledge to support an ‘insider trading’ ring

My favourite story that Ken recounts, is the one about the computer expert working for a credit card firm.  He kept telling the management that their systems were compromised.  They weren't interested.  He didn't get a good bonus or appraisal that year and nore did his team.  So the guy resigns and subsequently threatens to use his knowledge to bring down the credit card firm's payment systems unless his demands are met.  His demand?  That his team receives a bonus at least as good as the best performers in the firm.

They ignored him and guess what?  The payment systems started to have a few gremlins and glitches.  So the guy is arrested and taken to court.

The judge hears all of the evidence and ... releases the disillusioned techie with a warning and fines the firm.

The quality of mercy ... justice delivered.

The conclusion of the debate about IP versus bricks

Someone asked me this question: "Chris, why are still arguing?" about the debate I have been having with Michael Goldman for the last week.  Michael began this discussion because he fundamentally disagreed with my original blog about IP being the foundation of today's bank. 

They asked me this question as there's debate and then there's long, drawn-out and boring dull dialogue, which is where the discussion has been heading.  After all, this is my fifth entry on the subject - if interested, first, second, third, fourth - but I thought it had to continue until there was a conclusion ... and now there is one.

The conclusion of the debate is that Michael thinks you should build a bank around bricks and mortar first, and then think about technology afterwards, as he says in his responses. 

I disagree because I think you should first start with customers, employees, processes and organisation structure, then look at how to build the optimal way to use these resources with IP-based architecture as its underpinning, and finally build with bricks and mortar to manage the organisation structure at the end. 

Banks are trying to do the latter and, with greenfield operations, could do so brilliantly.   Instead, due to the fact that they started building Michael's way years ago, they are having to find a path to marry the two worlds.  They are achieving this by building their technical IP architecture around the rewiring of any existing buildings that they want to keep in play, as part of this process. 

And yes, I'm passionate about the bank being built around IP foundations today as, to me, it is like a discussion about rewiring a house that has faulty wiring or a building with subsidence.  If you had a house built in the 1920s with old-fashioned and out-of-date wiring and crumbling foundations, then you would rewire it and rebuild it for today's national grid.   And today that's a wireless IP grid. 

So, in this posting, which the editors of Finextra must be groaning and moaning about already as we're all fed up with this debate, I'm going to reveal something totally different.

What's been more interesting is the blogging and social networking aspect of this debate. 

Michael's entitled to his views ... as am I.

So I've had emails saying "Chris, stop it", "you're above all this", "ignore Michael", "leave it out" and so on and so forth.  Well yes, I could stop but I didn't. Why? 

(a) I like a good debate, when it's worth having;

(b) the nature of today's social internet should allow social dialogue and debate;

(c) I'm not "above anything" - I'm just a guy with online opinions like anyone else, and the fact that I am pretty opinionated myself puts me out there ready for a debate; and

(d) there really should not be any censorship of this debate, as that's not the point of blogs is it?

In other words, the beauty of the internet is that Michael can have this debate with me.  I may be right or I may be wrong.   However, the very fact that we can have this debate publicly online is the beauty of blogs, social networking and the internet.

For this, I thank Tim Berners-Lee and the fantastic world of the IP-enabled 21st century.

 

 

 

Deutsche Bank's Toxic Derivatives

I have a lovely little presentation entitled "All Bankers are Criminals". 

It's all about the dangers of weapons of financial destruction, in other words Derivatives, and people tend to enjoy it ... especially the part about “Greed is good”.  It's not that I'm against derivatives but, if you believe the stories in Frank Partnoy's excellent book Infectious Greed, I am against bankers ripping off their clients by preying on the client's naivety, innocence and trust, using incredibly complex financial instruments.  This is the world of Parmalat, Enron and Worldcom and worse.

You may say caveat emptor, buyers beware, but I disagree when it comes to financial products where the clients trust their advisor to do the right thing.  That’s the role of a trusted advisor, and financial firms advocate this position as their core reason for existence.  We exist on trust.

Now, I’ve written about Deutsche Bank a couple of times before. 

The first time was the anti-bank demonstration in the City due to their support of Huntingdon Life Sciences, the vivisection laboratory that cuts little beagle puppies to bits.  The second time because they have the most innovative bank branch project I've seen in Europe, Q110.

Deutsche Bank: Good 1, Bad 1.

So here's a third entry and it's Deutsche Bank: Good 1, Bad 2. 

It turns out Deutsche Bank are one of three banks who are purposefully breaking their client’s trust, according to Webb-site.com, by creating and selling toxic convertible products.

Toxic convertibles are derivatives products where companies, generally small and naive, give up their future ability to issue equities to their investment bank.  The bank's aim is to use this to tie in future profits by converting the firm's bonds on a continual basis at a deep discount.  They then sell the resulting shares at a profit.

In other words, a value-destroying programme which is good for the bank and bad for the client. 

Webb-site.com estimates that the banks average "a gross profit on the money raised of about 31%, and the average stock price has fallen 30% since a toxic convertible was launched".

Their in-depth report alleges that Deutsche Bank has used this trick on Sintronics Holdings Ltd, Spread Prospects Holdings Ltd  and First Natural Foods Holdings Ltd, three tiny little Fujian firms.   

This all goes back to the ease with which complexity in the financial markets allows banks to sell complete dross to the trusting client, and harks back to my trust rant of the other week therefore.

No wonder demonstrators in the City were shouting "Deutsche Bank, shame on you".  Mind you, Webb-site.com also points out that Credit Suisse and Merrill Lynch were the first to use such products back in 2005 and 2004 respectively, so they're not alone.

Ah well, it's just same s**t, different day.

 

Branches - the last word?

Well, my blog on design around  lP instead of branches created a real debate last week.  Now, there's nothing I enjoy more than a debate and so it's nice to finally have one online.  About time.

As I can see from the viewings, it's also popular with you guys.  So I have to thank readers for prodding me into explaining my thinking in far more depth, articulation and preciseness than I thought necessary.  But then I assumed the initimacy with financial technology was far higher with some of the readership than perhaps it is.

I also think I need to set the record straight, as some blogger's have picked on my discussions and are writing about my views as though Chris Skinner believes it is all about IP and that customers, branches and processes are unimportant.  This is based upon a complete misinterpretation of my blog entries and responses.

In other words, I do not believe any of those things.

For example, I totally agree with the point that customers and processes come first when you're designing a bank.  It's pretty darned obvious isn't it?  And, for those who have followed this debate and/or my blog, I've always said that human interaction and face-to-face connection is critical.  Sure, we could debate whether such interaction can be achieved electronically versus in person, but financial services is a service-based business and service can only be delivered by human connections and relationships.  So yes, BPR and all that good stuff is essential when you're designing for your customer.   That's why it's called Business Process Redesign. 

These have all been common themes of mine and, for those who know me or read my blog, are integral to my thinking. 

Some bloggers happen to ignore the fact that I have this view by trying to put words into play that make it look as though I don't think this way.  Some have taken a view to position my views as being IP-focused as the priority and first focal point, which it is not.  My background is very firmly in the BPR camp and how to apply and use technology to innovate and differentiate as a result.  Therefore, the focus should be upon designing tomorrow's bank bearing in mind that IP is the new foundation stone when it comes to implementation.  I'm pretty sure that's where I started in my original blog entry.

Some points also relate to, but are totally different from, my original posting. 

My point was around branch versus IP as a foundation for the bank, and that IP is now mature enough to design the bank completely around this as a foundation stone.  This is therefore all about new materials for building a bank architecture.  Brick-based raw materials have been replaced by IP raw material.  This is all about architecture and implementation, and is my core debating point. 

Some blog sites point out that it has nothing to do with IP and is all about BPR, processes, customers, service and so forth. These are all related to my argument, as processes need to be redesigned to service the customer across multiple channels that are IP-based.  So, everything I've said relates to customers, processes, TQM and BPR, but it is a different point completely.

This comes back to the key question: Why are we redesigning?  Answer: because we are changing branch foundation stones and architectures with IP ones.  The new IP foundation stone requires a focus upon customers, channels and services, as all of these areas need redesign using BPR and other techniques.  This point I've covered extensively in the original blog entry, it's follow-on entry, and again on Friday. 

Why do I keep adding to this? Because I think this is fundamentally important to the modern bank and so I want it to be clear to every reader, including the ones who find it hard to understand.

And goodwill to all men

'tis the season to be jolly and so, in the spirit of Christmas and recognising the globalisation of solutions thanks to my friends in India, here's a great way to celebrate this time of year courtesy of YouTube.

Meanwhile, for those of you based in jolly old Londinium, Vision in Business (VIB) Events are sponsoring an open evening at the Financial Services Club to celebrate Christmas on 18th December.  Festivities start at 18:00 at Lloyd's of London, and all are welcome. 

As well as meeting the Financial Services Club members, speakers and sponsors, the evening promises to be quite magical with mulled wine, mince pies, mistletoe, carols and all sorts of fun and games to ring out the old and bring in the new. 

So come along and join us for the Financial Services Club’s Christmas Party.   It's free, you will be very welcome, and all you need to do is register.

 

 

Bank designs versus architecture

 

I’ve been having an ongoing debate with some people for the last week over branch versus IP architectures, and it is clear that some people are confused so I will try to explain again.

The discussion I started last week was all about architecture, which is why I kept referring to foundations.  The discussion some people want to have is about bank designs, which is different.  The former is about what materials, dimensions, frictions, structures.  The latter is about interior design, windows, pillars and brick colours.

The two go hand-in-hand.  The bank designer would start with the customer and how to focus upon customers.  I call this buyology and blogged about it a while ago.  The designer would use these techniques of customer understanding to build processes from that customer viewpoint.  At the end of designing, they would then go to a specialist to build that design.  And the specialist is called an architect.

The base idea of this is at the core of Business Process Re-engineering (BPR) which is why we talk about process redesign, when we're designing, and process implementation, when we're architecting.

The architect has been called in recently because the bank's foundations are  sufffering from subsidence.  The foundations were built on cement and bricks-and-mortar, and those foundations are cracked due to the revolution of technology in the last fifty years.  Most banks got away with painting over the cracks but, today, they are finally saying they want to replace the brick foundations with technological foundations in the form of IP architectures.

The architect is there to replace the physical foundations, process implementation, and the designer is there to work out what the new bank house should look like, process redesign.

Likening this to the building trade illustrates the point well.

A house or building has foundations.  My point is purely to say that the bank architects of the last few decades used branches as those foundations but today would use IP infrastructures.

This does not mean that branches or people are irrelevant.  The branch and face-to-face discussion is more to do with what type of house you want to build.  In other words, it's the design, the vision, the interior decoration, the furniture and the other bits. 

The designers may say: “I want to build a high net worth house, with sales advisory centres for people who want face-to-face engagements”.  In this case, you build your bank house with IP foundations and lots of snazzy advisory centres, or branches, in the physical world.  Others may say: “I want to build a low-cost high volume processing house, with minimal physical contact” in which case you build your bank house with IP foundations and hardly any branches in the physical world.

Either way, the IP is the foundation, and that is where the architect will start.  That was the point of last week’s blog.

In particular, these is some confusion about the fact that I am starting with a technology focus, rather than a customer focus.  As an architect of today's bank, an implementer, I would start with technology as technology, especially IP networking, is my raw material for the building.  As a process designer, I would start with customers and staff, as people are my core differentiation for populating my building.

From an architecture and implementation viewpoint, I would look at the IP network and how to build upon that network.

From a design and process redesign viewpoint, I would start from the statement: "Design for the customer experience you want to deliver to the customers you want to engage, by creating processes and touchpoints that those customers want to engage through and with you."

In other words, work out what customers you seek and what those customers want.  Build your bank and design it based upon desired customer experiences.  Build those customer experiences to appeal to the customer behaviours of your targeted audience.  Address the needs of digital natives, digital immigrants and digital aliens, and work out how your designs address this mixture of customer types.  What experiences and behaviours will these different audiences require and how is it best to deliver them?

These are all designer questions and nothing to do with architecture.  Once you have your design you can then give this to the architect to work out how to build it ... and the architect will begin with a base design using IP as the foundation.

So we have a critical segregation between the designer, who will focus upon processes, interactions, people and customers; and the architect, who will focus upon building materials, infrastructures, networks and technologies.

The fact that people get confused about this segregation, the channel mix, the house design etc, versus the foundations of the bank house, is because they are mixing up business process redesign and business process implementation.  The channel strategy is the house design; the building strategy is the architect’s IP materials. 

My focus is that the strategy for the architect is to lay IP foundations rather than brick foundations.  It’s to do with the materials at the base of the bank.  The fact that these materials for the foundations are fundamentally different today, because they are IP-based rather than brick-based, is the reason why bank's need to fundamentally redesign.

This redesign is to replace the building foundation.  In replacing the foundation, the strategy for the design of the house itself may also change, but this is still very much open to the designer's competitive strategy.  It is a totally separate discussion that is nothing to do with architecture. 

The architect is purely working out how to replace the foundations with IP.  Therefore, the designer's role is to tell the architect what the designer wants to build on top of the foundations - branches or multichannels or electronic connections.

The two roles - architect and designer - go together but are very separate and distinct roles.  The reason the redesign started in the first place however, is because the foundations are crumbling - the branch brick-and-mortar model - and needs replacing through a new architecture - IP networking.   And, as I keep saying, architecture is related to, but separated from, design. 

In conclusion, the issue today is that most banks have their foundations in branches as the raw material, and that is forcing them into poor designs that do not match the way they want to behave.  That is why they are hiring architects to replace those foundations with IP.  The architects are then asking the bankers: "what design would you like to have on top of these foundations then?"

Some bank designers want redesigned branches. Some want to close down branches.  Some want to integrate branches onto common platforms with their electronic channel connections. Some just want electronic connections.

It's all a matter of choice but, as you have to replace the foundations, you might as well re-think, re-engineer and re-energise to exploit the new foundations effectively.

 

Branches - the last word?

Some of you may have noticed that Michael Goldman has recently joined the Finextra community to blog and has decided to create a debate with me over my blog entry last week.  Now, there's nothing I enjoy more than a debate and so it's nice to finally have one online.  About time.

As I can see from the viewings, it's also popular with you guys.  So I have to thank Mr. Goldman for prodding me into explaining my thinking in far more depth, articulation and preciseness than I thought necessary.  But then I assumed the initimacy with financial technology was far higher with the Finextra readership than perhaps it is, based upon Michael's input.

I also think I need to set the record straight, as many of you are reading our new blogger's views and, like me, could misinterpret them to think that Chris Skinner believes it is all about IP and that customers, branches and processes are unimportant, as this is how he's positioning my views.  His positioning of my views is actually completely based upon his own misinterpretation of my blog entries and responses.

In other words, I do not believe any of the things that Mr. Goldman implies I believe through his postings. 

For example, I totally agree with his point about customers and processes coming first when you're designing a bank.  It's pretty darned obvious isn't it?  And, for those who have followed this debate and/or my blog, I've always said that human interaction and face-to-face connection is critical.  Sure, we could debate whether such interaction can be achieved electronically versus in person, but financial services is a service-based business and service can only be delivered by human connections and relationships.  So yes, BPR and all that good stuff is essential when you're designing for your customer.   That's why it's called Business Process Redesign. 

These have all been common themes of mine and, for those who know me or read my blog, are integral to my thinking. 

Our new blogger happens to ignore the fact that I have this view by trying to put words into play that make it look as though I don't think this way.  His attitude is to try to position my views as being an IP-fixated techno nerd, which I'm not, and being IP-focused as the priority and first focal point, which it is not.  My background is very firmly in the BPR camp and how to apply and use technology to innovate and differentiate as a result.  Therefore, the focus should be upon designing tomorrow's bank bearing in mind that IP is the new foundation stone when it comes to implementation.  I'm pretty sure that's where I started in my original blog entry.

His points also relate to, but are totally different from, my original posting. 

My point was around branch versus IP as a foundation for the bank, and that IP is now mature enough to design the bank completely around this as a foundation stone.  This is therefore all about new materials for building a bank architecture.  Brick-based raw materials have been replaced by IP raw material.  This is all about architecture and implementation, and is my core debating point. 

His point is all about BPR, processes, customers, service and so forth. These are all related to my argument, as processes need to be redesigned to service the customer across multiple channels that are IP-based.  So, everything I've said relates to customers, processes, TQM and BPR, but it is a different point completely.

This comes back to the key question: Why are we redesigning?  Answer: because we are changing branch foundation stones and architectures with IP ones.  The new IP foundation stone requires a focus upon customers, channels and services, as all of these areas need redesign using BPR and other techniques.  This point I've covered extensively in the original blog entry, it's follow-on entry, and again yesterday. 

Why do I keep adding to this? Because I think this is fundamentally important to the modern bank and so I want it to be clear to every reader, including the ones who find it hard to understand, such as Michael.

For example, he was originally saying that a bank should be built around branch foundations instead of IP, which is how I got sucked into this discussion as that's where I was arguing a point, and now he's arguing around customers and processes versus IP.  I've never even raised this latter point, as I don't believe the two discussions fall into the same category.  The latter discussion around customers and processes relates to BPR and designs; the former area of IP foundations relates to architectures, and the implementation of the design. 

He also began by lumping IP and online banking into the same breath, as though IP meant online banking, which was a mistake I pointed out as IP is not online banking.  It's just infrastructure that supports online banking delivery, in the same way as it supports mobile/cellphone banking delivery, branch delivery and contact and call centre delivery.

So, just in case readers haven't seen my comment on his blog posting today, I'm posting it here separately as it clarifies exactly where I agree and disagree with Mister Goldman:

 

Michael 

I totally agree with some of what you say. 

As a bank designer, I would start with client and process.  I call this buyology and blogged about it a while ago.  It's what BPR is all about and why I distinguish between design and architecture.  So yes,  I would design my bank 100% around the client and, in this area, I fundamentally agree with you. 

I disagree with you in the use of phraseology, e.g. foundation. In the way I’m talking about them, foundations are builder’s terms rather than designers.   As a designer, I would hand my design over to the builders and architects to implement my design, and they would build with materials for the foundations using technology as the focus.  This is because technology is the underpinning of the bank these days. 

I also disagree that banks have totally ignored customer needs.  After all, they seem to have provided customers with a lot of decent services such as free banking, online banking, call centres, ATMs, integrated solutions for finance, trade finance, high alpha returns ... need I go on?  Some banks are just poor in their treatment of customers because they are not transparent and try and rip them off.  They'll get found out.

Finally, your comment about why is there "so much talk of IP and so little about the client" happens to be due to the fact that this is a financial technology website.

I realise you don't get my language, and that's why you don't get my point.  Hopefully, most other folks can see the difference in the semantics that you are not seeing.

 

The reason I've posted my comment here is that there's a load more to life, and banking, than a non-debate about whether customers and processes are important when designing a bank.  Of course they are.

 

 

p.s. I really hope this is the last word ... but never say never again.  

 

'Clearing and settlement barriers removed in 2008'

On Monday, David Wright, Director, Financial Services Policy and Financial Markets at the European Commission, made an interesting statement of policy work around European Clearing & Settlement in the Securities markets. Here's his words as I captured them (e.g. not 100% accurate but the essence):

"What we are trying to do is increase competition in the market, encourage rationalisation and improve competition across the board, so that cross-border Clearing & Settlement Mechanisms (CSMs) costs are the same as domestic. 

"On clearing and settlement, everyone here should recognise that our policy is made up of four different pillars:

1. the industry code of conduct,
2. our support for TARGET2 for Securities,
3. removing the legal and fiscal and technical Giovannini barriers, and
4. ensuring that standards are in place for CSMs in the EU from the European Central Bank and CESR. 

"The code of conduct is a three-part code that will be signed by everyone in this space in the EU:

1. the first part relates to price transparency;
2. interoperability is the second part of the code; and
3. third is unbundling and accounting standards. 

"There have been a large number of requests – 40 or more from one organisation – for interoperability.  It’s now critical to the EC that this results in flows of business to increase competition and to drive down prices and commission. 

"The Commission will monitor this space carefully, and we have made it plain that we will not tolerate any anti-competitive blocking of any form.  You can also expect that the Commission will push for interoperability agreements where we receive these requests. 

"Even with all of these discussions, there are lots of players in this space.  So there will be rationalisation and consolidation, and that’s for the market to determine.  The key is that these agreements take hold.  We also want our market participants to choose where they clear and settle – that’s at the heart of MiFID – and so these agreements are critical to this.

"The other aspects are just as important.  We are removing the legal and fiscal barriers and are now being asked for a timeframe for the removal of those barriers.  The commission in the New Year will come forward with a timeframe, a tight timeframe, to genuinely move forward to remove these barriers.

"On the standards for securities clearing and settlement, one or two member states and regulators have been slow on this, but the Council of Ministers has now appointed a group to look into this and ensure the standards are put into place.

"So we have a four-pronged strategy and will use all the equipment we have to ensure aspiration turns into delivery ...

"Our urgent priority is to get the code of conduct to work in practice in the marketplace, not just on paper.  We create conditions for markets to function, but not the markets.  Therefore, when we went down the non-regulatory route, we put the ball into play with the industry. It’s in their court, not ours.

"This is a real test on both sides to see if they can work it out and, if we can help them to work it out, we will.   We’ve had an open and inclusive policymaking approach.  We’ve tried to build a system and a model that is inclusive and takes the best from third party jurisdictions.  This is an open and transparent working method which has helped us well over the past few years. 

"This is also why I get jumpy about reciprocity and all that stuff.  We need to be attractive to capital from all over the world.  The priority is for the industry to deliver this code.  Success or failure falls for the industry ...

"Giovannini is with the governments to resolve.  We are going to work on this in the Spring with those government offices, to set a timeframe that is realistic but short-tem, to remove those fiscal and legal barriers."

I was pleased to hear that Giovannini's barriers is a priority for the Commission.  After all, an October Banker magazine feature started with this paragraph:

"More than a year after the Giovannini Group’s original deadline for removal of all 15 barriers to the creation of an integrated clearing and settlement system for European securities trades, only one barrier has been fully removed."

and concluded with:

"Although the European Commission is keen for these barriers to be removed, it agreed to a five-year implementation period for the Swift Protocol in March 2006. But if the proposed Target2 for Securities gets the green light, the implementation date is slated for 2013. It will be then – more than 10 years after the Giovannini barriers were first identified – that the industry could become unstuck if removal work is not fully completed."

I mentioned this to David who was a bit unhappy with the idea that only one - the interoperability standards - had been removed through SWIFT's Giovannini Protocol. 

The real issue is national fiscal and tax laws that cocoon and protect the national CCP's (Central Counterparties), CSDs (Central Securities Depositories) and SSPs (Securities Settlement Providers).  The challenge for Mr. Wright and his team is to get face-to-face with these national governments and get them to change these monetary policies. 

It sounds like he's going to give it a go but, if the track record of MiFID transposition is anything to go by, he's got a tough task and, seeing as Mr. Wright is going to be the Lone Ranger, then he'll need a very good Tonto ... any volunteers?

Bank designs versus architecture

I’ve been having an ongoing debate with some folks in the Finextra community for the last week over branch versus IP architectures, and it is clear that some people are confused so I will try to explain again.

The discussion I started last week was all about architecture, which is why I kept referring to foundations.  The discussion some people want to have is about bank designs, which is different.  The former is about what materials, dimensions, frictions, structures.  The latter is about interior design, windows, pillars and brick colours.

The two go hand-in-hand.  The bank designer would start with the customer and how to focus upon customers.  I call this buyology and blogged about it a while ago.  The designer would use these techniques of customer understanding to build processes from that customer viewpoint.  At the end of designing, they would then go to a specialist to build that design.  And the specialist is called an architect.

The base idea of this is at the core of Business Process Re-engineering (BPR) which is why we talk about process redesign, when we're designing, and process implementation, when we're architecting. 

The architect has been called in recently because the bank's foundations are  sufffering from subsidence.  The foundations were built on cement and bricks-and-mortar, and those foundations are cracked due to the revolution of technology in the last fifty years.  Most banks got away with painting over the cracks but, today, they are finally saying they want to replace the brick foundations with technological foundations in the form of IP architectures.

The architect is there to replace the physical foundations, process implementation, and the designer is there to work out what the new bank house should look like, process redesign. 

Likening this to the building trade illustrates the point well. 

A house or building has foundations.  My point is purely to say that the bank architects of the last few decades used branches as those foundations but today would use IP infrastructures.

This does not mean that branches or people are irrelevant.  The branch and face-to-face discussion is more to do with what type of house you want to build.  In other words, it's the design, the vision, the interior decoration, the furniture and the other bits. 

The designers may say: “I want to build a high net worth house, with sales advisory centres for people who want face-to-face engagements”.  In this case, you build your bank house with IP foundations and lots of snazzy advisory centres, or branches, in the physical world.  Others may say: “I want to build a low-cost high volume processing house, with minimal physical contact” in which case you build your bank house with IP foundations and hardly any branches in the physical world.

Either way, the IP is the foundation, and that is where the architect will start.  That was the point of last week’s blog.

In particular, these is some confusion about the fact that I am starting with a technology focus, rather than a customer focus.  As an architect of today's bank, an implementer, I would start with technology as technology, especially IP networking, is my raw material for the building.  As a process designer, I would start with customers and staff, as people are my core differentiation for populating my building. 

From an architecture and implementation viewpoint, I would look at the IP network and how to build upon that network.

From a design and process redesign viewpoint, I would start from the statement: "Design for the customer experience you want to deliver to the customers you want to engage, by creating processes and touchpoints that those customers want to engage through and with you."

In other words, work out what customers you seek and what those customers want.  Build your bank and design it based upon desired customer experiences.  Build those customer experiences to appeal to the customer behaviours of your targeted audience.  Address the needs of digital natives, digital immigrants and digital aliens, and work out how your designs address this mixture of customer types.  What experiences and behaviours will these different audiences require and how is it best to deliver them? 

These are all designer questions and nothing to do with architecture.  Once you have your design you can then give this to the architect to work out how to build it ... and the architect will begin with a base design using IP as the foundation. 

So we have a critical segregation between the designer, who will focus upon processes, interactions, people and customers; and the architect, who will focus upon building materials, infrastructures, networks and technologies.

The fact that people get confused about this segregation, the channel mix, the house design etc, versus the foundations of the bank house, is because they are mixing up business process redesign and business process implementation.  The channel strategy is the house design; the building strategy is the architect’s IP materials. 

My focus is that the strategy for the architect is to lay IP foundations rather than brick foundations.  It’s to do with the materials at the base of the bank.  The fact that these materials for the foundations are fundamentally different today, because they are IP-based rather than brick-based, is the reason why bank's need to fundamentally redesign.

This redesign is to replace the building foundation.  In replacing the foundation, the strategy for the design of the house itself may also change, but this is still very much open to the designer's competitive strategy.  It is a totally separate discussion that is nothing to do with architecture. 

The architect is purely working out how to replace the foundations with IP.  Therefore, the designer's role is to tell the architect what the designer wants to build on top of the foundations - branches or multichannels or electronic connections.

The two roles - architect and designer - go together but are very separate and distinct roles.  The reason the redesign started in the first place however, is because the foundations are crumbling - the branch brick-and-mortar model - and needs replacing through a new architecture - IP networking.   And, as I keep saying, architecture is related to, but separated from, design.  

In conclusion, the issue today is that most banks have their foundations in branches as the raw material, and that is forcing them into poor designs that do not match the way they want to behave.  That is why they are hiring architects to replace those foundations with IP.  The architects are then asking the bankers: "what design would you like to have on top of these foundations then?"

Some bank designers want redesigned branches.  Some want to close down branches.  Some want to integrate branches onto common platforms with their electronic channel connections. Some just want electronic connections.

It's all a matter of choice but, as you have to replace the foundations, you might as well re-think, re-engineer and re-energise to exploit the new foundations effectively.