The Financial Services Club's Blog

Internet Banking: 2010 and beyond

I’ve been reading a range of articles about the next generation internet, or the semantic web as it is called by those in the trade.

Semantic is a method of looking for the meaning and relationships between things, and the semantic web effectively moves us away from files and downloads to databases and integration. In practice, this means that rather than going on to the internet to pull things out and push emails and files around, the internet continually monitors you and your tastes and finds things to push at you which match your electronic lifestyle. In other words, it makes everything online much more relevant to you as an individual, and moves us away from having to search because the semantic web will find for you.

Take the way we use Google today. When you go into Google and search, it is very rare that you find what you want straight away. In fact, you often have to crawl through screen after screen, and change searches three or four times to even come close.

The semantic web overcomes these difficulties because you will not have to search. The semantic web knows you and finds for you. It knows you work for a bank or technology firm, and therefore knows that when you say ‘payments’ you mean it in a professional sense, not a generic sense. Therefore it senses the most relevant things to the way you search and your profile of usual interests.

Similarly, today’s Google-based internet does not realise that when you say ‘card payments’ you actually meant ‘trends in credit and debit card technologies and strategies’, and so you end up with 100’s of results of retail stores that accept credit card payments. Tomorrow’s web will know exactly who you are and what you’re looking for because it knows you.

How does it know you?

By linking all the information about your digital fingerprint with the database of the global worldwide web. A global web that interprets the meaning of things and has all of it held as metadata, descriptive information, in its database. The architects of this new web are already referring to this as a ‘Global Brain’. In other words it turns the internet from raw data into knowledge. It takes knowledge management as we think of it internally within our corporations, and throws it out to the over six billion people on this planet to share.

What does this mean for banking?

Well, you can get a sense from this description on the homepage of the W3C Semantic Web’s website:

“I can see my bank statements on the internet, my photographs and I can see my appointments in my calendar. But can I see my photos in my calendar to see what I was doing when I took them? Can I see a bank statement in my calendar?

“Why not? Because we don’t have a web of data. Because data is controlled by applications, and each application keeps it to itself.”

This is what the semantic web will overcome.

The future web will be one where you can create a domain of knowledge around banking, and plug-and-play that domain knowledge into an insurance domain, into an investments domain, into a holiday domain, into a buying cars domain … into any domain you want. Each time you create something, it is shared, networked and integrated into the global human brain of metadata in the semantic web’s database.

Just as we all found the first generation internet scary with fears over illicit materials and cybercrime, we will find the next generation just as scary as the internet becomes a conversational web of systems and applications rather than people.

Just as we are getting to grips with social web of Facebook and Second Life, the social web moves from humans to applications that continually talk with each other.

And when does all of this start?

It already has …

SEPA is working, according to corporates and banks

Unlike some of the sceptics about SEPA, I believe we are finally getting there. There’s still a long road ahead – the SEPA Direct Debits (SDD), the Payment Services Directive, effective card schemes using the SEPA Card Framework (SCF), D+1 and more still need to be implemented – but we are heading in the right direction.

This was confirmed the other day at the Eurofinance conference in Miami where we did another audience poll around SEPA. Again, using interactive voting of around one hundred or so US, Canadian and Latin American bankers and treasurers, I thought these results would be interesting as SEPA is thought of as a very European thing.

The first question was to gauge their familiarity with SEPA ...

Read more ...   

Government websites hacked so that they install malware

Two interesting stories on hacking this week.  The first is a joke and the second is worrisome.

The joke is that we have a race here in London.  The race is to see who can win the vote for Mayor of London this Thursday: Ken Livingstone (Labour) or Boris Johnson (Conservative). 

Sorry, that's not the joke.   

The joke is that the official blog of Harriet Harman (Deputy Leader of the Labour Party) has had to close down after a fake blogger hacked her website and put notices up that she had left the Labour Party and joined the Conservatives.  She's defected because she wants to support Boris and not Ken. 

Oh dear!

How did they hack her official blog?

Username: Harriet
Password: Harman

What a doozey!

Then there's the story that America's Department of Homeland Security, the United Nations and the UK Civil Service websites have all been hacked through SQL infections. These infections mean that when a visitor goes to the site,they are redirected to another website which tries to install malware on their system.

Watch out, watch out, there's a Trojan about.

No more sex and drugs and rock 'n' roll

The best story of the week is the leaked email from Der Spiegel of Deutsche Bank's instructions to employees to give up their sex and drugs and rock 'n' roll.

As the credit crunch hits, no more market excesses are allowed, with Deutsche's staff to shave and shower at airports (instead of booking into hotels), travel by second class train (instead of gold plated limousines) and stop billing lap dancers as restaurant meals (and eat proper meals instead).

Ah well ... at least the crisis has crunched their credits a little bit :)

With zero charges and zero spread, how is a bank meant to make money?

With Faster Payments going live on 27th May, the question the banks are really struggling with is how to make money.

FPS means that banks no longer make money on their float, as we are talking D. Not D+1, 2 or 3 or more. Just D, as in Just Do It and Do It Now.  FPS means that payments are processed in fifteen seconds by the processor, and the end-to-end cycle to process a payment from origination to receipt and confirmation will average around two hours.

Like SEPA, it means a massive investment for negative returns for most banks. The reason I say that it is like SEPA is that Eurozone banks will no longer be making margin on cross-border processing.

Then there was the news yesterday that UK banks have lost their test case on overdraft charging. It is already estimated that UK banks have returned over £750 million in “unfair charges” to retail customers. This announcement may not only result in billions more being returned, but also fundamentally challenges the fee structures for UK banking.

Add on to this the fact that banks no longer claim to be making money from the spread of buy and sell prices due to MiFID’s transparency of trade reporting and best execution*, and you have to ask yourself: how is a bank to make money these days?

Maybe through diversification?

Read more ...

Bird & Fortune explain the credit crunch (Part 2)

Further to my previous post of Bird and Fortune, they've followed up with another classic interview with their fictional banker to explain the credit crunch.  Fantastische!

What a bunch of bloggers

I was honoured today to join a panel at the Digital Money Forum of global bloggers, all of whom I think deliver great value to our industry.

First was Dave Birch of Consult Hyperion. Dave runs the Digital Money Forum and the Digital Money Blog. He’s a regular blogger on new payment systems, especially areas such as contactless payments, mobile payments, internet payments and related disruptive stuff.

Second was Aneace Haddad of Welcome Real-Time of France and Aneace’s Blog. Aneace is now domiciled in Singapore and is another really insightful person who seems to spend most of the time talking about card fees and, with MasterCard being told their model of interchange fees is now illegal, has a blog that has more relevance today than ever before.

Third, we were joined by Scott Loftness. Scott manages Payments News, an American blog with a global reach which, if you have not registered for their daily email, is the one email I read every single day as it gives you the most wide-ranging knowledge of what's going on in the payments world.

Last, but not least, was Colin Henderson of Bankwatch. Colin is a Scottish ex-banker living in Toronto who has a different way of thinking about retail banking with his wry views. Another great thinker on banking, and well worth following.

What was the point of the panel?

Read more ...

What Sky TV's service teaches banks

There are many examples of bad service and few of great service, but when you do find great service you might write about it and when you get bad service you definitely talk about it. That is why various studies say that if a customer has a bad experience they will tell four of their friends about it on average, whilst a customer who complains and has a good resolution will tell five of their friends.

There's a message in there somewhere, and if you like facts and figures of this nature, a Wharton study in January 2006 found that:

• The chances of a smooth experience are only 50:50, with half of all retail customers finding at least one problem when purchasing items;
• The retailer may be the last to know as shoppers experiencing problems are more than five times as likely to tell a friend or colleague about it than to contact the company;
• Each one will tell an average of 4.1 people about their bad experience;
• Their word does carry weight as almost half of shoppers have avoided a particular shop because of someone else's negative experience;
• Bad experiences are not easily forgotten, with almost half feeling that problems will be repeateed, and bad shopping experiences erode loyalty; and
• 'Disloyal' attitudes can have wide spread consequences as customers revealing the lowest levels of loyalty will talk to the largest number of friends or colleagues about the problems they encountered.

So here are three examples of service. Two are good and one is bad.

Read more ...

Clearing - the last barrier to a financially unified Europe?

This question occurs to me because it's top of mind with Charlie McCreevy, the European Commission and also many of the discussions taking place today in Paris at a tradeshow focused upon investment banking. Buy and sell side firms have gathered to debate algorithmic trading, dark pools of liquidity, multilateral trading facilities (MTFs), smart order routing, the credit crisis, low latency and more.

To set the context, we begin by talking about technology and it amazes me how blasé we have become about technology. For example, the investment banks talk about low latency, but what does it mean in practice?

Well, the new equities exchange Chi-x claim to process a trade in two milliseconds. How fast is two milliseconds? A human blink is meant to take 200 milliseconds – don’t ask me who measured that one – and therefore Chi-x processes orders in a hundredth of the time it takes you to blink your eyes.

That’s low latency.

Read more ...

PayPal gives banks a free phishing lesson

Reading the PayPal blog is worthwhile, particularly as this item appeared the other day. It’s all about stamping out phishing with Michael Barrett, chief information security officer, blogging about the ways in which PayPal were attacking this issue. As PayPal and eBay are the target of three-quarters of all phishing attacks, according to Sophos in July 2006, they should know what they are talking about.

The reason why Michael’s blog is relevant to you, me and all the bankers and citizens of the world, is that he thinks they have found a way to stamp out phishing losses. Between July 2006 and July 2007, the phishing rate targeting PayPal and eBay dropped from peak rates of over 80% to under 10%.

How did they do it?

Read more ...

Mind the GAAP? No, scrap the GAAP

The Generally Accepted Accounting Principles (GAAP) used across the USA for financial reporting appear to be fatally flawed. As a result, America is scrapping GAAP to move towards the International Financial Reporting Standards (IFRS) used around the rest of the world. The question is how fast can this be achieved?

Part of the reason for the urgency of scrapping GAAP is that many believe the GAAP methods contributed heavily towards the subprime credit crisis. This is down to the fact that American banks used insurance services to manage debt exposures and move them off-balance sheet.

GAAP allows this because it is applied differently to insurers and banks, as explained brilliantly in this Business Week account last week: the Death of the Bond Insurer.

In summary, the GAAP method allows banks to post profits on securities the day they book them, by swapping the risk with their insurance friends.

Under GAAP, banks have to recognise any exposure on the value of a security at prices which are mark-to-market. Therefore, a bank has to report any losses every quarter, even if those are only paper losses. On the other hand, insurers only have to state such losses if their investment is terminal such that it is likely to result in an insurance claim.

This fundamental difference meant that banks used insurers as a method of accounting arbitrage, by using Structured Investment Vehicles (SIVs), such as Collateralised Debt Obligations (CDOs), and then swapping them with their insurance arms as Credit Default Swaps (CDS). What this actually means is swapping the likelihood of the CDO going wrong with the insurer.

Perfectly acceptable under GAAP methods, but actually just moving the risk from one side to another whilst leaving the exposure in place.

Why would this be critical?

Because it allowed banks to book profits early and created the credit bubble that we are grappling with today, post explosion.

Using GAAP methods, a bank could buy an SIV which pays interest at 0.5% above base rates and then purchase insurance, a CDS, at 0.2% above base. The result is that the banks could book the difference of 0.3% as profit, which they did the day they took out the insurance. Banks profits looked great and credit boomed, because firms were reporting the profits of derivatives that spanned 5 to 10 years the day they bought them.

This is why GAAP is being scrapped, to be replaced with the more globalised IFRS standards, but the problem is that not everyone wants to move at the same pace, creating a scrap between the American Financial Accounting Standards Board (FASB) and the Securities Exchange Commission (SEC).

The SEC wants firms to move to IFRS accounting right now, whilst the FASB wants it phased in gradually. This is not to say that the FASB is unsupportive of scrapping GAAP. They firmly are in favour of IFRS. Their issue is less haste, more speed. The FASB think that the SEC is trying to do it too fast, too arbitrarily, and it is just not that easy.

For example, in a survey of 137 corporations, the FASB found over 1,000 differences between the accounting rules of the IFRS versus GAAP, with IFRS allowing earnings to be inflated by up to 11% as a result. The main differences occur in the reporting of pensions (99 differences), derivatives (53) and share-based compensation schemes (52).
As can be seen, the 53 differences in the reporting of derivatives catch the eye, and support the previous dialogue around accounting principles between banks and insurers.

So there are efforts to create a common, high quality, global financial reporting systems that can be used for decision making purposes across borders, and this formed the basis of an in-depth presentation this week from Dan Young, an executive on the Board of the FASB.

Dan noted that there are many countries adopting IFRS. The only exceptions are Brazil, India, Mexico, Canada ... and America; but these countries are rapidly converging towards a global standard.

For example, the International Accounting Standards Board (IASB) was created in 2001 with the support of the SEC and the FASB. This led to the Norwalk Agreement in 2002. This Agreement set a working agenda to move GAAP towards IFRS standards as soon as practical. This was followed by a Memorandum of Agreement (MOU) in 2006 between the FASB and IASB to move this further forward.

And yet, six years after the Norwalk Agreement and two years after the MOU, there is little progress.

Sure, there's been movement on key areas, such as the presentation of financial statements, but other area such as revenue recognition, 'fair value' measurement, leases, intangibles, financial instruments and so on and so forth are way behind.

So the SEC has decided to stop the messing around and has pressed the 'go' button.

In 2007, the SEC allowed foreign firms to list shares in the USA without reconciling financial statement to GAAP methods, but to just use IFRS if that is what they want to use; and now the SEC is saying that even American firms can choose how they want to report apparently. They can use either GAAP or IFRS. It is totally at the discretion of the business.

This issue is cited as a major one, as the FASB cannot condone a two stream reporting system. It needs to be consistent. After all, how can investors determine the value of a firm, if one has used IFRS reporting to inflate earnings by 11% compared to another who uses FASB?

So what is needed for a global accounting standard? The ideal system requires:

• A single set of high quality accounting standards, developed by an independent, well funded, global standard-setting organisation;
• Cooperative international regulatory, enforcement and corporate governance regimes;
• Common, high quality auditing standards; and
• Systems for training and educating capital market participants

These points were, once again, a scene setter towards an audience vote.

Bearing in mind that the audience comprised around 500 mainly American (both North and Latin) corporations and financiers, here's the results:

What is the best way to achieve convergence of GAAP to IFRS accounting standards?
49%   After completing critical projects to align the two, adopt IFRS
27%   Just name a date to adopt IFRS as soon as possible
16%   Joint work for gradual convergence on a project-by-project basis
8%      Let the market decide

What is the best way to achieve a cooperative international regulatory, enforcement and corporate governance regime?
1 We don't need one – let the market decide                  5%
2 Home country rule – company (head office base)      6%
3 Home country rule – investor (equity listed)                 1%
4 Coordinated global regulation                                      41%
5 Combination of 2 and 4                                                47%

When will the majority of the S&P 500 companies be using IFRS?
2012 or sooner                                                                    37%
2013 to 2015                                                                        29%
After 2015                                                                            28%
Never                                                                                     7%

You can read more on the FASB's views here.

The bottom-line is that accounting arbitrage, particularly of financial instruments and derivatives, has led to significant issues in the market. The current credit crisis was hidden through such accounting arbitrage, and has led to the current market crisis. Without alignment of accounting principles worldwide, such crisis could repeat itself over and over again.

We need to baton the hatches and plug the gaps, not just locally, domestically or regionally ... but globally.

The only question left in my mind is: who will lead that charge?

First Data close down Airline

Fascinating item sent to me by a mate that says that First Data are responsible for Frontier Airlines going bankrupt in the States. 

Apparently, Frontier blame First Data because they demanded a sudden jump in collateral, due to the credit crunch, and started taking a large slice of the 70% of Frontier's revenues which they controlled; the other 30% is from cash, cheques, AMEX and Discover.

On April 8th, First Data not only told Frontier that they wanted to raise Frontier's collateral from $55 million to $130 million, but allegedly claimed withholdings would rise from 45% to 100% by May 1st in order to build this up.

As a result, Frontier declared bankruptcy on April 10th.

First Data ... how could you?

Aha ... First Data were as surprised as everyone else by this announcement.

Sounds like it could be a bit of brinkmanship between a customer and their processor, especially as Chapter 11 in the USA just means that you don't pay your suppliers for a while.  And you can still book seats on the flights ...

... even so, declaring bankruptcy is a bit radical just because your card processor has kicked you in the collaterals so to speak.

 

What keeps the CFO awake? Plates and Pirates!

There were a couple of fascinating discussions during this conference on cash and treasury – been here all week if you haven't been reading this blog – about CFO's.  The best of these was a panel chaired by Julia Homer, editor-in-chief of CFO Magazine, with a discussion of CFO's major priorities. The discussion was based upon a survey that CFO magazine produces on a regular basis with Duke University in the USA.

CFO priorities are obviously important to banks and their providers, as these are the guys driving the decisions that corporations make, influencing their banking demands and the technology interconnections that support this financial decision-making supply chain.

So getting inside the head of CFOs is important.  And what's inside those heads?

Plates and Pirates!

Read more ...

Online Banking is as good as Amazon and eBay

The fourth Foresee online financial services survey came out today, benchmarking banking websites for their engagement and satisfaction with the user. 

What it finds is that online banking websites score 82 in overall satisfaction, a 12% improvement since 2003, and the best of the websites for financial services available online.  This is a great score, as e-retailers only benchmark at 83.  According to the report, online banks are getting the balance just right between convenience, value, information and transactions.

Apparently, where customers are ‘highly satisfied’ in their banking experiences, 31% are more likely to purchase more, and 57% are more likely to use the website as their primary channel for the bank.   

Whilst the banking websites get a rating of 82, investment and credit card websites score 75.

Highly satisfied investment website users are 68% more likely than others to recommend the investment service to their friends.  Similarly, highly satisfied online credit card users are 47% more likely to use this card as their primary credit card and 66% more likely to recommend the card to others.   

The headline I keep coming back however is that 12% improvement to a benchmark of 82. The fact that banks have improved 12% in five years to be on a par with the Amazon’s, iTunes and eBay’s of this world is definitely saying something.  You can download the full report here.

You do wonder about the extremes here though.  After all, you can have highly satisfied customers online, but what about all the other surveys that come out every day saying that people are fearful of online finance, such as this one saying that 1 in 5 Americans have had their account details compromised online.

I guess the balance between online bank lovers and internet financial haters is about 50:50?

Except that the survey from Gemalto is actually a big PR gaff as 1 in 5 Americans compromised would mean 60 million Americans have had their internet accounts accessed by hackers.  That is far and away more than the numbers reported anywhere else.

Therefore, Bank Technology News chased up and discovered the numbers were a bit 'jumbled' ... in other words, wrong.  The actual number of Americans who have had issues is about 27 million or 11% ... and their issues have been some form of loss of personal data, not banking data.

Maybe we do like internet banking after all.

 

Chris – stop blogging … as SWIFT prove their relevance

I’m in Miami at this cash and treasury show, and chaired a panel focused upon SWIFT and why is SWIFT relevant to corporates?

Here’s the blurb about the panel:

“SWIFT – It May Be Time You Connected
“Companies can use the SWIFT network for a number of transactions including payment initiation. The options for participating in the SWIFT community are increasing, but what is the difference in those methods, particularly in terms of cost? Also, is it even cost effective to use SWIFT for payment initiation? Recent research showed a reluctance of American companies to utilize SWIFT. This session will look at the nitty gritty of determining if it can bring benefits to your business.”

The research is from a Eurofinance Survey at the end of 2007 which found SWIFT was the lowest priority on treasury’s agenda. The top priorities were Liquidity Management and FX Risk Management.

Equally, the survey found that less than only 9% of corporates had a connection to SWIFT, with 40% turning down connectivity because the cost benefit didn’t stack up.

So this was the premise for our conversation of an hour and a half.

Read more ...

FSA fines outsourcing firm a million dollars

Under our radar, as it is in the pensions markets, but something very noteworthy occurred last week.  The FSA attacked the outsourcing and Third Party Administration Markets by fining Liberata over a million dollars for failures in its systems and controls for managing and issuing pensions policies.

Margaret Cole, Director of Enforcement at the FSA and who I quoted last week as someone keen to make a mark, said:

"The failings by Liberata were particularly serious because they put policyholders at risk of not receiving important information about their savings and pensions products. This resulted in customers not being treated fairly.

"The fine we have imposed on Liberata acts as a clear signal to firms to ensure that there are appropriate systems and controls around processes and, where there are problems, that such problems are identified and resolved swiftly. Firms which fail to do this should be in no doubt that they run the risk of enforcement action."

The fine represents a substantial chunk of Liberata's £5.9 million of profits in 2007.

Just goes to show that the services and technology community are just as exposed to the FSA's radar as the financial community, especially if you are running a bank's or insurer's back office.

Watch out, there's a fine about.

America is not in recession

Matthew Bishop, the American business editor of the Economist, talked through his views on the credit crunch at a conference I am attending in Miami.

He began by asking the audience if they thought the USA was in recession. This was using voting devices. Y’know the ones you get at conferences that are a bit like small calculators, and you are then asked a question and vote A, B, C or D.

At this conference, with over 500 bankers and treasury folks attending, the results were:

• 85% think the USA is in recession;
• 72% think USA is dragging down world economies;
• 63% think it’ll get worse in next 12 months; and
• 57% are finding it harder to get capital for the business.

Read more ...

Are Stock Exchanges fungible?

Reading today's news headlines, you might think that the markets had exploded or imploded, dependent upon where you sit. Apparently, hundreds of new exchanges and multilateral trading facilities have started up and are winning business away from traditional exchanges.

But the question top of my own mind is whether stock exchanges are really fungible?

According to my banking dictionary*, fungible is any "financial instrument equivalent in value to another, and easily exchanged or substituted."

Read more ...

G7 creates the Global Ivy League of Banking

The Global Ivy League is the scenario of truth for the future banking markets. More globally harmonised regulation creates less innovation, but more security, amongst the major league players who we feel we can trust. Or rather, our politicians feel we should trust.

Read more ...

Where Trading and the Internet combine for Liquidity

I saw this blog from a VC in NYC today.  It's entitled: "We Need A New Path To Liquidity" and I had to read that as I thought it would be all about how to trade out of recession or something.  But no.  It's about Microsoft, Yahoo!, Google, AOL, News Corp/MySpace and all these other players dickeying about with the internet as though it was a toy.

The problem our VC friend is grappling with is the fact that internet entrepreneurs spend years building their platforms.  If they take off, they then "need a way to get paid for that effort. And those of us who finance their efforts need to get some return on our investment" and "without a path to liquidity, all the innovation that is being created by the entrepreneur/VC equation will stop happening."

OK.  So just IPO.

Ah. There's the rub.  The IPO market has apparently shut down, and so that is the issue - how do you monetize your investments when you cannot bank them anymore.

The leads him into dark pools, and Goldman Sachs' TrUE ("GS Tradable Unregistered Equity OTC Market") system.  A great blog on this from Roger Ehrenberg in May 2007, almost a year ago.  

His point is that you then do not need to IPO anymore, as these dark pools allow you tap directly into private liquid markets.

Yahoo!  lets get in there.

Worth reading the more than 150 comments as well.