The Financial Services Club's Blog

Holiday Humour #6: Is there a Doctor in the Branch?

A very tired doctor walks into a bank branch after an all night shift.

He gets his cheque book out and tries to write a cheque.

After a short while, he realises that he has not got his normal pen but is trying to write with a rectal thermometer.

Realising his mistake, he sighs: "Well, that’s great ... that’s just great ... typical ..."

The teller asks him what's wrong and, without missing a beat, the doctor replies: "Some asshole has taken my pen."

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Holiday Humour #5: the credit crunch ATM

As a result of the credit crunch, NCR has designed a major new ATM innovation. 

This is an ATM where you can put money in and may find more goes into your account than you expected. 

In early trials, Lloyds Banking Group has found it be quite popular as, for every pound entered, there's the potential of a £20 return on investment:

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First O2-RBS Visa Cards, now Nokia Obopay Money

A year ago, I blogged about Royal Bank of Scotland (RBS) announcing the intention to become an MVBO - a Mobile Virtual Banking Operator.

The idea is to offer the mechanism for anyone to process mobile payments through the RBS payments system.

The first result of this strategy is the announcement of O2, the mobile carrier, partnering with RBS to offer Visa payment cards in the UK.  From small acorns ...

This is not to say that m-payments is just an MVBO space, as the European Payments Council is actively working with the GSM Association to develop standards in this space and other infrastructures, such as Monitise, creating joint ventures with Visa.

But  Nokia's press release yesterday annoucning that they are working with PayPal is intriguing, to say the least.  Here's what it says:

Nokia today introduced Nokia Money, a new mobile financial service offering consumers with mobile device access to basic financial services. For many consumers, this will be the first time they have had any access to such financial services.

Nokia Money has been designed to be as simple and convenient as making a voice call or sending an SMS. It will enable consumers to send money to another person just by using the person's mobile phone number, as well as to pay merchants for goods and services, pay their utility bills, or recharge their prepaid SIM cards (SIM top-up).

The services can be accessed 24 hours a day from anywhere, meaning savings in travel costs and time ...

Nokia is building a wide network of Nokia Money agents, where consumers can deposit money in or withdraw cash from their accounts. The Nokia Money service will be operated in cooperation with Obopay, a leader in developing global mobile payment solutions, which Nokia invested in earlier this year. The service is based on Obopay's mobile payment platform, with unique and newly developed mobile elements. Nokia intends the service to be open and interoperable with other payment services as well ..

The Nokia Money service will be shown for the first time at Nokia World on the 2nd and 3rd of September 2009 in Stuttgart, Germany, and it is planned to be rolled out gradually to selected markets, beginning in early 2010.

There's a great quote in there as well, from Mary McDowell, EVP and Chief Development Officer, Nokia:

"With more than 4 billion mobile phone users and only 1.6 billion bank accounts, global demand for access to financial services presents a strong opportunity to combine mobile devices with simple but powerful financial services such as Nokia Money."

It just makes me wonder whether this means all the handset manufacturers create m-payment systems with Sony Money, iPhone Money (MoBank), and more; and then all the mobile carriers have theirs too with O2 Money, Vodafone Money, T-Mobile Money and more.

If so, there's too many and eventually someone will win out to be the eventual PayPal for Mobile Payments.  That's a thought, what are PayPal doing?

Not enough from all I can see.  Launched as first mover in 2006, PayPal Mobile has been relatively quiet ever since.  Some would say, in fact, that it's going nowhere because they lack a mobile merchant acquirer and the current merchant processing fees are too high for mobile.  But don't discount PayPal too fast as they definitely have the brand for this space ... if only they can get the business model to go with it.

Dontcha just love this mobile stuff ...

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Holiday Humour #4: Einstein goes to heaven

Einstein dies and goes to heaven only to be informed that his room is not yet ready.

"I hope you will not mind sharing a room", says St Peter. "I know it's not great, but it's the best we can do as it's a bit crowded up here, I'm afraid."

Einstein says that this is no problem at all and there is no need to make such a great fuss.

So St Peter leads him to his room and introduces Albert to his new room-mates.

"Here is your first room mate", says the holy host. "He has an IQ of 180!"

"That's wonderful!" says Albert. "We can discuss mathematics!"

"And here is your second room mate", St Peter proudly brings him over. "His IQ is 150!"

"That's wonderful!" says Albert. "We can discuss physics!"

"And here is your third room mate", exclaims the bearded wonder. "His IQ is 100!"

"That's wonderful!" says Mr. Einstein thinking this place is sure crowded. But, in order to avoid offending his host, adds: "We can discuss the latest plays at the theater!"

Finally, a fourth man moves out to capture Albert's hand and shake it. "I'm your last room mate and I'm sorry, but my IQ is only 80."

Albert smiles back at him.

"So", Einstein enquires, "where do you think the economy is headed?"

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Northern cheese

Lancashire is a major Northern County of England famous for its many great Lancashire cheeses. 

There's Creamy, Tasty and Crumbly Lancashire Cheese, which are made by seven great firms including Butlers, Greenfields, Kirkhams and Singletons.

In a move to join these great Lancashire Cheesemakers, the Co-operative Bank released this video to say "thank you" to their customers for winning last week's Which? Magazine award for Best Financial Services Provider ...

Actually, forgetting the cheesy singing, it's rather nice to see a human, good-humoured bank.  Maybe that's why they got the award.

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Holiday Humour #3: Never mind the b******s

A little old lady entered the main branch of a large bank with a grocery bag under her arm.

She told the teller that she wanted to open an account and make a substantial deposit, in excess of £200,000 and that, because such a large sum was involved, she would only deal with the manager of the bank.

The teller checked she was good for the cash, which she was, and escorted her to the manager's office.

She repeated her request to open an account and the manager said he would take care of it personally.

Then his curiosity got the better of him and he could not help asking how she came by so much cash.

"Betting", was her reply.

"You bet!" he exclaimed.  "On what?"

"Just this and that" she replied.  "For example, I don't mind betting £50,000 that by this time tomorrow, your balls will be square."

After he got over the shock of such an audacious response, he thought about it and said, "sure".

Such a bet seemed too good to  pass.

They shook hands on it and she promised to return at nine the next morning to check and left.

As the day wore on, the manager found himself regularly checking things were in tact, which they were, until the next morning when the little old lady returned with a very smooth looking young man.

When the bank manager asked who he was, she replied that he was her lawyer and said that he always came along when payoffs involving significant sums were involved.

"No problem", said the bank manager, "as you have lost your bet this time, I'm afraid."

She looked a bit sad about that and asked timidly if she might check the evidence before giving him the fifty grand.

The bank manager thought that this was a reasonable request under the circumstances, so he stood up and dropped his trousers and, sure enough, she proceeded to closely inspect his balls to see if they were round or square.

As she did this, the smooth looking young man stood by the wall, banging his head against it in a persistent fashion.

The bank manager asked: "What's the matter with him?"

She paused her inspection long enough to glance at the lawyer and replied: "Oh, him. I bet him £250,000 that before 10 a.m. today I would have my bank manager by the balls.""

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The Squirrelizer

It's the holiday season and this is just too good to ignore, even though it has nothing to do with banking.

A couple were taking a holiday snap using the self-timer button on their camera when a curious squirrel, upon hearing whirr of the timer, took interest and got himself in on the shot:

Awww ... ain't he cute?

In fact, he's so cute that some bright spark has now invented the Squirrelizer, so that you can put the little fella anywhere you want.  Here's a few that I liked:

But the winner has to be this one:

It seems like Mummy Boxer is looking over and asking herself: "how did I give birth to that?"

 

Holiday Humour #2: Lawyers in a Bank

Two lawyers are in a bank when armed robbers burst in and shout: "hands in the air".

While several of the robbers take the money from the tellers, one of them frisks the customers and takes any nice jewellery off them, as well as their purses and wallets.

Two of the customers are lawyers and, seeing what's happening, one lawyer jams something into the other lawyer’s hand.

“What was that?”the latter says,  to which the first lawyer replies: “the £500 I owe you.”

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Your next employee

Just read this wonderful list from Beloit College of how their student class of 2009 will think.  Here's my edited version. 

Born in 1991:

1. Freddie Mercury has always been dead.
2. Mike Tyson has always been a criminal.
3. The Green Giant has always been Shrek.
4. They have never used a card catalogue to find a book.
5. Margaret Thatcher has always been a former prime minister.
6. Tattoos have always been very chic and visible.
7. Rap music has always been mainstream.
8. Someone has always been building something taller than the Sears Tower in Chicago.
9. The KGB has never officially existed.
10. Text has always been hyper.
11. They have never understood the meaning of R.S.V.P.
12. Europe has always been a Union and the euro is its currency (what's a deutsche mark?).
13. Sex is fine as Madonna made it fashion.
14. Condoms have always been advertised on television.
15. There has always been a Cartoon Network and MTV.
16. We have always watched wars, coups and police arrests on TV in real time.
17. Amateur radio operators have never needed to know Morse code.
18. Berlin has never been separated by a Wall.
19. Belarus, Moldova, Ukraine, Uzbekistan, Armenia, Latvia, Georgia, Lithuania, and Estonia have always been independent nations.
20. Chinese goods have always been in their home.
21. There have always been flat screen TVs.
22. Smoking has never been cool or a good thing.
23. Nobody has been able to make a deposit in the Bank of Credit and Commerce International (BCCI) or Barings Bank.
24. Everyone has always known what the evening news was before the Evening News came on.
25. Britney Spears has always been heard on classic rock stations.
26. Someone has always been asking: “Was Iraq worth a war?”
27. Apartheid in South Africa is a history lesson.
28. The conflict in Northern Ireland is a history lesson.
29. There has always been an internet and a mobile phone.
30. The fact that you can watch, listen and play music, films and radio over the internet does not amaze them - it's just the way it is.

Graduating in 2013 ... watch out!

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Holiday Humour #1: New Stock Market Terms

The Finanser is on holiday until 7th September but will be posting the odd thing here every now and then. 

By odd, we mean very odd, with a mixture of news, views and lots of jokes about banking. 

Therefore, every morning, you'll wake up for the next two weeks with a little bit of financial fun, courtesy of our absent host.

Today, we begin with a little education in post credit crunch financial terminology.

BULL MARKET

A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET

Another random market movement causing months where the children get no allowance, the wife gets no jewellery, and the husband gets no sex.

VALUE INVESTING

The art of buying low and selling lower.

P/E RATIO

The percentage of investors wetting their pants as the market keeps crashing.

BROKER

How much broker my broker has made me.

STANDARD & POOR

Your life in a nutshell.

STOCK ANALYST

The idiot who just downgraded your stock.

STOCK SPLIT

When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER

A guy whose phone has been disconnected.

MARKET CORRECTION

The day after you buy stocks.

CASH FLOW

The movement your money makes as it disappears down the toilet.

PROFIT

An archaic word no longer in use.

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The Finanser's Week: 17th August 2009 - 23rd August 2009

Finanser in the news:

Can Zopa beat the banks?  (Financial Times)
Social media facts businesses cannot ignore (Computer Weekly)

The biggest news stories of the week include:

Fed's Ben Bernanke says global economy 'beginning to emerge' from recession (Telegraph)
City taken by surprise as Bank of England’s figures herald end of recession  (Times)
UK banks ‘may need to shut third of branches’ (Financial Times)
US tax investigators win fight to force UBS to disclose accounts worth $18bn  (Guardian)
US man 'stole 130m card numbers' (BBC)
Bankers' pay soars 6% despite taxpayer anger (Times)
Iceland: what ugly secrets are waiting to be exposed in the meltdown? (Telegraph)
Nigeria Plans $2.6 Billion Bank Bailout, Ousts Top Executives (Wall Street Journal)
Bank of China to 'cherry-pick' UK mortgage customers as lending drought persists  (Telegraph)
Project Turquoise offered for sale to major exchange groups (Independent)

And our key stories include:

Cloud computing in banks

Our PSD and SEPA survey has now finished but another one has started. This one is all about cloud computing.  Cloud computing is a hot topic and often on the agenda at conferences, so why isn't it being used around the banking centres of the world more?  To find out, the Financial Services Club is running another brief survey about Cloud Computing: the reality.  Click here to take the survey.

Why social finance matters

In the fourth of a series about innovation in banking, it’s worth looking at the business models of the new entrants who are trying to disrupt this space and pose the question: are they sustainable?

The debate continues about Zopa

Lots of facts, stats and presentations about social lending and, particularly, Zopa.

The FT picks up our social lending debate

The Financial Times' Money Matters Blog has picked up on the debate  between James Gardner and I about Zopa.  They've asked readers for comments. Here are a few of the responses here so far ...

How a bank should respond to 'disruption'

The word ‘disruptive’ is being bandied about liberally in the debate about new competitors, such as Zopa.  So what exactly is ‘disruptive’ and how should a bank respond?

First Direct, Cahoot and Smile win again

Two years ago, the BBC ran a survey of 13,000 viewers about their satisfaction with banks and found that the leading financial providers were Cahoot!, Smile and First Direct, whilst Abbey came last. Now Which? has surveyed 14,000 people during the first half of 2009 to find Britain’s best bank. Here are the summary results ...

Queen to chair debate about bankers?

The UK's regal figurehead, Her Royal Majesty the Queen of England, has received two letters in the last month. The first was from the British Academy, making an attempt to explain the credit crisis.  The second was from a range of leading figures who claim that the financial system is killing the planet.  Which is true and should the Queen  chair a debate about whether banks are killing the planet?

US bank failures list since the crisis began

With the largest American bank collapse of 2009 occuring last week - the Colonial Bank Group was taken over by the FDIC, and its assets handed over to BB&T - there have been 83 US bank failures to date, since the crisis began.  Here's the list ...

Numbers Part 16: Cards, Cards, Cards

Just stumbled across a web page on CreditCards.com that's fantastic.  Full of stats and numbers such as the fact that there are 984 million bank-issued Visa and MasterCard credit and debit cards in the USA in 2006, and many more.

Where is the Antichrist?

Ghost Rider has set out to kill the Antichrist, but first has to find him ... in a bank?!

Dilbert's Bank

Today's Dilbert is a cracker ...

c

For news by date, click on the dates below:

• 22nd August 2009
• 21st August 2009
• 20th August 2009
• 19th August 2009
• 18th August 2009
• 17th August 2009

The Finanser is sponsored by Vocalink and Cisco:
  
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Things worth reading: 22nd August 2009

Things we're reading today include ...

Today's must read

"There are few in the battered world of banking and finance who still profess to be 'a fan' of Sir Fred Goodwin, the discredited former Royal Bank of Scotland chief. Not out loud, anyway.  Benny Higgins can afford to be. Over the past year, he has watched his former employers, RBS and HBOS, struggle for survival from the comfort of Tesco Personal Finance."

Business big shot: Benny Higgins, Tesco Personal Finance  (Times)

Companies

Return of $9bn Lehman claims delayed  (Financial Times)
My PayPal credit card beef, Part II: PayPal responds  (ZDNet)
Pace of HBOS decline 'unexpected' (BBC)
Spain’s BBVA acquires Guaranty  (Financial Times)

Economies

Eurozone economic recovery leaves UK trailing  (Independent)
Fed's Ben Bernanke says global economy 'beginning to emerge' from recession (Telegraph)
World Bankers Suggest Rebound May Be Under Way (New York Times)

Bonuses

City regulator 'spot-checking' bankers' pay deals  (Times)
Wall Street ponders pay czar's move on bonuses (China People's Daily)

General

The Top 10 Things We're Glad the Recession Killed  (Spike)
Photos: Social media facts businesses cannot ignore (Computer Weekly)

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The FT picks up our social lending debate

The Financial Times' Money Matters Blog has picked up on the debate  between James Gardner and I about Zopa.  They've asked readers for comments.  I thought I would re-post the responses here as it adds to the richness of the context of our discussion.

Martin Campbell (the one that started this off) responds:

Certainly wasn’t expecting it to all kick off as it has, but of course there is only one thing worse than being talked about...

Can I just take the opportunity to correct a fundamental misunderstanding that has plagued much of the debate across these various blogs. Zopa is not a lender like a bank is. It is a MARKETPLACE. It is a radically different proposition from the banks.

Zopa does NOT set the rates. Lenders make offers at the rates that they choose themselves. If borrowers think the rate is a good deal, they will take it up. If they don’t, they won’t and lenders will feel pressure to lower the rates they are offering to a level that borrowers will accept.

So all this toot about ‘price wars’ and killing-off Zopa when it becomes big enough is borne of a lack of understanding of how the Zopa model works.

If the banks wanted to kill-off Zopa with a price war as James G says they will, they would kill themselves off first; the extent to which they would have to reduce their current rates is too big, the overheads they have to cover are gargantuan compared to Zopa’s wafer thin operational costs (and charges) and because they would have to offer these new hugely loss-making rates to the whole country.

They would be dead long before Zopa would be.

Also, in response to an earlier comment, Zopa carries out all the credit and affordability checks that the banks do – and more.

Far from being denied the information banks have, Zopa obtains far more than most do, and takes more factors into account, even a would-be borrower’s eBay rating. Zopa also aims at a higher standard of “responsible lending” than most banks do – partly because it is not its own money that is being lent. The proof that they have got this right is a default rate that has never been higher than 0.5% - radically lower than the banks achieve.

GG says:

Zopa provides great rates for lenders and borrowers but, for me, it's the satisfaction of beating the bankers at their own game that makes it great.

Of course, there is no Government guarantee and that is why I focus on the lowest risk markets. At the moment, returns are double those of the best cash ISAs.

Vinay Basavaraj states:

I am sceptical of the role Skopa, and similar potential replacements, will play in the future. One fact that clearly undermines Skopa is the information advantage that banks possess. By means of the payment system, banks have acquired invaluable information of potential borrowers. What remains to be seen is whether this information advantage is eroded by an 'efficient market'.

Othermotte says:

I am a Zopa user and very pleased with it. I had money that I wanted to earn interest on and the only place to offer a decent return was Zopa.

The fact that it was "social lending" was an added incentive. In the past, I have had money in a number of mutuals and always voted against demutilisation, despite the bride of shares that was offered. I think that the demise of building socities was a bad thing and Zopa offers something closer to that model. I actually enjoy browsing the comemnts from the myriad of borrowers and the connection that it makes to real people.

But the bottom line is that it is a good interest rate for savers.

Andy from Bristol adds:

Whilst Zopa was very competitive for loans of £5K+ over terms of 4 years or more - it seemed to be in the top 2 or 3 providers offering just under 8%pa (3 months ago) - it really came into it's own for smaller loans over shorter terms. As someone who is reasonably careful with money, I wanted to borrow no more than I needed & repay it as quickly as I could afford - none of the big players (ie banks/building socs) are interested in small fry contracts so they either don't offer them at all or offer high rates, circa 15%. One thing worth noting re: Zopa is that the rate offered seems to be VERY sensitive to your credit score - I was offered a slightly higher rate (say 30 bips higher) than that published on moneysupermarket & have a good credit rating, but my wife, who I would imagine scores slightly better than me, was offered a rate 10 bips lower than me. The service was good & I would definitely use them again presuming their rates stay competitive.

Calc says:

I can only say that the returns offered by Zopa to it's lenders is considerably higher than that offered by any bank, the rates offered to it's borrowers generally, though not always, lower than those offered by the banks. It seems to me that both lender and borrower are well served.

There are though riskes to the lenders, borrowers may default, but Zopa appears to do as much as the banks to credit check those who wisht to borrow; I understand that 2/3rds that apply for loans are turned down.

My personal experience is of a lending body that was willing to offer me a £ 5,000 loan over three years at 8.1 % as against my high street bank that intitially proposed one at 16 % before reducing it on protest to 14 %. As an excersice I credit checked myself and found my credit score to be '999'; whereas I accept that different credit agencies may produce different credit scores based on different criterea, I assume that with all my credit rating is fairly high, I therefore wounder what the bank would charge me had not been so good.

The fact that Zopa exists indicates perhaps a failing on the part of our banks. I doubt Zopa and it's ilk will replace the banks but they are a highly valuable adjunct.

Comptroller adds:

Zopa is, after four plus years, very small, has operating deficiencies and obviously not fulfilling its initial business objectives (operating losses of £1million on a turnover of £673,000, reduction of staff literally in half from 2007 to 2008.) Activity spiked in early 2009 and has continued with steady growth but has nothing like the momentum required to threaten the banks.

Despite recent publicity on national radio and in the press it's activity is still less than the average branch of a High Street Bank (and about the same number of staff.) The rates of return are not bad but thre is the risk of bad debt, many lenders think this risk was inadequately flagged when they joined. Anomolies with tax and the better returns available elsewhere for about the same risk limit growth fo the moment.

In time Zopa will probably gain some critical mass if it's backers are prepared to be patient and continue to support it, but it is unlikely that it will challenge the Banks anytime soon from it's current position of less than 0.1% of the unsecured lending market in the UK.

GRR counters:

I've lent out money through Zopa since its early days; it's a fantastic innovation, aiming to create the perfect market, and so letting prices find their own equilibrium by the laws of supply and demand.

Granted, there's room for profiteers to make a killing by offering that few extra quid to make up someone's overall loan at a premium rate, but that's how markets work, and as the number of participants increases, that will continue to drive rates to a fair level for all.

As a lender in the current market conditions, Zopa offers a far superior return to even the best depsit accounts / fixed rate bonds - even after taking account of the notional cost of bad debts. However, you can't predict what will happen with your particular borrowers, and you have to accept the fact that -statistically speaking - it's possible that all your borrowers could default! But to say that the risk isn't evident to lenders is totally unfair - all the rates quoted make allowance for bad debts, there is ample guidance (and FAQs, etc), and the very nature of the model (multiple small-denomination loans to multiple individuals in predetermined credit bands) allows lenders to minimise their risk of exposure to unacceptable levels of risk of default.

Add to this the feeling of doing something socially responsible, and a really well-thought-out and user-friendly interface, and Zopa is a winning proposition - just awaiting the critical mass which it needs to really take off and challenge the incompetent and immoral institutional lenders.

Colin Henderson throws in:

The rates will be set by the market based on supply and demand. This is not the core of the argument however. The debate turns on business model characteristics.

Banks are entering a productivity crisis. Their opportunities for revenue growth during a period of consumer retrenchment and deleveraging is low. That is why banks are looking at exiting large nmbers of branches. However they have not laid the groundwork by automation of the customer processes needed to support less branches. Automation has been focussed on data management and not customer interaction.

Zopa is built as an efficient platform and has begun to automate customer processes such as identity verification, and integration of credit scoring with lending processes in ways banks have not.

The coming crisis of productivity will define losers and winners in this debate.

I_BURDON reports:

I lend on the Zopa Market it help people to get out of the credit crunch. Yes it does work and you can earn more than the banks will hand out in intrest. Free trade should worry the banks. But the banks are in a protected position , given by the UK goverment on the following grounds.

1) Deposits protected.
2) Bad debts written of by the bank . HMRC does not allow Zopa Lenders to have bad debts written off against profits.
3) The Banks have a Goverment share holder.

So not a level playing field by any means. I would think the OFT would be trying to level things up. But who is the Piper.?

So now you have it the UK Goverment is against free trade in financal services and has a vested intrest in protecting the the banks. When did nationalization become UK goverment policy?

Pete tells us:

I have been a borrower from inception of ZOPA and paid off within a year. I am now a lender and have over 1200 borrowers with a default (lost £80) rate of 4 and a late payment of 4 of whom 1 is paying at a reduced rate. I like this , as it gives the chance for a borrower to still pay back what he/she can afford and if I were in that situation then I would feel that I would make every effort to pay back my debt as the system allows compromise.

Overall. I am returning around 7% on my lending; which I am comfortable with in the present climate and (this may seem too sugary); I get to read the comments of people I have lent to, and their success stories and ambitions. Yes, it's a tough world at the present, but I reckon that I am doing my little bit to ease it for the people who need a loan, and through Zopa, I am reasonably assured that the people I lend to are not going to take advantage.
I think this is so much better than the corrupt and overpaid banking system, particularly as interest is only paid on outstanding balance and there are no early repayment penalties - That is refreshing!!

Hope this helps the blog - Hope this helps 'Stu**' the banks whom I do not trust , particularly as most of them are now owned by our beloved government - and will we as 'shareholders' get any dividend payout from our new aquisitions?.... watch this space, but I think pink elephants may be seen in the sky before this happens.

Whilst Devongirl elaborates:

As a new lender in Zopa, I'm very pleased so far, but only time will tell just how many bad debts I experience. If they are as predicted by Zopa, then I shall be making an excellent return comapred with cash in a bank. However, this is not really comparing like with like, as I cannot withdraw my money on demand. Every loan I make will be repaid gradually over three or five years. So I regard my funds in Zopa as an alternative form of investment, not a cash deposit. But for this reason, much as I like Zopa, it can never substitute for a bank -- not that it tries to, except perhaps from a borrower's point of view as provider of personal loans.

Toontopo pipes in with:

I am absolutely convinced that Zopa and similar platforms will become an ever more important competition to banks. Personally I don't think of Zopa as the banking equivalent to e-bay, because unlike with e-bay, there is no one-to-one relationship between lender (seller) and borrower (purchaser). Rather I like to think of Zopa as a facility that simply takes the potential of internet banking to the next level. Even if occasionally banks may still make better offers to potential investors or borrowers, in the long run they simply cannot undercut the substantial advantage that Zopa has in terms of overheads, an advantage that is entirely down to the potential inherent in internet. For those who understand German, I recommend this interview with Konrad Hummler, president of the Swiss private bankers' association: http://www.nzz.ch/finanzen/impulse_archiv_juni09/impulse_juni_2009_1.2656628.html?video=1.2673974
He makes, with remarkable candour, the same point (he doesn't mention Zopa specifically though), and I think he knows what he is talking about.

Lemondy is not so agreeable:

I have tried Zopa as a lender and will not be doing so again. I think that many retail punters who want more risk/return than cash would be better in fixed interest (i.e. corp bond funds) if not equities.

I fear that many retail punters do not understand the risk of Zopa lending, do not appreciate the FSCS guarantee they get from staying in cash, and don't understand that the quoted returns are BEFORE TAX.

Even in these exceptional times, for much of the last 12 months, I could have got better returns in a cash ISA than in my Zopa loan (expected return ~= 6% after fees, bad debt), plus liquidity, plus no risk to capital, plus FSCS safety net.

If Zopa improved the liquidity of loans (i.e. shorter minimum period, ability to sell on loans), then, possibly, I could see it might be a good idea people, maybe non-taxpayers at least.

Whilst Freckles doesn't agree with that:

Remember the Breweries?
You cant have real ale - your have what we give you!!!!!

And so dream on Breweries (they lost) and dream on the banks, yes zopa can make a difference and continue to grow if people like me (retired, with nest-egg ) continue to get bad deals from banks and building societies on our capital with pultry, insulting interest rates.

I have lent money through zopa for 5 months early days, being a bit cautious, but its working, takes a bit of time to get the money invested and rolling back, but its happening

I am impressed, but having trouble interestings my peers in similar position to me to invest - something `new` worried about the defaulters (heaven knows however the money we have lost on the stock market and they accept this crazy comparison)

The current problem lack of strong advertising - never seen it on a billboard, bus stop, tele etc. that needs to be addressed marketing!!!!!

Next I would like to see a `L` catogory of lender - standing for established lender, so that lenders can get preferential rates from there peers - next year I would like to pay off my car loan, wouldnt it be nice if my zopa mates offered me 0 - 4% I know they would be loosing interest but if we all put a bit aside to finance our own loans through zopa - a double wammy!

Keep going zopa - just dont brew beer!

SoupS asks us to read monevator's view, who has seen bad debts at Zopa rise to 2.68% recently, whilst Richard027 adds:

As Bill Gates reportedly said, "the world needs banking but it doesn't need banks". The way out of the financial crisis is not the prop up existing banks at all costs but to ensure banking services are available. This is where Zopa comes in and recreates the social benefit of banking, namely the availability of credit and the rewards attached to saving both of which encourage long-term planning in individuals, without sucking up all profit for the middlemen. It is a new form of mutualism. This is such an attractive propositon for both borrowers and investors that it seems inevitable that it will grow much more important than it is now. Plus, it has a number of independent comparative advantages - entirely internet-based, absence of legacy bad debt, not at the mercy of wholesale markets - that can only further strengthen the model.

Dilbert's Bank

Today's Dilbert is a cracker:

First Direct, Cahoot and Smile win again

Two years ago, the BBC ran a survey of 13,000 viewers about their satisfaction with banks and found that the leading financial providers were Cahoot!, Smile and First Direct, whilst Abbey came last. 

Unfortunately, the Beeb has removed the survey from their website but the chasm between leader (90% customer satisfaction) and loser (45%) was dramatic.

The other thing I noted back then is that the winners were all banks without branches and that the respondents had no link between the bank and their parent.  For example, First Direct's ATM network was voted the best in Britain whilst HSBC's was one of the worst - it's the same darned bank and ATM network! 

Now Which?  - the UK's leading consumer rights organisation - has surveyed 14,000 people during the first half of 2009 to find out who is Britain’s best bank. Here are the summary results:

Best current account

91% Smile (206)
90% First Direct (423)
84% Co-operative Bank (151)
84% Cahoot (68)
79% Nationwide (676)
74% Intelligent Finance (60)

Worst current account

50% Northern Bank (33)
51% Abbey (200)
53% Bank of Scotland (264)

* figure in brackets is number of people who voted with an account at that bank

The big four UK banks – NatWest, Lloyds TSB, HSBC and Barclays – are used by 47% of those surveyed and all scored between 55% and 60%, or low in other words.

Again, banks without branches represent four out of the top six.

Equally, the reappearance of Abbey in the bottom three is surprising as, two years ago, their issues were all about a systems upgrade.  Maybe customers haven't forgotten how bad that experience was.

Anyway, it makes no difference to customer loyalty with 61% of respondents saying that they have had the same current account for over twenty years.  Of those who switched (23%) only 7% did so in the last year, even though half of them say it's easy and hassle free.

Combine this with another survey which found that most people wouldn’t bother switching their bank account, particularly to a new entrant, and you realise that once you've got the sucker's account opened, you've got them for life.

Whatever.

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Things worth reading: 21st August 2009

Things we're reading today include ...

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Today's must read

"While online platforms may never replace conventional lending institutions, such as banks, it is important that the community development finance industry be aware of this emerging technology. Moreover, P2P finance platforms will continue to evolve—allowing for third-party issued loan sales, for example—which may fundamentally alter the way credit is allocated in the future. In either case, the potential community development finance implications are too significant to ignore."

Peer-to-Peer Lending and Community Development Finance (the Federal Reserve Bank of San Francisco)

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Can Zopa beat the banks?  (Financial Times)
800 new jobs as Tesco pushes banking ambitions  (Independent)
Spain’s BBVA leads the race for Guaranty  (Financial Times)

Lending is still falling, warns Bank of England  (Independent)

U.S. deficit estimate to be trimmed to $1.58 trillion  (Yahoo!)
Tarp investigation could shed light on US banks' toxic assets (Telegraph)
Leading bankers converge on Wyoming to assess recovery signs (Telegraph)

Chinese bank ICBC's expanding loan book may come back to bite shareholders  (Telegraph)
Bank of China to 'cherry-pick' UK mortgage customers as lending drought persists  (Telegraph)

A Failure of Capitalism: Honesty about the Stimulus  (Richard A. Posner in the Atlantic)
Recession easing among wealthier nations  (Financial Times)
Alistair Darling puts bankers' pay on G20 agenda  (Telegraph)

Social media facts businesses cannot ignore (Computer Weekly)

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Quotes of the Day

“68 Million Reasons Your Bank Sucks. That’s the amount BoA collected last quarter in needless ATM fees.”

Starting a Bank  (Founder of Wordpress)

“Of the 37,000 new viruses, worms, Trojans and other security threats that appear each day, 71 percent are Trojans, mostly designed for identity theft."

Identity-Theft Malware Flourishes During Economic Downturn, According to PandaLabs  (Newswire)

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Where is the Antichrist?

Ghost Rider has set out to kill the Antichrist, but first has to find him.

Sourced from Eco-comics and hat-tip to Dave Birch.

How a bank should respond to 'disruption'

The word ‘disruptive’ is being bandied about liberally in the debate about new competitors, such as Zopa.

First, as I’ve said before, banks don’t really have any competition except between the incumbents, due to the structure of the industry.

Second, where there are openings, then disruptive new players may find a way to find a niche which is what Zopa and their brethren are trying to do.

So what exactly is ‘disruptive’.

Well the term ‘disruptive’ in the management school sense, was coined by Clayton Christensen, the Harvard Business School Professor who wrote the book “The Innovator’s Dilemma”.

I've seen Mr. Christensen present this concept a couple of times, and he talks about two types of innovation: sustaining and disruptive.

Sustaining innovation targets the existing market, whilst disruptive innovation either creates new markets or takes root with the incumbent’s worst customers.

And a disruptive innovation cycle goes something like this ...

An industry grows up around a product or service.

Over time, many companies enter the market and compete.

Gradually, the competition moves from being the basic product to being the best product for a target market segment.

As a result, lots of different market niches emerge, and competitors compete on building more and more functionality to appeal to their target markets.

This leads to inefficiencies as the competitors add a lot of form and function that no-one needs but they have to add this as, otherwise, there is no desire to replace and repurchase.

The industry over time becomes one where a lot of the price of the goods is going into form and function that the customer does not require, and so new competition comes in and disrupts the incumbents who are now too blind to see the folly of their ways.

The new competition enter with a new technology or approach.  This new angle allows them to build the same product, but often stripped to the bones into the original basic and functional product and at a fraction of the price of the incumbents.

The new competitor wins eventually, because the incumbents laugh it off when they first see.

The incumbents dismiss the new competition as being trivial. 

They pour scorn on it, as it is a no-frills basic service compared to their beautiful, functionally rich offer. 

The real issue though, is that the incumbents dismiss it as trivial but the market - the customer - does not. 

The customer wants it because it is cheap and simple, rather than expensive and complex. 

They want it because they are paying for what they get, rather than the irrelevant form and function the incumbents have added on top that they do not need.

By the time the incumbents realise this, it is when the new competitor is succeeding.

By the time the new entrant is succeeding, it is because they have reached critical mass (above 2.5% of market share, according to some).

By the time they have critical mass, the industry has disrupted and it is too late to turn things around for the incumbents, who are stuck with legacy structures and products.

And so the industry reignites and rebuilds in a new business model, having been disrupted by a new competitor using new technology to build a new way of doing business.

Mr. Christensen used the car industry as his major case study, although he says you can apply this to any industry such as mobile telephones (Nokia v iPhone) or computing (Google v Microsoft), but let’s look at the car industry.

In the USA in the 1950s, Ford and General Motors were rocking and rolling with the Mustang, Chevvy and more.

Ford and GM built bigger, brasher, louder and weirder cars to create appeal to more and more diversified customer segments.

The cars were not cheap and most Americans were happy to buy used vehicles because they could not afford new ones.

Then a strange little company came into the US car market from Japan called Toyota.

Toyota’s offer was a really cheap, basic car with no bells or whistles, and not particularly attractive.

Ford and GM laughed at the new entrant as just cheap rubbish, and particularly derided the fact that after just a few years most Toyotas became rust buckets.

But guess what?

A large part of America that could never previously buy a new car could suddenly afford to do so.

This did not impact Ford or GM who just measured their new car sales and had no track on the second hand market, but a lot of that market were switching to buying new Toyotas.

After a few years, Toyota’s success meant that they could start up-scaling their car offer to slightly better cars at a cheaper price.

Meanwhile, Ford and GM were losing a few customers who used to buy their entry-level cars.

These customers now realised that (a) the resale value of their car was going down, because people were buying fewer second hand cars; and (b) they could now buy better new cars, with more spec than they could previously afford, if they bought Toyota's up-scaled offer.

These customers were typically the entry-level Ford and GM purchasers, so Ford and GM weren’t too worried as they didn’t make margin from those guys.

They made margin from the big spenders.

So, let Toyota have a few of the muckrakers with their rust buckets. We’ve got our big expensive and loyal customer base who spend lots and give us profits. We’re happy with those.

Over the years, Toyota upscale again, bringing in a new brand called Lexus.

The disruptive cycle went from rust bucket to luxury vehicle over a period of about 25 years.

Today, Ford and GM are dinosaurs dying in the heat of the comet that hit their industry called just in time manufacturing, total quality management and Japanese methods of sourcing and producing.

You could take this story and apply it to any industry. Think British Airways v Virgin or Easyjet; AT&T v Verizon; WHSmith and Barnes & Noble v Amazon; Thomas Cook v Expedia; and so on.

Or banks v social finance, lenders v social lending, and Lloyds and their cartel v Zopa and their brethren.

Zopa’s big attraction is that they purely provide a platform for people to sell money to those who want to buy money. Zopa sets no rates and makes their margin on the difference between the buy and sell rates, a few basis points of margin in other words.

That’s the razor thin margin I referred to in my earlier post this week.

The point I should underscore here by the way is that it is not that social lenders are necessarily cheaper as product, in the sense of the car illustration, but that they are cheaper as an operation.  Because they operate at razor thin margins, they give all of that margin that banks would take - the 1%+ differential - and give it directly to the customer.

That is their secret - not cheapness, but sub-1% margin operations.

The result is that Zopa and their brethren are disruptive innovators, gaining bank’s customers who seek to borrow money at discounted rates from people who have money based upon basis point differential, rather than percentage point.

Equally, as banks currently offer really bad rates for lending and saving, they’ve already risen above being off-radar as they are taking at least 1% marketshare, and possibly 2% (see yesterday's blog). This is because, as I've been telling all my mates who have bank savings accounts earning sub-4% interest, they could get 6% or more return on their savings through Zopa.

Is the risk greater with Zopa?  No.  They use the same risk management systems as the banks called Experian and Equifax.

What if people don't pay me back?  If you're worried about that, they offer an insurance policy you can buy for a small premium to cover your investment.

As a result, Zopa’s funders and borrowers who are giving and taking money (liquidity) on their platform are building and, since this crisis hit, building more and more rapidly.  This is because savers and borrowers can see that they can get better rates here than they can find anywhere else.  Slowly, this will attract more money and, like Toyota, over time it may attract a lot more.

Once the banks notice the loss of their loan book, it is too late.  The new operations will have critical mass and once you see critical mass, the train has left the station.

So you can't get on the train - it's left - and if the new competition operates at margins of around 0.5%, then a bank cannot compete.  Reason: how can a bank with 1,000's of branches, staff and fixed cost, suddenly operate at zero margin?

Add on to this the social, human and fun bit, and you can see where this goes, in terms of really innovative disruption.

Now, right now, banks laugh at this new competitor because it is an irrelevant bit of fluff on their shoulder, a flea on their backside, a noise that cannot be heard.

After all, Zopa is purely attracting muckrakers buying rust buckets.

But, as this week’s blogging has started to find, maybe they are not. And maybe its not them anyway. Maybe it will be Prosper, Boober, Smava, PPDai, SmartyPig, Wonga or one of the many, many others out there.

So a bank should compete.

How should a bank compete?

Do what Caja Navarro have done, and create a hybrid social lending model that is bank run but the exchange of monies is between mums and sons, dads and daughters, aunts and cousins, friends and strangers.

Why should a bank compete?

Not because it will make the bank money in the short-term, as the margins are rubbish, but it will keep the bank in the food chain and stem the tide of any demand that disappears to a new fledgling before the fledgling finds its feet.

That’s the real answer to this innovator’s dilemma.

After all, if you just laugh at the flea on your backside, before too long you find the nasty little parasite has sucked all the blood out of you and ... you die.

Things worth reading: 20th August 2009

Things we're reading today include ...

Companies

RBS hands £2.3m bonus to new executive (Times)
Retention bonuses back at Merrills (Telegraph)

Lloyds to 'review' closure of C&G  (BBC)
City perplexed by Lloyds' U-turn on C&G closures  (Times)

US tax investigators win fight to force UBS to disclose accounts worth $18bn  (Guardian)

Zopa Italy Reaches Agreement with Bank of Italy; Service to Resume in September  (P2P Lending News)
Prestiamoci: P2P Lending The Italian Way, Coming in September  (P2P Lending News)

Economy

UK banks face more high-street losses, accountants warn  (Guardian)
Bank of England governor voted for £75bn extra quantitative easing  (Guardian)
City taken by surprise as Bank of England’s figures herald end of recession  (Times)
Investors can work together to challenge boards, says FSA  (Telegraph)

Warren Buffett warns budget deficit may harm dollar (Telegraph)
June Likely Was the Trough, Goldman Says  (Wall Street Journal)

Crisis has marked a coming of age for sovereign wealth funds (Telegraph)

Quote of the Day

Win a prize to be a servant: "Virgin Money has launched a competition calling for a member of the public to chauffeur Sir Richard Branson around Sydney in a specially designed Virgin London cab."
Sir Richard Branson 'chauffeur' comp for Virgin Money  (Marketing Magazine)

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Queen to Chair debate about Capitalism Killing the Planet?

On 22nd July, Fellows of the British Academy Professors Tim Besley, FBA, and Peter Hennessy, FBA, sent this letter (pdf download) to Her Majesty the Queen (heavily edited version follows):

Madam

When Your Majesty visited the London School of Economics last November, you quite rightly asked: why had nobody noticed that the credit crunch was on its way? The British Academy convened a forum on 17 June 2009 to debate your question.

Many people did foresee the crisis. However, the exact form that it would take and the timing of its onset and ferocity were foreseen by nobody.

For example, the Bank of International Settlements expressed repeated concerns that risks did not seem to be properly reflected in financial markets. Our own Bank of England issued many warnings about this in their bi-annual Financial Stability Reports.

Risk management was considered an important part of financial markets. One of our major banks, now mainly in public ownership, reputedly had 4000 risk managers. But the difficulty was seeing the risk to the system as a whole rather than to any specific financial instrument or loan. Risk calculations were most often confined to slices of financial activity, using some of the best mathematical minds in our country and abroad. But they frequently lost sight of the bigger picture.

There were many who warned of the dangers of this. But against those who warned, most were convinced that banks knew what they were doing.

They believed that the financial wizards had found new and clever ways of managing risks. Indeed, some claimed to have so dispersed them through an array of novel financial instruments that they had virtually removed them. It is difficult to recall a greater example of wishful thinking combined with hubris.

And politicians of all types were charmed by the market. People trusted the banks whose boards and senior executives were packed with globally recruited talent and their non-executive directors included those with proven track records in public life. Nobody wanted to believe that their judgement could be faulty or that they were unable competently to scrutinise the risks in the organisations that they managed. A generation of bankers and financiers deceived themselves and those who thought that they were the pace-making engineers of advanced economies.

All this exposed the difficulties of slowing the progression of such developments in the presence of a general ‘feel-good’ factor.

Among the authorities charged with managing these risks, there were difficulties too. Some say that their job should have been ‘to take away the punch bowl when the party was in full swing’. But that assumes that they had the instruments needed to do this. General pressure was for more lax regulation – a light touch. The City of London (and the Financial Services Authority) was praised as a paragon of global financial regulation for this reason.

There was a broad consensus that it was better to deal with the aftermath of bubbles in stock markets and housing markets than to try to head them off in advance.

Inflation remained low and created no warning sign of an economy that was overheating.

So where was the problem?

Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well. The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction. This, combined with the psychology of herding and the mantra of financial and policy gurus, lead to a dangerous recipe. Individual risks may rightly have been viewed as small, but the risk to the system as a whole was vast.

So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

Very good.

On 14th August 2009, a group of senior figures including Professor Herman Daly of Maryland University, Professor Lord Anthony Giddens and Professor Peter Victor of York University, Canada, sent this letter (heavily edited) to the Queen:

Your Majesty,

We, the undersigned, noted with interest the letter to Your Majesty of 22nd July 2009 from the British Academy in which they respond to your question about how the current economic meltdown was missed. They talked of a "failure of the collective imagination of many bright people" and a "psychology of denial". The Academy wrote "It is difficult to recall a greater example of wishful thinking combined with hubris."

We are writing to you because we are concerned that the British Academy's letter focuses on one particular aspect of current insecurity, namely financial, failing to address the wider context of more serious macro issues facing mankind. We are also writing to the Academy to invite them to debate these issues with us.

We live in tumultuous times. Many developed world citizens are losing their livelihoods. The effects on the world's poorest will, as ever, be dreadful. However we are surprised that the Academy has not addressed anything outside the narrow remit their letter covered. Far greater insecurities threaten the world's poorest due to our effects on the natural world.

The letter ignores the physical constraints which are central to this bubble and indeed most bubbles. It speaks of "the bigger picture" and of "individual risks being small" and "the system as a whole being vast", yet, for us has a limited horizon.

Our premise is that our current economic malaise is symptomatic of a far more serious systemic failure to acknowledge what Archbishop Rowan Williams has identified in saying "It has been said that 'the economy is a wholly-owned subsidiary of the environment'. The earth itself is what ultimately controls economic activity because it is the source of the materials upon which economic activity works".

Energy is the lifeblood of any economy. Our exponential debt-based money system is in turn based on exponentially increasing energy supplies. It is therefore clear that the supply of that energy deserves our very highest attention. That this attention doesn't appear in the Academy's analysis is deeply worrying.

The letter refers to the "overheating economy" but gives no mention of the effect and cause of the overheating of planet Earth.

The Academy's letter mentions unprecedented global economic growth - yet it fails to mention the rapidly escalating environmental destruction caused by this insatiable growth. It also mentions the poor of the developing world who have been brought out of poverty to 'prosperity'; but not the far greater numbers condemned to an increasingly inequitable world and the ravages of peak-food and climate change.

The letter talks of a "general feel-good factor", but doesn't address the fact that, in the developed world, general wellbeing long ago ceased to be linked with GDP growth.

We envisage a society whose primary goal should be the wellbeing of society itself and of the planetary resources and environment that sustains us all, with economic objectives shaped to support that central goal rather than the other way around."

Our current form of corporate-consumer-capitalism has been shown to be what many of us knew it was: a fundamentally flawed system which badly needs updating.

It would appear from the British Academy's letter that they are not aware of the rapidly growing and vibrant debate around these issues. We agree with them about the need for "authorities with the power to act" and for appropriate levels of regulation fit for the task in hand. Their prescription is to consider how they "might develop a new, shared horizon-scanning capability". We will invite the Academy to join with us in a public dialogue about these issues and ask them to consider how this 'new capability' can make its primary horizon the issues we raise in this letter.

We will of course report findings of such debate to Your Majesty.

I wonder if the Queen could be the Chair in a nice debate entitled: this House believes that Capitalism is Killing the Planet?

Hattip to the FT for this one.

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