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Investment banking has had a rocky year all year. Pilloried by politics, public and the media, the investment banker is currently about as popular as a Vampire at a Blood Bank ... not a bad analogy as the refrain all year has been about that giant Vampire Squid that is known as Goldman Sachs.
Goldmans do bring it upon themselves though, as paying $111 million in bonuses this year sits badly with the average Joe. And I must admit that any bank that makes $100 million a day in profit most days, along with an admittance of how they manipulate markets and screw customers, has to be suspect.
The trouble with this is that it brings a whole cloud over the industry, as all banks are now viewed as being casino capitalists, robbing the economies to line their pockets with cash.
Not true.
There are some who might do this, but not every bank is Goldman Sachs.
However, it does mean that most of 2010 has been taken up with regulators and politicians wondering what to do about things like ‘dark pools’ and ‘high frequency trading’.
DARK POOLS
In the case of dark pools, they suspect these of being suspect because of the market manipulating suspicions created by the world’s leading investment bank, Goldman.
It means that regulators have been looking with deep scrutiny at trying to raise the illuminations on dark pools, even though these pools are argued to be good for markets as they increase liquidity by allowing block trading to occur that would otherwise be avoided if such trading was transparent.
Certainly, in Europe, the new revisions to MiFID could damage such trading, as illustrated by this May article from Financial News:
“NYSE Euronext and Deutsche Börse, have argued the regulators should use MiFID II to clamp down on the trading venues, known as dark pools, arguing they lack transparency and are open only to institutional investors, but not retail investors.
“But Rolet, who this week marks his first anniversary as chief executive of the UK exchange, said: ‘The biggest challenge is transparency and the balance between retail and institutional needs. Without institutional crossing networks (the so-called dark pools) some of the latent wholesale liquidity would go unexecuted or be simply more difficult to execute.’
“He said bank dark pools, which enabled customers to trade large orders privately away from the glare of the public exchange order books, served a valuable function in a market where there had been a sharp reduction in average trade size resulting from algorithmic and arbitrage activities.
“He added: ‘Transparency may have diminished in some areas but in formulating a response we should be careful to ensure that the differing needs of wholesale and retail participants are properly recognised.’
“The LSE chief executive and the exchange’s largest investment bank members, believe strict rules on bank dark pools would make it more expensive for institutional customers, such as pension scheme managers and hedge funds, to execute business.”
The result is that the European Parliament took on board a report produced by Kay Swinburne, rapporteur to the Economic and Monetary Affairs committee of the Parliament, during the summer recommending that dark pools be reclassified as multilateral trading facilities (MTFs) or systematic internalisers (SIs), and therefore lit.
The report has now been adopted as part of the MiFID review, and also places limits on order sizes. In other words, it wipes out the very reason for dark pools, as in large block orders placed outside the general exchanges to avoid market movements in advance of the order placement and processing.
HIGH FREQUENCY TRADING (HFT)
Swinburne’s report goes further and recommends a number of other restrictive changes, including:
In particular, there is a focus upon HFT, which has been augmented after the issues in America in May that created the conditions for the ‘flash crash’, something I’ve blogged about too often this year.
Therefore, I won’t do it again, except to say that between targeting dark pools AND HFT, the regulators are doing their utmost to kill any market liquidity and alpha investing strategies that exist.
Is that a good thing?
No, because the regulators are in danger of throwing the baby out with the bathwater.
REGULATORY NIGHTMARES
This was demonstrating by the reactions of the corporates, where they made it clear that the discussions of regulators about ‘systemically important’ and ‘commercial activities’ was purely speculative wording with no practical implementation ability.
In fact, it is concerning that the regulations being developed will more likely kill the markets:
And none of the above really addresses the issue anyway, which was how the risk models created by the markets enabled massive risk exposures to be allowable when they were clearly, in hindsight, untenable and unworkable.
Where’s the regulation that addresses this area?
Which part of the regulatory structures of Dodd-Frank in the USA and MiFID II in Europe is addressing the fundamental question: how to eradicate products in banking that fuel risk, if the risk model has not been proven, tested and is comprehensible and comprehensive.
Meanwhile, we have had a few other key areas of regulatory focus, such as how to unravel a major global bank in 48 hours so that we can allow the too big to fail banks ... to fail.
CLEARING AND SETTLEMENT
Finally, there has to be a nod towards clearing and settlement. The whole clearing and settlement field is still a mess, with most of Giovannini’s barriers still unaddressed. That’s because of national market interests and focus.
During SIBOS, this all became clear as we spent so much time discussing interoperability that it became a buzzword, and we all know what you do with buzzwords don’t you?
Yep so, to finish the year, here’s a nice little buzzword bingo card for y’all to play with when you get back to the office in January (doubleclick to enlarge) ...
Oh yes, and if you're a real MiFID freak then Dechert produced a nice four-page PDF detailing the revised regulatory regime they anticipate this month.
So, there are a lot of things we’re juggling around with in the payments arena, from real-time to TARGET2 to SEPA to SWIFT ISO20022 to mobile to contactless to biometrics and more.
I guess I can summarise this area best by using the results from this year’s payments survey because the last section of the survey asked people what's hot, hot, hot in payments this year.
EUROPEAN PAYMENTS
What was not hot is the world of the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD). Interest in these areas due to stagnation and indecisiveness had, to be honest, become flatter than the Flat Earth Society's annual party. In fact, an indication of how much euro interest exists was articulated well in an insight article on CNBC that claims that: “The European Union Is Over”.
I wouldn’t go that far but, in reviewing the developments of this year, I would say that everything in the Eurozone got a bit tired, tainted and tense.
Thank goodness therefore that the SEPA end-date is in sight, with the European Commission approving the forced migration of national instruments to SEPA credit transfer and direct debit schemes 12 and 24 months after the new regulations for migration are approved.
So that puts SEPA to bed (lol), and leaves me to hone in on other key areas such as mobile and contactless payments.
MOBILE CONTACTLESS
Often breathed in the same breath, these are distinctly different areas even though they are converging as we speak.
For example, Orange has just committed to rollout contactless payments and NFC capabilities across all of their European network next year, whilst Google and Apple are committed to incorporate NFC into Android and iPhones.
Picture stolen from Brett King
So we’re definitely in the era of simple mobile payments.
This was voted the #1 item of interest amongst those responding to the survey this year, and is top of mind with everyone.
What’s surprising is that mobile contactless may be top of mind, but it’s transient.
We’re already into using NFC tags everywhere and the mobile operators’ movements will simply decimate the NFC stick-on tag business (sorry taggo, bling nation et al).
Meanwhile, the fundamental issue is still not addressed: where can you use an NFC chip?
Barclaycard have been pushing Visa Paywave for a couple of years now, and yet I hardly ever get a chance to use it.
Sure, we may now have a few London taxi’s wirelessly enabled, but it’s hardly dense terminal acceptance or usability.
And there’s the rub: we need more terminals.
Maybe they could learn something from Zapa in Ireland, where AIB Merchant Services have worked closely with them to rollout terminals that can use the tags.
Half of all AIB’s merchant terminals are now Zapa ready: that’s 40,000 of their 90,000 terminals, with over 1.5 million contactless transactions in the year to September 2010.
Compare that with Barclaycard who have rolled out just 42,500 merchant terminals to date and processing just over a million transactions by November 2010, and you can see the challenging dimensions they face.
Hmmm ... but there’s no doubt that this will grow ... except that by the time it does, technology will have moved on and direct mobile-to-mobile, or M2M payments, will be the order of the day.
Ah well, we always roll out three-year old technologies to meet three-year ahead needs.
Behind mobile contactless, real-time payments is the next big deal.
REAL-TIME PAYMENTS
Real-time payments are big news because everything is moving into real-time, a point I’ve made often.
What real-time really means is real-time information transfer. Information about money moving worldwide in real-time. Not the money itself, which will still be gated and subject to the laws and barriers required to ensure money moves at the pace of AML, KYC, repudiation and revocation needs.
But real-time is a game changer, as real-time information, risk, cash and enterprise management is delivering real differentiation for corporates and clients worldwide.
That’s why banks need to focus upon it.
For example, in corporate treasury, real-time information that consolidates all the knowledge about a corporation's cash positions across all of their operations, geographies and subsidiaries would be invaluable. In fact, it amazes me that most companies do not have this capability.
That is because they are multi-banked and multi-country.
Banks that focus upon aggregation of information in real-time to provide additional knowledge about money will win business.
That's why real-time is important.
OPERATIONAL MANAGEMENT
After these big ticket items, everything becomes a bit more mundane with new pricing models for European payments post-SEPA, SWIFT MX and ISO20022, payments processing hubs, liquidity management and such like being on the ‘must-do’ list.
It’s all about standards, cost reduction and ensuring efficient processing. In other words, good operational management focus.
I could write a lot more about this, but it's covered pretty well elsewhere by SWIFT and other forums, so I'm not going to get all techie today (phew!).
The only point that’s really worth noting on the ‘new for 2010’ model from my side is the fact that there are a lot of new payments institutions appearing out there.
NEW PAYMENTS INSTITUTIONS (PIs)
PIs are new, non-bank payments processors taking out licences across Europe to process payments instead of, or on behalf of, banks.
Funnily enough, when we mention PIs, most people normally think of institutions like PayPal except that PayPal respond by saying: “we are a bank”.
First Data, Western Union, Mobile Telecom firms are also keen PIs, with over 70 licenses registered with EU authorities so far this year to offer payments services in this form.
But the most intriguing new PI for me is Voice Commerce.
Not because they were the first non-bank PI to register with the EU after the implementation of the Payment Services Directive (PSD).
Nor because they were the first PI to become a Visa and, more recently, MasterCard Principle Member.
No, the reason for Voice Commerce being of interest is that they use the idea of the human voice biometric being an identity authentication method.
Bearing in mind that yesterday, all things were moving to mobile and today, all payments are moving to mobile, the idea of using a human voice biometric on mobile seems to be a non-brainer.
And yet, according to our survey, voice biometric fraud management is the least interesting aspect of 2010s innovations.
Amazing how short-sighted we can be when it comes to seeing what may be the most disruptive developments sitting right in front of our eyes or, in this case, right in front of our mouths.
So this week I thought it worth posting a few reflections on 2010, the year that was, and begin with some thoughts on retail banking (tomorrow will be payments and Wednesday, capital markets).
Surprisingly, retail banking has not had any really startling changes.
Branches are still the focal point, as evidenced by Santander who increased their branch density across the UK this year by a half, to 1400 branches, to become a bigger branch based bank service than HSBC.
Santander, like most banks, believe the branch based model is the key point of customer interaction and building trust. It’s also the place that banks believe customers want to see first, when they consider opening a new account.
Whatever the social media decriers believe when they say that branches are dead, they’re wrong.
Nevertheless, there have been a few innovations in branches, led by Citibank of all banks.
Citibank have been trialling the branch of the future in Hong Kong and Singapore and, after being received well there, launched the first new branch in New York last week.
The branch features wi-fi, touch screens, interactive videokiosks and all sorts of other nifty features.
Even tellers!
Pictures from PSFK and the Business Insider
Trialling branches of the future is no big new thing, Barclays did it last year ...
... but it is interesting, considering the recent history of the bank, that Citi would embark on such a venture when it’s going to cost them billions to refit branches across flagship cities in the USA and worldwide.
So they obviously believe there’s something still in the branch network.
Mind you, lots of banks believe in branches such as BNP Paribas, Umpqua, our own Metro Bank.
One bank, DBS, even ran a competition for customers to design their branches – a great crowdsourcing initiative – with the winner being a 27-year old design student.
What I really liked here is that 80% of the entries came from people aged 26 years or younger, such as this one designed out of lego bricks.
Lovely.
And there are loads of other case studies on branch designs out there now, particularly notable being the summaries of designs from folks like Jeffry Pilcher and Brett King.
Nevertheless, as a post-branch modernist, I’m not convinced about branch gadgets which all of the above represent for me.
Giving out sexy iPads to staff in branches or telling them how to dress is all well and good, but the branch is still a broken cog in the bank retail distribution model.
First, because branches are on the decline long-term, whatever Santander and their cohorts believe.
Second, because modern bank branches with whizz-bang electronics will always lose to an old and dingy branch with a great team.
In other words, branches are all about humans.
The best branches will be those with a great branch manager. The manager inspires the team – people leave managers, not companies – and so a bank with 2,000 branches needs 2,000 great branch managers to be truly different and high performing.
Whatever the technology.
And what banks really need is probably about a tenth of the branches they currently sustain, and staff them with amazing managers.
Nevertheless, most banks still believe in expanding the branch network, as that's where they believe the customer experience, engagement and relationship starts and ends.
Equally, ATMs are still alive and well.
This was ably demonstrated by the Spanish bank BBVA, who launched the ATM of the Future earlier this year:
The Future of Self-Service Banking from IDEO on Vimeo.
Created by BBVA with design firm IDEO and ATM manufacturer NCR, the new design is like an iPad stuck on a wall that dispenses money.
Neat.
Mind you, there are lots of things happening in the remote retail space with iPads that are really changing the game.
Although the iPad only came out in Easter this year, it’s already pervasive with three million sold in just 80 days and around 13 million units sold this year since the launch last April.
Phenomenal.
And, interestingly, financial services dominates this space, with 36% of iPad activations this year from the finance sector according to a survey from Good Technology:
What are they doing with it?
There’s lots of high net worth and investment banking usage for a start, with JPMorgan giving iPads to all of their investment bankers.
But we’re focused upon retail here, and there have been several interesting retail developments, with banks across the world launching apps.
Chase were one of the first to release an iPad app, and most US banks are offering some form of iPad app usage.
Spanish banks got into iPad banking early in Europe, whilst Bank Hapoalim was one of the first I heard about in the Middle East.
Some banks even launched complete iPad branches, and there are new ones every day (today's is Charles Schwab), but it’s still questionable about where all of this is going.
After all, iPad’s good for banking for dummies, but it’s still an iFad.
So what’s been really important this year, if all the gadgets are just dull?
Social media?
Not really.
There’s been some good things launched as social platforms, such as those of First Direct, but not a great deal of radical bank activity in blogging, YouTube, twitter or ...
... oh, hold on, there is one notable experiment: the Facebook bank from ASB, New Zealand.
Launched in September with a team of eight staff to answer customer questions and engage them online, it’s a good example of an experiment.
But then again, it is just that: an experiment.
Will all banks move to branch services on Facebook online?
No.
To me, it’s similar to the Second Life bank experiments ... interesting, but not for the long-term.
It’s another iFad.
So what has been the biggest change in retail this year?
It has to be mobile.
Mobile is THE change in 2010.
Mobile is everywhere.
And yes, I know the detail brigade will say: well, isn’t iPad apps mobile Chris?
Yes ... ish.
But mobile - from NFC contactless to smartphone apps, from P2P payments to bank/telco partnerships, from text alerts to using the mobile to track fraud - has come of age in banking in 2010.
It’s been bubbling away for at least seven years, when I first talked about mobile banking, and it’s finally and definitely here and now.
I’m not going to cite specific mobile usage or illustrations as you can find loads by clicking here.
Let’s just say 2010 was the year mobile really hit banking.
In fact, if I were making a prediction, it would be this: within the next decade, bank account numbers will be portable across banks. Like mobile telephone numbers, if you change your provider, you can take your number with you.
Add on to this the fact that the mobile is your main number, the bank account number will incorporate the mobile for account details.
The mobile will be an authentication, verification, validation and identification system.
Mobile with voice biometric and potentially other identity checks built into the phone - a fingerprint or eyeball check - will be the #1 device for all bank activity.
Just you wait and watch.
Meanwhile, if it took the mobile telephone seven years to move from possibly being disruptive to being mainstream, then social media will come of age around 2012-2014 as this first hit my radar in 2005 as a potential for bank distribution.
Interesting.
If that is the case, then the debate I’ve been having with Venessa Miemis about the future bank may be in our heartland sooner than we think.
Our biggest stories of the week are ...
Is there any competition in banking?
So along I go to the Independent Commission on Banking’s (ICB) Hearing this week on bank competition and financial inclusion. For those unfamiliar with the ICB, they are the idea of the UK Chancellor of the Exchequer, who asked the Commission to “consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition.” The evening I attended had a panel consisting of several esteemed individuals:
All ably hosted by BBC Money Box presenter and former FSClub keynote, Paul Lewis.
Competition and choice in the banking sector
On Tuesday last week the House of Commons Treasury Committee took evidence from:
It makes for interesting viewing.
Andrew Tyrie: a Man with a Mission
Our last meeting of the year at the Financial Services Club featured Andrew Tyrie, Head of the Treasury Select Committee. The meeting was held in partnership with the Industry & Parliament Trust, and a good night was had by all. In a packed room, Andrew talked about the government’s challenges and his own varied agenda.
Europe’s most innovative Financial solutions
Finovate Europe takes place in London on 1st February 2011. Organised by Net Banker, in partnership with the Financial Services Club, and hosted by Club chair Chris Skinner, this first financial innovation showcase event is now less than two months away.
Bank tells women what to wear and men to shave
It may be old news for some of you by now, but the wires have been abuzz with the news that UBS has issued a strict dress code guide to staff in Switzerland, including what bra and socks you should wear.
The Establishment is just PANTS!!!
I was quite intrigued to hear a speech by Ben Ramsden, Founder and CEO of Pants to Poverty. Ben's talk was all about social business which, when combined with social finance, creates a completely different and new form of commerce that, if the next generation has any say, will compete with and potentially merge with traditional finance and business over time.
I was asked to join a panel with Tony Richter from HSBC; Bob Lyddon from IBOS; and Ruth Wandhofer of Citibank; with the theme: “what should banks be doing to be competitive after SEPA?” My reaction was that all banks appear to be the same and , like the scene in the film Spartacus where all the gladiators stand up and shout: “I am Spartacus”, banks across Europe all appear to claim they are Sepacus. SEPA-enabled and SEPA-ready, when they really are not.
The major general news stories of the week include ...
The FSA has put the RBS board in an impossible position - The Telegraph
The clamour for the publication of the Financial Services Authority's findings into the collapse of the Royal Bank of Scotland in 2008 is understandable but it may be impossible in anything other than a highly redacted form.
Standard of UK high street banks is shocking, says Metro Bank founder Vernon Hill - The Telegraph
Retail banking in the UK is run by a concentrated group that apparently believes 'you have to deliver bad service to make money', an influential committee of MPs has been told.
China 'will not be a superpower' soon - BBC
Richard Young and Dr Steve Tsang discuss China's role in the future world order.
Ireland blocks Allied Irish Banks from paying €40m bonuses - The Telegraph
The Irish government has blocked Allied Irish Banks from spending €40m on bonuses, saying it would withhold state aid if the pay-outs went ahead.
American Express Identifies Five Key Trends Driving Consumer Spending - Payments News
American Express recently announced the results of new research on consumer spending behavior, identifying a “New Era of Pause and Purchase” that shows U.S. consumers are giving more thought to their purchasing decisions and redefining what it means to be a smart shopper today. One trend, Check In to Check
Wikileaks: RBS chairman Sir Philip Hampton 'believed directors breached duties' - The Telegraph
Sir Philip Hampton believes some of his predecessors on the board of Royal Bank of Scotland (RBS) breached their duties as directors, according to leaked US diplomatic messages.
Sants: bosses to blame for crisis - BBC
The Financial Services Authority Chief Executive, Hector Sants, has blamed bank bosses for the financial crisis.
Plans to phase out cheques from 2018 face renewed criticism.
Shake-up for dull world of transaction banking - Financial Times
The lawsuit filed against HSBC by the Madoff trustee highlights the very real risks inherent a once low-priority industry that proved popular for its stability
Madoff's son found hanged in NY - BBC
Convicted US fraudster Bernard Madoff's son Mark has committed suicide in his New York apartment, a family lawyer says.
If you like the Finanser, check out the books of the blog: the new Complete Banker Series
The Financial Services Club is sponsored by:
For details of sponsorship email us.
Our last meeting of the year at the Financial Services Club featured Andrew Tyrie, Head of the Treasury Select Committee.
The meeting was held in partnership with the Industry & Parliament Trust, and a good night was had by all.
In a packed room, Andrew talked about the government’s challenges and his own varied agenda.
For example, just in the last few days he had witnessed:
Just an average few days for a Treasury Select Committee Chairman, or maybe not.
As Andrew made clear, he has little time for wishy-washy mish-mash.
By way of example, he was not impressed with Michel Barnier, and thinks it strange that someone who has no experience of financial services has the regulation of the UK’s most important industry in his hands.
Equally, the FSA’s resistance to publishing their insights into the failure of RBS was a mistake, and for Lord Turner to only publish the report with the permission of Stephen Hester is a sign of weakness.
Andrew then went on to talk around the Parliamentary Houses a little about how getting the country straight hasn’t even started yet and that their biggest challenge will be trust in their ability to reform. Like many of our generation, Andrew grew up as a Thatcherite youth, in his case a Conservative one, and so he claimed that you may not have liked Thatcher’s reforms but did you trust her to get them through? Yes.
The challenge today is that after the Iraq War and the Parliamentary expenses scandal, does anyone trust the politicians today to reform effectively? No.
This is their biggest challenge and, funnily enough, the number of times I hear about ‘rebuilding trust’ in banking, it’s common to both politics and finance. There again, politics and finance are near enough the same thing these days, aren’t they?
Further to this general introduction, Andrew went on to talk about regulatory reform in the finance sector and made clear that, although banker bashing is popular amongst the public and the media, it wasn’t just banks that failed and it wasn’t just banks that cause this crisis.
Everyone had a hand in the crisis from the Prime Minister and Chancellor to the Governor of the Bank of England to the Financial Services Authority (FSA), Rating Agencies, Auditors, the Boards of Banks and their Chief Executives.
Even the consumers who over-mortgaged and the businesses that over-borrowed are to blame for some part of this crisis.
[Note: there was an audible sense of disagreement amongst some of the audience when this comment was made]
What Andrew was really getting at is that all of the parties involved in organising, regulating, managing and running the financial system overlooked the growth of risk on the balance sheet of the banks, and this is where future regulations need to focus.
On this note, he did not think the Dodd-Frank regulation addressed the issues above. Instead it merely presents the problem and leaves it to the regulators to sort it out.
Funnily enough, the solution here is expected to come out of the Independent Commission on Banking (ICB). However, after my attendance the night before at their hearing, I don’t think so.
All in all, I agreed with much of what Andrew covered and said.
He’s a realist.
He does not believe that regulation will solve anything – has Basel ever achieved anything? – and that the more regulation is put into place, the more it costs the customers to fund its implementation.
This is all true.
Equally, the business cycle of finance is endemic, and so there will be another crash in the future. In fact, many of us think it’s already bubbling away in China.
So what is the answer?
No regulations at all?
Or 100% regulations written for every possible nuance and avenue of running a bank?
The former is the Wild West and the latter is Boa Constriction.
The balance has to be somewhere in the middle, and that’s what the Treasury Select Committee, the Independent Commission on Banking, the Chancellor, the Bank and the FSA are all trying to achieve.
Mind you, isn’t that what they were trying to achieve before this crisis hit?
So along I go to the Independent Commission on Banking’s (ICB) Hearing this week on bank competition and financial inclusion.
The evening is the last of several meetings that have taken place across the country, as part of the Government sanctioned Independent Commission review of the structure of the banking market.
For those unfamiliar with the ICB, they are the idea of George Osborne, Chancellor of the Exchequer, who asked the Commission to “consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition.”
Chaired by Sir John Vickers, former Chief Economist at the Bank of England and a Director General/Chairman of the Office of Fair Trading, the ICB is due to make recommendations to the Government by the end of September 2011.
The evening I attended explored several connected issues of competition, choice and financial inclusion and it didn’t start too well I must admit as, having trailed into London, the organisers said that I wasn’t on the list.
This was after a confirmation from the organiser saying I definitely was on the list.
However, I hadn’t printed it off – no-one had! - so a small tete-a-tete ensued.
It was resolved amicably, with a clear statement that as the evening was organised as apart of government enterprises inc., it was not surprising that they couldn’t organise a drink-up in a brewery.
Or, in this case, a hearing in One Great George Street.
The panel itself consisted of several esteemed individuals:
All ably hosted by BBC Money Box presenter and former FSClub keynote, Paul Lewis.
The evening began with a poll of the 100-strong audience to see what sort of instituainots they represented.
The second instant poll question asked whether this audience thought it likely that they would switch their main current account within the next two years:
This compared with Consumer Focus research of over 2,000 adults, which found only 7% had switched and 17% had considered. Just under a quarter of the general populous therefore had switched or thought of switching, compared to a third in the room last night.
The audience were then polled as to what would increase competition in the banking sector:
This is a bit strange as websites like MoneySupermarket and MoneySavingExpert provide the number one above and have done for a while, and yet folks still don’t switch.
The second item is also not going to increase competition as I often blog about league tables showing service levels and complains. There are loads out there.
So I’m sorry but that question was just bosh.
On to the next one: what would help low income customers the most?
Hmmm ... I’d have thought money would help them the most.
Finally, the audience were asked how much they would be willing to pay to have bank accounts with fair and transparent charging if you are overdrawn.
I wasn’t sure how useful these questions were, but some of the answers did interest, as in a quarter of customers would be happy to pay £10 or more a month for a transparent charging structure.
Funnily enough, I pay about £20 per month for an account that lets me go overdrawn as much as I want with no fees. That suits me as I don’t have to worry about my account balance. Some may say that’s a lot, but there’s all sorts of other account perks, such as travel and gadget insurances for free, concierge services, direct access to a relationship manager, etc.
My bank calls this: ‘Private Banking’.
I call it: ‘Painfree Banking’, because I don’t have to worry about my account.
Ah well, guess I’m in their sought after category rather than being some low-income underbanked and can’t afford such accounts ... who then get merrily stiffed with charges.
I say the latter as the polling led to a debate that pretty much had the theme: how come banks allow painfree banking for the rich whilst stiffing the poor.
For example, when discussing why consumers don’t switch accounts, Martin Lewis suggested taht it is because the current account is the most service oriented of all bank products, but that it is subsidised by the banks cross-selling higher margin and fee-based products once they have the customer onboard.
Not quoting Martin accurately, but his view went something like: “Apathy, ignorance and inertia delivery most of the bank profits and it is a disgusting disgrace that we don’t have financial education in schools to overcome this.”
As you can see, it sets the tone for Mr. Moneysavingexpert.com. In fact, he went further to state that any system that gave free services to the rich whilst charging the poor to subsidise them, had to be wrong.
This set the tone for the evening and rather than being a nice discussion that was balanced, it felt far more like a bank bashing session from consumerists and the public if you ask me.
For example, Danielle went next.
Now she was far more considered by comparison, and focused upon financial inclusion, stating that 1.5 million adults in the UK have no bank account today, although six out of ten had one once before.
Part of this is because of the hidden charging structure which, by nature, attracts those with money whilst punishing those without. For example, the average savings on bills when paid by direct debits amounts to over £250 per year, but you need to have a house, electricity, telephone etc, to get those savings. Otherwise, the average charges on an account each year is £140, and that’s where the underbanked get stung.
This concurred with Martin’s point, but was articulated slightly less emotionally and more rationally.
Paul Lewis emphasised that the issue is more to do with the introduction of free banking in the UK in the 1970s which, forty years later, has led to a system where “they give you gifts to attract you in, and then sell you everything at very high profit margins to rake it back”.
Martin Taylor admitted that “in private, many senior bankers would love to move away from the free banking and charging model, but not of them has the courage to be the first to change it.”
He also underlined that when free banking was introduced in the UK, it was because the average fees paid were £100 per year. Then interest rates rose and banks could reduce these fees. By the time free banking came into play, banks were trying to compete in an interest rate environment at 17% and fees had become a barrier to gaining business.
Now that’s changed, and if anyone had predicted that banks would be offering free banking when interest rates were 0.5% forty years later would have left those 1970s bankers incredulous.
Bearing in mind that he was Chief Executive in the 1990s, he knows what he’s talking about.
A member of the public then said: “what we need is a whole new banking system, rather than propping up one that doesn’t work.”
Danielle then brought the subject back around to the unbanked and underbanked, stating that low income groups purely want to have control over their money. For example, many are reliant on payments from the government or from a partner and, if those payments arrive late which is out of their control, they don’t want to get high charges for someone else’s forgetfulness, which is what happens today.
Equally, when they want to borrow money, they usually only want £50, £100 or £200. Banks don’t cater for those needs, as they want to lend £1,000 or more. Therefore, there is mismatch in the system.
I thought that was a very good point.
Paul Lewis suggested that control was hard because electronic payments make it so easy for money to flow in and out of your account that you can’t keep up with it.
Martin Lewis countered by saying that electronic actually gives you more control over your money, as mobile and internet allows you to check 24*7 what’s happening.
Paul countered by saying that most low-income families don’t have mobiles or access to the internet.
Personally, I think Paul doesn’t realise that many low-income families have a mobile today.
Mike O’Connor chipped in that low income communities are meant to be served by Post Office Banking, which is not providing access to a bank through a Post Office but actually have a state-owned and run Post Office Bank.
And Mark Lyonette of the Credit Unions, said that it was clear that Credit Unions worked for these communities with half of Northern Ireland’s citizens having a Credit Union account (450,000 accounts), and 5% of Scotland of which 20% are in Glasgow.
As you can see, the conversation was wide-ranging and, although structured, felt fairly inconclusive to be honest.
It was more of a talk shop than anything which showed a conclusion.
Having said that, I walked away with a few observations.
First, the traditional banks serve those who have money well. For those who want flexible banking, we are willing to pay a monthly fee and it gives us painfree banking.
It may be subsidised by those who pay high fees and charges, but those are the people who are often just messy with their money, according to Martin Lewis, rather than structured and in control.
Second, for those in low income communities who are unbanked or underbanked, it is because banks don’t want them. The question then is why force banks to look after them? We need alternatives instead, and if those alternatives are credit unions or the post office, all well and good.
Third, if we want more bank competition, we need to make it easier to open a new bank. I’ve blogged often about how difficult that is and it’s getting no easier. If anything it’s tougher.
Finally, there is a big dichotomy between big banks and small banks. Most consumers don’t trust small banks, even though they give better service. This is why credit unions and building societies are generally small, apart for the one exception of the Nationwide. So small banks should focus upon community, including low income communities, and service. Big banks are trusted that they won’t fail and provide the hygiene services of transaction banking. That’s all most people want, safe and secure transactions. Simple.
Meanwhile, I did learn two other things at the event.
One from Metro Bank, our favourite new bank, is that 68% of Londoners and 32% of Brits have heard of Metro Bank ... not bad for a bank with four branches. Oh, and don’t be too smug about their size, they just got £52 million in new funding secured yesterday to expand to 18 branches by 2012, six more than the original target.
And Vernon Hill, founder of Metro Bank, was reported as saying to the Treasury Select Committee yesterday that the standard of retail banking in the UK is "shocking" and run by a concentrated group that apparently believes "you have to deliver bad service to make money".
He’s out to change that. Bearing in mind he achieved that objective in one of the hardest markets to crack – the USA – I think he’ll achieve something here.
Second, there is a new bank in Britain that I had not heard of before: the Secure Trust Bank.
Secure Trust Bank offers a current account that requires no credit checks, KYC or AML for the account opening.
What?
Yes!
It’s a prepaid bank account.
“The Prepaid Basic Bank Account comes with a prepaid card. Simply retain sufficient funds in your account to cover your regular commitments and outgoings. The rest can be transferred onto your Prepaid MasterCard for you to use as you would a debit card, at over 28 million outlets, any cash machine, retail outlets and for shopping online or over the phone. You can vary the amount that you transfer to your card at any time – online or by our automated telephone service, 24 hours a day, 7 days a week.”
Perfect for the underbanked, unbanked ... and those who want to anonymously gamble, buy porn and do other crap over the internet.
So there’s some competition in UK banking out there after all!
I was quite intrigued to hear a speech by Ben Ramsden, Founder and CEO of Pants to Poverty.
Ben's talk was all about social business which, when combined with social finance, creates a completely different and new form of commerce that, if the next generation has any say, will compete with and potentially merge with traditional finance and business over time.
Ben began his talk by saying how he used to be motivated by money, like most of us.
His career launched into a trajectory in telco’s before the dotcom implosion, at which point he decided to try something different and travelled out to Guyana to see how other people lived.
It changed his life, and he ended up getting heavily involved with Amnesty International and, through that work, the “Make Poverty History” Youth Movement of 2005.
This was the event, wrapped up with Live8 and lots of other NGO (Non-Governmental Organisations) pressure groups changed the world, or was meant to, by getting the G8 to sign up for relief for African nations from debt.
Only five years ago, but a very different world.
At this time, Pants to Poverty was launched and sold 11,000 pairs of pants in just five months.
After a while, Ben realised this could be a business and created it as a social business.
What is a ‘social business’?
There are lots of definitions of social business, with many mistaking such businesses as charities. They’re not. They are businesses, but they are there to deliver against social and environmental needs, as well as financial ones.
The core of such businesses therefore is that they redefine the profit and shareholder view of the world.
Profits are based upon contributions to the environment and society, as well as the bottom-line, and shareholders are all of the stakeholders, not just the investors. So the farmers, shippers, staff, customers, investors and community all get a share of profit here, not just the business investor.
It may sound airey-fairey, but it works in practice as Pants to Poverty sources cotton from fair-trade farmers, turns it into pants at ethical factories in the developing world, and sells them in ways that raise awareness as well as making money.
And Pants to Poverty is very good at creating awareness. For example, the business holds the Guinness world record for the most people gathered in pants in public ...
... as well as the biggest pair of pants ever created!
The point that Ben made is that this had started as a social movement – to Make Poverty History – and had moved to being a social business – Pants to Poverty.
By being a social business, every stakeholder in the supply chain has a stake. The cotton producers get pesticides; the factories have inspectors to avoid any labour misuse such as child labour; and the distributors get rewards in both cash and kind.
For example, Pants to Poverty is going through a round of funding right now, to try and get £250,000 in order to build the brand and capabilities of the firm.
In order to raise the £250,000, the company has issued 100 convertible bonds valued at £2,500 each. The bonds last ten years and are designed to sell to friends and family, and anyone else who might buy them.
And interestingly enough, Pants to Poverty is finding a lot of High Net Worth Individuals are interested in taking the bonds.
Why?
Well, apart from the philanthropic virtues and the fact they are helping the world, there’s actually a really interesting triple bottom-line financial product on offer here.
What is the product?
For your £2,500 per bond investment, you get 8.65% annual interest.
The interest however, is paid in three ways via quarterly instalments consisting of:
In other words, you actually only a small amount of real interest, the £21.63 cash, but add in the other components and it’s worth a lot more.
No wonder Pants to Poverty is gaining ground.
But what really intrigued me is the likes of Ben, Venessa Memis, Nicholas Negroponte and others, because they’re doing something for the world.
Changing it for the better.
Some in small ways and some in big ways, like Bob Geldof, and though the majority of us capitalist banking community might think they’re all a bunch of tree-hugging hippies, there’s something that struck me as Ben talked.
You see we have this old world, let’s call it the Establishment, and the new world, let’s call it the People.
The Establishment affirms the views of old, and believes that management of the People is through control mechanisms of which a key part is the traditional media.
The People represent the views of the next generations, and believe that anything can be achieved through crowdsourced change.
The Establishment has trashed the planet whilst the People want to change the planet.
And there’s the rub.
There is a real friction between Old World and New World.
This is what has occurred to me more and more as I think about Wikileaks, the rise of social networks and media, the ability for P2P to crowdsource globally and to think differently.
I thought it worth illustrating, and so created a few slides to illustrate the point ...
And the key drivers of change are accumulating today to force the old bubbles to burst:
Not sure where all of the above leads, except that it is becoming more and more obvious, and some form of hybrid model will need to be created.
Otherwise, when two tribes go to war, a point is all you score.
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