The Financial Services Club's Blog

20,000 consumers cannot be wrong ...

Ernst & Young has just completed a massive survey of over 20,000 consumers worldwide to see what they think about their banks. Half of the consumers are from Europe, but the rest cover the globe with a strong showing in Latin America.

The results are summarised in a 56-page report which you can download from their website, but here’s the core headlines.

How confident are you in your bank?

Globally, 44% of customers say their confidence in the banking industry decreased in 2010

Within Europe, the UK (63%), Germany (61%) and Spain (58%) have seen the largest falls in customer confidence

However, in emerging markets trust has risen, with 75% of respondents in India, for example, saying their trust in banks increased last year

One of the big reasons for loss of confidence in developed economies is the issue of bank bonuses, with the banking industries of the UK and US in particular seeing a huge drop in confidence levels – 80% and 69%, respectively – citing this as one of their reasons for a loss of faith in their banks.

Have you ever changed your bank?

Globally, 36% of customers have changed their main bank in the past, and 7% of customers are planning to leave their bank

Indian and Chinese customers are more likely to move in the future, with 11% and 13%, respectively, thinking of switching their banks

Attrition in mature markets is slightly lower than the global average, with 5% of US customers, 5% of German customers and 6% of UK customers saying they plan to leave

48% of customers around the world are planning to change banks because of general levels of service, and 43% because of price.

Other factors include product offerings, the proximity of branches and a lack of trust in the existing bank relationship. Almost a quarter of respondents (22%) who have moved their main bank attribute their decision to a loss of trust.

Marketing does make a difference by the way, with brand strength cited as the main reason for choosing a bank by 39% of those surveyed.

Globally, 81% of customers hold two or more products with their main bank, with more doing so in Spain, Belgium, France, Canada and South Africa.

Do you get good service from your bank?

43% of customers say they get no, or only occasional, personal attention from their main bank

Maybe that’s why we prefer to deal with machines at banks with internet banking (83%), ATMs (79%) and branches (79%) being the channels with the highest levels of customer satisfaction

Call centers are not popular, with only 52% of customers satisfied with their services and 30% never using them

The personal attention received in emerging markets seems to be significantly better, with 81% of Indian respondents saying they receive good or very good personalised service

When dissatisfied customers are asked how they would like to see channels improved, 40% want branches to deliver better service and 39% want them to be more available.

43% of disaffected customers want better access to ATMs, a third want websites that are easier to use, and 46% are demanding higher quality service from call centers.

Globally, 42% of customers never use mobile banking (yet)

 

Things worth reading: 31st March 2011

Things we're reading today include ...

House of Lords report attacks 'complacency' of Big Four auditors in financial crisis, urges competition investigation - The Telegraph

Survey Says Corporate Account Takeover a New Payments Fraud Threat - Payments News

Google to be audited on privacy - BBC

Buffett's successor quits amid $3m share scandal - The Independent

Danish Bank Mergers May Stall on Bad Property - Business Week

Barclays tops FSA rankings for bank complaints - The Independent

Lloyds' António Horta-Osório to collect up to £13.3m, while Eric Daniels gets £2.57m - The Telegraph

 

Banks will absolutely be disintermediated

OK, so I said that banks would absolutely not be disintermediated last week, and it sparked some interesting debate and dialogue.

A few folks were incredulous that I could say this; others thought it made eminent sense; some noted that the movement of money could be disintermediated, but the holding of money could not; whilst others were up in arms over the fact that I could possibly believe any of it.

Well, for those who know me, it was written with a deep sense of irony and disbelief.

I absolutely believe that banks will be disintermediated and have believed it for a long time.

However, I also believe that some of the system will be protected and will never be destroyed or replaced.

This is the part that governments are regulating, protecting, licensing and calling too big to fail, or 2B2F.

The 2B2F area is the core of the monetary system, and needs to be protected.

If your social media account is compromised, it doesn’t matter too much that someone sends a status update saying: “I’m flat on my face in a flap” or worse from your account.

Sticks and stones will break my bones, but names cannot hurt me.

Losing money can hurt though, so it does matter if they steal all your worldly wealth.

This is the part that will never be disintermediated, and I guess that’s the part that Nancy Pierce of HSBC and Mark Buitenhek of ING were saying is core.

• “We will absolutely not be disintermediated … who’s better to move the money than the banks?” Nancy Pierce, Head of Product Management for Payments and Cash Management Europe, HSBC

• “Banks need to reinvent themselves as they will be disintermediated by other banks, because we are the only ones that are trusted for secure transaction processing.” Mark Buitenhek, Global Head of Payments and Cash Management, ING

But it’s open season for the rest of the financial system and yes, there are companies that claim they could replace VISA, MasterCard, SWIFT and other infrastructures.

In fact, as discussed on Monday, it’s warfare between the banks, card processors and PayPal.

The iDEAL system originating from the Netherlands gains more traction for banks across Europe as an alternative to PayPal; this is in the same moment as AMEX opens a P2P platform, as does VISA, as an alternative to PayPal; and this is in the same breath as PayPal stretches out towards physical store paypoints to compete with VISA, AMEX and MasterCard, as the online world merges with the offline.

A similar story can be seen in capital markets where the rise of Chi-X, from upstart electronic trading platform to the biggest trading system in Europe, took place in just two years (doubleclick image to see full size version):

Source: Monthly MiFID Monitor / Thomson Reuters Equity Market Share Reporter

A similar story can be seen with BATS in the USA, which is why BATS is buying Chi-X.

So disruption can occur.

In the latter case, it’s down to deregulation.

In the case of PayPal, it’s down to disruptive innovation and the dilemma of something that appears to be innocuous at first but soon becomes mainstream, e.g. with $4.2 billion revenues forecast for 2011, PayPal is now almost half the size of Citigroup’s Global Transaction Services business.

The real issue of disintermediation therefore, is not around the core of banking – the holding money area that is protected by banking licences – but around the boundaries of banking.

The thing is the boundaries is where all the profit lies.

The boundaries is everything from savings to investments, cards to loans, trade finance to treasury dashboards, insurances to wealth management, foreign exchanges to bond markets, pensions to mutual funds, swaps to futures, mortgages to marriages …

In fact, everything in a bank can be broken down into components of functionality and then traded in and out by new competitors.

Source: ACI Worldwide

This is the picture I’ve talked about for a while, where all of the processes and functions of a bank can become apps that users can download and integrate to build their own bank.

The Build-Your-Own-Bank (BYOB) is the new generation of banking.

It’s the generation where anyone from a banksimple to a Mint can step in and take out a piece of core banking.

That’s what disintermediation is really all about.

Taking out the parts of banking where there is not enough competition, and leaving the bits of banking that aren’t worth competing against … which is the part that is protected by licence because it’s too big to fail.

BYOB will absolutely be disintermediating, whilst 2B2F will never be disintermediated.

That’s the real bottom-line.

• “Could we see a wholesale version of Zopa or PayPal? Yes, I think we can.” David Birch, Director, Consult Hyperion

• “Disintermediation is well under way, and will happen very quickly.” Daniel Marovitz, Head of Product Management, Global Transaction Banking, Deutsche Bank

 

Things worth reading: 30th March 2011

Things we're reading today include ...

'Fatally flawed' accounting standards inflated RBS's worth - The Telegraph

Mobile Money, Afghanistan: Researching the Mobile Frontier - Payments News

SFO raids Tory donor David Rowland's bank over Kaupthing - The Telegraph

Portugal and Greece in downgrades - BBC

Dodd-Frank fails to meet test of our times - Financial Times

Banks up the ante ahead of ICB report: hollow threats or endgame? - The Telegraph

UK banks could lose business to rivals within months, warns HSBC's Douglas Flint - The Telegraph

 

Unimaginable and unmanageable risks, or total transparency and control?

Just sat through a day of academic debate about the financial crisis and how much technology was to blame.

We’ve had these blame games many times in the past, usually to try to point a finger at an individual like Greenspan or Brown, so taking the finger to point to an inanimate pile of metal processors was going to prove interesting I thought.

But it wasn’t, as this was run by the London School of Economics who pretty much made the day a disinfected affair with professors emeritus pondering and pontificating.

As one of my friends said: “an academic is someone who looks at something working in practice and wonders what it would be like in theory”, and this was the case here.

However, there were a few brighter spots, including addresses by CIOs from the European Central Bank and Royal Bank of Scotland.

The real point of the whole day was to point to the origins of the crisis – the rich and diverse world of derivatives – and to say that the complexity of quantum analytics that drove us down the spiral of debt was due to the systems handling our formulas in such a way that it made it look like risk was managed … but it wasn’t.

In other words, the computers messed up.

One speaker pointed out that risk was hidden because regulators focused upon individual financial institutions instead of systemic risks across the industry.

Another talked about the origins of the Black Scholes system, and said that “it wasn’t technologists who caused the crisis, but physicists”.

Another mooted the scale of computing, and how complex analytics had moved us into grids, data centres and clouds, that provided unlimited processing and scalability. Hence, what could never have been mapped, simulated or contemplated before could now just be modelled and deployed overnight.

Whatever your view, systems are a contributor to this crisis, but it’s not the systems that caused it but the people who programmed them. So here’s my potted view of how technology exacerbated the crisis and what will happen next …

Back in the 1960s, markets were inefficient and ran on open outcry systems where lots of men stood in pits shouting at each other.

These men were “chaps” and “blokes”, with the chaps being the ones who wore top hats and the blokes bowler hats.

The top hat brigade didn’t like the bowler hat lot – mainly because blokes spoke with common accents shouting out things like “cor blimey guv’nor, catch a load of this stock at five and ten” – and so they found a new-fangled thing called a computer and wondered what they could do with it.

Luckily, two men called Fisher Black and Myron Scholes came up with an exceedingly complex formula which they called the Black-Scholes formula as they were very imaginative.

 

The formula meant that if you were buying or selling stocks, you could break the buy or sell order into pieces and manage the risk by placing the purchase with other related instruments in a derivative.

Luckily, this formula was perfect for the computer age and allowed the chaps who could afford such technologies to trade bits of equities.

This was no big deal as the processors back then were not very sophisticated – a mainframe would have been the equivalent of your Nokia mobile of five years ago – but it did allow some complex analysis to begin.

In particular, it allowed the age of leverage to start, and introduced new disciplines in market and credit risk.

This bubbling area of derivatives and risk didn’t really take off until the 1990s, when systems had become more and more distributed, powerful and capable. Such systems enabled the chaps to do more hedging and complex investment strategies began. This was further supported by electronic trading, which had also increased in prevalence after the automation of the main markets in New York and London known, over here, as the Big Bang.

Now things were getting a little more efficient, and markets started referring to exotics and “the Greeks”. And risk became more destructive as a result with Nick Leeson destroying Barings Bank; Long Term Capital Management (LTCM) almost blew up the financial world; Frank Quattrone was indicted over the internet boom for misrepresenting IPOs; and Henry Blodget got into trouble for mixing securities research with securities trading.

What was really happening is that the mixture of market greed and gaps in regulations allowed many to create more and more complex risk.

Risk management was evolving and trying to keep up, as were the lawmakers, but creative and innovative masters of the universe were seeing the opportunity to combine processing power and automated trading with arbitrage and exotic instruments to create ever increasing returns at the expense of those who did not have the ability to make these combinations work.

And yes, there were some big deals like LTCM but the markets coped.

That was until David Li’s formula cropped up.

David Li’s formula is the one that almost killed Wall Street, as Wired Magazine so eloquently put it, and it goes like this:

No big deal.

But it is a big deal as it created a number of false assumptions and operations.

First, it made traders believe credit risk was managed and covered, when it wasn’t.

Second, it ignored real world assets to simulated models, and hence separated two key areas that were mutually inclusive and made them mutually exclusive.

Third, it didn’t incorporate the new forms of market risk we now look towards, namely liquidity risk and systemic risk.

And the real issue that occurred is that the trading systems leveraged the formula to death because, just as this formula was released, electronic trading moved a step forward into algorithmic trading and high frequency trading.

This is why the FSA’s Prudential Risk Report 2011 shows that credit went through the roof over the last forty years.

Similarly, worldwide, OTC Derivatives exploded from a market worth $100 trillion in 2000 to $300 trillion in 2005, growing at thirty percent year on year. It then gathered momentum to grow at forty percent per annum from 2005 through 2008 reaching a peak of almost $700 trillion when the crisis hit.

This debt and credit explosion was a result of the dangerous concoction of leverage, OTC derivatives, unregulated markets, complex analytics and unlimited processing capacity.

This heady mixture had stepped up the financial game into markets that were unmanageable.

From a systems viewpoint, the technology enabled and supported this explosion but was not the cause. The cause is the humans who program the systems.

But the systems capabilities are illustrated well by the fact that, in 2000, the New York markets were processing around 5,000 electronic trade movements per second. This has now risen to levels of over ten million per second.

The financial markets have flared up server processing on an unprecedented scale.

For example, RBS Global Banking & Markets are using over 20,000 server blades for core market processing today, compared to a single processor two decades ago.

And, as the BBC reported last week, those processors are now operating at near the speed of light: “Trades now travel at nearly 90% of the ultimate speed limit set by physics, the speed of light in the cables”.

How fast is that?

Well the speed of light travels at around 299,729,458 metres per second, or near 300,000 kilometres per second, so systems are moving trades around at about 270,000 kilometres a second.

Pretty darned fast if you ask me.

In real life, Professor Doctor Roman Beck of the e-finance laboratory of the Goethe University Frankfurt, says that we’re moving electronic orders around at 5.8 milliseconds between London and Frankfurt. That’s about 52 trips between here and Frankfurt in the time it takes you to blink your eyes (a blink being around 300 milliseconds).

Not bad.

So, we have these completely automated systems processing everything in lightning fast speeds globally with all the opportunities for a bit of a byte of a stock or commodity being built into complex arbitrage systems with unlimited scale and processing power.

Sounds like a recipe for a disaster if you ask me.

And it has been.

But it’s also been a recipe to allow some firms, such as Goldman Sachs, to generate $100 million profit every day that they’re open for business. Consistently.

So where does this leave us?

In a bit of a bind I guess.

We’re not going to get rid of these systems, processors and capabilities are we?

But equally, can we effectively control and regulate them?

I think not.

As the general counsel of Salamon Smith Barney is quoted in Liar’s Poker: “My role is to find the chinks in the regulator’s armour”, and that attitude prevails.

So whilst systems look for chinks, the fragmentation, complexity and geographic spread of systems and regulations allow for arbitrage … and that makes money.

This is why there is no way to demand and force transparency on the markets. For all the calls of the FSA for real-time liquidity reporting, that reporting is meaningless if the Shanghai or San Paolo operation of the financial firm is leveraged to the hilt.

And the idea of a global response to this is also unlikely.

As one speaker said here: “I don’t trust any solutions that claim to be global as most global projects fail”.

Maybe he was involved in the GSTPA or similar ventures.

So the solution: to continue to try to regulate in hindsight and hope that the banks, in foresight, don’t create unsustainable or unmanageable risks.

Or just pray!

 

Things worth reading: 29th March 2011

Things we're readintg today include ...

UK watchdogs' stance on bank capital attacked - Financial Times

Financial services win the booby prize for most customer complaints - The Independent

Regulation win for hedge funds over banks - The Telegraph

UK's soft bank rules 'dragging down' reform - The Independent

FSA fines hit £98m 'and could triple' - The Telegraph

Bank fight - BBC

Yunus appeal day moves to 4 April - BBC

 

AMEX enter the P2P payments war

I got an interesting link last week to a new website called Serve.com.

It’s the website spawned from the takeover of Revolution Money by American Express for $300 million last year, and goes live today with a marketing blitz across the USA.

The service is basically Revolution Money’s MoneyExchange, Version 2.0.

If you’re not familiar, MoneyExchange is a payment service that allows users to easily send and receive money to and from friends, family and colleagues online, in a secure, free and instant way.

It’s a P2P service in other words, and one that could displace PayPal as an online and mobile direct payment platform.

Here’s what the Serve home page says about it:

“Wherever you need to move money, Serve makes it easy. It is your virtual wallet, accessible 24/7 online and on your mobile phone via the Serve mobile app. And you can even use your prepaid reloadable Serve card to make purchases in stores where American Express Cards are accepted.

“In addition to making purchases, Serve is a fast, simple and secure way to send and receive money to and from your friends and family. All you need is the recipient's email address to quickly send and receive money.”

It also has some interesting new features over and above the old MoneyExchange, such as subaccounts:

“You can extend your Serve account to others by creating subaccounts. With subaccounts, you control how much of your money to distribute, who to distribute it to and how they can use it. You decide which transactions they can perform with their subaccount, can set daily limits on transaction amounts, limit their purchase capabilities and more.

“You can create a subaccount for virtually anyone you choose, thirteen and older. Create a subaccount for the babysitter so they can order pizza, create a subaccount for your son to receive his allowance, the possibilities are limitless. And managing your subaccounts is easy. You can set and change your subaccount privileges from anywhere at anytime.

“Whatever the reason and whenever you choose, you can quickly transfer money to and from your subaccounts online or via the Serve mobile app1 available for iPhone and Android making it simple to get money to the people who need it without slowing you down.”

The service  allows you to add money via a debit or credit card and has limits of $1,000 per day or $2,500 per month of transactions, which is quite low, but enough for basic usage.

In the first instance, AMEX is also waiving fees.  This waiver applies for the first six months, after which it costs 2.9% + $0.30 per load to put money into accounts and $2 for ATM cash withdrawals.

It’s interesting to see AMEX doing this and yes, it has all the obligatory stuff related to blogs, facebook and twitter.  It also has a mobile component for the iPhone and Android, as well as access via Facebook.

This is a serious gambit by the card firm, and I hear that AMEX is investing heavily with 200 people working in their Florida office on Serve, along with more developers in New York where all of the marketing is based.

This division is all run by Dan Schulman who joined AMEX as Group President, Enterprise Growth, in 2010 and is responsible for the company’s global strategy to expand alternative mobile and online payment services, form new partnerships and build revenue streams beyond the traditional card and travel businesses.

Previously, he was President of Sprint’s Prepaid Group and was the founding CEO of Virgin Mobile USA, where he led the company from its concept stage and national launch in 2002 to become one of America’s top wireless carriers, with more than 5 million customers and $1.3 billion in annual sales.

As can be seen, there is real substance behind all this and, like the Visa attack on PayPal – did you know that Visa has splashed out $2.2 in acquisitions in just the last six months? – the card companies have finally recognised that they have to cannibalise themselves and offer P2P services or PayPal will take over.

This push into P2P occurs just as PayPal push the other way, and target to open a physical network to complement their online services in a bid to displace Visa and MasterCard.

Interesting times indeed.

 

Things worth reading: 28th March 2011

Things we're reading today include ...

Collapsed Icelandic bank Landsbanki faces Serious Fraud Office inquiry - The Telegraph

Lords inquiry to damn Big Four auditors' role in financial crisis - The Telegraph

Bankers' pay cuts lead to £5bn tax loss - The Telegraph

Burnt out: Bank boss who went to Boots quits - The Independent

HSBC told to amend pay plan or face investor revolt - The Telegraph

ECB finalises bank liquidity scheme - The Independent

 

 

 

The Finanser's Week: 21st March - 27th March 2011

 

Our biggest stories of the week are ...

Survey: are payments infrastructures fit for purpose?

This is the last week of our survey on payments infrastructures. Over 300 people have completed the survey and the results will be released in April. Have you taken the survey yet? If not join in: https://www.surveymonkey.com/s/P5KN6V3

The Mobile Revolution

It is clear that mobile is not only important; it is a real game-changer. Here are six reasons why mobiles are revolutionising banking and payments.

Banks should advise customers on the do’s and don’ts of social networking

Banks miss a trick in not advising customers how to network socially with safety, so here’s my top do’s and don’ts for social networking. It’s not exhaustive, but just those that are top of mind and banks would do well...

Banks "will absolutely not be disintermediated"

We got into another fine debate this week about bank disintermediation, a term used liberally throughout the 1990s and early 2000s when Web 1.0 came around, and then was dropped just as fast. Disintermediation – taking the bank out of the customer delivery cycle ...

Extremely Vital Statistics

Some interesting numbers include the fact that Google has 750 people working in their Payments Division, having just hired PayPal veteran Osama Bedier to lead it. This is at the same time as PayPal hire Don Kingsborough to go after Visa and MasterCard and Facebook announce the opening of a payments ...

Cash is still #1

Another day, another payments conference and just had an interesting discussion about the cashless society. We’ve talked about this so often that it’s pretty meaningless as, no matter how hard card companies and banks talk about a war on cash, cash is just as prevalent as ever ...

 

The major general news stories of the week include ...

Banks Bring Jobs to London, Pay Most U.K. Tax - Business Week

Goldman Sachs Group Inc. employs almost as many people in London today as it did in 2007, before Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history, sparking a global recession.

Hedge fund billionaire 'violated Goldman ethics' - The Independent

Jurors in the trial of Raj Rajaratnam, the hedge fund executive accused of insider dealing, came face to face yesterday with one of Wall Street's most powerful bankers, as the Goldman Sachs chief executive, Lloyd Blankfein, took the witness stand.

António Horta-Osório reassembles his Lloyds executive team - The Telegraph

Lloyds Banking Group chief executive António Horta-Osório has reassembled his original executive team from Santander UK with the appointment of the Spanish lender's head of British retail banking.

Light-speed trick in stock trades - BBC

High-speed stock trading has become so fast that the speed of light is a factor - and financial institutions are looking into exploiting it, says a physicist.

Ireland warns it will fire top bankers found unfit - The Independent

Ireland has put the directors of its state-supported banks on notice that they will be sacked if they are found to be unfit for the job.

Break-up plans force FSA to accept limits - The Independent

The Financial Services Authority said yesterday it expects a tough year as it puts new initiatives on hold to cope with the heavy load of extra work created by the Government's plans to break it up.

Goldman Sachs takes the axe to its underperformers - The Telegraph

Several hundred would-be masters of the universe have drawn their last bonus cheque from Goldman Sachs as the US investment bank begins its annual cull of its also-ran bankers.

London tops financial services league - Financial Times

City relieved amid 'banker-bashing' as capital retains its slight lead ahead of Hong Kong and New York in list of 75 world cities

New banking stress tests come under fire - The Independent

Europe's regulators were still haggling over the details of new banking stress tests yesterday as the published terms showed up some major holes.

Reform of British banks may cost £15bn a year - The Telegraph

Forcing banks to fundamentally restructure how they operate in the UK could cost the big five banks £15bn a year.

 

If you like the Finanser, check out the books of the blog: the new Complete Banker Series

 

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The Mobile Revolution

Mobile featured heavily throughout the International Payments Summit and it is clear that mobile is not only important; it is imperative.

This was made loud and clear by a comment from Daniel Marovitz of Deutsche Bank that it used to be that online and offline worlds were separate because, to make an online payment, you had to go to a computer and hit enter on a keyboard. Now that’s all changed as the mobile allows you to make online payments immediately 24*7 through a device in the pocket. That’s new and radical, as it means the online world is now integrated with the offline.

Through the course of such exchanges about mobile, several things became clear to me.

• First, mobile is lumped in as one area, but is actually about a hundred different things;
• Second, banks are finding mobile challenging because it has merged the online and offline worlds;
• Third, banks see mobile opportunities based upon partnerships and joint ventures with mobile carriers, but this is wrong;
• Fourth, the underbanked and unbanked are the initial targets to be serviced through the mobile carriers; 
• Fifth, apps are incredibly disruptive; and
• Finally and most importantly, mobile is a real game-changer.

Let’s start with the fact that mobile is not one thing.

There is mobile internet and mobile texting; mobile apps and mobile devices; mobility and wireless; SMS and NFC; SIM and EMV …

There is mobile payments and mobile banking; mobile bill pay (checkout Danske Bank for this one) and mobile bill deposit; mobile balance checks and mobile cheque deposits (USAA et al); mobile account opening (Jibun Bank and eBank) and mobile telephone calls to contact centres (!) …

There is mobile identification and mobile biometrics (Voice Commerce); mobile secure tracking and mobile proximity marketing; mobile as a payments device and mobile as a point of sale; mobile for texting money and mobile for reading QR codes …

There is such a rich variety and diversity of what is meant by mobile now, that it is plainly annoying to talk about mobile as though it is a single thing in banking.

I would suggest that talking about mobile is like talking about banking.

“Oh, I want to talk about mobile” is the equivalent of saying, “Oh, I want to talk about banking.”

What sort of banking do you want to talk about?

Retail, investment, commercial?

Brokerage, wholesale, branch?

International, domestic, regional?

FX, derivatives, exotics?

Online, offline, direct?

Come on.

Get some context around mobile and start talking the specifics, not the generics.

Second, the merger of offline with online.

I’ve already mentioned this, and said it was a challenge.

It was already a challenge, when we talked about having customer contact 24*7.

When we moved into call centres and then the internet, it was a challenge as customers were suddenly making demands at 3:00 in the morning.

But we handled it.

Now customers are using mobile devices to use bank services 24*7 electronically.

And yes, we will handle it … but it’s slow.

Take the example of making a mobile payment,.

During the conference this week, David Birch of Consult Hyperion challenged any bank in the room to make a payment using a mobile directly from their bank account to any individual in the room.

No-one could.

Sure, you can use mobile to do bill pay, balance cheques, money transfers and more; but a simple exchange of £20 between me and you? Forget it.

The only way to do that is via PayPal!

So banks get mobile, but they’re getting it v e  r   y        s       l        o         w          l            y.

It reminded me of how Chip & PIN was born.

Chip & PIN was conceived in the year 2000, developed in the year 2003 and implemented in the year 2005.

Five years to get from an idea to the delivery of a new security system.

In that same timeframe, Facebook created over 600 million users and took over the planet.

When I asked the leadership for Chip & PIN why it took so long, he explained it has to be a cohesive and consensual process.

So ok, you move at the speed of the slowest.

When I asked him why they went for Chip & PIN rather than Mobile & PIN which, by 2005, would have made far more sense; he said it was because mobile was not advanced enough in 2000 to be used as a security device via SMS and OTP (One Time Passwords).

But it is now!!!!

So why banks still take five years to make a decision and implement it when it takes Zynga six weeks to release a social game and garner 100 million users is beyond me.

Third, banks think winning in mobile is through JVs and partnering but this is wrong.

Banks are not the best organisations at collaboration, except amongst themselves.

It is difficult to name a single successful bank and non-bank partnership, but easier to point to others that failed.

This is because bank business models are completely unique and different.

Banks deal in basis points – bps … who else deals in bps???

Banks are regulated for resilience, security and robustness, whilst mobile operators are regulated for agility, innovation and fees.

If a mobile call fails to connect it's irritiating but there's no problem; if a payment fails to get through, there's a problem.

That's why banks want to control everything which, in a partnership, is not a good thing.

The result is that for all their good intentions, banks find partnering tough.

I could point to 1,000 examples but the best is NTT DoCoMo.

NTT DoCoMo and their e-wallet Osaifu Keitai, is liberally pointed to everywhere as being the most advanced mobile service in the world.

Its financial usage as an ewallet, NFC device and more is second-to-none.

So when NTT DoCoMo wanted to get bank services on their mobile, what did they do?

They bought a credit card company.

Far easier than trying to partner with a bank that didn’t understand them or their business model.

The same can be said for several other carriers, such as easypaisa in Pakistan and, in the case of established mobile carriers like Vodafone’s Safaricom in Kenya who operate M-PESA, when a mobile carrier does partner with a bank it will be on their terms, not the banks.

Which brings me to my fourth point: the underbanked and unbanked are the target markets for mobile carriers.

Nokia Financial Services, Ericsson, Telecom Italia and others attended this week’s Summit and they all underlined the same view: it is the underserved that will use mobile first.

This is why mobile has succeeded in Africa, and is now crawling across other regions where markets are under-served.

Where people had no access to bank or payment services, being able to suddenly make and take a payment wirelessly via the mobile is nirvana.

You suddenly have a service that previously was only available by walking 100s of miles or having someone do that on your behalf for a massive fee.

You have a service that used to cost a bucketload, being commoditised into a cheap wireless activity.

For the unbanked and underbanked, mobile moves the world from high cost remittance services to low cost wireless services.

That’s a big deal.

It is the reason why the mobile carriers will go for the high volume, low value first.

Grab the customer base the banks don’t want.

Look after the microfinance and low profit pool.

It’s only just over three billion people.

If banks ignore three billion people, that’s ok.

Someone can make money out of that.

High volume, low value money, but money all the same.

And that’s the mobile carriers’ mission.

Intriguingly, that’s also a classic innovator’s dilemma approach, in the words of Clayton Christensen.

Start with the bottom-end, then upscale.

The fifth area is how apps are really disruptive.

I’ve already talked a bit about disruptive apps such as Angry Birds, a $0.99 mobile app that generated $75 million for its creators in a year.

Apps create micropayments and micromoney.

More importantly, apps deconstitute banks into components.

This was first demonstrated by BBVA who launched the tu cuentas service two years ago, but has built up a head of steam such that my vision of Banking-as-a-Service (BaaS) is finally here.

BaaS allows the user to mix and match apps to suit their financial lifestyle and build their own bank in the cloud.

That’s new and different, and is something unthinkable even a few years ago.

Which brings me to my final point: mobile is a game-changer.

When the online and offline worlds meld into a seamless service, the world has changed.

When everyone on the planet can be connected P2P, B2C, E2E, the world has changed.

When anything can be moved electronically and wirelessly 24*7, the world has changed.

When industries that were delineated are merged and integrated, the world has changed.

When you can balance check with an app or text your partner money at three in the morning, the world has changed.

When money can be transacted from an African village to an Indian paddyfield via a Chinese entrepreneur and an American taxi driver, the world has changed.

The world has changed.

Have you?

 

From Mashable:

Things worth reading: 25th March 2011

Things we're reading today include ...

China 'is to overtake US by 2030' - BBC

U.K. to Sell Bank Stakes for Budget Windfall - Business Week

Portugal May Need Up to $99 Billion in Aid - Business Week

Payment Preferences of Online Gamers in Europe and North America - Payments News

Moody's Cuts Ratings on 30 Spanish Banks - Business Week

Banks' dodgy assets: Taking out the trash - The Economist

Deutsche Bank on trial: Rhyme and reason - The Economist

 

Banks should advise customers on the do’s and don’ts of social networking

Banks miss a trick in not advising customers how to network socially with safety, so here’s my top do’s and don’ts for social networking. It’s not exhaustive, but just those that are top of mind and banks would do well to send such advice to their customers in writing, online and always when they logon to their bank accounts (in an engaging user experience way – not just by cut and pasting the words below).

Do

• clear any sensitive information from all of the electronic devices that you use, especially your mobile
• use all the tools you can to be safe online such as free antivirus software like AVGfree, and plugins to browsers such as NoScript
• share your life and lifestream, but restrict this to only those who deserve to know you and who you really know
• keep everything private and think that anything you’re posting to a website could be seen by your parents, partner or boss
• watch what your children are doing online and that they are not giving away information about themselves or the family that could be sensitive or dangerous – examples would include “going on holiday for two weeks” and connecting with adults they don’t know
• consider that everyone online is the equivalent of everyone you meet offline, as would you really trust “Bitcha Armoff”, the gorgeous and mysterious person who just poked you, in real life?
• think about opening two accounts on all social sites: one where you link to work colleagues and another where you link with friends and family – that way you can manage the work/life balance and keep personal separate to professional
• make sure that your privacy settings in both sites are set correctly and remember that by joining groups no matter how innocuous can result in many strangers seeing your profile, status updates and lifestream

Don’t

• use passwords and usernames similar to your bank logon details anywhere other than with the bank
• store your password and username on devices such as your mobile, netbook or laptop, or keep such information anywhere near them
• click on any links from people you don’t know or to something that sounds exciting but could be fishy, such as a Facebook link to see “Justin Bieber Gets Boner” can often link to a download of malware
• accept an invitation to link with just anyone – it may make you feel more popular, but any of those so-called ‘friends’ may be gangsters and murderers
• use location co-ordinates in your status updates as that’s asking someone to rob your house when you’re out
• mix work and play on your profile or social network
• put your birthday, telephone number, email address and particularly your work situation on any social networking site, as that’s a real giveaway
• link with mum and dad or most family members in any network with potential non-family or work members, as parents particularly post crap on your updates and might give away your mother’s maiden name or similar information
• talk about what you’re doing in the future except with those you trust, as this gives a perfect opportunity to ‘groom’ you for crime, e.g. “going to be at the Dog & Duck for Joe’s stag do is a real invitation”

Why do I say the above?

Because the number of times I’ve targeted people to coerce them into doing something they don’t want to do by knowing where to find them and when; who their friends, family and work colleagues are; what their tastes in music, books, films and sushi are; and more … oh, did I just say that?

On a more serious note, Facebook is being blamed for one in five divorces in the USA, and employers and potential employers are using these sites to see how fit for work you are. If your partners and employers are checking up on you, do your really believe that criminals aren’t?

I would urge every bank to post some sort of advice on their website, mobile and internet service, as it seriously worries me that customers aren’t getting this education and are probably giving away their identities as we speak.

I would also, as a bank, underscore that if a customer is found NOT to have followed these policies and procedures then they may not be covered for fraudulent account access and identity theft.

That way, the bank has protected itself, helped the customer and moved our new Bank 2.0 world a step forward.

Whilst banks ignore such perils, their customers are at risk.

 

Things worth reading: 24th March 2011

Things we're reading today include ...

Banks Bring Jobs to London, Pay Most U.K. Tax - Business Week

Science: Banks will boost research by £100m - The Independent

Corporation Tax: Bigger tax cuts for business, but the banks will not benefit - The Independent

Regime clan has £4bn in gold reserves, says IMF - The Independent

Russia's Nomos Bank plans $700m London float - The Telegraph

Ex-Intel man 'tipped' Rajaratnam - BBC

Hedge fund billionaire 'violated Goldman ethics' - The Independent

 

Banks "will absolutely not be disintermediated"

We got into another fine debate this week about bank disintermediation, a term used liberally throughout the 1990s and early 2000s when Web 1.0 came around, and then was dropped just as fast.

Disintermediation – taking the bank out of the customer delivery cycle and displacing it with a new provider.

As if that could happen.

We thought it might happen a decade ago and a decade later, nothing’s changed.

Sure, we have more banks competing with each other through these channels but Netscape, Intuit or Microsoft opening a pucker bank has not happened.  Even Virgin and Tesco's threat of disintermediating the banks has failed.

Sure, we now have bank net and mobile channels, but there is no big new bank anywhere in the world.

Sure, there’s PayPal, but PayPal is just a layer on top of the old system. They’ve not replaced anything.

Maybe I’m just being a realist, but banks don’t need to worry a jot about the new payment providers.

PayPal will never be a serious player: Visa and MasterCard will crush them.

The threat of a BT or Earthport offering a secure transaction alternative to SWIFT is just a fallacy.

And the idea of Google, Facebook, Amazon, Apple or any of those guys becoming a serious contender in the financial servicing space is just smoking dope. They’re not in that space. They’re search engines and IT shops, not financial servicing processors.

As Nancy Pierce from HSBC put it yesterday: “we will absolutely not be disintermediated … who’s better to move the money than the banks?”

Or as Mark Buitenhek of ING put it: “banks need to reinvent themselves as they will be disintermediated by other banks, because we are the only ones that are trusted for secure transaction processing.”

So, for all my bleating about change and new entrants, don’t worry about them.

They are irrelevant.

 

Things worth reading: 23rd March 2011

Things we're reading today include ...

António Horta-Osório reassembles his Lloyds executive team - The Telegraph

Light-speed trick in stock trades - BBC

Goldman chief called to testify in Galleon case - Financial Times

Portuguese Government on Verge of Collapse - Business Week

UBS risks running out of steam in Asia - Financial Times

Ireland warns it will fire top bankers found unfit - The Independent

Break-up plans force FSA to accept limits - The Independent

 

Extremely Vital Statistics

I found a mixed bag of themes this week as I’m scooping up numbers.

First, some interesting numbers include the fact that Google has 750 people working in their Payments Division, having just hired PayPal veteran Osama Bedier to lead it.

This is at the same time as PayPal hire Blackhawk Network founder Don Kingsborough, to go after the retail store network and take on Visa and MasterCard.

And just as Facebook  announce they are opening a Payments Unit too.

Change is afoot.

As one panellist at the conference I'm at this week said, during a discussion of new competitors: “We reached a digital inflexion point in film a decade ago and Kodak did not follow it. Five years later, they made no more film. The business model had fundamentally changed. Banking is at a similar inflexion point today.”

This followed a keynote presentation from Deutsche Bank who alluded to banking being like the music industry.

Music was profitable until the internet killed the radio star by giving it away for free.

Napster became huge during the early 2000’s until two things happened.

First, the legislative battlefield began to close down the illegal distribution of music; and second, Apple launched iTunes to go with the iPod.

In 2004, digital music represented just $20 million of the $25 billion revenues of the industry, as most digital music was being distributed for free.

Since then, music industry revenues have declined by 30% but, luckily, Apple launched iTunes in 2003 and, in 2010, the ten billionth tune was downloaded.

The change in the business model had occurred, from physical stores and CDs to online downloads and Amazon.

Similarly, thanks to iTunes, the business model had proven that you could move from illegal downloading to most people feeling comfortable paying 99 cents for a song to have it legally.

This is why, by 2009, digital music represented $4.5 billion revenues, or 27% of the global music industry revenue flows.

It is also why the songs now cost $1.29 per tune, up from 99 cents.

The business model has changed; the inflexion point has been reached; the world has moved on.

Will this happen in banking?

That’s the question and the answer is:

YES IT WILL!!!!

Google illustrates this with the growth in their payments business which is not a payments business.

Google are growing their Payments Division primarily from their focus upon the advertising profit pool, rather than necessarily making profits from payments per se.

The business model has changed.

And it’s changing fast.

For example, Techcrunch published one article last week that stunned me with its opening lines:

• Facebook has over 600 million users;
• Twitter had 25 billion tweets last year;
• Tumblr has a billion page views a week; and
• Zynga reached 100 million users on Cityville in just six weeks.

Critical mass can be reached in days, and businesses can be wiped out overnight.

Just ask Tower Records.

Meanwhile, as we see this growth in social networking – Facebook gets 30 billion pieces of new content every month! – much of it is being driven by women, who represent £13 trillion in consumer spending and, by 2025, will control 60% of the UK’s private wealth according to Odgers.

If Comscore says women are the majority of users of social networking sites and spend 30% more time on these sites than men; with mobile social network usage being 55% female, according to Nielsen; then I’d take a close look at this as a bank.

And I'd take a close look FAST.

Things worth reading: 22nd March 2011

Things we're reading today include ...

Warren Buffett backs Japan to rebuild, sees 'buying opportunity' - The Telegraph

Investors alarmed over EU reform process - Financial Times

US banks face fresh scrutiny on lending - Financial Times

Citigroup pays dividend again as Fed lifts bar - The Independent

The euro-debt crisis: Muddle, fuddle, toil and trouble - The Economist

Government urged to name banks who handled money for Gaddafi, Mubarak and Ben Ali - The Telegraph

Lenders lobby Treasury officials over commission's threat to force banks to restructure - The Telegraph

 

Cash is still #1

Another day, another payments conference and this one is International Payments Summit 2011.

Just had an interesting panel discussion with:

• Dr Michael Salmony of Equens;
• Dr Malte Krueger of the University of Applied Sciences, Frankfurt;
• Bridget Taxy of De La Rue; and
• Ron Delnevo of Bank Machine;

about the feasibility of a cashless society.

We’ve talked about this so often that it’s a discussion that is pretty meaningless as, no matter how hard card companies and banks talk about a war on cash, cash is still just as prevalent as ever.

Worldwide, the number of banknotes in circulation increases around three percent year on year, and cash in circulation still represents about six percent of the GDP of the Eurozone (12% in Russia!).

Even the most advanced payments economies, like Iceland, where 94% of transaction volumes are electronic have 6% therefore in cash.

Across the European Union, 78% of all payments transactions are in cash by volume of transactions, and that rises to over 90% in Russia and China.

It all reminded me of a speech from Lars Nyberg of the Central Bank of Sweden in 2008 who said that, for all of the attacks on cash, the volumes remained steady and could not decline further:

Cash payments still account for a large proportion of the number of transactions in the Swedish economy. But it comes as no surprise to anyone if I say that they have declined in significance in recent decades. As a per cent of GDP, the share of Swedish banknotes and coins in circulation (M0) has more than halved since the 1950s, from around 10 per cent to just around 3.5 per cent.

In the past fifteen years, however, the trend has levelled off. The use of cash has not declined in the same way as before. M0 in nominal terms has actually increased. If we look at the statistics for ATM withdrawals, we find that the total transaction value has remained fairly constant at around SEK 275 billion a year during the entire 2000s. The number of cash withdrawals has been around SEK 320 million.

Does this mean that we have reached a lower limit for how much the use of cash can decline? Has the heyday of the account-based payments ended? I do not believe we should be so sure of that. Cash is still expensive to transport and manage and a heightened risk of robbery in recent years has not made cash management cheaper. In the end, it is we consumers who pay the costs in different ways. However, we must probably point out that we Swedes like our cash more than most analysts believed a few years ago.

Similar experiences are reported elsewhere and cash remains a stalwart backbone of most societies worldwide.

Why?

Because there is no reasonable alternative.

Cash is simple, reusable, has no limits on values that can be exchanged, is totally anonymous, has no hardware involved, cannot be tracked and traced, is immediate and so on and so forth.

Equally, cash makes sense in all sorts of ways.

Try selling a car and what’s more trusted? A bank promise or a wodge of cash?

Try paying your babysitter with a credit card … it’s difficult.

How should you tip staff in a hotel or restaurant?

And when will merchants change their view and accept card payments for sub-£10 transactions?

Sure, some do, but they are still few and far between.

It’s a generational thing some claim, but others say Gen Y are bigger cash users than any.

Why?

Because it makes budgeting easy.

If you have £100 on Monday for the week and it runs out on Friday, you know you’ve spent out.

You don’t when it’s on a card.

That’s why I was intrigued to hear the story the other day of a woman who uses her television as a piggy bank.

How?

Because her TV works on a meter.

She pays £1 for two hours viewing.

However, if she’s paid in over £40 in a month, she gets anything left back.

So she puts £1’s in her TV all night every night, on the basis that this is the way she budgets and saves.

Strange, but true.

So why do we want to get rid of cash.

Various reasons with the cost being the biggest.

But what is the cost of cash?

Cash in transit and cash management systems are efficient, and the challenge is how to replace such systems.

Who would pay?

The merchants? The consumer? The government? The banks?

And if we got rid of cash, what would happen to all the cash machines?

Equally, is it really that costly? After all, look at counterfeiting operations and they’re pretty pathetic in comparison to card theft numbers.

So cash makes sense, especially the Seigniorage that governments make from cash.

For example, the US Government makes $5 billion a year from issuing quarters that cost dimes to make. The average 25 cent coin costs 10 cents to manufacturer. The 15 cent profit makes eminent sense … or is that cents.

And what about the success of alternatives?

Contactless for example.

Is contactless really a viable alternative?

Not according to one card firm who has spent millions advertising contactless cards in the UK, and yet recent numbers showed 6,000 contactless transactions in London across 20,000 readers in a month.

Not bad?

Not good!

Their busiest London ATM saw 29,000 transactions the same month.

29,000 transactions at one terminal versus 6,000 across 20,000 readers … not great.

Sure, that will change …. but it’s not happening yet.

And then we have the final argument: cash supports the underground economy.

Yea, right.

Do we honestly believe that if we got rid of cash completely, that the criminal fraternity wouldn’t find some other way to launder and pay?

Come on, get real.

So, as you can see, our panel firmly believed that cash is here and here to stay.

A bit like a paperless society, the cashless society dream is still just that.

A dream.

 

Things worth reading: 21st March 2011

Things we're reading today include ...

Lehman trustee is suing Citibank - BBC

Eight-year jail term for theft of bank's code - Financial Times

Barnier warns of complacency amid reforms - Financial Times

Goldman Sachs takes the axe to its underperformers - The Telegraph

London tops financial services league - Financial Times

New banking stress tests come under fire - The Independent

Reform of British banks may cost £15bn a year - The Telegraph

 

The Finanser's Week: 14th March - 20th March 2011

 

Our biggest stories of the week are ...

Future visions in video

As anyone who tracks this blog knows, I love all things futuristic. Via Rob Findlay I discovered this video yesterday from Corning Glass ...

Monthly MiFID Monitor, February 2011

We are pleased to provide our eleventh month of monitoring the MTF performances in European Equities trading, in partnership with Thomson Reuters Equity Market Share Reporter (EMSR).

Capitalising on the Japanese disaster

The Japanese earthquake and tsunami over the weekend was terrible. In a country that is familiar with Earthquakes – remember Kobe – it is surprising the devastation caused, and the Tsunami that followed made it far worse. In fact, a...

Great identity theft infographic

I almost missed this, but found a wonderful infographic on identity theft produced by Lines & Moodswings. Well worth a look if you like statistics on fraud and theft.

CNN - not news, but fraud

After my note about identity theft the other day, I got a nice note from Barry Marshall at Identity Intelligence (IDI), who run a database about fraud. Their numbers are staggering, and they define the issue today is not about Card Not Present (CNP) fraud, but Card Not Necessary (CNN).

How a cyber-security firm got hacked

This is just amazing and something that almost slipped under my radar somehow. Earlier this year, we were all waiting with bated breath for the leak of secret Bank of America emails via Wikileaks. It was going to be explosive...

Bank branches are not dead

We’ve had lots of discussions about the branch being dead. For example, Brett King recently wrote a blog entry: “If your bank is opening branches – get worried” with some great stats: Bank visits have declined in the US by 20% in the last decade ...

Survey: are payments infrastructures fit for purpose?

We've had a lot of dialogue about interoperability and the difficulties of getting all the pipes and plumbing of payments to work together. The real question is whether payments processors are meeting the challenges of the world of 2011?   To find out, we are launching a survey to see what readers think of SWIFT, EBA, Fedwire and other clearing systems.  To join in, click: https://www.surveymonkey.com/s/P5KN6V3

 

 

The major general news stories of the week include ...

Lloyds job cuts: graph - The Telegraph

Lloyds Banking Group has announced it is to cut 570 jobs and outsource a further 600. As the graph below shows, the bank has axed thousands of staff since the recession hit.

What next for the FSA? - The Telegraph

On May 20 1997, the FSA was formed by then Chancellor Gordon Brown - it will be broken up by the end of 2012.

Bank bail-outs: in pictures - The Telegraph

Lord Turner, chairman of the Financial Services Authority, said in a speech on Wednesday that the best way to prevent big banks from failing would be to impose a significant surcharge. Here, we look at some of the banks (and one country) that needed help during the credit crisis

Libor explained: the real cost of money or just a fix? - The Telegraph

It is the monetary policy committee you have probably never heard of - a group of bank treasurers and officials from the British Banking Association that set interest rates for trillions of pounds worth of international lending each working day.

NAB UK chief Lynne Peacock exits as Lloyds talk grows - The Telegraph

National Australia Bank's UK chief executive is to step down as speculation mounts over the lender's interest in 600 branches currently being sold off by Lloyds Banking Group.

Number of City jobs created rises 30 per cent - The Independent

Nearly 6,000 jobs were created in the City last month, 30 per cent more than last year and 6 per cent more than in January, according to a financial services recruitment company. Meanwhile, dissatisfied bankers unhappy with meagre bonuses pushed job application numbers up by a whopping 47 per cent,

Banks have £1.6 trillion exposure to ailing quartet of Greece, Ireland, Portugal and Spain - The Telegraph

The total exposure of foreign banks to the struggling quartet of Greece, Ireland, Portugal and Spain tops $2.5 trillion (£1.6 trillion) once all forms or risk are included, according to the latest data from the BIS.

History's lesson is that investment and retail banking must be separate - The Telegraph

The economic newsflow was thick and fast last week. Ongoing commodity price jitters combined with renewed fears of another eurozone default - this time in Spain, the currency union's fourth biggest economy.

Retail banks face significant challenge - The Independent

The recent round of UK banking results shows that despite a rebound in 2010, retail banking faces "significant challenges" in the next three years, according to a new report.

British bank accounting standards 'not fit for purpose' - The Telegraph

One of Britain's most respected accountants claims the controversial International Financial Reporting Standards used by British banks are not "fit for purpose".

 

If you like the Finanser, check out the books of the blog: the new Complete Banker Series

 

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