The Financial Services Club's Blog

All credit to Jane

Jane wakes to the sound of Michael Bublé on her wristband communicator (a 4G broadband videostrap).

She washes and has breakfast before skipping out of the house and onto the metro.

As she enters the station, her communicator flags to the metro system that “Jane Smith” has passed through the doors.

She reads the paper on her 3D glasses, which show a 24” screen of digital news feeds from her wristband communicators.

It looks pretty strange to non-wristband users, to see all of these people waving their hands around in front of their faces as they wear their wireless glasses and wristbands, but hey, this is the future.

Arriving at her destination, she leaves the metro and picks up a coffee and blueberry muffin from Costabucks. Her wristband transmits 2 credits to the store wirelessly.

Then down to work.

During the work day, she makes 15 video calls, 5 audio calls, 108 status updates and downloads 421 gigabytes of data. Most of the data is video newsfeeds and a few episodes of “Desperate Husbands”, the 8th season originating from the Desperate Housewives of 2004.

Her digital account records 2.25 credits for the day.

She then returns to home, with the door opening as she walks up to her apartment based upon instant recognition of her biometric heartbeat from her wristband communicator.

She gets ready for a night out and puts on the new LBD picked up at lunchtime for 40 credits.

Then it’s down to the Newbar to meet up with Emily and Chloe.

After a few quick vodka red bulls (3 credits), they catch the metro and get up to Jensons nightclub (4 credits for entry).

Upon returning home, via the metro again, her digital currency account wirelessly transmits 4 credits to the metro system to pay for her travel for the day.

Then it’s to bed, where she does a quick tally for the day:

• 2 credits for Costabucks
• 2.25 credits for calls and data
• 40 credits for the new dress
• 3 credits to the Newbar
• 4 credits to Jensons
• 4 credits to the metro

Total of 55.25 credits taken from her Facefeed account.

Not bad for a Friday.

Oh yea, should have said, just playing with an idea here ...

Banks “have to unhinge themselves from the physicality of banking”

I interviewed good friend Brett King last week, author of Bank 2.0, and here’s a podcast that some Finanser readers might enjoy:

Download Brett King Podcast (right-click link to save file)

Brett King from Chris Skinner on Vimeo.

Note that I started by trying to bait Brett a little bit by being a technology and innovation cynic, which I’m not. In fact, most of what he says I’m in violent agreement with.

For example, Brett says that banks “have to unhinge themselves from the physicality of banking” due to the behavioural shift of customers to digital media, which is what his book is all about.

Right now, “most banks won’t be able to cope with that behavioural shift of customers and the way we look to interact daily in terms of money and financial transactions and products.  What will happen is organisations such as Apple, PayPal, Zopa and these sorts of organisations will come in and fill the gaps.

“The banks will still be there as the back-end facilitator, but the user experience will be increasingly owned by a third party.”

This is going to get worse as “most customers can get access to their footprint of information about their relationship with the bank through internet banking, and get a more consolidated view of their relationship with the bank than staff within the bank themselves can get, because they have so many disparate systems within the branch and the call centres.

“The single customer view, which a lot of the banks are working on at the moment, is going to be important.

“But moving forward in the three to five years time span, as traditional media continues to deteriorate in terms of its ROI and ability to engage customers, the key will be behavioural analytics: understanding what customers have done before and trying to anticipate what they will do in the future to provide them with an on-target, impactful offer.”

All good stuff and well worth a listen or even a read.

EU's bank stress tests creating more bank stress

It turns out that 91 European banks are to be put through a ‘stress test’ to see how well or badly they will cope with a shock to the system. The stress test itself was a little unclear until late last week, when the Committee of European Banking Supervisors (CEBS) detailed what would happen. As a result, a lot of folks think it’s a fudge, and the intention of creating more confidence in the EU’s banking system may actually have achieved the opposite.

Here’s the lowdown.

CEBS stress tests were announced after their initial approach was viewed as being too little and too narrow. The intention was to stabilise confidence in the EU banking system following the crisis in the Eurozone, and the approach was meant to follow the example set by America in May last year.

Back then, everyone felt the American banking system could not deal with the exposures they had to OTC derivatives, so the Federal Reserve tested the banks to see if they could deal with not just those exposures, but any other severe shocks to the system.

The US tests used two economic scenarios: one mirroring the consensus of economic experts on the course of the downturn through 2010, and the second modelling a worse-than-expected course of economic activity.

This resulted in recognition of a $74.6 billion shortfall, which was far less than the figures being bandied around before the stress test results. For example, the IMF estimating that the U.S. banks needed another $275 billion to $500 billion whilst some analysts throwing figures around that the industry may need as much as $1 trillion.

The less than anticipated shortfall led to increased confidence in the American banks. That confidence led to some stability in the system thereafter, financial stocks jumped 36% in the seven months after the tests, which is why it was worth doing.

This is why the US example was followed by the lengthy discussion of living wills in the UK regulatory sector, and the idea of reverse stress testing as implemented by the FSA last December. In these tests, banks are meant to imagine that they have failed and then have to work backwards to determine which risks and vulnerabilities caused their hypothetical collapse.

The FSA’s approach to stress testing consists of three main elements: companies’ own internal stress testing, where they assess their ability to meet capital and liquidity demands in a sudden downturn; the regulator’s testing of specific companies; and simultaneous “system-wide” stress testing, based on a common crisis scenario.

In both the US and UK examples, the stress test methodologies were completely transparent and now we come to the European bank stress tests.

In the EU tests, CEBS will study 91 banks, mainly in Spain and Germany, but also several other key banks including Britain's "Big Four" – RBS, HSBC, Barclays and Lloyds. In the latter example, thanks to the FSA’s scrutiny, they have already been subject to tough tests at home and should pass with flying colours.

The list is actually considerably longer than the original announcements in June which selected just 25 banks for review, and includes the German Landesbanken for the first time.

The significance of that decision cannot be underscored more deeply as BaFIN, the German regulator, announced a year ago that €800 billion of toxic debt sat on the balance sheets of these banks, particularly some of the Landesbanken, and that was double the amount they had estimated just three months earlier.

With almost $1 trillion in deposits, 2,500 banks and 45,000 branches, Germany also has one of the densest banking networks in the world, and hence a weakness in the German system would be a weakness for all, particularly as Germany has been bailing out Greece and, soon, Spain, Italy, Portugal and more.

In Spain’s case, as recently blogged, there is a big problem with the mid-size banks where the savings banks, regional banks and mid-sized banks are all closing, merging and consolidating, with anything from a quarter to a third of all Spanish bank branches to close.

That’s not good.

But the stress tests can turn this situation around by showing that Europe can cope with even the worst case scenario.

That’s a tough call, as we are all asking: ‘Can it?’

After all, a stress test if it turns out to be negative will worsen the situation but, if it’s positive, it will improve everything.

So the stress tests are being reported to be as transparent as the US version, with a three scenario test, according to the German newspaper Handelsblatt.

The first will analyse how banks perform if economic growth is at the rate forecast by the European Commission; the second will test the effect of a 3% drop in gross domestic product; and the third will look at how banks would cope with a "shock" situation in government bond markets, a scenario similar to events in May this year when Greece was downgraded by Standard & Poor’s.

It is that downgrade which has caused all of these jitters anyway, and created the uncertainty and lack of confidence in the Eurozone. Without confidence in the European banking system, then even worse scenarios could be considered, such as the collapse of the Eurozone and a return to national boundaries and nationalistic tendencies therein.

But there is already an issue with the European stress tests as the approach, structure and details of the tests have been changing over time, and many think the results – to be announced on 23rd July – will be a fudge. This view was given even more fuel when there were rumours that France and Germany were trying to suppress the methodology to be used for the tests.

This is bad news, as the lack of confidence in European banks will be made worse when or if there is a lack of confidence in the European banks’ stress tests, and the stress tests will only increase market uncertainty, rather than decrease.

All in all, my view is that Europe is caught between the Devil and the Deep Blue Sea.

If they complete the stress tests and release the results with complete transparency, there is likely to be some fallout. Unless the results show that the fears for bank counterparty risks in Europe are unfounded, which in the case of the Landesbanken and Spanish caja banks is unlikely, then it will just confirm what many already suspect: Europe’s broke.

On the other hand, if they complete the stress tests and release the airbrushed results that show some manipulation or opaqueness, then everyone will believe that their fears for bank counterparty risks in Europe are proven.

Therefore, what seemed to be a great idea to bolster confidence in the Eurozone may actually prove to be a lose-lose situation.

So how can the Eurocrats create a win out of this?

Just be totally honest.

If there are real issues in the heartland of Europe’s banks, be brutally frank about them.

It is only with total honesty, transparency and clearly washing any dirty laundry in public at the end of the month that Europe has any hope of surviving this current battering.

Think the unthinkable

Many interesting, weird and wonderful things drop into my inbox, Facebook newsfeed and twitter status updates.

Take yesterday.

I was sent:

• a copy of the BBA’s Annual Abstract of Banking Statistics,
• lots of notes from my accountant,
• various invites to press shindigs,
• a note from FatBoy Slim, who is an England groupie at the World Cup,
• a disgusting PowerPoint show detailing World Cup supporters of the opposite sex,
• a solution for the issues Apple iPhone4 users are having with signal loss if they hold the phone the wrong way around

• 

• and a note from my conspiracy theorist friend about the weird coincidence that, on 7th July 2005, a company was running a simulation of a terrorist attack in London using the exact situation that became a reality that very morning.

How coincidental was that?

Anyways, talking of simulations, I am also getting lots of emails from bank economists with the title generally being: THINK THE UNTHINKABLE.

The one that really grabbed my attention was from ING, looking at what will happen if the Eurozone collapses.

We’ve had this discussion a few times lately, since Greece and co have been under duress, but no matter how much dialogue there is over this, it never seems to quite go away.

But I’ve not seen a bank analysis of the consequences of a Eurozone breakup before.

Here’s the opening lines:

“Suddenly the unthinkable is thinkable. The possibility that one or more of the members of European Monetary Union (EMU) might leave is no longer being dismissed, even by Eurozone politicians. In this report, we discuss not the probability of this – readers will doubtless have their own views – but rather its potential economic and financial market impact. Complete break-up would have effects that dwarf the post Lehman Brothers collapse.”

Oh dear.

The report is written by Mark Cliffe, Global Head of Financial Markets research, who looks at two scenarios: what happens if Greece leaves the euro and what happens if the Eurozone falls apart.

The first scenario is bad: “While the initial economic damage of a Greek exit is naturally focused on Greece itself, the effects elsewhere are non-trivial. While Greek output falls by 7½% relative to our base case, the remaining Eurozone economies could see their output fall by as much as 1%. Losses on Greek assets spread the pain across Europe and beyond.”

The second is horrible: “the impact of complete break-up is dramatic and traumatic. In the first year, output falls by between 5%and 9% across the various former member states, and asset prices plummet. With their new currencies falling by 50% or more, the peripheral economies such as Spain and Portugal see their inflation rates soar towards double-digits. Meanwhile, Germany and other core countries suffer a deflationary shock. Indeed, with the US dollar surging on safe haven flows to the equivalent of 0.85 EUR/USD, the US also suffers a bout of deflation.”

He concludes that: “without extended preparations for EMU exit, the risk of at least a temporary breakdown in payments systems would be enormous. In our complete EMU break up scenario, the cumulative loss of output in the first two years is close to 10%, dwarfing the loss that followed the collapse after the demise of Lehman Brothers in September 2008.”

Yeuch.

So I do wonder what our banks are doing to protect us from such a disaster by preparing contingency plans for the Eurozone collapse. Believe me, they are creating contingency plans.

Mind you, it’s more cheery than the note I got from the economists at the Royal Bank of Scotland, who “strongly believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe), and for the global economy (particularly in the US/Europe).”

This one is written by Andrew Roberts, who is “amazed there is not now immense market & media focus on the new letters that will bring forward the end-game and worsen it.”

The 'new letters' to which he refers is the SEC Rule 2a-7 which came into force on 30th June, and demands that US money market funds take a safer position when it comes to their investment policies.

There’s US$2.8 trillion of 2a-7 funds, and this rules demands that they now own 30%, not 5%, of assets in sub 7-day liquid paper. In other words, money that is available for access if liquidity is needed within seven days.  This means investing a third of the portfolio in short-term bonds and gold, whilst avoiding longer term investing in things such as ... er, sovereign debt.

“We can all see the logic – the sovereign defaults from EMU have the power to hit EMU banks badly, and the USA does not want to repeat the calamitous ‘breaking the buck’ problem when” they let Lehmans collapse.

Mr. Roberts believes that “the USA is basically pulling up the drawbridge and retreating into its fortress, trying to protect its financial system from coming European banking problems. But the consequence is clear. Banking is about confidence. If you are reliant on markets to fund yourself and that confidence wanes, a total stop can occur immediately/within days. Northern Rock (75% reliant on wholesale markets) was the first example of this in the UK, though not the last. Once we apply 2a-7 to our economic slowdown/deflation themes, this means one thing. If there is a slowdown and sovereign trouble, the problems facing EMU banking have through this rule potentially become a whole lot worse. This worsens – and brings forward – the ‘cliff edge’ potential.”

Jeez, this sounds serious although one of my mates tweeted a response: “surely history tells us RBS haven't the faintest idea what the economy might or might not do?”

Thing is that it’s not the end of it.

Morgan Stanley, for example, put this chart in their gloomy outlook:

And state that: “euro area banks’ exposure to the EMU periphery could amount to about €140 billion. Germany’s banking sector seems most exposed to Spain, France’s to Greece and Spain’s to Portugal ...

European banks are more wholesale-funded than any other major banking system. According to our equity analysts, European banks have €3.3 trillion of senior wholesale funding – almost half due in 2010-12. We think that providing extra liquidity might help to buy time, though the fundamental problems are unlikely to go away very easily. Bank recapitalisation, further fiscal restraint and structural reforms might help to address the underlying issues.”

Looking at the other economic outlooks, thye’re all talking about the euro, the Eurozone and the probability of a double-dip recession being high.

That blows my tracker fund investments then.

Guess, I'll just have to put all my money on the Netherlands winning the World Cup finals.  After all, going Dutch only means spending half of the cost rather than having to take all of it!

Bank branches and the next gen mobile

Spent a lot of time yesterday talking with folks about the future of money, payments and banking.

The conversation got interesting in two particular areas: branches and mobile services.

This is because I realised some things.

Take branches.

There appears to be an evolution of branch usage from underbanked economies through emerging economies to developed economies.

In the underbanked economies, the issue is often a mixture of a lack of infrastructure and investment combined with low income and low prospects.

In these instances, banks don’t make investments in branches as there is only going to be profitability from clients in major urban areas where there’s population density, wealth and work.

As a result, these countries have had little banking prospects, availability or access, but this is changing due to the introduction of mobile wireless infrastructures.

Even so, these communities will still remain underbanked as full bank services have limited availability in rural communities.

You then move to emerging economies, and find the massive urbanisation of these economies is creating new wealth and new communities. You only have to look at the urbanisation of China, with the rural population to urban population changing from 74% to 26% in 1990 to a major switch in 2009 of 53.4% rural to 46.6% urban to realise such change.

And with such change, comes branches and branch banking. China has seen a revolution in banking during their change process, and today’s Chinese banks hardly reflect those of two decades ago in service and style.

In this instance, mobile services range from simple to complex, and the mobile channel is everything from basic payments to full service banking depending upon which consumer segment the bank serves.

Then you look at developed economies, and the bank branch is already inbuilt to their model from the past. The branch may be an asset or liability, but the criticality is that new channels and technologies – internet and mobile internet specifically – are offering additional and alternative capabilities for these banks to reach their consumer.

This also varies by culture and language. For example, Spanish bank customers much prefer bank branch access than UK customers, who would rather call their bank than visit a branch.

So you cannot generalise too much about these services.

Nevertheless, and this was my other realisation, you can also see big changes in mobile.

I’m no mobile expert but in banking, I’ve seen five phases of mobile channel access and usage.

The first was basic payments processing and transaction services using SMS text messaging.

Then there were additional bank account services based upon Wireless Application Protocol, WAP.

Third generation mobile bank services offered a more multimedia rich interaction, based upon smartphones. This was OK but limited by the fact that you had to design your apps for each phone operating system and, in some cases, model of phone. Hence, it was very limited.

Fourth generation is where we are today, and I recently blogged about the killer apps offered by iPhones and Androids. The beauty of this generation is not only that we now have phones that can offer idiot proof bank services, but apps that can be developed and deployed for mobile internet. Therefore, the design is no longer for a specific phone model or operating system, but for easy access to multimedia rich banking services using Open APIs.

Finally, there is a next generation mobile service appearing on the horizon ... the chip-neutral device.

Today, we have EMV chips for cards, SIM chips for phones and RFID chips for contactless services. This is all going to change in the next few years as Visa, MasterCard, the GSMA and mobile operators work together to develop chip enabled services that are device-neutral.

Hence you could stick your communicating wireless payments chip into any machinery, gadget, tool or technology you want ... a telephone, a watch, a television, an iPad, a laptop, a pair of sunglasses ... anything and everything can become a wirelessly communicating, interactive payments device.

Roll on the next generation.

With perfect foresight, where would you invest?

I recently blogged a lot about 10,000 year thinking, the Long Now and how it relates to financial services. If you missed it, then here’s the info:

• The Long Now of Finance, Part One
• The Long Now of Finance, Part Two
• The Long Now of Finance, Part Three

In fact, the whole meeting of the launch of the Long Now of Finance was recorded and, if you have 40 minutes free or even 10 minutes (bearing in mind that we’re talking 10,000 years ahead, that’s not bad) then you can hear Brian Eno, Alexander Rose and Stewart Brand introducing the concepts properly through this video:

We followed this up with a discussion of the Long Now of Finance at the FSClub on 7th June.

Here’s a short write-up of what transpired from guest contributor Richard O’Rourke:

Monday evening saw another excellent Financial Services Club event with the Long Finance team.

The evening was kicked off by the panel chair, Professor Michael Mainelli, founder of Long Finance.

He provided an overview of Long Finance and summed up its raison d'etre as 'When would we know when our financial system is working?'

Drawing attention to work he'd recently published, 'Just Doing My Job: Intelligence versus Integrity in Financial Professionals', he pointed out the difficulties facing the finance professions and their institutions.

He also talked about the impact of 'feed forward loops' which make financial systems intrinsically unstable, complex and not suited to normal distributions.

Drawing inspiration from David Hilbert's Meta Mathematics project of 1900 setting out a roadmap for the key mathematical challenges of the 20th century, Mainelli described the MetaCommerce part of Long Finance as an attempt to identify the impertinent challenges that need to be overcome by the global financial community.

First of the panelists to speak was historian Dr Malcolm Cooper, author of the first Long Finance Eternal Brevity paper, 'In Search of the eternal coin' (32 page pdf).

He made two observations of note, the first, that land has always been part of long term value. The second was that, despite the scale of their merchant empire, the Carthaginians had no coinage.

Next up was David Steven, author of the Finance Short paper, 'Time To Stop Betting The House' (42 page pdf).

He remarked on his surprise that despite what has arguably been the greatest financial crisis since the thirties, and the collapse of house prices in the US and elsewhere, in Britain house prices have barely paused for breath and have even started climbing again.

The question on his mind is 'has Britain simply delayed the inevitable?'

He also highlighted his belief that the pervading dynamic in Britain's housing market represents the single largest transfer of wealth from the young to the old in its history.

Inter-generational transfer was a point picked up on by the final panelist, Jan-Peter Onstwedder.

He pointed out how our generation is the first to turn an age old tradition on its head by attempting to consume future wealth today rather than enhance it for future generations.

He highlighted how it is becoming increasingly believed that we are bequeathing to our children a world in a worse state than we received it.

He also pointed out how a key financial tool for measuring value across time, NPV, has probably contributed to poor inter-generational decisions.

When the discussion was thrown open to the floor it revealed an audience of both pessimists and optimists.

The pessimists started by pointing out that we're locked into the current financial paradigm and a sustainable replacement can only emerge after our present system collapses. Malthus even got a mention.

Quick to rally to the optimists cause, Z/Yen's Ian Harris reminded us that throughout history there have been those concerned with catastrophe and collapse and each time our ingenuity has triumphed. Jared Diamond's 'Collapse' was mentioned in the context of what might motivate our present society to choose success over failure.

Finally, I recently spent a day with some futurists, as mentioned.

The result of that day is that we decided to create the Long Finance Futurists Forum, with founders including:

• Chris Yapp (SAMI Consulting)
• Gill Ringland (SAMI Consulting)
• Ilaria Frau-Hipps (University of Cambridge)
• Martin Duckworth (SAMI Consulting)
• Michael Mainelli (Z/Yen)
• Oliver Sparrow (Challenge! Forum)

Oh yes, and me!

Our first output from this meeting is the attached document:  Download "Where shall I invest" (Word Doc).

The idea is to look at what would have happened, post the last financial crisis of 1929, if someone had taken an investment position based upon the various geographic views of that time.

We then pose the question: with perfect foresight, where would you invest for the next century?

All in all, the Long Now and the Long Finance Futurists Forum will be an ongoing process of dialogue, discussion and debate, and will gain some traction at this year’s SIBOS I suspect.

Therefore, if you’re interested in the Long Now and a real focus upon Future Finance, let me know and will make sure you get invited to these discussions.

 

When's the next financial crisis and what will cause it?

WARNING: THIS BLOG ENTRY WILL NOT CHEER YOU UP [sorry]

I spent the morning with a group of futurists debating the long-term outlook for financial markets and am never sure about the usefulness of such debates, although there is definitely something of use in creating scenario plans for the future which is where we were focused.

The key question I kept asking myself during the conversation is: when will the next financial crisis take place, what will cause it and is it predictable?

To answer the first part of that question, we only need to look back in history.

If we take the first financial crisis as the fall of the Roman Empire then it was about 1,000 years until the second financial crisis occurred, with the collapse of the Medici banks of Renaissance Italy. Four centuries later, the South Sea Bubble and Great Tulip Collapse took place. 250 years after that, we hit the Great Depression; and 80 years after that we imploded in the Subprime Crisis and Global Credit Crunch.

Sure there were plenty of hiccoughs along the way - LTCM, Asia, Russia and Latin American implosions in the late 1990s for example - but global crashes have been notable.  Loosely speaking, global crisis are now occuring twice as fast as the previous ones:

• 1,000 years – the Roman Empire to the Medicis
• 400 years – the Medicis to the South Sea Bubble
• 250 years – the South Sea Bubble to the Great Depression
• 80 years – the Great Depression to the Subprime Crisis

On that basis, you could bet on the next crisis being anything between thirty and fifty years from now.

2040 to 2060.

So what would cause the next financial crisis? After all, we’re only just trying to get through this one. Surely we can regulate to avoid another one?

Maybe not.

Here’s a view you could take of the factors that contribute to the next financial collapse. I should say that it doesn’t make for fun reading, but the logic could have some grain of accuracy.

2011

Banks globally are heavily regulated, taxed and governed to avoid another subprime crisis. The focus is on derivatives, liquidity, capital and governance.

2012

The European Union struggles through a fragile and fallow period of financial and political instability with Portugal, Italy, Greece and Spain managing to just about maintain Eurozone requirements. Unfortunately, it is at the expense of citizens and governments in many of these nations.  In fact, the cuts and tight budgets in these Southern member states creates a major movement of economic migrants from Southern Europe into Northern Europe, with the associated tensions and fissures appearing between Northern Europe and Southern Europe as a result.

The outcome is that Europe never quite achieves the competitive economic zone it dreamed of becoming.

2016

China opens its markets to full financial servicing, with a rocking stock exchange in Shanghai that becomes the world’s second major investment banking city by volume and value by 2020, just behind New York  This is combined with a revaluation of the Remnimbi (RMB) that satisfies their critics but worries some, particularly the USA, as the Chinese currency is looked towards by the investment community as a possible alternative reserve currency.

2019

Rather than creating a reserve currency for the world, the investment community creates a basket of currencies to avoid too much exposure to risk in one economy – after all, they don’t want a repeat of the 2008 crisis. The basket includes Euro, RMB and Dollar, along with Gold and other commodities. Nevertheless, the decision to place a weighting towards RMB rather than the Dollar creates issues for the USA, which has spent most of the 2010s in stagnation.

2022

The Middle East enters a major crisis, as oil becomes less needed as a commodity due to the rise of alternative energy sources and conversion of many motorised vehicles to electricity. Iran and Israel go to War and there is a huge effort by the United Nations to bring stability to the region. Eventually, Sovereign Wealth from the GCC outflows towards new and rising economies, such as Africa, and tensions continue to rage across the region on an ongoing basis.

2025

Africa’s economy is raging onwards and upwards. Like the BRICs of the 2000s, Goldman Sachs creates a new investment portfolio known as CAGES – Congo, Angola, Guinea, Ethiopia and Sudan – where natural resources of platinum, cobolt, gold, diamonds, manganese, uranium, chromium and tantalite are abundant. Johannesburg is rising fast as one of the largest world financial centres.

China is now the largest trading partner and region with Africa, thank to their investments at the turn of the century. America finds this to be particularly challenging, as their view of Africa had been one of occupation and charity, rather than investment and growth, during this period.

But China doesn’t care too much, as China has now become the world’s largest economy.

2028

American and European investment firms decide to make RMB the reserve currency of the world, and drop the concept of the basket of currencies.

2032

The quiet rise of India as the world’s second largest economy had largely gone unnoticed but, in 2032, for the first time China’s economy had less than 3% growth. This was put down to the lack of skills in the country where skills were needed, and is a reflection of the aging population in China and lack of new blood. China’s one-child policy of the previous century, and a distinct lack of female population for the overly male populated society that resulted, means that 2 in every 5 citizens has reached or is near retirement age. This, combined with strict immigration controls, places a strain on continued growth and industry.

2039

India’s continually booming economy has created frictions between their Chinese border rivals, and a Cold War commences between the two nations. Like the Cold War of the previous century, no arms are traded or battles take place, but the economic controls freeze out much of China from India’s trading partners and vice versa. The result is an economic climate where India’s investment community trade with India and China’s with China.

There are ripples through the Shanghai and Mumbai stock exchanges as a result.

2044

India continues to see success as a stable and harmonised country. China appears to be becoming more unstable as the government struggles to maintain investment and trading, and avoid the inflationary pressures created by their exposure to investments in Africa for future commodities that can no longer be utilised.

The economy fails to achieve growth rates above 1% for three quarters, and the government determines that the Remnimbi needs devaluation. This angers the USA and Europe, who have major investments in Chinese land and other illiquid stocks, along with major reserves of Chinese currency.

The decisions taken by the Chinese government force them to look towards India and Africa.

2050

The outflow of investment by American and European investment houses from China results in aggressive currency arbitrage between the Chinese RMB and the Indian Rupee, with the latter winning as the RMB’s reserve currency status ends.

The resultant big time betting against the continued stability of China causes the Cold War between India and China to spill over into skirmishes.

The world sees a period of major instability ensue and the China Crisis is put down to currency speculation amongst the world’s capital markets created by complex foreign exchange instruments intertwined between the major economies.

Nothing to do with housing this time.

Jeez, that was a depressing vision and I told you this conversation wouldn't cheer you up.

Thank goodness it’s just fiction.

However, if you like this sort of future conjecture and dialogue, you are welcome to join us for two more optimistic discussions (hopefully) at the FSClub in June:

Monday, 07 June 2010
The Long Now of Finance
A panel discussion with Professor Michael Mainelli and guests

This evening is dedicated to a panel discussion focusing upon: "The Long Now of Finance - a Framework for the next 10,000 years".

Many financiers and academics are beginning to focus upon how to invest in long-term projects that secure the planet for our children and grand children and great grandchildren. Short-term thinking is killing the planet. So how do we think long term: the Long Now, and how do we fund it: Long Finance?

Long Finance is an initiative begun in 2007 by Z/Yen Group in conjunction with Gresham College, to establish a World Centre of thinking on Long-Term Finance. The initiative began with a conundrum – “when would we know our financial system is working?” and has worked on a variety of projects, including the signature program focused upon an Eternal Currency.

This debate will be chaired by Professor Michael Mainelli, a cofounder of Long Finance and Executive Chairman, Z/Yen Group.

Monday, 14 June 2010
The Future of Banking, a discussion with Professor Ray Barrell, Professor David De-Meza and Professor Donald MacKenzie of the Economic and Social Research Council, chaired by Brian Caplen, editor of the Banker Magazine.

The Economic and Social Research Council (ESRC) is the UK's leading agency for research funding and training in economic and social sciences. Established in 1965 as the Social Science Research Council, under a Royal Charter, the ESRC covers a wide range of disciplines, ranging from anthropology to statistics with a budget that has grown from £73 million in 2001-02 to £204 million in 2009-10. Financial services are a key sector for the Council's business engagement strategy. The ESRC is partnering with the Technology Strategy Board on the new Financial Services Knowledge Transfer Network. This evening the ESRC has kindly agreed to host a discussion focused upon the Future of Banking featuring three very distinguished scholars.

Professor David De-Meza is with the London School of Economics and has published many papers on banks policies in a wide range of journals. He is the on the Council of the Royal Economic Society and the Institute of Economic Affairs; Associate Editor of the Journal of Industrial Economics and Joint Managing Editor of the Economic Journal.

Professor Donald MacKenzie is a Professor of Sociology at the University of Edinburgh, with work that has constituted a crucial contribution to the field of Social Studies of Finance. He has also undertaken widely-cited work on the history of statistics, eugenics, nuclear weapons, computing and finance, and was awarded the Chancellor's Award from HRH Prince Philip, Duke of Edinburgh and Chancellor of the University of Edinburgh, in August 2006 for his contributions to the field of Science and Technology Studies.

Professor Ray Barrell is a visiting professor at Brunel University, Director of Macroeconomic research and Forecasting for the UK and World Economies, and Senior Research Fellow at the National Institute of Economic and Social Research. Previously, he has been a visiting Professor of Economics, Imperial College, London from 1996 to 2004, and was a part-time professor at the European University Institute, Florence, 1998-1999. He is on the editorial boards of Economic Modelling and was on the board of the Journal of Common Market Studies until 2007.

What happens to SEPA, Chi-x etc if the euro fails?

There’s the classic old joke about the European dream being a place where the police are English, the chefs are Italian, the car mechanics are German, the lovers are French and the bankers are all Swiss. The nightmare is that it is a place where the police are German, the chefs are English, the car mechanics are French, the lovers are Swiss and the bankers are Italians.

It seems that the nightmare is coming true, although the basket case is Greece and the bankers are German.

Last week’s surprising comments from German Chancellor Angela Merkel that “the euro is in danger” and “if the euro fails, Europe fails” sent shudders across the world’s markets, and probably made Brussels shake with rage.

But the Germans are shaking with rage. After Nicolas Sarkozy was rumoured to threaten Merkel with France’s withdrawal from the euro if she didn’t step up to the plate and support a Greek bailout, Germany’s citizens have been demonstrating their rage by printing deutsche marks whilst the national newspaper, Bild, is stirring anger towards the EU and the Greeks in particular with headlines such as:

• "How much more do we have to pump into this country?" April 26th
• "Why are we paying the luxury pensions of the Greeks?" April 27th
• "Greeks ready to cut back? They would rather strike!" April 28th

As I talk to German colleagues, they refer to Greece as the Golden Fleece and that they aren’t paying bills in Greek restaurants because they’ve prepaid to 2020.

All of this puts a huge strain on the European Union, in its fragile 53rd year of unity, particularly as Spain, Italy and Portugal are considered to be on a par with Greece by many, forming a Southern European Union called the PIGS [Portugal, Italy, Greece and Spain].

It raises a key question in my mind, and I’m sure all of the bankers I deal with: if the euro fails, what happens to the monetary union of banks, the Financial Services Action Plan and all those bank and insurance directives like Solvency II, MiFID and the PSD?

What happens to Chi-X, SEPA, the EBA and the rest?

In order to answer this question, you have to look at two key areas. First, is the economic and monetary union (EMU) broken? Second, if it is, do we throw away the eighteen years of change introduced by the agreement to launch the euro when the Maastricht Treaty was signed in February 1992?

Let’s take the first question: is the EMU broken?

We asked this question in 2005, when the French and Dutch threw out the EU Treaty. Answer: it is political union that they were rejecting, not economic union. Note: even with their rejection, and the Irish no vote, the Treaty became the Lisbon Treaty in 2010 regardless of such resistance. In other words, in the interests of the long-term vision of Europe, Europe wins.

Equally, America has taken years to gain its United status, starting with a nation of disparate states that had far less history than those of Europe.  Their Union was easier in comparison, and that still took years, so Europe’s union will take time and will face many more tests.

But this is the greatest test so far.

The size of this test should not be underestimated as it is the first time that we are seeing an economic union, resulting in a cascading effect upon money and politics. Historically, the tests for Europe have been mainly about how much power is ceded to Brussels. This test is showing the inter-relationship between economies and Germany’s anguish is that if they are to keep the vision of Europe in harmony, then they have to pay for it.

Therefore, returning to the rejection of the European constitution, that was a political rejection and when a country has an economic crisis, the monetary union means that other nations pay and, as a result, that political will is tested when one nation's tax dollars are taken to pay for another nation's debts.

That is why this challenge is so much greater than any before, because it is testing the political will of citizens, not just their ability to trade and compete.

The core issue though, is that it is not just the Greek economy and Greece that would leave the Union if they were allowed to fail.  It is the Union.

Should the Greek economy fail to honour their government bonds due to being economically bankrupt, the ratings agencies and banks would downgrade Spain, Portugal and Italy, and there would be a spiral effect. This means the European Union breaks apart.

That is why the Greek failure option is unpalatable ... but is the alternative palatable?

Why do we need a European Union?

Answer: Europe needs to be a Union to maintain its drive to be a regional superpower, and competitive commercially and economically with China and America. There’s the rub. If Europe fails, then the UK, Germany and France fail, as parity to compete internationally and intraregion becomes far more difficult.

This is why Greece needs the bailout and why Germans are paying.

It does not help Angela Merkel maintain her status or power hold in Germany – her popularity is sinking faster than the Titanic – but if Greece fails, it is felt that Europe may fail too. And that is not an option seen to be agreeable today.

Also, nations have been bailed out already.

Two years ago, Spanish banks received over €50 billion worth of ‘aid’, in the form of mortgage-backed securities with the European Central Bank (ECB), when they faced a property meltdown.

Did the Germans wail out about that bail out?

No.

Why?

Because it wasn’t on the front page of the Bild.

That bail out was smaller and less obvious, so no-one really noticed.

The Greek bailout is a bit bigger – €110 billion – admittedly, but it is supported by the IMF and is necessary for Europe’s future. ‘nuff said, although if you want to know more, Robert J Samuelson in the Washington Post provides a particularly good overview of why Europe needs to support Greece.

My summation is that Europe will survive this crisis, the euro will stay and the currently ridiculous pricing of US$1.24 to the euro will reverse within the next month or so, as forecasted by most economists.

But let’s look at the worst case scenario: what do we do if the euro does fail? Does it mean we unravel all we’ve done to date?

This is the second and, in some ways, more important question: is there a backup plan?

OK, if the Eurozone breaks apart, then it matters ... but it will not throw away all that has been built to date.

The banks will still want to use cross-border instruments that work. They will just bring back a margin to represent those cross-border movements whilst maintaining the efficiency of the infrastructure that has been built.

As Werner Steinmuller, Head of Global Transaction Services of Deutsche Bank, stated when we researched the Payment Services Directive (PSD) and the Single Euro Payments Area (SEPA) last year:

Deutsche Bank is in a comfortable situation. We spent quite a sizable amount on SEPA infrastructure and have a brand new system that is extremely capable of doing this that is also highly scalable. Others have not made this investment so this gives us a price advantage. We have built some conversion solutions for handling old volumes and now can run both old instruments and the new SEPA instruments so, if SEPA is coming, we are extremely well positioned. If SEPA fails, I can write off the investments and still win.

In other words, the SEPA process has forced the banks to build new infrastructure, new systems and new efficiencies in transaction processing. That will stay.  It does not go away if the euro goes away, as the new infrastructure is designed to handle efficient transactions, not euro payments.

So if we look at SEPA Credit Transfers and Direct Debits, the Euro Banking Association (EBA) and STEP2 ... it will all stay. The EBA will be a private consortium to operate efficient systems, rather than a government initiative to create efficiency, and it will stay. There will be a charge for this, and a charge that could provide a substantial return to the banks that created this infrastructure, but it will not go away.

The same will be true for Chi-X, and the capabilities electronic trading platforms have introduced into the European equities markets. Sure, some countries may want to block and reverse policies in these areas – Spain? – but the process of regional investing is unstoppable now. Goldmans, Merrill, BarCap and co, won’t want to see this go away, so it will remain.

Bottom-line: the efficiency of European payments and investing is in the interest of banks, corporates and institutions today, not just governments and policymakers.

So, if the euro fails, my answer is that the all the investment made by the financial markets in efficient systems will stay.

It will just be at a profit rather than a regulation.

Financial innovation @Finovate

Whilst I hid in Singapore last week, Finovate - the excellent financial innovation conference run by Jim Bruene and co at NetBanker - took place in San Francisco.  I wanted to go this year, as Finovate is definitely the one place you will find the NEXT generation of banking and financial solutions and providers.

The way it works is that the NetBanker team pick out the most innovative firms in the online financial world and invite them to appear on stage for seven minutes to pitch their wares.  At the end, a small few are picked out and tipped for the top, with previous winners including highly disruptive and now successful firms such as SmartyPig and MINT.

There was obviously a good buzz going on there this year, with over thirty-six firms getting their seven minutes of fame in front of a record audience of 500 industry executives ...

 

The winners of the Finovate awards for Best of Show were announced on Wednesday last, and these are:

          Bobber Interactive: Launched a youth-oriented online 
          banking/savings program with gaming and social 
          features.  

   Expensify: Demoed new tools for managers to track and 
   monitor employee spending via "expense reports that  
                                  don't suck."

                oFlows: Showed its new end-to-end paperless loan-
                application system.

      Wikinvest: Launched its new Hurricane stock
      information system to deliver real-time info
                                  faster than other outlets.

Meanwhile, other bloggers have been commenting, with Tom Cochrane picking out these firms to be of note:

Wikinvest: There would seem to be little doubt about the future success and impact of this company.  Financial services data aggregation is a common theme at Finovate but it is rapidly becoming a commodity.  Wikinvest is heads and shoulders above the field when it comes to leveraging data aggregation to provide interesting features/analytics and outstanding products.

Kabbage: On-the-fly credit risk analysis and lending to online sellers.  This is something very different, innovative and potentially disruptive.  An impressive demo with an applicant’s account funded in less than 7 minutes.

Bobber Interactive: I am not sure whether this was a product or a very elaborate demo that has yet to become a product.  In any event, it was very impressive and I am certain would appeal to my 15 year old nephew.  Certainly seems that this company and demo should have caught the eye of any early stage venture investors in attendance.

Cortera: Think of a Web 2.0 version of Dun and Bradstreet that is focused on small medium sized businesses.  In other words, commercial credit analysis and information with a social media bent that covers the vast majority of American business.  Not necessarily sexy, but very, very interesting.

Continuity Control: Financial institution compliance services.  Seems like a no-brainer in light of pending financial reform and everything other crisis-reform cycle that has taken place in the financial services sector over the past decade or so.  A solid presentation and what appears to be a solid management team.

eRollover: Have to them a nod as the company hits close to home with the focus on retirement planning.   Also spent some quality time with their very high quality CEO .  A breath of fresh air for the retirement income industry and a company we will continue to follow.

Meanwhile, if you wanna know more, it would do you no harm to follow their twitter stream.

Finally, there are two more Finovates coming up in the next year:

• FinovateFall, October 4th and 5th, New York (I've already booked my ticket); and
• FinovateEurope, February 1st 2011, London

Truly recommended.

Why payments innovations are rubbish!

Here's my latest retail payments focused presentation.  It's premise is that there's loads of innovation out there, with micropayments and iPhone apps being hotbeds of innovation for developed economies whilst microfinance and 2G GSM messaging being creative fields for developing economies. 

However, all of these innovations are just froth on the cake of the payments infrastructure and the core of that infrastructure - the clearing and settlement services that underpin these services - is still pretty rotten.  There's still lots of legacy infrastructure out there, which needs updating to operate in our 21st century world ... but sits languishing because banks are slow to act.

And the fact that banking protects banks through bank licensing, means that none of the innovative firms - including PayPal - can make much difference to this rotting core.

A little bit over-stated, but I think it makes the point.

Why all payments innovations are rubbish

View more presentations from Chris Skinner.

You'll notice some of my usual slides in here, but I've also added quite a few new ones, including several that list stunning numbers ... such as Facebook currently uses over 30,000 servers!!

PayPal, Microsoft and Google's visions of the future

Today seems to be a day about future trends.

For example, I stumbled across a great discussion about the future of the internet with Google CEO Eric Schmidt:

This is a 45 minute interview with Mr. Schmidt at a Gartner Symposium in the USA last year.

Key comments from the interview, identified by Read-Write Web, include:

• Five years from now the internet will be dominated by Chinese-language content.

• Today's teenagers are the model of how the web will work in five years - they jump from app to app to app seamlessly.

• Five years is a factor of ten in Moore's Law, meaning that computers will be capable of far more by that time than they are today.

• Within five years there will be broadband well above 100MB in performance - and distribution distinctions between TV, radio and the web will go away.

• "We're starting to make significant money off of Youtube", content will move towards more video.

• "Real time information is just as valuable as all the other information, we want it included in our search results."

• There are many companies beyond Twitter and Facebook doing real time.

• "We can index real-time info now - but how do we rank it?"

• It's because of this fundamental shift towards user-generated information that people will listen more to other people than to traditional sources. Learning how to rank that "is the great challenge of the age." Schmidt believes Google can solve that problem.

This stumble was followed by an email from FSClub friend Milos Hoschek who sent me a link to this video of PayPal's vision for the future:

Fantastic.  Everywhere you go, you pay with PayPal.

What happened to Visa and MasterCard I wonder?

It reminds me much of a video made by AT&T in the 1990's:

Recognise the voice?  Here's a clue:

Anyways, strong American male cheesy voice-overs are the de facto standard for technology future focused videos, as evidenced by this one from Microsoft:

Something slightly wrong about that?

Branches are dead, the future is social (Part Two)

After my post last week about my latest presentation with an audio file, my keynote in Bahrain this week was going to be a variation of the presentation.  Due to being unable to fly to Bahrain, I mentioned on Monday that most of the day had been spent editing a video file for the conference to be able to present my keynote. 

This 'aired' for the first time this morning and so here is the video version for the blog:

MEFTEC 2010 Presentation from Chris Skinner on Vimeo.

And the original slides, in case you missed them:

Branches are dead, the future is social

View more presentations from Chris Skinner.

And an audio file to go with it if required:

Download Chris Skinner, EBF2010 (45MB)

Bearing in mind that this was made with a cheap ($200) HD video camera, free video editing and slide management software and cheap ($59 per year) hosting services, it's an extraordinary way for anyone to create and become their own media channel in the 21st century.

Mind you, they could improve the looks of the anchor hosts a bit, couldn't they?

The World of Me (Part Two)

Building on the World of Me post last week, I’ve just found out how powerful the tools are that are at our disposal today.

This week, I’m meant to be chairing a conference in Bahrain: MEFTEC. 

MEFTEC is now in its sixth year, and I’ve attended every year as a speaker or as chair.

Guess what?

Not there this week due to ash clouds from Iceland (that sounds like a new thing on the shopping list) ...

... so what can one do?

Their whole program is shot to pieces due to many of the speakers being ill or from outside the region, but the attendees are still coming as they are mainly flying in from around the Gulf region, or Asia and Africa.

Well, I went out and purchased a little HD Flip Video camera last week as those of you who read, and now watch, the summary of the week's entries know.

Now I didn’t do that for some vain glorious reason, but because it’s the only way I can get my presentation from London to Bahrain in a form that works.

So yesterday I sat and recorded the presentation using my $200 video recorder and today I edited it using my free download of Videopad software. Posted on Vimeo, where I opened an account for under $60 a year, and the conference gets a completely tailored video presentation of the keynote I would have given had I been able to make it.

What really amazes me is the ease with which I could record, edit and then distribute the video. Why that amazes me is that I used to make video recordings regularly as a marketing director ten years ago, and each video would cost a minimum $20,000 to film and edit professionally.

Today ... it’s near enough free.

That’s why I’m regularly blogging about the world of me and what it means to banks, as banks still seem to struggle to get this one.

Meanwhile, my personalised video keynote is just another example of the world’s axis changing from centrally created goods being distributed to the masses, to the masses creating goods distributed to anyone who wants them.

Come and join the Ryanbank

Going back to the idea that a bank could offer a widget-based business model of functionality and that everything these days is free, makes me realise exactly what tomorrow’s bank will look like.

The thought struck me yesterday when I took my brother-in-law’s lad to see Clash of the Titans – more my thing than his – and we purchased tickets via the internet. This meant that we self-served, but the cinema charged us an extra £1.80 handling fee for doing so.

Duh?

We have avoided their peanut paid staff having to say: “Which screen? What time? How many?” by doing it ourselves, and yet they’re charging us for it.

When we saw the movie, they charged us £6.90 for reduced size popcorn and coke, and then an extra 80 pence for 3D glasses, even though we’d already paid an extra £3.50 to get into the 3D theatre. 

Duh?

Why the extra charge for the 3D experience plus a charge for the glasses, and who is going to go into a 3D theatre without glasses?

All in all, the experience cost about £40 for drinks, petrol, treats and extras, for something that will be on Sky+ HD within a week or two.

Warraripoff.

And that’s when it hit me as the whole thing reminded me of Ryanair, who charge a levy of £5 ($7) per leg of a trip per passenger.

Why not open the Ryanbank, based upon building a bank services around the Ryanair (South West Airlines for Americans) business model.

Why Ryanair?

Well, love ‘em or hate ‘em – and most of my snobby business class flying mates hate ‘em – they offer a stripped down service with no bells and whistles but, if you want the bells and whistles, you pay for them.

The love em or hate em debate is raging right now over at the Telegraph, after columnist Bryony Gordon bet her flat on no-one using the words ‘marvellous’ and ‘service’ in the same line as ‘Ryanair’.

This debate intrigued me thanks to the over 90 respondents to her comments – most of whom love Ryanair's service.  I particularly liked Alan James’ response: “I think it bloody marvellous that Ryanair provides any service”, although he doesn't win her flat for that response (unlike Ryanair who just might, according to this press release: Ryanair to Seek Journalist’s ‘Flat and Contents’).

No, what really intrigued me is the number of people who get Ryanair, and this is evidenced by the comments.

What I mean by this is that you just need to understand their business model and, if it suits you – and it doesn’t suit everyone – then it’s brilliant.

Their business model is this: if you want to travel as cheaply as possible, then you’ll love us. If you want some snobby service, then get lost and fly with BA.

For example, I fly with Ryanair regularly to Dublin. Ryanair are cheap, punctual, regular, very convenient and it all flows incredibly well. For these meetings, I have no hold baggage, just a carry-on; I don’t want any special service; it’s a short haul flight; and I don’t mind the things that are irritating - their charging policies, especially their policy of adding £5 per leg per passenger for a credit card booking - as it’s appropriate for these needs.

On the other hand, they do have some things that let them down. For example, I flew with Ryanair to Rome last year for a holiday, and that was a disaster. Their limit of one 15kg bag per person in the hold was almost impossible to adhere to and meant that the whole experience left us feeling exhausted and disgruntled.

But hey, they’re not British Airways, which is what my family are used to, so take it or leave it. It’s cheap, cheerful and it works.

So get with the business model and work it.

That’s what many of the responses to Brynoy’s blog articulate very well. Here’s a small selection:

Jamie: All they have done is break the fare down into bits allowing you to pick what you do want and leave out what you don't.

Old Codger: I fly Ryanair whenever I can. Plan ahead, use your pre paid card, take on hand luggage - Yes that simple. Pisa for a £1 - yup, Rome for... you get the picture. Retire & travel the world (maybe?) with Ryanair. I Love Ryanair.

Alan: Ryanair only suits people that are able to read and understand the terms and conditions - like check in on line, don't bring check in size bags if you have not already paid for them, don't be late and read the destination information for where you arrive ... no Ryanair and we would still be paying the crazy prices of the 80s to travel and air travel would be for the rich only.

Geoffrey Walker: I have no complaints. Never late. Never on strike. Never loses baggage (if you have any). Dirt cheap if you know your dates and book in advance. What else do you want?

And so on and so forth.

So here’s the rub: Ryanair broke down the business model and made it clear that you could fly for nothing. Then they add on charges for all the other bits.

You want to take a lot of luggage. You pay.
You want to eat and drink on board. You pay.
You can’t be bothered using the internet to check-in. You pay.

In other words, for those who want cheap flights with no frills, you got it. For those who want BA or similar style services, go and pay more to fly with them instead.

I could labour the point further, as it’s a critical point, for this is the concept for one of tomorrow’s banks.

A bank that offers free banking, free cards and even free credit.

All core bank services are free.

But there are rules.

First, your services are all paid for through sponsorship.

Hence, before you can make any transaction, you have to wait for a 15 second video ad to play for Pringles, McDonalds, the next Harry Potter movie or whatever (all of which are personalised to your tastes of course).  For the more frequent transactions, such as balance checks, then they can just be supported by banner ads and google ads.

Second, you can only deal with the bank for free via an internet or mobile internet service. You cannot talk to someone or visit a branch.

Yes, we have branches and call centre operations, but the fee is £1 per minute to call us or £5 to visit inside the branch.

Third, any charges from correspondent banks for services you use – e.g. if you make a payment to someone and it is rejected – are added to your monthly billing.

You get the picture.

Gradually, you create a smorgasbord of services, some of which are free and some are fee-based. The customer can effectively have a whole bank service for nothing if they work the rules. However, break the rules and they pay.

Students and the thrifty Ryanair demographic audience would suit this bank.  Equally, for the unbanked and underbanked, a plain and simple sponsor-based system for bank services would work.

You want personalised service. Go away and deal with the big banks.

You want basic, cheap and cheerful banking. Come and join the Ryanbank.

Branches are dead, the future is social

I haven't posted a presentation recently.  Been a bit lazy, so here's a bonus.

My latest presentation on the future of (retail) banking:

Branches are dead, the future is social

View more presentations from Chris Skinner.

And an audio file to go with it:

Download Chris Skinner, EBF2010 (45MB)

This is a keynote presentation I gave at this year's European Banking Forum: 

... an event we've partnered with for the past few years, and which enables banks and vendors to network in a convivial, exclusive and private conference.  Next year's is already in plan in Brussels for March 2011, and is well worth a look for those interested in the future of banking.

Online payments is far more than PayPal

As those who follow this blog know, I write regularly about services such as Facebook and PayPal.

This is because they are disruptive and fresh, as well as being incredibly successful.

For example, Facebook is now the world’s #1 website, bigger than Google.

Not bad for a five year old.

Meantime, PayPal is still growing fast, making over $95 a second in revenues based upon $3 billion in revenues this year. This makes them the interweb’s sixth most successful website by earnings.

Not bad for a ten year old.

But these sites are not the be-all and end-all. You have to bear in mind that they are purely popular in their language of origin: English.

As a result, there are several other search engines, social networks and P2P payment services that are succeeding out there, from China’s QQ to Russia’s Yandex.

Here's a world map of social networks, taken from the blog of Vincos, Italy (doubleclick to enlarge picture):

Although Facebook is a big hit worldwide with 400 million users, it’s tiny in some countries like the Czech Republic (Lidé is the #1 social network), Hungary (iWiW), India (Google’s Orkut), Japan (Mixi), Netherlands (Hyves), Philippines (Friendster), Poland (Nasza-Klasa), Russia (vkontakte), South Korea (Cyworld), Taiwan (Wretch) ...

Similarly, PayPal is hardly recognised in some countries.

In the Netherlands, for example, the banks launched iDEAL, a set of standards to facilitate online payments.

iDEAL was created in 2005 by a range of participating banks with ABN AMRO, ASN Bank, Fortis, Friesland Bank, ING, Rabobank, SNS Bank, SNS Regio Bank and Triodos Bank on board today.

Some of the major features of iDEAL include the fact that it offers both real-time payment initiation and authorisation by both the issuing and acquiring bank, followed by irrevocable credit transfers to the merchant at the time of online purchase.

The participation of the banks along with real-time processing, has created a strong perception of iDEAL being SAFE. As a result, iDEAL has gained over 15,000 participating merchants and 5.8 million users, resulting in a total of 45 million transactions in 2009 worth over €3.4 billion (up 60% over 2008).

* maandtotalen = monthly total

In other words, iDEAL has a 40% market share of all e-payment transactions in the Netherlands, with an acceptance rate at almost 9 out of 10 online merchants (88% of all Dutch merchants) compared with only 1 in 4 for PayPal (although that’s up on 1 in 5 a year ago, thanks to the decline of AMEX in the Netherlands).

So the banks do have a PayPal service equivalent ... but, right now, only in the Netherlands, although iDEAL aims to expand across more of Europe by gearing up for SEPA Credit Transfers (SCT) and the Unify XML standards.

Meanwhile, in Russia, their version of Google Checkout has taken a place ahead of the market.

Google Checkout is actually called Yandex.Money run by Yandex, Russia’s largest search engine.

According to Liveinternet.ru, Yandex increased its share of search traffic from 56% in January 2009 to 59% in December to 62% in February 2010.

Yandex.Money claims to be the leading online payment system in Russia as a wholly owned subsidiary of Yandex. Founded in 2002, Yandex.Money has seen payment volumes grow 135% CAGR, processing 21.5 million transactions per year worth $350 million.

This may sound small, but the appeal of Yandex.Money is for the vast numbers of unbanked and underbanked Russians who want to deal online.

Yandex.Money provides over a million prepaid cards per year through 100 distributors, to be used in over 50,000 participating outlets all over Russia. They have over 200,000 participating terminals to load cash on the cards in 80 of Russia’s largest cities, and 1 in 5 customers use them as top-up wallets. Meanwhile, 61% of users pay directly from the Yandex.Money interface online.

So Russia’s online payments market has developed a slightly different way.

Meanwhile, China has an incredible story of the success of Alipay, a division of Alibaba the B2B ecommerce portal.

Alipay is China's primary payment platform thanks to being the preferred payment system for sister firms Taobao and Alibaba.com, along with over 460,000 external merchants. The result is that Alipay has a 49% market share today for all online payments in China:

Q1 2010 market share figures from iResearch

Equally, it has a larger userbase than even PayPal with over 300 million registered users as of March 2010, with five million transactions per day worth an average RMB 1.2 billion (US$176 million).

Why should this be of interest to our global banking community, and PayPal specifically?

News Headline, April 11th 2010: “Alipay, China’s largest online payment network, has announced that Alibaba Group will invest a total of RMB5 billion (US$732 million) over the next five years to upgrade the payment solution for e-commerce in China and around the world.”

Serious stuff!

Meanwhile, in a non-exhaustive list, there are many other online payment services worth a look including 2CO, AlertPay, Bill Me Later, C-gold, CashU, Dotpay, E-Gold, LiqPay, Mobile Wallet, Nochex, PayPay and Z-Payment.

So in future, when I talk about PayPal, don’t forget that we’re also talking about their national equivalents such as iDEAL, Yandex.Money and Alipay. Similarly with Facebook, don’t forget that there’s also Mixi, Hyves, Orkut and Friendster.

The implications of these services on core banking is exactly the same which is that we are seeing the creation of many disruptive, fresh and incredibly successful web services for social and P2P finance ... leading, in future, to social B2B finance.

The World of Me

I was watching a program about Sandi Thom.

Sandi was the girl who played music in her bedroom, put it on MySpace, got picked up by a record firm and became an overnight star with a massive hit: "I Wish I Was A Punk Rocker (With Flowers In My Hair)" back in 2006.

She was saying how she didn’t like the record firm she had dealt with so now had her own label and acts as her own agent, media, publishing, recording and distribution firm, as well as being the creative artiste.

She has created a musical world of her own. A quarter of a century ago this would have been far more difficult or even impossible but, thanks to today’s cheap technologies and distribution services, it’s easy. So she can do that. She can be her own agent, PR, distributor, publisher, record label etc.

Similarly the world of words has been restructured thanks to today’s cheap technologies and distribution services.

Fed up with the way that book publishers behave towards artistes, more and more authors are self-publishing. It doesn’t mean they reject the publishers, but often they can’t get published in the first instance but believe they have a good idea.

Nowhere is this more evident than Sally Bee’s experience, where she self-published a recipe book which Michelle Obama ordered.

Result: a #1 bestseller on Amazon and a major deal with a publisher.

I’ve often related this to my own experiences with the Financial Services Club (FSClub).

The FSClub would have cost over a million dollars a year to run a decade ago, with 85% of the costs wrapped up in printing, postage, mailing and telecommunications costs.

Today, those costs are nothing as all you need is a broadband connection and a typepad account to write a blog, distribute news, invite people to meetings, communicate 1-to-1 or 1-to-many worldwide in real-time.

So the only costs of anything are the physical costs of travel, room hire, drinks, food etc.

All the virtual costs

are free. More than this, everything today is mashable. I can mix and match pieces of functionality from all over the mobile internet into a lifestyle structure that suits the World of Me.

This has fundamentally changed things because I can now design the World of Me.

The World of Me is defined by how I structure and connect with friends, companies, governments, media and more. It defines how I structure and connect with everything, including and especially for banks and banking.

For media, the World of Me is defined by the blogs I consume, the YouTube videos I watch, the diggs and RSS feeds I absorb, the tweets I read ... I create my world which is why iPhone, iPad and iPod.

I is everything. Me is all.

It sounds very selfish but it’s not.

It’s actually about me designing the world around me.

That is the world we, and especially Me, lives in.

I want to publish my thoughts – I can.

I want this in print on Amazon – simple.

I want to share my music – no worries.

I want to get my bank to work around me ...

Hmmmm.

Bit more difficult that one.

Sure you could use social credits or Hyve payments, but they all need to be backed by a banking system that has not changed much in the last decade.

For example, how do I interact with my bank?

Via a dull online bank statement that looks just like my old printed bank statement?

Via a call centre and branch, with these interactions appearing to have no relationship with the online or mobile bank, and no ability to access these services via my net-based banking service?

Via a bank that has no blog, no social interactions electronically and, only if I’m very lucky indeed, might respond to an email to open an account?

This will change of course, as new entrants open up new social finance services and a few innovative banks interact electronically via tweets and status updates.

But what will really revolutionise this world is when a bank offers all of their services as individual apps, gadgets, widgets and wikis, to plug and play into the World of Me and my internet lifestyle.

This is a theme I have regularly explored, particularly in depth a year ago, and continue to play with today.

When I can design my bank services around me, by taking:

• a little bit of transaction servicing from bank A’s widget,
• a snippet of card services via bank B’s app, and
• a sprinkle of P2P payments via bank C’s wiki,

then I’ll truly be living in a world of 21st century banking.

Oh shoot, this is the 21st century!

Metro Bank: the first new bank for a while

So, we are finally seeing a new retail bank launched in Britain for the first time in, oh, living memory?

Yes, it’s Metro Bank time.

Opening in about two months time, Metro Bank plans to grow from a couple of London branches to a couple of hundred by the end of the decade.

In the spirit of full disclosure, I should state that the founders of Metro Bank are old buddies of mine.  Their Chairman is Anthony Thomson, who has spent much of his life successfully engaged in marketing financial services* and Vice-Chairman is Vernon Hill, who created the massively successful Commerce Bank in America.

What’s different about these two guys and their banking ideas is that they want to make banking fun. They want you to love your bank. They won’t settle for the mere tolerance of a bank’s service; instead, they want you to really rave about the bank.

This is why dogs will be welcome in branches – branches have doggy water bowels and biscuits at hand to entertain man’s best friend – and why the bank intends to put an end to the traditional British bank’s ways of ‘stupid rules’.

The origins of Metro Bank go back to 1973 when Vernon Hill, an American entrepreneur, created Commerce Bank. Commerce Bank started with one branch, nine employees and $1.5 million in capital and was sold in 2008 for $8.5 billion to Canada’s TD (Toronto-Dominion) Bank, having blossomed into a 470 branch powerhouse.

The secret of Commerce Bank’s success was based upon Mr. Hill’s focus upon creating a bank based upon retailing, further to his previous experience as a manager of a Burger King store. This is why the bank is colourful, with coin changing machines that greet you as you step through the doors – something other banks think is expensive and unnecessary – along with in-branch facilities to open accounts and issue cheque books, including credit and debit cards, within fifteen minutes.  Placing card issuing machines in branches is another thing other banks view as expensive and unnecessary.

But the ‘expensive and unnecessary’ is what made Commerce Bank’s approach different and why they view these things as necessary for good service. It is the reason why Metro Bank will follow a similar approach. For example, the bank will not only have coin changers and in-branch card issuing machines, but also plans to be open throughout the weekend.  That means more than just Saturday morning, like other banks, but all day Saturday and Sunday too. Their hours are longer – eight till eight every day except Sunday, which is 11 till 4 – and only close for Christmas Day, New Year’s Day and Good Friday.

The bank has also promised to answer every customer call before the third ring in person. Not some outsourced call centre, but a bank run and customer focussed centre.

What is even more intriguing about the bank’s business model is that their core systems in the back office are run on a cloud computing, banking-as-a-service basis. This is particularly unusual as most banks believe in buying in a major installation of hardware and developing their own software systems, for control and security purposes. The idea of using a system – Temenos in this case – and running customer accounts on a pay-as-you-use basis is pretty much unheard of, but Metro claim this has saved them around £20 million in start up costs.

The bottom-line with Metro Bank is that they are a new bank, running a model in a completely different way, to buck the system. And, for those traditional bankers who think this all sound like some fad, glitzy, marketing spin stuff, it does work.

For example, not only did Commerce Bank become a sizeable force in the USA from its origins of one branch to a $50 billion in assets bank by 2008, but it also returned a whipping 23% average growth in share price to its shareholders. If you’d invested $10,000 in Commerce Bank way back in 1973, your stock would have been worth $108,000 by 1991 and $4.7 million by the time of its sale to TD.

The only question mark about the bank has been its management, as assembling a team of financiers that the FSA would sign-off on for a banking licence in the UK has been a major challenge. Now, with an executive team that comprises extensive senior experience from institutions such as Royal Bank of Scotland, Halifax Bank of Scotland, Anglo Irish Bank, Barclaycard, Bank of America and the Nationwide Building Society, they have their licence and are all systems go to emerge from their initial two branches in London to become a 200-branch bank by 2020.

Some ambition, but with Anthony in the lead and Vernon supporting, one that is likely to be achieved.

 

* Anthony co-founded City Financial Marketing in 1987, which became Europe’s largest financial marketing consulting and communications group before being sold to Publicis in 1997.  After this, he created the highly successful Financial Services Forum, the largest membership group I know that is dedicated to the financial services marketing community.

 

Why ICBC didn't buy Citibank

Good friend of the FSClub Emmanuel Daniel joined us this week to talk, about the future of banking and the rising influence of Asian banks, especially those from China and India.

Emmanuel Daniel is the founder of The Asian Banker, a leading provider of strategic business intelligence on the financial services industry for the Asia Pacific and Middle East region.

He began with a review of the composition of the largest banks’ income streams, which shows that the truly global banks keep a small home income balance (doubleclick images to make them bigger) ...

... by comparison with banks from larger countries like the UK and US, which are essentially domestic in their income even if they were international ...

... whilst banks from smaller countries like the Netherlands and Switzerland, have large earnings from outside the domestic base of the bank. 

He thinks the same trend will be the case if Asian banks globalise, namely that the ones from smaller countries will be truly international whilst the ones from larger countries, such as China and India, will be essentially domestic.

Emmanuel then raised the striking point that at one point during the financial crisis – March 2009 – many Asian banks, such as DBS, UOBC and ICBC, were larger by market capitalisations than the world’s former big banks, such as Citi and RBS.

So why didn’t these banks buy an American or European bank to make themselves global?

Emmanuel puts it down to culture and a fear of repeating past mistakes.

After the Asian financial crisis, many Asian banks were beaten up by American and European financial markets for being too lackadaisical with their management of risk, especially credit risk. Non-performing loans (NPLs) were rife across the Asian markets, and this led to huge issues.

As a result, Asian banks had looked to American and European banks for leadership practices and, when China opened its borders to foreign bank entry in 2001, it was the world’s global banks they sought for knowledge.

Now, these banks are looking around and saying: “whoa, there’s no-one out there who can help us but ourselves”, and this has led to the realisation that these banks are leaders themselves today.

Not only that, but these banks are big.

ICBC has 20,000 branches and over 400,000 staff, so change is a challenge. But these banks are changing and changing fast. For example, the Asian Banker presented an award to ICBC for consolidating 1,000 fragmented data centres into two in a program that took under a year to implement. That’s the sort of leadership these banks are achieving – best practices in data centre management; branch distribution and transformation; use of new technologies especially mobile; and more.

Equally, Chinese banks are now clearly generating profitable leadership, as around $20 billion in profit is created in Chinese banks every year. So, after a couple of profitable years, China’s banks could buy an RBS or Citi.

But they didn’t because they were not ready.

Indian banks are even more risk averse than the Chinese in this process, as their Chairman is normally elected when he is three years from retirement. As a result, an Indian bank rarely wants to make decisions that are aggressive or growth oriented. They would rather be boring and safe, and are incredibly account driven with a focus upon stability.

Equally, there is a lot of unionisation in India which halts change. For example, the State Bank of India has tried to introduce branch automation programs over the years but the unions have resisted this strongly as they don’t want to see job losses.

In contrast, China wants to create a long-term, sustainable, commercial banking model. This is unlike the Japanese who have far more interest in gaining global credibility in capital markets, as demonstrated by the likes of Nomura.

Emmanuel finally left us with something to think about, by bringing in the impact of technology and customer expectations to realise that our biggest fear may not be Asian banks but any small player who can disintermediate the larger banks just by being relevant.

All in all, a really insightful review of the state of Asia’s banks and the thing that surprised me most is that we haven’t seen an Asian bank become truly global yet.

But we will, with ICICI (India) and ICBC (China) being the two most active players today.

That's why Emmanuel reminded us that two global banks originated in Asia – HSBC and Standard Chartered - albeit run by British Chiefs.  Now, the question is whether the banking talent found in banks like ICICI and ICBC will throw up ambitions to repeat what their colonial masters did a century ago.

Ending the never-ending bonus war

Solving the bonus questions

I’m fed up with the argument about bonuses and cannot believe it still rumbles on after a year of debate and G20 meetings. With Barclays announcing record profits last week, and therefore increased bonuses, the media latched onto this angle more than the fact that Barclays, UBS, Goldman Sachs and others demonstrates reviving markets and a recovered financial sector.

Sure, bonuses are irritating ... but only because we don’t get them, the guys who do are as reliable as stockpickers as monkeys, and no-one knows how to break out of this cycle of paying millions for a job that is demanding, but no more so than many.

So here’s my suggestion as to how it could be resolved.

First, set a regulatory limit on the bonus pool and the size of an individual's bonus payment.

For exmple, limit the bonus pool allocation to no more than 33% of the bank’s full year profit after tax across all bank subsidiaries, as shareholders and capital reserves must have an equal recognition.  This means that profit should be apportioned equally - one third - to each constituency.

Then limit individual bonus payments to a cap of 0.1% of full year profits after tax.

For example, Barclays net profit was £9.39 billion in 2009, up from £4.38 billion a year earlier.

£9.39 billion profits would create a maximum bonus to any one trader of £9.39 million. That may seem a lot, but it’s been a good year and is far less than some of the current payouts. Equally, if you take Barclays profits from the year before, it would have been £4.38 million. A mere pittance compared to today’s bonus culture but, if you have a level playing field, far better than today’s excesses. And this is looking at a decent bank result.

Meanwhile, take a bank like Royal Bank of Scotland (RBS).

The rules above would be extremely punitive for them. It doesn’t necessarily outlaw any bonuses within RBS, but it does challenge the bank as to how to create a bonus pool when there is no profit.

But look at the wording. It says the bonus pool ‘cannot exceed’ a third of group profits, not that it must be a third. Therefore, for RBS, they can allocate bonuses.  In fact, they have to in order to retain talent and remain competitive.

Nevertheless, you would want to ensure that a loss-making bank allocated bonuses that were in the best interests of the bank.  As a result, the stipulation should be that the bonus plan and allocations for all banks are approved by an independent panel comprising a cross-section of the shareholders of the bank. Approval of the plan must be agreed by a majority – greater than sixty-six percent – of the panel, and the panel must comprise a minimum of ten investors including at least three retail investors.

The selection and choice of panel members must be approved by the home regulator and, whatever the panel size, a minimum of one third must be retail shareholders rather than institutional.

This should ensure a bonus pool and payout that seems agreeable to all shareholders, and therefore should also keep the regulator and media quiet.

All of the above may sound reasonable (or not), but then you have the other key question which is: how would you ensure these caps are adhered to?

After all, any government who contemplated the above would just find all of their banks moving to the Cayman Islands or Switzerland to avoid such punitive arrangements.

OK, so let’s stop that one at the same time by declaring that, for a bank to operate in certain markets – especially the G20 nations – the bank must be registered in a country that has signed up to and been recognised as implementing the G20’s taxation agreement.

This taxation agreement is based upon banks regulated under the new Tobin Tax regime (oh yes, if you didn’t think it was going to happen, it will!). From today’s FT:

For years, taxes on capital flows were seen as a barbarous relic of the 70s, on a par with Demis Roussos and Baked Alaska. No friend of free markets dared support the idea of US economist James Tobin, dreamed up to curb currency volatility after Bretton Woods collapsed. That’s changing. Since Lord Turner, chairman of the UK’s Financial Services Authority, started stirring interest in taxing financial transactions last year, politicians in Germany, France and Australia have voiced tentative approval. Now Japan, through the musings of vice-finance minister Naoki Minezaki, might just be falling in line.

So, the first thing is that the bank must be head quartered and file accounts in a recognised G20 Tobin tax location.

Second, the banks’ accounts must be filed in that country and show a detailed breakdown of profits and losses using IFRS accounting, not GAAP (ouch, that might hurt).

Third, and most crucially, the bank must declare any movement of funds or debt to a location that falls outside the G20 Tobin tax coverage, such as the Cayman Islands or Costa Rica. This is to ensure that complex debt equity swaps, such as the Barclays transaction that took place last September, are registered, regulated and monitored to ensure that this is legitimate tax avoidance and not evasion.

All of the above would ensure that banks and their individuals on major bonus deals, could not just upsticks and move to a location outside the grip of the bonus rules as, if they did, they would effectively be removing themselves from the markets where they need to trade – the G20 markets.

Anyways, it may not solve or cover all the ground required – as I’m no lawyer or accountant – but at least this would be a start.

I think what’s bugging everyone right now is that this crisis began in August 2007 – almost two and a half years ago – and blew up into a full blown meltdown almost eighteen months ago in September 2008. So here we are, years after this all began, with bailed out banks, angry taxpayers, a full blown recession and all the news is of investment markets behaviours remaining unchanged.

That’s what’s bugging everyone ... so come on G20, pull yer finger out, get some actions started, and put an end to this never-ending bonus debate.

p.s. the last discussion of this issue at September's G20 summit ended up with a split view between France and Germany, and the US and UK.