The Financial Services Club's Blog

Remittances and the need for financial inclusion

I chaired a dinner last night on remittances and it was pretty interesting.

The term ‘remittances’ is generally used to refer to foreign workers sending money home and represents major GDP for many countries. For example, Tonga’s remittances represent 40% of the country’s GDP, Samoa’s is 25%, Jamaica’s is over 20% and the Philippines 10%.

This is a big market and a mature one.

Equally, it is not just about migrant workers as the appetite for transferring money internationally has  extended far beyond itinerant workers to a vast and diverse cross-section of senders and receivers.

Some senders are using lo-tech systems like Hawala, whilst others are heavily linked via hi-tech mobiles ... meanwhile receivers are the same, with everyone assuming they receive through human interfaces and yet, if you study this area closely, more and more is being enabled via mobile.

For example, in the Philippines, SMART and Globe Telecom have been running riot in the remittances space for years:

• SMART is the leading mobile operator in the Philippines with over 25 million subscribers, and has been offering an SMS-based remittance service known as “SMART Padala” since 2004. This service allows expatriates to deposit money with partnering banks in areas where high concentrations of Filipinos live, such as Hong Kong, Yokohama, and Abu Dhabi, and to specify the SMART subscriber in the Philippines who is to receive the money. The service sends a text message to both the sender and the recipient, notifying them that the money has been transferred. The recipient can then use his/her mobile account to specify the desired withdrawal amount and pick it up at a partnering institution in the Philippines.

• The Philippines’ second mobile operator, Globe Telecom, offers a similar service known as G-Cash. At participating remittance companies in the US, the UK, Australia, and Taiwan, Filipino workers can send money via an SMS message to Globe subscribers in the Philippines. The recipient can pick up the cash from any Globe Telecom store by showing his mobile phone (with the SMS message) and a form of personal identification.

And if you wonder whether low-income folks want mobile money, then this is the place to look. For example, a study by the microfinance and remittance focused organisation CGAP found that targeting low income users could succeed.

“Philippines is known as the texting capital of the world but we were working in provinces that were poorer and where literacy levels were lower than the national norm. What we found is true in most markets globally: younger people whose social lives involve being connected via cell phones and people with exposure to using computers are more comfortable using cell phones to begin with.”

The result is that 80% of money movements in the Philippines is now made electronically. A decade ago, 80% would have been physical movements of cash. That’s transformational and is why one of the folks at the table said that: “if you don’t know what is happening with technology these days, then you’ve lost the plot”.

This increase in access to electronic and formal channels for money transfer, rather than physical and informal channels, is rapidly changing the dynamics of connectivity and funding.

For example, microfinance is now becoming a major focal point, as is financial inclusion, and it amazed me that everyone talked about mobile for money transfer during our discussion but no-one talked about social networks. And when I did raise the subject of Kiva as a social lending microfinance service, one of the bankers asked me: “what’s Kiva?”  Surely, being in this space, banks should know about these developments?

Another said the lack of commentary on social media and microfinance was more of a reflection of the fact that young people use social networks and the average age of a remittance sender and receiver is around 37.

I then added that the average age of a Facebook user is 42 and Twitter users are generally over 35s.

Silence.

“if you don’t know what is happening with technology these days, then you’ve lost the plot”

The nature of networks, mobile internet and social finance is changing all of our lives fundamentally and is as true in the remittances space as any other.

Ignoring such fundamental changes is likely to leave the existing money transfer firms dead in the wake of dynamic societal change.

For example, the likelihood of a divide between informal networks using human carriers of money versus formal networks using mobile internet is the clear path of the future. This inevitably raises critical questions for existing providers of Money Transfer such as Western Union, Travelex and the banks.

And these are the themes we explored in depth last night.

It was interesting that one theme that kept cropping up regularly was ‘trust’.

I always hear trust in the context of banking and payments, so challenged what it is that is trusted.

For example, the Philippine GCASH Service is delivered in partnership with financial institutions and banks. Why? Because, according to the banks, customers trust the service if a bank is involved.

Sure. They trust the service, not because they trust the bank but because they trust the banking infrastructure to guarantee movement of funds.

So the trust is in the system, not the individual bank or financial partner involved.

That’s one critical point.

Another is that this market – especially if we talk more about financial inclusion – involves so many players. It cannot be led by a bank or mobile operator, but needs to be led by a collaborative effort of banks, mobile carriers, governments agencies, regulators and more.

It may even need involvement of security services and police, as half the dialogue about money transfer is focused upon terrorism.

“9/11 was funded by hundreds of sub-$1,000 transactions through the money transfer markets”, was one of the comments made last night.

Sure, but is the role of a money transfer service to allow simplicity of money transfer or to monitor the pulse of terrorism?

I would argue that it is both, which is why so many organisations need a hand in these markets: global regulatory authorities, national governments, police and security forces, banks and infrastructure providers, mobile and electronic service organisations, software and technology firms ... and money transfer agents of course.

This led to an interesting debate at the end of the evening about the role of banks in money transfer markets and their interest, or lack of interest, in remittances.

One banker said that: “any dramatic change in the past will not have been noticed by the bank and any dramatic change in the future will not be noticed because these changes happen locally, not globally”.

Another reckoned it was because banks are not able to make money out of money transfers, but can lose money: “on a $1,000 transaction, we make about $10 if we’re lucky but, if you mess up, the costs are anything up to $100 million in fines and over $1 billion in lost business due to reputational damage.”

I disagreed with that view as, if banks felt that way, you wouldn’t be performing any payments processing for anyone.

In fact, a point came up that surely this was a corporate and social responsibility and that if banks are not interested in remittances today, and the market continues to grow, then at what point will banks start to wonder why they are disintermediated from these markets and wish they had been involved?

We concluded that, in order for remittances to really rock and roll in the future, it needed three things:

1. A goal: there must be some collaborative objective and mission to be reached;
2. A reason: there needs to be some skin in the game and value returned for all players;  and
3. A cause: there needs to be a common enemy to cause the players to do this, such as the threat of regulatory change.

With the above, then a multi-industry group could potentially be created to burst the bubble of financial exclusion and move us to a completely connected global society of commerce.

This is the www.recession

People have talked about an L-shaped, U-shaped, V-shaped or even LUV-shaped recessions, but don’t believe them.

This is not a LUVerly recession, it’s a nasty one as demonstrated yesterday by the news that Dubai is deeply in distress.

Dubai's news will make this the internet, or WWW-recession.

Just as we get a bit bolder – with stock markets rising 60 to 120 percent in some regions – we then get our fragile confidence knocked for six.

Why is this so much of a shocker?

Because Dubai has been in denial of any issues for months.

For the past three months Dubai's leader, Sheikh Mohammed bin Rashid al-Maktoum, has always said there are no issues. He has adamantly claimed that he has made no mistakes and any rumours of issues between Dubai and Abu Dhabi are unfounded and the scaremongers should just "shut up".

So yesterday ends with everyone disappearing for the religious holiday of Eid al-Adha for a week, what does the Sheikh do?

Oh, he just says that the $80 billion worth of debt may be in doubt (btw, it’s probably twice that amount as that’s just hte official numbers) and could they postpone their mortgage payments on Dubai World and Nakheel, the two largest firms in Dubai.

Dubai World owns P&O (controversial buyout in March 2006) whilst Nakheel are the developers of the Palm Resort where David Beckman and other stars own properties.

What yesterday’s announcement really means is that Dubai can’t afford its debt. Not paying back the capital on its debt, but even paying the interest on its debt.This has been denied as an issue by Dubai until yesterday, and is a reflection that even with the $10 billion borrowed from Abu Dhabi, it’s not enough.

Dubai World on their own owe $22 billion and the issues of interest drifts on sovereign debt – the cost of borrowing has doubled in recent months – created this chasm of cost.

For the UK banks this is particularly difficult. Just as they were getting some sense of normality back in the system with share prices rising and Lloyds recapitalisation rights issue looking sound, the markets take a knock for six.

The thing is that the UK banks have been the most supportive of the region during the growth years ... which obviously means they would be the most exposed in a recession if Dubai does implode.

It is interesting for example, that for some time we have known the region has issues, with a mass exodus of workers leaving cars at the airport as they flee the country and their debts.

This is highlighted for me with the fact that I first visted Dubai in 2003 and there were a few buildings being developed, but you could count them easily.  Returning each year, it amazed me how many more new buildings were flying up, with what seemed like hundreds of new skyscrapers appearing each year.

In fact, with the ultimate arrogance, Dubai has most recently been building the world's tallest building for a cost of over £1 billion.  I also remember visiting the Burj Al-Arab Hotel a few years ago ...

 

... and seeing it's opulence, with gold leaf pillars and emerald encrusted walls, asking: "how much did this cost to build?"  The answer was that no-one knew.  They just said spend whatever it takes.

This would be fine for an oil-rich state, but Dubai is not oil-rich.  They realised twenty years ago that their oil reserves would run out before any other GCC nation, so they switched tack to create a logistics (cargo and port authorities), tourism and financial mecca for the Middle East.

And they have been on track to achieve this, but with the implosion of goods, tourism and finance in this crisis, their three main focal points, this is a bad time for Dubai.

Now whether this means the end of Dubai, another global knockdown, tighter lending or worse, we don’t know yet as it could not be as bad as it looks (really?!) ...

... but it does mean that the banks exposures to Dubai which people are saying is in the $13 billion to $40 billion range  – WHAT? that’s a massive range!!! Yes, but no-one knew what the cost will be as the Dubai authorities aren’t saying – will mean that the recapitalisation and rights issues of the UK banks means diddlysquat if partner nations move into meltdown.

All in all, a bad day and it’s no wonder that one City analyst described this as the new Lehmans.

Let’s hope he’s wrong.

The BBC has been collecting views from the region:

ANONYMOUS BUSINESSMAN, TEXTILE INDUSTRY

This news doesn't come as a surprise to anyone here, although the government has kept quiet on the subject and people don't discuss it. We've been concerned about the situation for quite some time. Since July we've had two increases in our electricity bills. Our monthly bill was £15,000, now it is nearly £30,000. That is a massive industrial price hike and it's totally unjustified in this oil-rich country.

SARAH, WESTERN JOURNALIST

Six months after I bought a flat, it lost more than half its value. I'm trapped here - even if I rent it, the rental income won't cover my mortgage payments.

MATTHEW, PERSONAL TRAINER

The word out there at the moment is that Abu Dhabi will bail Dubai out and people here are confident that sooner or later it will happen.

ANDREW, MANAGING DIRECTOR OF A COMPANY

I have to say, I think the West and the UK in particular focus too much on the negative stories from Dubai. Like all places, Dubai has been hit hard by the global financial crisis. But believing rumours of 5,000 cars abandoned at the airport, which has only 1,950 parking spaces, is a case of not letting the truth spoil a good story ... we have no rain, no tax and no jury service. I can think of many worse places to be.

PHILIP, FINLAND

Nakheel carried out the most ambitious projects in Dubai - too too ambitious and costly. They damaged the very thing that was Dubai's jewel in the crown - the beautiful white sandy beaches. Dubai needs to invest in a wider range of sectors: manufacturing, the service industry and perhaps more specialised industries. Unfortunately the emirate has learnt the hard way, but it will recover and it will be a good place to live and work in the future.

REBECCA, TEACHING ASSISTANT

I feel unsure about the future of Dubai. When I was listening to the news this morning I was thinking, if things get worse, maybe we should consider moving. It's not what I want to do, but the thought crossed my mind. As my husband says, Dubai has been going too big too fast and now there are not enough funds to sustain this development.

PAUL, DUBAI

A few of my friends lost their jobs, then over a period of three, four months most of my friends lost their jobs. Then I lost my job too. I was really hit hard. The bars and restaurants here were full of unemployed people, talking about moving. Then I noticed the small things - rental prices dropped massively, the daily commute to work in horrendous traffic took only 15 minutes instead of one and a half hours. Lots of abandoned cars in the car parks gathering dust ... greed played a huge part, short-sighted planning, an attitude of get what you can and get out, all played a big part. That's all over now, it's time for Dubai to mature. This is a good thing, I am staying as I know Dubai will come back as a vibrant, successful and truly amazing place to live.

JOHN, DUBAI

I never noticed those signs last year but now they are all over. There are so many office buildings empty here, giant letters on their sides spelling out how cheap the square footage is. There was no control, just wild building and even worse inflation. Now things are on the slide, you can pay your rent monthly and negotiate with desperate landlords for 50% reductions.

Russia's nerves creates massive volatility

After my meetings in Moscow last week, I’m wondering whether there is a Russian model of investing that could work with our Anglo-Saxon world of trading and meeting one of the key guys at MICEX, the Moscow International Currency Exchange (nothing to do with one’s gender), gave me a different view of Russia’s position.

As mentioned last week, real-time settlement is key to Russia’s markets, because no-one trusts each other. This then inhibits leverage because of the need to deposit enough collateral to cover your position.

On MICEX, the Central Bank obviously has an ability to leverage as much as they want because they are guaranteed to pay back. The large banks, such as Sberbank, are allowed a reasonable level of leverage based upon a deposit of a percentage of their trading position, although I had the impression that this is a sizeable percentage. But everyone else has to deposit enough collateral to near enough cover their total trading. This inhibits trading and leverage, but at least it guarantees settlement which some might say is no bad thing.

But there is a bad thing.

Volatility.

As mentioned on Friday, the RTS Index has been bouncing around faster than a Bolshoi Ballet Ballerina this year. This is because no-one invests in Russian stocks or stock markets for the long-term. It’s all short-termism.

A casual trader will play with Russian stocks for six months and then pull out. An e-trader maybe for just a month. When asked “what is long-term in Russia”, my friend at MICEX calmly replied: “less than a year”.

You see you can get your fingers burnt real fast. We talk about short-sellers in Europe and America, but in Russia these guys are not just selling short, they’re selling Bashful, Grumpy, Sleepy, Sneezy, Happy, Doc and Dopey.

These are the ultimate of short sellers, and hence you can buy into Russian stocks in the morning and be a millionaire or a pauper by end of day.

That is why real time settlement is critical, and why positions, margin calls and trading structures are so key.

With MICEX, they claim to be trading around RUB 700 billion (GBP £17 billion / USD $25 billion) per day. Of that, over half is currency trading and the rest is everything from derivatives to equities, corporate bonds to treasury bills.

MICEX’s history is also interesting. The Exchange started just after Gorbachov’s reforms in 1990, as a division of the Central Bank of Russia.

Launched in 1992, it enabled currency trading which, before MICEX, did not exist in Russia.

MICEX were also at the heart of the bubble that led to the 1998 financial crisis in Russia, as GKOs were their stock in trade.  GKO’s - Gosudarstvennoe Kratkosrochnoe Obyazatelstvo’s - are short term state bonds issued by the state of Russia and traded on MICEX. Because people did not understand or know how to deal financial instruments in Russia back then, it meant that debt was generated without any sense of the obligation to pay back.

As a result, GKOs were originally traded for the short term in days and weeks but, as people saw these as state-backed securities, they gradually moved into being traded in months and years. In other words longer term, rather than short term.

The result of over issuing GKOs and trading them long instead of short meant that, by the end of the 1990s, GKOs were worthless and the market imploded, creating a financial crisis with effects still felt today.

MICEX survived because they had diversified beyond trading currencies and GKOs to trading equities.  Today, they trade a few hundred of Russia’s most liquid stocks such as Gazprom.

But the issue remains that, having had fingers burnt by trading long, no-one trades long today. Everyone trades short.

So there’s the rub.

By being short sellers, Russia’s markets are highly volatile and very liquid and, by being risk avoiders, Russia’s markets are totally geared towards zero risk. There is no risk in Russian trading as everything is geared towards real-time settlement. The only risk is technical risk if the systems fail.

A market with risk eradicated is not a market that can trade effectively.

Now I’m back in London and thinking that European and American markets are geared towards high risk arbitrage strategies based upon low latency leverage. We have market risk, credit risk, and operational risk.

But our market encourages risks, and this is also a market that cannot trade effectively, as recognised post the Lehmans collapse.

We are trying to baton down the shutters on liquidity risk and we talk about ‘likelihood of settlement’ as a part of the puzzle, although price and cost are just as important.

In Russia, there is no ‘likelihood of settlement’. Settlement is guaranteed.

But equally, in Russia, there is no long-term investment market.

So there may be a middle ground here, between highly leveraged risk strategies and guaranteed settlement; a middle ground between long-term investing and making a buck through a short selling bet.

Right now, the Anglo-Saxon model is broken, whilst the Russian model is yet to start working effectively to build commerce.

So, will the financial instruments of the Anglo-Saxon model play a part in building leverage and commercial growth in the Russian markets? The Russians certainly think so but if, and only if, the trading model can incorporate the risk management principles of the Russian model.

Why is a ruble a ruble?

You may be wondering what I’m doing in Moscow (my wife does) ... it’s all to do with new opportunities as the doors open.

I was invited here to join a small software firm who have had success in the Russian and other emerging markets, and are looking for some advice as to how to get to the next level of business. They are introducing me to their Russian clients, including the Stock Exchanges MICEX and RTS, as well as some of their core banking customers in the retail and commercial banking space.

From my side, it’s all fascinating as I get a whirlwind tour of Moscow whilst, at the same time, a whirlwind tour of Russian financial markets.

Today was mainly touring, with visits to the Kremlin, Red Square and such like.

One of the major things I noted is that, since the Berlin Wall came down and the Cold War ended, how much more open and transparent Russian Society is. For example, they even provide signage these days to find their military intelligentsia:

Actually, that's a joke.  This sign is just to a local nightclub ...

But speaking of the secret service, I was quite amused to find that during a museum tour, the school children kept pointing at me and whispering with smiles and wary looks sideways.

To begin with, I thought that Russian children had never seen a foreigner before ... then I realised it was the Financial Services Club’s badge that I wear proudly as a lapel pin, as do all members.

The badge is our logo (as above) and, apparently, looks surprisingly like the Russian Military Intelligence Agency’s (MIA) logo ...

... so the kids all thought I was some official from the KGB or something.

Actually, they should have looked closely as not only is our logo a bull and a bear, but the Russian MIA’s logo is actually a bat, but then everything in this place is slightly different in a fascinating and enigmatic way.

For example, St Basil’s Cathedral in Red Square is, to me, the symbol of Moscow to foreigners:

Not so to Muscovites who almost blew it up during the Stalin years. In fact, several national monuments were blown up or removed during those years including this Cathedral ...

... and the Gates that led to Red Square.

Now you may be saying: “but Chris, if they were blown up, how come you could photograph them?”

Answer: the Gates and Cathedral were rebuilt by Boris Yeltsin as an exact replica of the originals which were destroyed in the 1930’s. In the case of the Gates, they were blown up because they obstructed the tank paths when public displays and march pasts were taking place in Red Square. In the case of the Cathedral, it was just a backlash against anything to do with the Church during the Soviet lockdown years of the Doctor Zhivago era.

All fascinating stuff.

But enough of the tourist posting. That’s not what this blog’s about. So what did I find out today about financial services?

Not a great deal actually, as I was a tourist today. Business is tomorrow and Friday.

But I did get one fascinating fact.

Why is the Russian ruble called the ruble (rouble is the French transliteration)?

No idea?

Well, it get its name from the Russian verb rubit, meaning "to chop."

This is because, historically, rubles were produced by chopping a certain weight of silver from a silver ingot.

The ruble itself was therefore the Russian equivalent of the mark, a measurement of weight for silver and gold used in medieval Western Europe.

In ancient times, it was also called “tselkovyi” or “tselkovyi ruble”, which means a wholesome, uncut ruble. This is because the cut ruble might sometimes be cut into further pieces for smaller denominations. So the uncut first ruble, was wholesome.

I could bore you for hours more with Russian history and folklore, which I find fascinating, but instead will leave it at that for today.

Except to say that rubles have been minted in St Petersburg since 1724 at the Monetny Dvor mint, and also in Moscow. This led to the production of smaller denominations of currency, the kopek. Kopek is a derivation of the Russian world kop’yo, meaning spear, and there are 100 kopeks in a ruble.

The first kopeks were produced with the Moscow coat of arms: a picture of Saint George slaying the Dragon on the other ... ... strangely enough, in case no-one noticed, Saint George is also the patron saint of England.

Maybe we have more in common that you first thought.

Has the G20 solved the financial crisis?

NO

I was going to leave it at that but ok, I guess I better explain.

The G20 is here.

No more G7 or G8.

Twenty of them now.

Count them.

The big EU players, America, the BRIC economies, Japan.

You’ve got Argentina, Oz, Canada in there.

Indonesia gets a nod, as does Saudi Arabia and South Africa.

Not forgetting Turkey of course.

Twenty of them.

All huddled together working out what to do with the banking system.

France and Germany shout bankers should be hanged and bonuses eradicated.

America and Britain tell them to get lost as the banks would leave America and Britain if they did that.

The Chinese just sit and smile, sit and smile.

Russia got a headache and swigs a little more vodka, whilst the rest look confused.

What to do, what to do.

“Well there’s two big issues at work here”, pipes up someone from the back in a heavy Scottish brogue. “Clean up the banking system so this never happens again and sort out the economy.”

“And ‘ow are we going to do zat?” asks the short Frenchman.

“Well, we’ve all agreed the banks need sorting out and we now have a plan, don’t we Mr. President?” says the Scotsman.

“You talking to me?” the United States of America’s First Black President splutters.

“First, we are going to slap the banks around their cheeky little chops with new regulations that will stop them taking excessive risks,” says the tartan leader.

“Vot do you mean?” asks a stout German lady called Miss Marple.

“Well, we are going to say that if they are taking risks they have to be ‘socially useful’. This means they must be able to explain, in words a ten-year old could understand, what it is they are investing in, why, how much is involved and the possible losses if it all goes wrong.”

“Vot if it goes wrong?” Miss Marple asks again.

“Well”, says Braveheart. “We throw them in jail. This is what we think the bankers want as - and I quote from Mr. Stephen Green, Chairman of HSBC and the British Banker’s Association - when I say that ‘banks have chased short term profits by introducing complex products of no real use to humanity’ and it is clearly a ‘basic failure of corporate governance’. So we are going to make it clear that they can’t do that any more.”

“How are you going to do zat?” asks Inspector Clouseau the short Frenchman.

“Obvious isn’t it Mr. President?” the kilted wonder turns to the United States of America’s First Black President.

“You talking to me?”

The haggis chomper ignores this and continues: “what we are going to do is to tell these banks they have to reserve lots of money to pay for and cover any risks they take in the future.”

“How much?” asks Miss Marple.

“Well, we don’t know. It depends on the size of the risk they are taking,” responds the heather misty eyed Scot.

“And what about ze bonuses?” asks Inspector Clouseau.

“Well, we don’t want to go there, do we now?”

At this point, the Chinese delegate raises a finger and a scurry of activity takes place to translate something.

After five minutes, the interpreter breathlessly says: “President of the People’s Republic kindly asks how Britain and America will repay the $5.8 trillion of money they invented in the last year.”

“Puh, puh, puh ... guh, guh, guh ... duh, duh, duh ...

So there you have it.

The bottom-line of the G20 summit this time around is that yes, they will regulate for bank risks in the future, and ensure that the more risk taken, the more money is placed in reserve. The challenge with this policy is obviously:

1. how do you measure the risks taken,
2. how much needs to be placed in reserve, and
3. how does this impact lending when banks are already being asked to place more capital in reserves than ever before.

But they will work something out.

For me, the key point is the old ten-year old test.

If a banker cannot explain their product in words a ten-year old can comprehend, then they shouldn’t be investing in that product.

Going back through this crisis we have had all sorts of instruments - CDO-Squared, SIVs, MBAs, CDS and more three-letter acronyms than we’ve ever seen before – which even the cleverest banker has found hard to digest, absorb and explain. If they cannot digest, absorb and explain their own products then they shouldn’t be selling or investing in them.

That’s the rule for the future.

But there’s a more fundamental question.

Has Quantitative Easing worked?

Has the Toxic Asset Relief Program solved the issues?

Have the economies stabilised?

Is the future bright or even Orange?

These questions remain to be resolved and my personal view is that we’ll flatline for at least another two years.

Royal Bank of Scotland needs more capital as do many other banks – where are they going to get it from? The USA and China are on the brink of a trade war whilst Europe sees a rocky road of challenges for the foreseeable, with even the most successful economy (Germany) admitting this will be tough for years to come.

We’re not out of this mess yet.

Yes, there are green shoots ... but are they growing vibrantly or struggling in rocky soil?

Right now, the latter.

So the soil still needs tending, nurturing and watering and the USA and Britain has little rain to sprinkle on these shoots left.

We’ve already bet our children and grandchildren’s tax burden on getting through the last year ... what happens if it doesn’t work?

Now I’m an optimist, which is why I’m saying we will get through this after two years of flat lining ...

... but Marc Faber who produces the Gloom Boom Doom Report and often gets these things right, came out this week on Bloomberg and said that the US Government will fail within the next decade on the back-end of this crisis.

Switch US for the UK Government if you believe his words, as the two economies are intimately tied.

All in all, the G20 has challenges and can treat the easy bits – how to regulate banks – but the hard bit is how to detox the global economies to regain stable future growth. And you don’t get that by printing more money to feed the addict.

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SWIFT innovations: a 'trust score' (update)

So, the innotribe session has just come to a close.  I'll post more about the ideas proposed for SWIFT to invest in later, but here's our team's idea.

First, what is innotribe?

It's a stream at SIBOS focused upon finding innovations in finance for the future comprising SWIFT and banks, corporates and anyone else who's interested.

At the start of the week, we created three teams who would look at cloud computing, wikinomics and social crowdsourcing to see if we could find an idea for SWIFT to invest in for the future.

SWIFT gave me the job of managing the group focused upon social crowdsourcing - Facebook, Twitter and all that stuff - along with Tim Collins, Head of Experiential Marketing at Wells Fargo.  Through a self selection process, we were joined by:

• Patrick Nachtergaele (SWIFT)
• Linda Haddad (Bank of America)
• Amr Soliman (e.Vision)
• Thomas H Wiles (Standard Chartered)
• Nicholas Moch (SEB)
• Michael Gialis (Sun Microsystems)
• I. Vijaya Kumar (Andhra Bank)
• Dr Brad Pagnell (APCA)

to come up with our proposal for venture capital to expand a crowdsourcing idea.

We all had good ideas, although they are hard to pitch in under ten minutes.  But that's what we had to do today.

So, here's our pitch.

People don't trust each other.

Banks don't like risk.

Could banks use crowds to analyse risks through social media and networks?

If they could, then could the bank community create a 'trust score' that adds multi-dimensional analysis of corporates and individuals by aggregating all the financial and social data out there into something that makes sense?

We think we could and that SWIFT could provide the trusted and secure aggregator of trust scores which are then exchanged to secure transactions between individuals and corporations across borders.

Why is this important?

Because financial information is too stark and lacks completeness of the profile of what someone behaves like and whether they can be truly trusted to trade with:

• Is there a risk of being involved in moral hazard?
• What are the attitudes to risk and finance of the person or firm being invested in?
• If a firm has no record in this constituency, are there other proofs that could be provided?
• If a firm is trying to do something brand new, is there anything that could increase confidence with those individuals/firms

In this sense, just as you vet employees with social media by checking their profiles, in future we will check customer and client profiles for risk.

The aim therefore of our crowdsourcing group is to create a 'trust passport' that has a variety of critical applications:

• For P2P transactions where the history of one party is too poor to create trust; incurrent climate, there is no proof of dependability

• In cross-border transactions where the old way would be to provide a letter of credit but many firms do not understand such letters, particularly small firms and microenterprises working in a globalised world where they need to provide commerce with no track record in a new country of operation

• In governmental and bank transactions where governments and banks want proof of track record when no track record (financially) is available, e.g. trying to get hold of a visa

This passport and trust score would become critical for not only banked individuals and firms, but also for those who are unbanked or who have no credit history as it offers an ability to use this understanding in other environments where a 'credit history' is missing, such as mobile and gaming where you (a) can pick up behavioural details of transacting in these environments as well as (b) offering a transaction support service by enabling 'trust' in these non-financial environments.

As a result, banks could pickup a lot more business of what would previously have been unbankable due to the richness of this risk information.

The business model is based on a charge per access which may be a charge to:

• A user who wants to prove their credentials (e.g. an individual or firm that is expanding)
• A provider who wants to check a user's credentials (e.g. an auto or mobile carrier)
• A marketing organisation who want to market to a specific demographic and get a charge per clickthrough for having their banner on the trust passport check

Why should SWIFT pull this together?

Well SWIFT would become a gargantuan spider bot bringing together all this data and analysing the chatter of crowds to securely manage and distribute the trust scores and who else is better positioned to be the aggregator, manager and distributor of trust scores?

What's in it for SWIFT?

A new business model that extends SWIFT into non-bank territories, e.g. managing a trusted passport on behalf of the banking community and their customers and offering this as a pay per download/usage/software as a service.

What's in it for the user?

The user can now immediately secure trust with strangers to do business.  For example, the small business in India that wants to trade with the multinational corporation based in the States; the landlord who wants to ensure the prospective tenant is decent and trustworthy; the microcredit farmer who now wants a bank account; the migrant worker who is a new country and needs financial services ... anyone in fact who has no way to prove their standing.

And just like eBay buyer and seller ratings, the more you work on your trust score, the easier it becomes to do business.

There's lots more to this idea, but there's the bare bones.

We presented this to a 'buyers panel' who will choose one idea to go forward with SWIFT's backing to take it to a developed idea (bear in mind that this is the result of just three 1-hour discussions).

The buyer's panel (or it a judging panel?) comprised:

• Lazaro Campos, CEO, SWIFT
• Ignace Combes, Deputy CEO, Euroclear and member of the SWIFT Board
• Guy Kawasaki, Founding Partner and entrepreneur-in-residence, Garage Technology Ventures
• Gottfried Leibbrandt, Head of Markets, SWIFT
• Kosta Peric, Head of Innovation, SWIFT
• Javier Santamaria, Assistant General Manager, Banco Santander Spain and member of the SWIFT Board
• Paul Simpson, Managing Director and Global Head, Treasury and Trade Solutions, Citi

The winner will be announced in this afternoon's plenary and I'm interested to see what happens, especially as I have a £20 bet with Nick Davies of the Cloud Computing team that our idea will win.

Obviously the Hong Kong Jockey Club's experience has really gotten me in the mood for gambling.

UPDATE: I just gave Nick HK$240 (£20) as he won!

His team's idea was very similar to above, but is based on SWIFT managing a secure vault based upon the Deathbook concept I blogged about a while ago. 

No hard feelings ... and pigs fly as well ;-0

Can we get Asians to spend rather than save?

Not surprisingly I’ve now turned in from the conference for the day absolutely knackerood.

After the 10k marathon of going up and down from ground to third floor and back all day, between the two exhibit halls, conference rooms, plenary and breakout sessions, toilets and you name it, me feet are falling off.

Not that I’m complaining as it’s been a good day.

After the McKinsey session, I went along to the plenary on whether Asia would be the powerhouse for the next century. This was an excellent panel of luminaries including:

• Dominic Barton, Worldwide Managing Director, McKinsey & Company;
• Tetsuya Kubo, Senior Managing Director, Sumitomo Mitsui Banking Corporation; 
• Huiman Yi, Vice President, Industrial & Commercial Bank of China (ICBC);
• Ranee Jayamaha, Advisor to the President on Banking, President Secretariat, Central Bank of Sri Lanka;

and moderated by David Pilling, Editor for the Financial Times, Asia.

The gist of the session was whether the Asian economies would create growth for the future and the panel seemed to be reasonably optimistic. The thorn in this optimism is where the demand will come from however. For many moons we have talked about the BRIC economies creating the next billion consumers, but Asian consumers don’t consume. They save.

These savings created the global imbalance in the current crisis where there is a capital excess in China and its siblings and a debt excess in the Western economies.

How do you solve this when the Asian mentality is to save? As Ronnie Chan mentioned yesterday, “when China has enjoyed 3,000 years of frugality as a culture, you aren’t going to change this overnight”.

So true.

But then Dominic Barton of McKinsey (again!) is a bull optimist when it comes to Asia driving a wave of future economic growth. He believes it just needs the consumer to be ‘ignited’.

David Pilling asked him how that would happen when the last crisis in Asia in 1997 had net exports at 37% of GDP but, by the start of this crisis a decade later, it had risen to 47% reinforcing the view that Asian save rather than spend.

Dominic retorted that there are 900 million new middle class consumers entering Asian society by 2015 and that 2015 ain’t that far away. As a result, “if you don’t have a footprint in Asia by the end of the next decade, your institution will be irrelevant”.

Interesting, and it reinforces research I produced for Misys three years ago that predicted the top ten banks of the world would be half Asian by 2010. This has already come true with Mr. Yin’s bank, ICBC, the largest bank in the world by deposits and market capitalisation today.

Woo-hoo.

After this session, it was down to innotribe to talk about cloud computing.

This session was led by my colleague Peter Hinssen of A-Cross Technology and a panel of cloud vendors:

• Joe Weinman, Strategy & Business Development VP, AT&T
• Jeffrey Barr, Senior AWS Technology Evangelist, Amazon Web Services 
• Willy Chiu, Vice President of IBM Cloud Labs & High Performance On-Demand Solutions 
• Philippe Coullomb, facilitator, The Value Web 
• Russell Daniels – Vice President and Chief Technology Officer, EDS, Hewlett Packard 
• Nick Davies, Global CTO, Lombard Risk Management 
• Amir Halfon, CTO Global Financial Services, Sun Microsystems 
• Stephen Morse, Senior Director - Sales Engineering APAC, Salesforce.com 
• Clare Porter - Senior Vice-President - Technology Solutions, Sungard 
• Roland Slee, VP Banking & Capital Markets, Oracle Asia Pacific 
• Neil Vernon, Senior Product Manager, Smartstream 
• Stevan Vidich, Industry Technology Strategist, Worldwide Financial Services, Microsoft

As you can see, this is one of the biggest panels ever seen!

And yes, we did relocate to the jungles of Macau for this session, in case you're wondering what that stuff is growing out of their backs.

Anyways, there was a long debate about whether cloud is just outsourcing wrapped up in a new way, it’s just utility computing, what about the security issues and more.

I’m not going to post much more about this here as I would like you to take part in our cloud computing survey if you haven’t already.

Click here to take the survey.

Suffice to say, the main commentary is that this is a $150 billion market so, whatever background you come from, you better be in there if you want a slice of the action.

Oh yes, and Peter asked each panellist to introduce themselves based upon the first computer they programmed. The fact that some panellists referred to IBM 360, punch cards, commodore 64 and more made me feel positively young again ;-)

So then to my own innotribe group. Here they are in action:

Just look at that hand movement and those brown shoes!

Anyways, I can't tell you anything about what we’re discussing as it’s a secret and I’d have to kill you if I told you ... but it will come out on Thursday, so I’ll tell you then. Meanwhile, if you haven’t had a chance to join our troop we’re all down in the SIBOS Lab on the 1st floor.

So that’s about it really.

Apart from trawling the floor in meeting after meeting debating and dialoguing.

A usual SIBOS.

And being a usual SIBOS, it’s now off to party.

And Hong Kong is a great place to party.

Will tell more tomorrow.

Queen to Chair debate about Capitalism Killing the Planet?

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

Madam

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

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

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

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

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

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

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

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

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

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

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

So where was the problem?

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

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

Very good.

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

Your Majesty,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hattip to the FT for this one.

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If I ruled the world ... nope, Goldman Sachs does

Paul Kedrosky's Infectious Greed is always a great read, and today he's posted some blurb from Science Magazine that's worth repeating here.

The Science article is called Economic Networks: The New Challenges by Frank Schweitzer et al. in Science, July 24, 2009.  Here's the abstract:

"The current economic crisis illustrates a critical need for new and fundamental understanding of the structure and dynamics of economic networks. Economic systems are increasingly built on interdependencies, implemented through trans-national credit and investment networks, trade relations, or supply chains that have proven difficult to predict and control. We need, therefore, an approach that stresses the systemic complexity of economic networks and that can be used to revise and extend established paradigms in economic theory. This will facilitate the design of policies that reduce conflicts between individual interests and global efficiency, as well as reduce the risk of global failure by making economic networks more robust."

The bit that Paul picked out is a graphic that shows the flow and liquidity of trading between banks, as follows:

Node colors express different geographical areas: European Union members (red), North America (blue), other countries (green).  The identifiers in the nodes represent major financial institutions and the links are both directed and weighted and represent the strongest existing relations among them.

Even with the reduced number of links displayed in the figure, relative to the true world economy, the network shows a high connectivity among the financial institutions that have mutual share-holdings and closed loops involving several nodes.

  

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Clearing is becoming clearer ...

Having written a bunch of blogs about clearing and settlement, an interesting announcement on clarifying the standards came out today:

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have set up a working group to review the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to clearing arrangements for over-the-counter (OTC) derivatives. The recommendations, which were developed by the CPSS and the IOSCO Technical Committee, set out standards for risk management of a central counterparty.

In recent years, there have been coordinated efforts by the public and private sector to improve bilateral clearing and settlement arrangements for OTC derivatives transactions. More recently, several existing, newly established, and proposed central counterparties (CCPs) have sought to provide central clearing and settlement services for OTC credit default swap (CDS) transactions, interest rate swaps, and other asset classes of OTC derivatives.

The CPSS and IOSCO believe that the expansion of centralized clearing and settlement is a positive development because, if well designed, CCPs can reduce systemic risk in financial markets. Accordingly, the relevant authorities for CCPs for OTC derivatives seek to ensure that each CCP meets the risk management standards set forth in the recommendations. However, applying the recommendations in practice can involve a significant degree of interpretation and judgment.

To promote consistent interpretation, understanding and application of the recommendations across CCPs for OTC derivatives, the working group has been formed to discuss key issues that can arise when CCPs, including the new CDS CCPs, provide central clearing services for OTC derivatives. Where necessary, the working group will propose guidance on how CCPs for OTC derivatives may meet the standards set out by the recommendations and will identify any areas in which the recommendations might be strengthened or expanded to better address risks associated with the central clearing of OTC derivatives.

Participants in the working group include representatives of the central banks that are members of the CPSS, representatives of the securities regulators that are members of the IOSCO Technical Committee, and representatives of the International Monetary Fund and the World Bank.

The working group will coordinate with other regulatory authorities and communicate with the industry, as appropriate, as the work moves forward.

By way of background, the CPSS is a forum for central banks to monitor and analyze developments in payment and settlement arrangements as well as in cross-border and multicurrency settlement schemes.

IOSCO is the international policy forum for securities regulators. The organization’s membership regulates more than 95% of the world’s securities markets in over 100 jurisdictions, and its membership is steadily growing.

The Technical Committee is a specialised working group established by IOSCO’s Executive Committee, and is made up of 18 agencies that regulate some of the world’s larger, more developed and internationalized markets. Its objective is to review major regulatory issues related to international securities and futures transactions and to coordinate practical responses to these concerns.

The members of the Technical Committee come from Australia, Brazil, China, France, Germany, Hong Kong SAR, India, Italy, Japan, Mexico, the Netherlands, Ontario, Quebec, Spain, Switzerland, the United Kingdom and the United States.

The original recommendations issued in 2004 can be viewed here (75 page pdf).

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Where will innovation come from?

McKinsey publish regular articles and research that stimulates the little grey cells.  For example, this week they ask the question: "will Asia become the center for innovation in the 21st century?"

This is a timely discussion, as it fits with the work I'll be delivering at SIBOS this year, bearing in mind that SIBOS is in Hong Kong and I'm going to be looking at innovation in financial services and the most likely scenario for the future bank.

In the McKinsey debate Iqbal Z. Quadir, founder and director of the Legatum Center for Development and Entrepreneurship at the Massachusetts Institute of Technology (MIT), argues Asia “is positioned to generate a torrent of new products and services that could make it the global leader in innovation. China and India are fast adopting modern technologies and making great economic strides. South Korea, Taiwan, and Singapore have already leaped forward. Yet all of these countries were among the world’s poorest only a few decades ago. With this momentum, Asia could become the center for innovation in the 21st century.”

He then discusses the challenges, and believes that Asia’s need to deal with poverty and remoteness will stimulate Asia’s economic and technological innovation and leadership.

Robert Atkinson, founder and president of the Washington-based Information Technology and Innovation Foundation (ITIF), adds to the debate stating that “defenders of the status quo dismiss Asia’s prospects as an innovation leader because the United States has been the leader for so long—and they assume it will continue to be. But past performance in innovation is no guarantee of future performance, as we have seen with one-time leaders that have lost their advantage, such as Germany and Great Britain. In fact, while the United States once led the world, it no longer does by many measures, and absent significant changes to public policy, it won’t in the future. Asia will.”

According to analysis by ITIF, the most innovative nations are Singapore, Sweden, Luxembourg, Denmark and South Korea, with America lagging in sixth place.  Increasingly Asian nations are rising up the tables fast, with China making the most progress.

Robert worries that the USA has no explicit national innovation policy whilst most leading Asian nations have, and he concludes that Asia will lead in the future because “the United States lets it by continuing to rely on market forces alone to generate innovation leadership.”

Interesting discussion.

Where do you think innovation will come from?

Europe, Asia, Africa, America, Latin America … or from everywhere.

My own view?

Asia leads mobile innovations; America leads internet innovations; and Europe leads in maintaining our traditions.

Now that should get a backlash for a start!

More on remittances

After my scribble on remittances the other day, it is timely to talk about this as it relates to the G8 Summit taking place in Italy this week.

During the buildup to this meeting campaigners have been reminding the leaders of their obligations to Africa, especially Italy and France who reneged on their pledges of 2005.  Bob Geldof wasn't going to let them get away with that, and publicly shamed Silvio Berlusconi into an apology this week.

With this in mind, a key part of the G8 meeting will focus upon remittances, as this payments process has a critical role to play in the health and wealth of Africa.  For example, a few choice snippets from recent news includes:

"The collapse of international capital markets and the recession in major economies have halved growth in Sub-Saharan Africa. Combined with falling national income from commodity prices and remittances, and the increasing cost of food and energy, this will seriously retard progress towards the Millennium Development Goals (MDGs), pushing tens of millions more Africans below the poverty line."   Sean Leno, CBC Africa Forum

"The world's poorest countries will see $1tn (£600bn) drain from their economies this year according to the first detailed analysis of how the global recession is hitting developing nations." The Guardian, June 2009

"One area that holds promise pertains to remittances by the African Diaspora. Remittances have become a major source of financing for Africa’s development, and in some countries, they are more important than aid. Remittances are however sensitive to economic conditions and the recent crisis has resulted in significant reductions of remittances to Africa." Brookings Institute, July 2009

"Poor people are being forced to shoulder multiple burdens that are not of their making. The economic crisis is hitting their remittances and investment and trade flows. Climate change is harming their harvests, livelihoods, health and safety. High food and commodity prices are worsening a chronic poverty crisis which continues to claim thousands of lives every day. You can make health care and education a reality for millions of people if you keep your promise to pay $50 billion in foreign aid." Letter from Annie Lennox, Colin Firth, Scarlett Johansson, Angélique Kidjo, Bill Nighy and many others to the G8

What this train of thought clearly shows is that the financial markets and financial providers have a key role to play in the health of nations through the wealth of nations.

************************************************************************************************ 

Meanwhile, on another remittance note, I was intrigued to see these signs in Tesco, our newest UK Bank:

 
You cannot miss the signage as it's everywhere:


The service has been launched in Tesco in Slough, and is targeted at the large Polish community there.

Money Transfer firms be afraid, as "every little helps".

  

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A remittance strategy scribble

As mentioned, last week was a Remittances week in Rome.

Remittances continually intrigues me as a market, especially the major focus financial institutions are now placing on this area as an opportunity. This is contradictory as those who need remittance services the most are often those who do not use banks or have bank accounts. 

So there’s an anomaly there.

Nevertheless, the banks’ interests are probably something to do with the fact that there’s $375 billion worth of remittances sent around the world every year.

First, we need to consider exactly what a remittance is.

Most folks think of a remittance as money transfer from a migrant worker to their family in another country, with 14 major sending countries to 72 receiving countries according to the World Bank.

These are:

• Canada to India; Vietnam; Jamaica; Haiti
• France to Senegal; Mali; Côte d'Ivoire; Haiti; Morocco; Tunisia; India; Vietnam; China; Algeria
• Germany to Turkey; Lebanon; Serbia; India; Romania; Bosnia and Herzegovina; Croatia; Morocco; China
• Italy to India; Philippines; Albania; Romania; Serbia; Nigeria; Sri Lanka; Morocco; China
• Japan to Philippines; China; Korea; Brazil; Peru
• Malaysia to Indonesia
• Netherlands to Morocco; Suriname; Nigeria; Turkey; Indonesia; Netherlands Antilles; Ghana; Dominican Republic
• Russia to Armenia; Kyrgyz Republic; Belarus; Moldova; Azerbaijan; Georgia; Ukraine; Tajikistan; Kazakhstan; Uzbekistan; Latvia; Lithuania; Estonia
• Saudi Arabia to Pakistan; Yemen; Bangladesh; India; Philippines; Egypt; Jordan
• Singapore to Bangladesh; India; Malaysia; China; Indonesia; Pakistan
• South Africa to Swaziland; Lesotho; Zimbabwe; Angola; Botswana; Mozambique; Malawi; Zambia
• Spain to Dominican Republic; Colombia; Peru; Brazil; Romania; Ecuador; Philippines; Morocco; Bulgaria; China
• United Kingdom to Brazil; Pakistan; Poland; Bangladesh; Nepal; Sri Lanka; Philippines; India; Sierra Leone; Nigeria; Ghana; Lithuania; Uganda; Romania; Bulgaria; South Africa; Jamaica; Kenya; Albania; Zambia; Rwanda; China
• United States to Ecuador; Vietnam; El Salvador; Peru; India; Nigeria; Ghana; Guatemala; Honduras; Colombia; Jamaica; Mexico; Philippines; Haiti; Dominican Republic; Guyana; Indonesia; Brazil; Pakistan; China; Lebanon; Thailand

The primary receiving countries are India (15% of global remittances), Mexico, Philippines, China (8% each), Turkey (6%) and Egypt (5%), and the top 16 receiving countries represent 75% of all remittance receipts.

All of this is fluid however, as economic migration is predicated on economic health and, as seen recently in the UAE, if the economies falter then so does the economic migration:

“It's the great escape by Indians who've hit the dead-end in Dubai. Local police have found at least 3,000 automobiles -- sedans, SUVs, regulars -- abandoned outside Dubai International Airport in the last four months.”

Nevertheless, global remittances is big business, particularly as the traditional model of money transfer – via an agent’s office such as Western Union’s or via Hawala - is changing thanks to technology.

With half the world now able to access mobile telephones, the remittances space is being re-engineered. This was illustrated well by the rise of m-Pesa in Kenya – from nothing to 7 million subscribers in just two years making this the largest financial services in the country – which led to the announcement by Citibank of an agreement with Vodafone to emulate the success of the service worldwide.

Since then, Vodafone have linked with other providers, such as Western Union, and mobile and prepaid remittances is definitely worthy of note.

This led to an illumination for me last week, which is that it is not the transfer of money or the technology which drives this marketplace … it is how to get value from person to person.

Whether the transfer of value is via an agent, mobile telephone, card or other service does not matter. Purely the accessibility to sending value and receiving value.

In this context, the sender typically lives in a developed or growing economy – France, Germany, Italy, Spain UK, Russia, Saudi Arabia, South Africa, Japan, Singapore, Malaysia, USA, Canada – to one that is underbanked and often underdeveloped.

In other words, from countries with high density of technology access to countries with lower or poor access to technology.

With this in mind, I felt a chart for a remittance strategy could look something like:

In other words, this aims to provide sender’s with sophisticated and ubiquitous access points to send value via any technology channel, including anything from an iPhone app to a money transfer agency … through to receiver’s being offered simple and ubiquitous access via the most appropriate channels for the culture and country infrastructure which for many will be SMS text messages and / or a money transfer agency.

Oh yes, and value could be monetary remittances, but it doesn't have to be.  It might be airmiles, loyalty points for telephone or food services, or even games, ringtones and anything else that has a value ...

This is just a scribble on the back of a notepad at this stage, but may be worth fleshing out into something more substantial.

Would be interested in any views …

The Mobile Financial Present

Yesterday, I presented the second in a series of webinars focusing upon Global Bank Trends.

The first presentation looked at these trends generally.  You can watch and hear the hour-long webinar by clicking here or view and download the presentation:

The second presentation focused upon trends in mobile financial services, and covers key developments in this space in Asia, Europe and the USA.

You can watch and hear the hour-long webinar by clicking here, or view the presentation here:

A download of this presentation is available.  Right click this link to download the file (3 Mb pdf). 

The next presentation will focus upon social finance developments and the relevance of Facebook, Twitter et al to banks and financial services providers.  Register via email here.

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Stéphane Garelli presents ...

Stéphane Garelli was the keynote at last week’s conference on payments and, as usual, was stimulating, entertaining and thought provoking.

For those who are unaware, Stéphane made Davos what it is today and is a world authority on competitiveness. I’ve placed his full bio at the end of this entry for those who are unfamiliar with his full range of activities.

Interviewing Stéphane before his speech, I asked him what he thought we would be talking about this time next year?

“Unemployment and inflation” was his answer.

Massive unemployment which is already in play, and hyperinflation due to the capital injections and quantitative easing of the US, UK and developed economies.

Oh dear.

Then he said, as a result of inflationary forces, the stock markets would see another major bull run and will rally back to record highs soon enough.

Hurrah!

Here’s a summary of his presentation, including the bit I liked best: his favourite quotes.

A competitive outlook for 2009 and beyond

Many people got the world wrong, for example:

“I do not anticipate any serious problems among the large internationally active banks”
Ben Bernanke, 28 February 2008

“I do believe that the economy is growing”
George W. Bush, 15 July 2008

“In today’s regulatory environment, it is virtually impossible to violate the rules”
Bernie Madoff, 20 October 2007

They got it wrong and it has led to this massive global downturn.  Is this finished?  Well, to work that out, we need to consider what sort of recession we are in.  There are four types of recession:

• a V-shaped recession,
• a W-shaped double dip,
• a U-shaped where the bottoming is a long-cycle rather than short cycle, and
• an L-shaped recession, which is Japan’s speciality.

The consensus is that this global recession is U-shaped, although Stéphane feels that we have more of an ECG-style U-shaped recession, with lots of false dawns before we get a recovery.

He also believes we have gone past the low-point and that recovery is on the way.  As a result, “we shall see the best year on the stock exchanges ever”.

Boy, I hope so.

Stéphane then displayed some democrat views by using a slide that showed there was a $236 billion budget surplus when Clinton left office, leading to a $1,750 billion deficit (-13% of GDP) when George W left office (double-click picture to see a big version):

In other words, the Republicans built up a debt at a run rate of $3.7 billion a day … about 100 years worth of spending a dollar a second (my new unit of currency!).

The standard economic answer to fixing these issues of debt is to:

(1) flood the streets with money by just printing more (quantitative easing);
(2) pack the bad debt away in a bad bank;
(3) recaptialise the banks and take part ownership; and
(4) later on, resell the bad debt and/or the shares.

This is pretty much the route that the EU and USA have taken, and it may now be working, but not without issues.

For example, the US Paulson plan which went through Senate and Congress last October was originally 113 pages. This was rejected first time, because Congress folks were using it to negotiate tax breaks for their states. This is why the final version was expanded to 338 pages and included tax breaks for wind and solar energy, an excise tax on rum from Puerto Rico, an amortization for motor racing tracks and exemption taxes for wooden arrows in toys!!

Anyway, the result is that we have spent about $3.2 trillion (100,000 years spending a dollar a second) in stimulating the global economies and a further $2.7 trillion (85,000 years) in loan guarantees.

The question now is: will it / has it worked?

Yes, it has ... but it’s a fragile world and a fragile recovery.

Stéphane believes that the EU still needs a further $1 trillion stimulation to get back to stability; and the USA another $2.5 trillion, in terms of borrowing requirements for 2009. This is why the $ will stay weak for the remainder of this year; the € is more or less ok; and the £’s future is uncertain.

From a political viewpoint, this crisis has also been good for politicians.

“I think politicians have really enjoyed this crisis,” Stéphane said, “because, for the first time, they have a sense of purpose”.

That got the biggest laugh of the morning … until he added the line that : “a government is big enough to give you everything you want, are also big enough to take everything you have.”

This is why, after the crisis, there will be more regulation because governments are now in power and, just as Enron led to Sarbanes-Oxley, we now have another Enron but this time it is ten times worse … so expect ten times more regulation.

Stéphane had a lot more to say about unemployment and inflation, but his summary was that:

In the 1980s, we had to work smarter and all began re-engineering;
In the 1990s, we had to work cheaper so we outsourced everything; and
In the 2000s, we had to work globally so we moved everything offshore.
In the 2010s, we have to work more easily and so business simplification will be the focus.

Simplify products, services and processes to their essentials.

That is what the iPod has done for music - it's just one button! - and businesses need to do the same.

Simplify and you will win.

As I mentioned, he sprinkled his favourite quotes liberally throughout his speech. Here are a few of them:

“There are three kinds of people in the world – those who make it happen, those who watch it happen, and those who wonder what happened”
Ronald Reagan, 1911-2004

Michael Faraday (1791-1867), reply to William Gladstone, then British Minister of Finance, when asked of the practical value of electricity: "One day sir, you may tax it."

“The markets can remain irrational longer than you can remain solvent”
John Maynard Keynes, 1883-1946

“The real difficulty lies not in developing new ideas, but in escaping from the old ones”
John Maynard Keynes, 1883-1946

“Confidence is what you have before you understand the problem “
Woody Allen, 1935-

“He that is too secure is not safe”
Thomas Fuller, 1608-1661

“It is very wrong to be right before everyone else”
Michel Eyquem de Montaigne, 1533-1592

Stéphane Garelli is a Professor at both the International Institute for Management Development (IMD), and at the University of Lausanne, Director of The World Competitiveness Yearbook, the most renowned annual analysis of the competitiveness of nations and a reference for government and business leaders around the world.

He is Chairman of the Board of Directors of "Le Temps", and was formerly Chairman of the Board of the Sandoz Financial and Banking Holding, and member of the board of the Banque Edouard Constant.

The author of numerous publications in the field of competitiveness, international trade and investments, he is also a columnist in several magazines. He was permanent senior adviser to the European management of Hewlett-Packard, and before that Managing Director of the World Economic Forum and of the Davos Symposium. He is a member of a number of institutes, such as: China Enterprise Management Association, Board of the 'Fondation Jean Monet pour l'Europe', The Swiss Academy of Engineering Sciences, The Royal Society for the encouragement of Arts, Manufactures and Commerce and the Mexican Council for Competitiveness.

Can regulators really regulate?

I blogged a while ago about David Doyle, expert on all things in finance with a Brussels flavour.

David and I regularly tag-team on MiFID and the PSD, and in the wider context of Europe's Financial Services Action Plan.

In particular, he has an inside track on all this stuff and presented the latest updates on Europe's Directives at the Financial Services Club Ireland last week.

What struck me as David outlined the massive change agenda in plan, is that the process of drafting regulations is fine ... but can any of this work?

Answer: probably not.

First, there are all the local regulations, such as Faster Payments in the UK.

Then there are the national implementations of European regulations already in play, such as the PSD.

These all have slight variations in that every country’s policymakers have a different view of how the PSD impacts their national banking structures. In France, it means direct debit charges have to be slashed by a third whilst, for most countries, it just means adding on some bells and whistles.

For example the FSA’s approach, published in March, splits responsibilities between the FSA, the Office of Fair Trading and the Financial Ombudsman. However, it also tries to explain how to interpret every aspect of the PSD.

Ruth Wanderhofer, Vice President for Cash Management in Europe within Citibank's Global Transaction Services Division, claims this is bad.  Speaking at this year’s European Banking Forum, Ruth stated that “the PSD is very complex and can be interpreted and read in so many different ways every day that you don’t necessarily want a supervisor to write down what it is supposed to be meaning”, especially as the FSA's interpretations go “far beyond the scope of the PSD”.

Then there is the EU process of evolving regulations for Capital Adequacy and Solvency II, UCITS IV, Retail Investment Products, Market Abuse and more.

Finally, there is now the global agenda of the G20 to create consistent supervision across regions as well as within regions. So far, this has been an aggressive agenda in the EU covering:

October 2008
Commission appoints ad hoc high-level group on financial supervision, chaired by Jacques de Larosière

15 November 2008
G20 summit in Washington agrees five-point action plan to reform global financial markets

25 February 2009
De Larosière groups hands in report.

5 March 2009
Commission tables proposal for G20

19-20 March 2009
EU summit endorses common position for G20

2-3 April 2009
G20 summit in London.

April 2009
Commission to present measures on hedge funds, private equity, retail investment products and remuneration in financial services.

By end of May 2009
Commission to present European financial supervision package.

June 2009
Expected agreement on follow-up to De Larosière report;
Commission plans to present a White Paper on Tools for Early Intervention to Prevent Crises, and legislative proposals to increase the quality and the quantity of prudential capital; and Legislative proposal from the Commission on hedge funds and private equity.

Before end 2009
EU expected to finalise approval of financial regulation measures

This is also a very broad agenda.

As David made clear last week, the Commission is taking a 'safety first approach' to regulating capital markets and market actors, filling in the gaps where European or national regulations are insufficient or incomplete. In particular, these will be created for:

Credit rating agencies (April 2009)

Hedge funds and private equity: to include private equity and other systemically important market players (April 2009).

Crisis prevention: A White Paper on tools for early intervention to prevent a crisis (June 2009).

Derivatives: A report on derivatives and other complex structured products will provide a basis for Commission initiatives to increase transparency and ensure financial stability (June 2009).

Prudential capital: Legislative proposals to increase the quality and quantity of trading-book activities and tackle complex securitisation (Due: June 2009), and to address liquidity risk and excessive leverage (Autumn 2009).

Along with a rolling program to update and create a far more consistent approach to global and European supervisory rules.

But I just cannot see all of this working, and beg the question: can regulators really regulate such a broad and aggressive agenda, or are they smoking dope?

It took us ten years to develop the European Financial Services Action Plan, and where did we get to? A vast array of Directives which some countries implement and some do not. These Directives have attacked the simplistic areas of retail financial products, insurance, payments and investing. Now, with the credit crisis and the realisation of the complexity of global derivatives, we are tackling the complex financial areas of exotic options, futures, clearing and settlement.

So how does this work?

How can a regulator create global, regional and national rules that are all harmonised, consistent, integrated and cooperative?

What happens when countries, such as Costa Rica, opt out?

These are all the tough questions for the regulators and policymakers to answer but, my own view … no matter how much regulation the governments of the world draft and create to address this crisis and harmonise rules:

(a) can they be implemented
(b) can they be enforced?
(c) are they truly global and how do you deal with countries that are non-cooperative?
(d) are they water-tight or can market operators wriggle around them?

… and more.

Not throwing rocks or anything, as we do need regulatory enforcement, but I would suggest that:

(a) it is still light-touch, as detail will constrain implementation
(b) it is enforced via regional and global co-operation of the G20
(c) the G20 and United Nations sanction nations that are uncooperative
(d) if it is light touch, then it is not water-tight but should be clear enough that any non-compliant market operator is hounded out of the markets by other market operators being whistleblowers about their bad behaviours.

Whoops.

Did I say that they should be whistleblowers?

Hound out the non-compliant market operators?

No way.

After all, the role of most market makers is to find ways to create risk to make money, not to be compliant with the rules.

I guess the answer really needs to be that the regulators and policymakers are clued up enough about the complexity of these markets that they can slap down any non-compliant performers before they create another bubble such as the leveraged debt of the credit default swaps markets.

And how do they do that?

By being intimate with all market operations from the simple to the complex, not just the way they’ve behaved to date which is to hire administrators who can draft rules about the simple stuff.

Postnote:

David's presentation is available to Club members, including remote online members. 

The Financial Services Club also runs a European Financial Regulatory Advisory Group who provide clients with in-depth knowledge of the European Reglatory landscape and draft Directives.  If you are interested in such services, let me know.

And what's next (Part 2)

There's a good dialogue going on over at the blog last week about "What's Next?", with Paul P and Paul W debating whether economist Carlota Perez is right or wrong in her view that this crisis reflects the restructuring of the world's economies thanks to the network revolution.

Bearing in mind the old comment:

Q:  What do you call a roomful of economists? 
A:   A disagreement!

it is unlikely that we'll find a common thread of an answer on this one, but there is a fair bit of substantive analysis to support Perez’s theories in her 19 page paper from 2003: “Rethinking Globalization after the Collapse of the Financial Bubble: an essay on the challenges of the Third Millennium.”

Here's a couple of interesting charts from that paper.

The first shows that it takes about fifty years for a new commercial revolution cycle to mature (double-click to see larger version of this chart):

 

Whilst the second overlays this with the four previous commercial revolutions and demonstrates that after the internet bubble burst we were right in the middle of this one:

I would claim that, thanks to broadband and mobile, we are still in the middle of this one which is why Facebook and Twitter have changed our business models yet again ... and global low latency algorithmic trading has done the same in our investment markets.

So, about 2035 before this revolution settles down then!

It is also interesting to note two or three other economists, who are being referred to right now as potential pointers to our future, alongside Perez.

For example, the Times referred to Hyman Minsky the other day.

“Minsky showed that speculative bubbles, and the financial collapses that follow them, are an integral part of modern capitalism. That is, they are not the result of accidents or poor decision-making, but a fundamental and recurrent feature of economic life once you deregulate the financial system.

“He pointed out that, given sustained economic growth, there was a tendency for the finance system to move from a situation where everything is under control, to a speculative situation, which is precarious.

“Minsky’s proposed solution to financial crisis was state intervention on two fronts: the government should run a big budget deficit and the central bank should pump money into the economy.”

That’s exactly what has happened!

Thing is that Minsky was ignored because he was thought to be crazy, as he had nothing to substantiate his ideas. Now however, having been proved to be right, everyone is started to study his socialism of banking theories.

Mind you, if you listened to every crazy economist over the years, you would end up with a completely buggered economy ... oh yes.

Anyways, Tim Harford who writes as the Undercover Economist with the FT, throws in his own solution building on the work of Jeremy Bulow and Paul Klemperer:

“They suggest splitting crippled banks such as Citigroup or RBS into a good 'bridge' bank and a bad 'rump' bank. The bridge bank gets all the assets, even the so-called 'toxic' assets. These are not truly toxic, simply worth less than everyone hoped. The bridge bank also inherits sacred liabilities such as deposits. The rump bank gets no assets, only the debts the old bank used to owe to creditors.”

Now then, would you like your rump rare, medium or well done sir?

How green is your valley?

I just discovered an interesting part of The Economist I never knew existed: the Daily Chart.

Yesterday's focused upon how much of the economic stimulus created by governments to get economies moving is going into projects that have green credentials.

Here's the chart:

Interesting.

The day before was how much protest has taken place at each major summit:

Hmmm ... I'll definitely be visiting the Daily Chart more often.

A banker's bonus ain't what it used to be ...

The Financial Stability Forum published their principles on reservering, crisis management and banker's compensation yesterday.  Here are the headlines:

Recommendations and principles to strengthen financial systems

On 2 April 2009, the Financial Stability Forum (FSF) issued reports covering:

• Recommendations for Addressing Procyclicality in the Financial System;
• Principles for Cross-border Cooperation on Crisis Management; and
• Principles for Sound Compensation Practices;

The Forum also published an update on the implementation of the recommendations contained in the FSF's April 2008 Report on Enhancing Market and Institutional Resilience.

Addressing procyclicality in the financial system

The present crisis has demonstrated the disruptive effects of procyclicality – mutually reinforcing interactions between the financial and real sectors of the economy that tend to amplify business cycle fluctuations and cause or exacerbate financial instability. Addressing procyclicality in the financial system is an essential component of strengthening the macroprudential orientation of regulatory and supervisory frameworks.

The recommendations set out in this report mitigate mechanisms that amplify procyclicality in both good and bad times. They encompass a mix of quantitative/rules-based and discretionary measures that are interrelated and reinforce one another. They will be implemented over time once conditions in financial markets return to normal.

Principles for Cross-border Cooperation on Crisis Management

Through these Principles , relevant authorities, including supervisory agencies, central banks and finance ministries, commit to coooperate both in making advanced preparations for dealing with financial crisis and in managing them.

Update on the Implementation of the April 2008 FSF Recommendations

The update on progress in implementing the recommendations of the April 2008 Report on Enhancing Market and Institutional Resilience covers actions in five areas:

(i) strengthening capital, liquidity and risk management in the financial system;
(ii) enhancing transparency and valuation;
(iii) changing the role and uses of credit ratings;
(iv) strengthening the authorities' responsiveness to risks; and
(v) putting in place robust arrangements for dealing with stress in the financial system.

The previous follow-up report, issued in October 2008, is available here.

Principles for Sound Compensation Practices

The Principles require compensation practices in the financial industry to align employees' incentives with the long-term profitability of the firm. The principles call for the following key principles to be implemented:

Effective governance of compensation

• The firm’s board of directors must actively oversee the compensation system’s design and operation.
• The firm’s board of directors must monitor and review the compensation system to ensure the system operates as intended.
• Staff engaged in financial and risk control must be independent, have apppropriate authority, and be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the firm.

Effective alignment of compensation with prudent risk taking

• Compensation must be adjusted for all types of risk.
• Compensation outcomes must be symmetric with risk outcomes.
• Compensation payout schedules must be sensitive to the time horizon of risks.
• The mix of cash, equity and other forms of compensation must be consistent with risk alignment.

Effective supervisory oversight and engagement by stakeholders

• Supervisory review of compensation practices must be rigorous and sustained, and deficiencies must be addressed promptly with supervisory action.
• Firms must disclose clear, comprehensive and timely information about their compensation practices to facilitate constructive engagement by all stakeholders.

The report's opening lines say: “In the future, all the stakeholders of financial firms, including supervisors [or regulators], shareholders, and (where firms are systematically important) governments, will expect to receive more information about compensation policies and to increase their engagement with them.”

I'm off to Costa Rica.

Understanding the crisis of credit

Jane Wells of CNBC says that her 18-year old daughter only understood the credit crisis after watching this 12 minute video:

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Seems worthwhile to reference this here then.