Spent a lot of time yesterday talking with folks about the future of money, payments and banking.
The conversation got interesting in two particular areas: branches and mobile services.This is because I realised some things. Take branches.There appears to be an evolution of branch usage from underbanked economies through emerging economies to developed economies.In the underbanked economies, the issue is often a mixture of a lack of infrastructure and investment combined with low income and low prospects.In these instances, banks don’t make investments in branches as there is only going to be profitability from clients in major urban areas where there’s population density, wealth and work.As a result, these countries have had little banking prospects, availability or access, but this is changing due to the introduction of mobile wireless infrastructures.Even so, these communities will still remain underbanked as full bank services have limited availability in rural communities.You then move to emerging economies, and find the massive urbanisation of these economies is creating new wealth and new communities. You only have to look at the urbanisation of China, with the rural population to urban population changing from 74% to 26% in 1990 to a major switch in 2009 of 53.4% rural to 46.6% urban to realise such change.And with such change, comes branches and branch banking. China has seen a revolution in banking during their change process, and today’s Chinese banks hardly reflect those of two decades ago in service and style.In this instance, mobile services range from simple to complex, and the mobile channel is everything from basic payments to full service banking depending upon which consumer segment the bank serves.Then you look at developed economies, and the bank branch is already inbuilt to their model from the past. The branch may be an asset or liability, but the criticality is that new channels and technologies – internet and mobile internet specifically – are offering additional and alternative capabilities for these banks to reach their consumer.This also varies by culture and language. For example, Spanish bank customers much prefer bank branch access than UK customers, who would rather call their bank than visit a branch.So you cannot generalise too much about these services.Nevertheless, and this was my other realisation, you can also see big changes in mobile.I’m no mobile expert but in banking, I’ve seen five phases of mobile channel access and usage.The first was basic payments processing and transaction services using SMS text messaging.Then there were additional bank account services based upon Wireless Application Protocol, WAP.Third generation mobile bank services offered a more multimedia rich interaction, based upon smartphones. This was OK but limited by the fact that you had to design your apps for each phone operating system and, in some cases, model of phone. Hence, it was very limited.Fourth generation is where we are today, and I recently blogged about the killer apps offered by iPhones and Androids. The beauty of this generation is not only that we now have phones that can offer idiot proof bank services, but apps that can be developed and deployed for mobile internet. Therefore, the design is no longer for a specific phone model or operating system, but for easy access to multimedia rich banking services using Open APIs.Finally, there is a next generation mobile service appearing on the horizon ... the chip-neutral device.Today, we have EMV chips for cards, SIM chips for phones and RFID chips for contactless services. This is all going to change in the next few years as Visa, MasterCard, the GSMA and mobile operators work together to develop chip enabled services that are device-neutral.Hence you could stick your communicating wireless payments chip into any machinery, gadget, tool or technology you want ... a telephone, a watch, a television, an iPad, a laptop, a pair of sunglasses ... anything and everything can become a wirelessly communicating, interactive payments device.Roll on the next generation.
WARNING: THIS BLOG ENTRY WILL NOT CHEER YOU UP [sorry]
I spent the morning with a group of futurists debating the long-term outlook for financial markets and am never sure about the usefulness of such debates, although there is definitely something of use in creating scenario plans for the future which is where we were focused.
The key question I kept asking myself during the conversation is: when will the next financial crisis take place, what will cause it and is it predictable?
To answer the first part of that question, we only need to look back in history.
If we take the first financial crisis as the fall of the Roman Empire then it was about 1,000 years until the second financial crisis occurred, with the collapse of the Medici banks of Renaissance Italy. Four centuries later, the South Sea Bubble and Great Tulip Collapse took place. 250 years after that, we hit the Great Depression; and 80 years after that we imploded in the Subprime Crisis and Global Credit Crunch.
Sure there were plenty of hiccoughs along the way - LTCM, Asia, Russia and Latin American implosions in the late 1990s for example - but global crashes have been notable. Loosely speaking, global crisis are now occuring twice as fast as the previous ones:
1,000 years – the Roman Empire to the Medicis
400 years – the Medicis to the South Sea Bubble
250 years – the South Sea Bubble to the Great Depression
80 years – the Great Depression to the Subprime Crisis
On that basis, you could bet on the next crisis being anything between thirty and fifty years from now.2040 to 2060.So what would cause the next financial crisis? After all, we’re only just trying to get through this one. Surely we can regulate to avoid another one?Maybe not.Here’s a view you could take of the factors that contribute to the next financial collapse. I should say that it doesn’t make for fun reading, but the logic could have some grain of accuracy.2011Banks globally are heavily regulated, taxed and governed to avoid another subprime crisis. The focus is on derivatives, liquidity, capital and governance.2012The European Union struggles through a fragile and fallow period of financial and political instability with Portugal, Italy, Greece and Spain managing to just about maintain Eurozone requirements. Unfortunately, it is at the expense of citizens and governments in many of these nations. In fact, the cuts and tight budgets in these Southern member states creates a major movement of economic migrants from Southern Europe into Northern Europe, with the associated tensions and fissures appearing between Northern Europe and Southern Europe as a result. The outcome is that Europe never quite achieves the competitive economic zone it dreamed of becoming.2016China opens its markets to full financial servicing, with a rocking stock exchange in Shanghai that becomes the world’s second major investment banking city by volume and value by 2020, just behind New York This is combined with a revaluation of the Remnimbi (RMB) that satisfies their critics but worries some, particularly the USA, as the Chinese currency is looked towards by the investment community as a possible alternative reserve currency.2019Rather than creating a reserve currency for the world, the investment community creates a basket of currencies to avoid too much exposure to risk in one economy – after all, they don’t want a repeat of the 2008 crisis. The basket includes Euro, RMB and Dollar, along with Gold and other commodities. Nevertheless, the decision to place a weighting towards RMB rather than the Dollar creates issues for the USA, which has spent most of the 2010s in stagnation.2022The Middle East enters a major crisis, as oil becomes less needed as a commodity due to the rise of alternative energy sources and conversion of many motorised vehicles to electricity. Iran and Israel go to War and there is a huge effort by the United Nations to bring stability to the region. Eventually, Sovereign Wealth from the GCC outflows towards new and rising economies, such as Africa, and tensions continue to rage across the region on an ongoing basis.2025Africa’s economy is raging onwards and upwards. Like the BRICs of the 2000s, Goldman Sachs creates a new investment portfolio known as CAGES – Congo, Angola, Guinea, Ethiopia and Sudan – where natural resources of platinum, cobolt, gold, diamonds, manganese, uranium, chromium and tantalite are abundant. Johannesburg is rising fast as one of the largest world financial centres.China is now the largest trading partner and region with Africa, thank to their investments at the turn of the century. America finds this to be particularly challenging, as their view of Africa had been one of occupation and charity, rather than investment and growth, during this period. But China doesn’t care too much, as China has now become the world’s largest economy.2028American and European investment firms decide to make RMB the reserve currency of the world, and drop the concept of the basket of currencies.2032The quiet rise of India as the world’s second largest economy had largely gone unnoticed but, in 2032, for the first time China’s economy had less than 3% growth. This was put down to the lack of skills in the country where skills were needed, and is a reflection of the aging population in China and lack of new blood. China’s one-child policy of the previous century, and a distinct lack of female population for the overly male populated society that resulted, means that 2 in every 5 citizens has reached or is near retirement age. This, combined with strict immigration controls, places a strain on continued growth and industry.2039India’s continually booming economy has created frictions between their Chinese border rivals, and a Cold War commences between the two nations. Like the Cold War of the previous century, no arms are traded or battles take place, but the economic controls freeze out much of China from India’s trading partners and vice versa. The result is an economic climate where India’s investment community trade with India and China’s with China.There are ripples through the Shanghai and Mumbai stock exchanges as a result.2044India continues to see success as a stable and harmonised country. China appears to be becoming more unstable as the government struggles to maintain investment and trading, and avoid the inflationary pressures created by their exposure to investments in Africa for future commodities that can no longer be utilised.The economy fails to achieve growth rates above 1% for three quarters, and the government determines that the Remnimbi needs devaluation. This angers the USA and Europe, who have major investments in Chinese land and other illiquid stocks, along with major reserves of Chinese currency. The decisions taken by the Chinese government force them to look towards India and Africa.2050The outflow of investment by American and European investment houses from China results in aggressive currency arbitrage between the Chinese RMB and the Indian Rupee, with the latter winning as the RMB’s reserve currency status ends. The resultant big time betting against the continued stability of China causes the Cold War between India and China to spill over into skirmishes. The world sees a period of major instability ensue and the China Crisis is put down to currency speculation amongst the world’s capital markets created by complex foreign exchange instruments intertwined between the major economies.
Nothing to do with housing this time.
Jeez, that was a depressing vision and I told you this conversation wouldn't cheer you up.Thank goodness it’s just fiction.
However, if you like this sort of future conjecture and dialogue, you are welcome to join us for two more optimistic discussions (hopefully) at the FSClub in June:Monday, 07 June 2010 The Long Now of Finance A panel discussion with Professor Michael Mainelli and guestsThis evening is dedicated to a panel discussion focusing upon: "The Long Now of Finance - a Framework for the next 10,000 years". Many financiers and academics are beginning to focus upon how to invest in long-term projects that secure the planet for our children and grand children and great grandchildren. Short-term thinking is killing the planet. So how do we think long term: the Long Now, and how do we fund it: Long Finance?Long Finance is an initiative begun in 2007 by Z/Yen Group in conjunction with Gresham College, to establish a World Centre of thinking on Long-Term Finance. The initiative began with a conundrum – “when would we know our financial system is working?” and has worked on a variety of projects, including the signature program focused upon an Eternal Currency.This debate will be chaired by Professor Michael Mainelli, a cofounder of Long Finance and Executive Chairman, Z/Yen Group.Monday, 14 June 2010 The Future of Banking, a discussion with Professor Ray Barrell, Professor David De-Meza and Professor Donald MacKenzie of the Economic and Social Research Council, chaired by Brian Caplen, editor of the Banker Magazine.
The Economic and Social Research Council (ESRC) is the UK's leading agency for research funding and training in economic and social sciences.
Established in 1965 as the Social Science Research Council, under a Royal Charter, the ESRC covers a wide range of disciplines, ranging from anthropology to statistics with a budget that has grown from £73 million in 2001-02 to £204 million in 2009-10. Financial services are a key sector for the Council's business engagement strategy. The ESRC is partnering with the Technology Strategy Board on the new Financial Services Knowledge Transfer Network.
This evening the ESRC has kindly agreed to host a discussion focused upon the Future of Banking featuring three very distinguished scholars.
Professor David De-Meza is with the London School of Economics and has published many papers on banks policies in a wide range of journals. He is the on the Council of the Royal Economic Society and the Institute of Economic Affairs; Associate Editor of the Journal of Industrial Economics and Joint Managing Editor of the Economic Journal.
Professor Donald MacKenzie is a Professor of Sociology at the University of Edinburgh, with work that has constituted a crucial contribution to the field of Social Studies of Finance. He has also undertaken widely-cited work on the history of statistics, eugenics, nuclear weapons, computing and finance, and was awarded the Chancellor's Award from HRH Prince Philip, Duke of Edinburgh and Chancellor of the University of Edinburgh, in August 2006 for his contributions to the field of Science and Technology Studies.
Professor Ray Barrell is a visiting professor at Brunel University, Director of Macroeconomic research and Forecasting for the UK and World Economies, and Senior Research Fellow at the National Institute of Economic and Social Research. Previously, he has been a visiting Professor of Economics, Imperial College, London from 1996 to 2004, and was a part-time professor at the European University Institute, Florence, 1998-1999. He is on the editorial boards of Economic Modelling and was on the board of the Journal of Common Market Studies until 2007.
There’s the classic old joke about the European dream being a place where the police are English, the chefs are Italian, the car mechanics are German, the lovers are French and the bankers are all Swiss. The nightmare is that it is a place where the police are German, the chefs are English, the car mechanics are French, the lovers are Swiss and the bankers are Italians.
It seems that the nightmare is coming true, although the basket case is Greece and the bankers are German.Last week’s surprising comments from German Chancellor Angela Merkel that “the euro is in danger” and “if the euro fails, Europe fails” sent shudders across the world’s markets, and probably made Brussels shake with rage.But the Germans are shaking with rage. After Nicolas Sarkozy was rumoured to threaten Merkel with France’s withdrawal from the euro if she didn’t step up to the plate and support a Greek bailout, Germany’s citizens have been demonstrating their rage by printing deutsche marks whilst the national newspaper, Bild, is stirring anger towards the EU and the Greeks in particular with headlines such as:
"How much more do we have to pump into this country?" April 26th
"Why are we paying the luxury pensions of the Greeks?" April 27th
"Greeks ready to cut back? They would rather strike!" April 28th
As I talk to German colleagues, they refer to Greece as the Golden Fleece and that they aren’t paying bills in Greek restaurants because they’ve prepaid to 2020.All of this puts a huge strain on the European Union, in its fragile 53rd year of unity, particularly as Spain, Italy and Portugal are considered to be on a par with Greece by many, forming a Southern European Union called the PIGS [Portugal, Italy, Greece and Spain].
It raises a key question in my mind, and I’m sure all of the bankers I deal with: if the euro fails, what happens to the monetary union of banks, the Financial Services Action Plan and all those bank and insurance directives like Solvency II, MiFID and the PSD?
What happens to Chi-X, SEPA, the EBA and the rest?
In order to answer this question, you have to look at two key areas. First, is the economic and monetary union (EMU) broken? Second, if it is, do we throw away the eighteen years of change introduced by the agreement to launch the euro when the Maastricht Treaty was signed in February 1992?Let’s take the first question: is the EMU broken?We asked this question in 2005, when the French and Dutch threw out the EU Treaty. Answer: it is political union that they were rejecting, not economic union. Note: even with their rejection, and the Irish no vote, the Treaty became the Lisbon Treaty in 2010 regardless of such resistance. In other words, in the interests of the long-term vision of Europe, Europe wins.
Equally, America has taken years to gain its United status, starting with a nation of disparate states that had far less history than those of Europe. Their Union was easier in comparison, and that still took years, so Europe’s union will take time and will face many more tests.
But this is the greatest test so far.
The size of this test should not be underestimated as it is the first time that we are seeing an economic union, resulting in a cascading effect upon money and politics. Historically, the tests for Europe have been mainly about how much power is ceded to Brussels. This test is showing the inter-relationship between economies and Germany’s anguish is that if they are to keep the vision of Europe in harmony, then they have to pay for it.
Therefore, returning to the rejection of the European constitution, that was a political rejection and when a country has an economic crisis, the monetary union means that other nations pay and, as a result, that political will is tested when one nation's tax dollars are taken to pay for another nation's debts.
That is why this challenge is so much greater than any before, because it is testing the political will of citizens, not just their ability to trade and compete.
The core issue though, is that it is not just the Greek economy and Greece that would leave the Union if they were allowed to fail. It is the Union.
Should the Greek economy fail to honour their government bonds due to being economically bankrupt, the ratings agencies and banks would downgrade Spain, Portugal and Italy, and there would be a spiral effect. This means the European Union breaks apart.
That is why the Greek failure option is unpalatable ... but is the alternative palatable?
Why do we need a European Union?
Answer: Europe needs to be a Union to maintain its drive to be a regional superpower, and competitive commercially and economically with China and America. There’s the rub. If Europe fails, then the UK, Germany and France fail, as parity to compete internationally and intraregion becomes far more difficult.
This is why Greece needs the bailout and why Germans are paying.It does not help Angela Merkel maintain her status or power hold in Germany – her popularity is sinking faster than the Titanic – but if Greece fails, it is felt that Europe may fail too. And that is not an option seen to be agreeable today.Also, nations have been bailed out already.Two years ago, Spanish banks received over €50 billion worth of ‘aid’, in the form of mortgage-backed securities with the European Central Bank (ECB), when they faced a property meltdown. Did the Germans wail out about that bail out? No. Why?Because it wasn’t on the front page of the Bild. That bail out was smaller and less obvious, so no-one really noticed.The Greek bailout is a bit bigger – €110 billion – admittedly, but it is supported by the IMF and is necessary for Europe’s future. ‘nuff said, although if you want to know more, Robert J Samuelson in the Washington Post provides a particularly good overview of why Europe needs to support Greece.My summation is that Europe will survive this crisis, the euro will stay and the currently ridiculous pricing of US$1.24 to the euro will reverse within the next month or so, as forecasted by most economists.
But let’s look at the worst case scenario: what do we do if the euro does fail? Does it mean we unravel all we’ve done to date?
This is the second and, in some ways, more important question: is there a backup plan?OK, if the Eurozone breaks apart, then it matters ... but it will not throw away all that has been built to date.The banks will still want to use cross-border instruments that work. They will just bring back a margin to represent those cross-border movements whilst maintaining the efficiency of the infrastructure that has been built.As Werner Steinmuller, Head of Global Transaction Services of Deutsche Bank, stated when we researched the Payment Services Directive (PSD) and the Single Euro Payments Area (SEPA) last year: Deutsche Bank is in a comfortable situation. We spent quite a sizable amount on SEPA infrastructure and have a brand new system that is extremely capable of doing this that is also highly scalable. Others have not made this investment so this gives us a price advantage. We have built some conversion solutions for handling old volumes and now can run both old instruments and the new SEPA instruments so, if SEPA is coming, we are extremely well positioned. If SEPA fails, I can write off the investments and still win. In other words, the SEPA process has forced the banks to build new infrastructure, new systems and new efficiencies in transaction processing. That will stay. It does not go away if the euro goes away, as the new infrastructure is designed to handle efficient transactions, not euro payments. So if we look at SEPA Credit Transfers and Direct Debits, the Euro Banking Association (EBA) and STEP2 ... it will all stay. The EBA will be a private consortium to operate efficient systems, rather than a government initiative to create efficiency, and it will stay. There will be a charge for this, and a charge that could provide a substantial return to the banks that created this infrastructure, but it will not go away.The same will be true for Chi-X, and the capabilities electronic trading platforms have introduced into the European equities markets. Sure, some countries may want to block and reverse policies in these areas – Spain? – but the process of regional investing is unstoppable now. Goldmans, Merrill, BarCap and co, won’t want to see this go away, so it will remain.Bottom-line: the efficiency of European payments and investing is in the interest of banks, corporates and institutions today, not just governments and policymakers.So, if the euro fails, my answer is that the all the investment made by the financial markets in efficient systems will stay. It will just be at a profit rather than a regulation.
Inspired by three events this week, I focused on apps for my panel discussion today ... and got shot down in flames for talking bollards.
Harrumph.
Here are the events, the logic, the proposal and why it got shot down.
First, the events.
Event number one: my first iPhone
My Blackberry has just been switched for an iPhone. Now, not knowing the beauty of iPhone apps personally until I made the switch, I am so in love with the new phone. It’s not just the ease of everything, the thousands of choices of apps from flight and traffic alerts to currency values to imitating noises your bottom makes, it’s something else that really amazed me. The ease of setup.
You see I am used to programming things, like the PC and Blackberry. With the iPhone, you just plug it in and it automatically synchs all your contacts, calendar, email accounts, music etc. No setting up involved, it just does it. Fantastic.
Event number two: bank bloggers unite
This week, James Gardner kicked off a debate about iPhone apps and the lack of one at HSBC. A good debate is always a great way to resolve an issue, and between James and Brett King’s entries on this, I think it’s obvious that the iPhone and iPad have some potential in banking.
Event number three: apps are for dummies
Number three event is the front page in the business section of the Straits Times today, which has headlined with an interview with Philip Yeo. Mr. Yeo heads up the Singapore government’s innovation and enterprise
programme, Spring Singapore, and has managed to incur the wrath of Apple's fanatical followers by saying that they buy 'useless applications' for Apple's products as 'gullible customers'.
In fact, he goes one step further and calls them ‘dummies’. Tut-tut. He did clarify later on that he meant dummies as in ABC for dummies, the books, rather than being idiots although, listening to the interview, I think he meant the latter.Anyways, these three events inspired me to outline a vision of the future based upon this logic.The logic is that banks are being componentised, as mentioned many times before.As banks componentise their services into little pieces of functionality, my original proposal is that they would then offer these as widgets to customers who could build them back into any form of integrated service they wanted.
Now, my view has gone a step further with the belief that the banks will actually wrap them into apps. I should say that my use of the word app here, is in terms of the ease-of-use of Apple apps but it does not mean that has to be Apple based.
Just so you know I'm not an Apple fanatic, just someone who can see the ease-of-use of apps is a revolution. So where I talk about apps, think about Google's Android phone or any other phone that makes mobile interet access easy, as these are the new generations of phone that are revolutionary.
Y'see first there were SMS and WAP-based phones; then there were mobile internet access smartphones; and now there are intelligent mobile internet phones with apps.
That's the revolution.
The first phones were mainly for just that - telephone calls. The second wave allowed us to pull information to the phone, but push internet services were more difficult. Push began with the Blackberry, but that was just for push email. The iPhone revolution of apps gives us location-based push services that users download to gain such usability.
That's the revolution.
It gives us the ability to create location-based components of functionality that are relevant at the point of action.
It gives users the immediate access to pieces of functionality on demand.
It makes using the internet on the mobile as simple as touching a screen.
That's the revolution.
Now, back to banking and treasury services (note: the only reason for the focus on treasury, corporate and B2B is because that's the conference I'm attending this week).
If banks are component-based, and each bank offers different treasury apps and usability, you will soon end up with a million banking apps. There will be a liquidity risk app, an e-invoicing app, a supply chain app, a cash management app, an accounts payable app, a foreign exchange app ... and so on and so forth.
Corporates will then take these apps and select those that work best for their businesses.
They will download the apps to their corporate treasury iPads, iPhones and Androids (Google), and roll these out to their ‘dummies’: the employees who need to look at days sales outstanding, inventory, supplies and logistics, etc.
These dummies will be used to the interface and service – a bit like folks got used to using PC’s and keyboards to access the internet in the old days – and will take to this easily.
Similarly, the users, the corporates and the banks will be in continual ‘synch’ because, just as my iPhone automatically synched with my iTunes and Outlook, it will automatically synch with my corporate treasury processes, data and content.
In other words, you end up with treasury being redefined as we move to banking-on-demand 24*7 through treasury-in-the-pocket.
The critical point in this logic is that, by making treasury app-based, corporates will be much more efficient:
They will be able to mix and match the apps and the app providers – banks – to best fit their business model;
They will be able to ensure that even the most unskilled member of staff, associate, player, employee or whatever can use them;
They can be easily adjusted to suit business changes over time through centralised control;
They can be a mix of in-house created or bank provided and operated or collegiate, open source apps; and
They will always be secure, up-to-date, controlled and managed in real-time 24*7.
All of the above will give the treasury ops incredible flexibility, agility and speed to adapt to changing circumstances.Now ok, I said a lot more than that, but this was the gist of it.
So here’s the proposed treasury operations future.
The corporate treasury runs on SAP today, and will in the future probably. However, the CFO will have consolidated all treasury ops onto SAP as a single platform and determined that a small number of bank partners will be selected to integrate with it.
Those bank partners will be selected on the basis of the beauty, ease, adaptability and refreshment of their component-based bank app functionality, and its fit with the business needs of the corporation.
To me, this is a simplified future as we have turned a tipping point from proprietary bank lock in and lack of standards in the past, to very easy and flexible developments that are open sourced and simple in the future.
And here’s where I got shot down.“Oh, but treasury is far more complex than your simple consumer view of the future.”“Oh, but this won’t work because our processes and infrastructures are too difficult to change to this vision.”“Oh, but technology is expensive.”“Oh, but oh but, oh but, yea but no but yea but no ...”
I was really disappointed with this reaction. Of course, I had views on these points which have been explored on this blog before, but the disappointment is that I expected more buy-in for such a vision in visionary Asia.Then I got it.
None of these guys use iPhones (double click image to enlarge, and note Chinese and Indian iPhone users):
Note: Japan and Australia don’t count in this context as these are developed economies versus emerging markets
The thing that really sticks in the throat is that by omitting to view these developments, corporates and banks will miss the whole trend towards business simplification that such tools allow.
Luckily some banks are not so short-sighted in Asia, as the announcement of the iPad coming up for sale from July in Singapore was underscored with the news that OCBC and DBS have both developed specific apps for this service, amongst the first.
Meanwhile, and to put the record straight, HSBC and First Direct are on the case with these technologies as they are sponsors of this conference and have told me some of their plans.
Finally, and the real underline of this blog entry, is that it now explains why, when the Chair of the panel I was on asked: "Chris, what are the new things you see happening? Do you think, for example, that we could use the iPhone for Treasury one day", he got a big laugh with that opening question.
Like Philip Yeo, these guys think the iPhone is just a toy.
It's not.
The iPhone, Android and, more importantly, the app is for business use as much as it is for consumers.
Get real.
Postnote: it's a shame but I suspected this at the time. Apparently many folks in the audience thought that I was some Appleite with iPhomania because I kept referring to 'apps'. To be honest, I meant apps as an interchangeable idea with widgets and gadgets to refer to the componentised bank functions.
It actually doesn't matter that much if folks did interpret this as being Apple-based however, as the PC-age was Microsoft-based, the internet-age is Google/Firefox/Explorer-based and the mobile internet is now Apple-based.
With 100 million units shipped in just three years, a further 58 million this year, the iPhone is becoming the de facto standard for the mobile internet.
Ah but wait, what's this?
Android tops iPhone: Google's Android operating system edged out Apple's iPhone operating
system for the No. 2 spot in the U.S. consumer smartphone market in the
first quarter, according to research firm NPD Group.
Some years ago, I delivered a presentation as a keynote with the title: “All Bankers are Criminals”.
I actually didn’t mean “all”.
The chicken feed, battery farmed, commercial, transactional and retail bankers are pin-stripe suited, humble pie, nice guys.
I was talking about the evil animals of Wall Street and the City.
These jungle animals hunt you down, rip out your wallet and tear your money apart note-by-note.
OK, I exaggerate a little, but you get the idea.
The first time I gave this presentation was back in Summer 2005 at a European Conference, and repeated it again in Spring 2006, as an Associate Director of TowerGroup.
The theme of the presentation mainly came from Frank Partnoy’s excellent book Infectious Greed, which traces the growth of weapons of financial destruction: derivatives, as named by Warren Buffett in his 2002 shareholder letter.
It is quite clear from this book that unchecked investment markets will run free of scruples and morals. This is what happened with Frank Quattrone of Credit Suisse and the dotcom boom and bust, along with many other examples through history.
It is not necessarily as true when we talk about arbitrage strategies and the John Meriwether’s of this world. However, these people are far more dangerous because they create financial markets systemic risk that can bring down companies and countries.
For example, in case you are wondering who John Meriwether is, he was one of the first arbitrage players and built Salomon Brothers into the big swinging dick master of the universe world so brilliantly depicted in Michael Lewis’s book Liar’s Poker.
With his colleagues, the use of arbitrage instruments led to the downfall of Salomon Brothers – they were subsequently merged into Citigroup – and Meriwether went on to create Long Term Capital Management (LTCM).
In 1998 LTCM lost $4.6 billion in less than four months and became the leading case study for how systemic risk created by derivatives products, combined with massive leverage
and arbitrage risk-models, creates a financial deck of cards. A deck that can rise and fall in the blink of an eye, with the latter potentially ruining companies, markets, countries and governments, as happened in the most recent crisis.
Anyways, not to be dissuaded from his cause, Meriwether went on to found JWM Partners, another highly leveraged "relative value arbitrage" firm. Yet again, he built leverage through this hedge fund from its opening with $250 million under management in 1999 to a massive $3 billion firm by 2007. Of course, it was all just on paper as the latest crisis battered the fund, losing almost half of its value between September 2007 and February 2009. The deck of cards strikes again. It closed in late 2009 and guess what? Meriwether’s about to launch yet another hedge fund, based upon just the same concepts.To me, this is the criminality of the financial system in action. Firms that build highly leveraged derivatives instruments for short-term arbitrage, with unproven skills and massive risk.Not that I’m calling Meriwether a criminal, as it’s all perfectly legitimate under SEC and FSA Rules.Or it was.It may be that the Goldman Sachs furore will change all this.You see, Goldman Sachs, like Meriwether, is very good at taking leverage and risk and managing the markets to gain short-term profit. Like Meriwether, Goldman Sachs succeeded in using these tools and instruments to generate massive profits. They achieved a record 131 trading days last year, in which the bank made at least $100 million net trading revenue each day.
Unlike Meriwether, Goldman Sachs managed to offload and hedge their risks back to others, such as AIG and IKB, such that when the markets collapsed their clients, suppliers and partners got burnt, but not them.Nothing wrong with that, as it’s all perfectly legitimate under SEC and FSA Rules. Unless the SEC and FSA find Goldman Sachs guilty of fraud.But how can they be guilty of a crime that was not a crime at the time it was committed?There’s the rub.I’m sure the SEC will aim to build a bulletproof case, and their cause is a worthy one: clean up the financial system. Is it worthy to do this so publicly?Not sure.Is it worthy to name the defendant up front, when the burden of proof has yet to be proven?Not sure.The Goldman Sachs case is actually more like watching a rape trial in action, where the defendant is a shifty looking guy who probably seems guilty whether guilty or not.For example, if you name someone like Jack Tweed in the UK, you might still associate him with being a rapist even though he was found not guilty.The guilt sits there, and that’s what will happen with Goldman Sachs.Whether guilty or not – and they’ve hired the best team possible to defend themselves, including “Master of Disaster” Mark Fabiani – we will always associate Goldman Sachs with something smelly for the foreseeable years to come.Ho-hum.At least all of this seems to inspire some humour. For example, in an April episode of hit comedy US TV series This American Life (TAL), they tell the story of a hedge fund that comes up with an elaborate plan to make money. It sponsors the creation of complicated and ultimately toxic financial securities while, at the same time, betting against the very securities it helped create. TAL commissioned a Broadway song to go along with the story:
The only thing that really gets me, in finishing this blog entry, is Warren Buffett.The Sage of Omaha has made his billions through prudent focus upon ‘value investing’. That means investing in strong and robust businesses like Coca-Cola, American Express, Gillette and the Washington Post. So when he referred to derivatives as ‘weapons of financial destruction’ in his shareholder letter of 2002, I respected the man and his integrity of thought.Now, having found Goldman Sachs under attack, he has stepped up to their defence, and I wondered why.Warren Buffett is an intriguing character, as we all know. The friend of kings and kingmakers, he walks a path separate to most.He knows the dangers of arbitrage, derivatives and leverage, because he had to step into Salomon Brothers in 1991 to clean up Meriwether and his colleagues mess.An extract from Carol Loomis’s in-depth review of Buffett’s experience at Salomon’s:
“You may reasonably ask what was going on in Salomon's stock while all of this was transpiring. It was emphatically down, from above $36 per share on Friday to under $27 on Thursday, when the second press release rocked the market. But the stock was only the facade for a much graver matter, a corporate financial structure that by Thursday was beginning to crack because confidence in Salomon was eroding. It is not good for any securities firm to lose the world's confidence. But if the firm is "credit dependent," as Salomon was to an extreme, it cannot tolerate a negative change in perceptions. Buffett likens Salomon's need for confidence to a mortal's need for air: When the required good is present, it's never noticed. When it's missing, that's all that's noticed.
“Unfortunately, the erosion of confidence was occurring in a company grown enormous. Salomon in August of 1991 had bulged up to $150 billion in assets (not counting, of course, huge off-balance-sheet items) and was among the five largest financial institutions in the U.S. Propping the company on the right-hand side of the balance sheet was--are you ready?--only $4 billion in equity capital, and above that was about $16 billion in medium-term notes, bank debt, and commercial paper. This total of about $20 billion was the capital base that supported the remaining $130 billion in liabilities, most of these short-term, due to run off in one day to six months.”
The result meant that Warren Buffett had to actually take over physically as manager of Salomon Brothers for a nine-month period, and it was emotionally exhausting for him.
Switch to 2010.
Warren Buffett invested heavily in Goldman Sachs in September 2008 – when Lehman Brothers, Merrill Lynch and Morgan Stanley were all imploding – buying $5 billion of preferred stock at a 10 percent dividend. These investments earn him $950 a minute, or $500 million a year today. No wonder he claims to be in love with that investment.
Trouble is that the alleged fraud at Goldman Sachs has really hit their share price. For example, Standard & Poor's downgraded Goldman
shares to "Sell" and lowered their target price by $40 to
$140 the other day.
Thinking back to Salomon's - if the firm is "credit dependent," as Salomon was to an extreme,
it cannot tolerate a negative change in perceptions - Buffett must be seriously worried about Goldman Sachs losing its credit worthiness, especially as it depends on good credit.
Oh yes, and having called derivatives ‘weapons of financial destruction’, guess what? Berkshire Hathway, Warren Buffett’s investment firm, has a massive portfolio of derivatives investments. From the Wall Street Journal last week: “Democrats took a step toward their goal of overhauling financial regulation, reaching a tentative deal to set restrictions on trading in exotic financial instruments known as derivatives. Among the considerations still in the balance: A big provision being sought by Warren Buffett in recent weeks ... the provision, sought by Berkshire and pushed by Nebraska Senator Ben Nelson in the Senate Agriculture Committee, would largely exempt existing derivatives contracts from the proposed rules. Previously, the legislation could have allowed regulators to require that companies such as Nebraska-based Berkshire put aside large sums to cover potential losses. The change thus would aid Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.”
Hmmm ... maybe that greed is infectious, although Morningstar Analyst Bill Bergman supports Mr. Buffett's exemption by stating that: "claiming Berkshire poses a risk to the financial system is a difficult
case to make."
Either way, the US movement towards an approval of a Financial Reform Bill to handle the issues of banks that are 'too big to fail' yesterday, takes it one step nearer to the American system taking a lead role towards a new financial architecture.
Derivatives are next ... and Warren Buffett, like Lloyd Blankfiend at Goldman Sachs and all of those current and former bankers and brokers who dealt in toxic derivatives across the world, must be worried.
Postnote: here is Berkshire Hathaway’s full commentary on derivatives from that shareholder letter back in 2002:
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.Of course, both internal and outside auditors review the numbers, but that’s no easy job. For example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions.The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”I can assure you that the marking errors in the derivatives business have not been symmetrical.Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain.When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-TermCapital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market for weeks, was far from a worst-case scenario.One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
After my post last week about my latest presentation with an audio file, my keynote in Bahrain this week was going to be a variation of the presentation. Due to being unable to fly to Bahrain, I mentioned on Monday that most of the day had been spent editing a video file for the conference to be able to present my keynote.
This 'aired' for the first time this morning and so here is the video version for the blog:
Bearing in mind that this was made with a cheap ($200) HD video camera, free video editing and slide management software and cheap ($59 per year) hosting services, it's an extraordinary way for anyone to create and become their own media channel in the 21st century.
Mind you, they could improve the looks of the anchor hosts a bit, couldn't they?
Building on the World of Me post last week, I’ve just found out how powerful the tools are that are at our disposal today.
This week, I’m meant to be chairing a conference in Bahrain: MEFTEC.
MEFTEC is now in its sixth year, and I’ve attended every year as a speaker or as chair.
Guess what?
Not there this week due to ash clouds from Iceland (that sounds like a new thing on the shopping list) ...
... so what can one do?
Their whole program is shot to pieces due to many of the speakers being ill or from outside the region, but the attendees are still coming as they are mainly flying in from around the Gulf region, or Asia and Africa.Well, I went out and purchased a little HD Flip Video camera last week as those of you who read, and now watch, the summary of the week's entries know.Now I didn’t do that for some vain glorious reason, but because it’s the only way I can get my presentation from London to Bahrain in a form that works.So yesterday I sat and recorded the presentation using my $200 video recorder and today I edited it using my free download of Videopad software. Posted on Vimeo, where I opened an account for under $60 a year, and the conference gets a completely tailored video presentation of the keynote I would have given had I been able to make it.What really amazes me is the ease with which I could record, edit and then distribute the video. Why that amazes me is that I used to make video recordings regularly as a marketing director ten years ago, and each video would cost a minimum $20,000 to film and edit professionally.Today ... it’s near enough free.That’s why I’m regularly blogging about the world of me and what it means to banks, as banks still seem to struggle to get this one.
Meanwhile, my personalised video keynote is just another example of the world’s axis changing from centrally created goods being distributed to the masses, to the masses creating goods distributed to anyone who wants them.
... an event we've partnered with for the past few years, and which enables banks and vendors to network in a convivial, exclusive and private conference. Next year's is already in plan in Brussels for March 2011, and is well worth a look for those interested in the future of banking.
Sandi was the girl who played music in her bedroom, put it on MySpace, got picked up by a record firm and became an overnight star with a massive hit: "I Wish I Was A Punk Rocker (With Flowers In My Hair)" back in 2006.
She was saying how she didn’t like the record firm she had dealt with so now had her own label and acts as her own agent, media, publishing, recording and distribution firm, as well as being the creative artiste.She has created a musical world of her own. A quarter of a century ago this would have been far more difficult or even impossible but, thanks to today’s cheap technologies and distribution services, it’s easy. So she can do that. She can be her own agent, PR, distributor, publisher, record label etc.Similarly the world of words has been restructured thanks to today’s cheap technologies and distribution services.
Fed up with the way that book publishers behave towards artistes, more and more authors are self-publishing. It doesn’t mean they reject the publishers, but often they can’t get published in the first instance but believe they have a good idea.
Nowhere is this more evident than Sally Bee’s experience, where she self-published a recipe book which Michelle Obama ordered.
Result: a #1 bestseller on Amazon and a major deal with a publisher.
I’ve often related this to my own experiences with the Financial Services Club (FSClub).
The FSClub would have cost over a million dollars a year to run a decade ago, with 85% of the costs wrapped up in printing, postage, mailing and telecommunications costs.
Today, those costs are nothing as all you need is a broadband connection and a typepad account to write a blog, distribute news, invite people to meetings, communicate 1-to-1 or 1-to-many worldwide in real-time.
So the only costs of anything are the physical costs of travel, room hire, drinks, food etc.
All the virtual costs
are free. More than this, everything today is mashable. I can mix and match pieces of functionality from all over the mobile internet into a lifestyle structure that suits the World of Me.
This has fundamentally changed things because I can now design the World of Me.The World of Me is defined by how I structure and connect with friends, companies, governments, media and more. It defines how I structure and connect with everything, including and especially for banks and banking.For media, the World of Me is defined by the blogs I consume, the YouTube videos I watch, the diggs and RSS feeds I absorb, the tweets I read ... I create my world which is why iPhone, iPad and iPod.I is everything. Me is all.It sounds very selfish but it’s not.It’s actually about me designing the world around me.That is the world we, and especially Me, lives in.I want to publish my thoughts – I can.I want this in print on Amazon – simple.I want to share my music – no worries.I want to get my bank to work around me ...Hmmmm. Bit more difficult that one.Sure you could use social credits or Hyve payments, but they all need to be backed by a banking system that has not changed much in the last decade.For example, how do I interact with my bank?Via a dull online bank statement that looks just like my old printed bank statement?Via a call centre and branch, with these interactions appearing to have no relationship with the online or mobile bank, and no ability to access these services via my net-based banking service?Via a bank that has no blog, no social interactions electronically and, only if I’m very lucky indeed, might respond to an email to open an account?This will change of course, as new entrants open up new social finance services and a few innovative banks interact electronically via tweets and status updates.But what will really revolutionise this world is when a bank offers all of their services as individual apps, gadgets, widgets and wikis, to plug and play into the World of Me and my internet lifestyle.This is a theme I have regularly explored, particularly in depth a year ago, and continue to play with today.When I can design my bank services around me, by taking:
a little bit of transaction servicing from bank A’s widget,
a snippet of card services via bank B’s app, and
a sprinkle of P2P payments via bank C’s wiki,
then I’ll truly be living in a world of 21st century banking.
After the long analysis of Jamie Dimon’s 36-page shareholder letter, we now have an 8-page shareholder letter from Goldman Sachs.
I cannot remember such letters being of such interest in the past, and wonder if the let’s tell-all letter writing from Bank CEOs is the new fashion for the teens (or 2010s if you prefer).
Alternatively, Goldmans just don’t like being called names, since this is their longest shareholder letter ever. If anything, it appears to be a direct response to the accusation of being a Vampire Squidlobbed at them last year by Rolling Stone’s Matt Taibbi (who I’m sure will have something to say about this letter).
Mind you, if I had just dished out $16 billion in bonuses for last year, for an average pay of $500k per staffer, you could call me anything you want.
It’s noteworthy that the letter refers to ‘clients’ on at least 56 occasions. A good example being: “We are responding to our clients’ desire either to establish, or to increase or decrease, their exposure to a position on their own investment views. We are not ‘betting against’ them.”
Yea, right.
That’s why Goldman Sachs managed to generate over $100 million in pure profit every day for over 131 days of trading last year I guess, a new record.
It also defends the bank’s controversial employee bonuses, relationship with AIG and role in short-selling the mortgage market.
Here’s a summary of the really juicy bits (the last three pages):
“In July 2007, as the market deteriorated, we began to significantly mark down the value of our super-senior CDO positions.
The letter refers to Collateralized Debt Obligations – click here to find out background on this stuff.
July 2007 was a key point as Goldmans had just lost billions on their Alpha Fund, due to their algorithmic systems messing up.
“Our rigorous commitment to fair value accounting, coupled with our daily transactions as a market maker in these securities, prompted us to reduce our valuations on a real-time basis which we believe we did earlier than other institutions.
They would do this on a real-time basis because their systems are controlling ahead of the markets.
“This resulted in collateral disputes with AIG. We believe that subsequent events in the housing market proved our marks to be correct — they reflected the realistic values markets were placing on these securities.
“Over the ensuing weeks and months, we continued to make collateral calls, which were based on market values, consistent with our agreements with AIG. While we collected collateral, there still remained gaps between what we received and what we believed we were owed. These gaps were hedged in full by the purchase of CDS and other risk mitigants from third parties, such that we had no material residual risk if AIG defaulted on its obligations to us.”
What this implies is that, acting as an intermediary in the markets and as a market maker, Goldman Sachs could see the ensuing implosion in the housing markets and specifically in Credit Default Swaps (CDS) and CDOs, in real-time.
These complex derivatives were integral to their trading strategies for hedging purposes, as well as being a prime broker of these risk instruments at the same time. Therefore, they were using these hedging strategies to cash-in their insurances with AIG to get out of any risk positions early.
This is why: “In mid-September 2008, prior to the government’s action to save AIG, a majority of Goldman Sachs’ exposure to AIG was collateralized and the rest was covered through various risk mitigants. Our total exposure on the securities on which we bought protection was roughly $10 billion. Against this, we held roughly $7.5 billion in collateral. The remainder was fully covered through hedges we purchased, primarily through CDS for which we received collateral from our market counterparties. Thus, if AIG had failed, we would have had the collateral from AIG and the proceeds from the CDS protection we purchased and, therefore, would not have incurred any material economic loss.”
So they aren’t saying they screwed AIG, but they legitimately ensured they weren’t screwed by insuring someone else was. All perfectly legal and above board. Only the fittest and strongest survive and all that.
The letter then goes on to talk more generally about their involvement in the mortgage securitisation market.
“The markets for residential mortgage-related products, and subprime mortgage securities in particular, were volatile and unpredictable in the first half of 2007 (which is why they unravelled their position with AIG). Investors in these markets held very different views of the future direction of the U.S. housing market based on their outlook on factors that were equally available to all market participants, including housing prices, interest rates and personal income and indebtedness data. Some investors developed aggressively negative views on the residential mortgage market. Others believed that any weakness in the residential housing markets would be relatively mild and temporary. Investors with both sets of views came to Goldman Sachs and other financial intermediaries to establish long and short exposures to the residential housing market through RMBS, CDOs, CDS and other types of instruments or transactions.
“The investors who transacted with Goldman Sachs in CDOs in 2007, as in prior years, were primarily large, global financial institutions, insurance companies and hedge funds (no pension funds invested in these products, with one exception: a corporate-related pension fund that had long been active in this area made a purchase of less than $5 million). These investors had significant resources, relationships with multiple financial intermediaries and access to extensive information and research flow, performed their own analysis of the data, formed their own views about trends, and many actively negotiated at arm’s length the structure and terms of transactions. We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today. We also did not know whether the value of the instruments we sold would increase or decrease. It was well known that housing prices were weakening in early 2007, but no one — including Goldman Sachs — knew whether they would continue to fall or to stabilize at levels where purchasers of residential mortgage related securities would have received their full interest and principal payments.
“Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients’. Rather, they served to offset our long positions. Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits.”
In other words, Goldman Sachs puts everything down to prudent accounting and intelligent risk management.
Maybe ... but the fact that both clients selling and buying mortgage products and complex instruments (which no-one understood except Goldmans traders and a few others, such as JPMorgan Chase, creators of Credit Default Swaps) came to Goldmans, meant that they could see very early on that more people were getting out of the housing and mortgage markets than getting in.
Why are they coming to Goldmans?
Because Goldmans market manipulating systems for high frequency trading give them the best price. This resulted in Goldmans getting out of the mire before everyone else got into it, and is why they cashed in their positions with AIG before everyone else.
They were almost acting as a primary market in and of themselves and, as a market, therefore had much greater knowledge of what was being bought and sold.
Then, as not just the market but also an investor, they invested when everyone was getting out (buy low) and were selling when everyone was getting in (sell high).
The only difference with this market being that it just happened to be the whole US housing market, based upon leverage and funding fuelled by AIG's insurances and complex hedging instruments.
The result is that Goldmans is the nimblest firm at avoiding bubbles bursting and bandwagons rolling.
It’s not illegal of course. It just means they’re far more likely to be onto a sure thing than anyone else.
So, Matt Taibbi’s claim that Goldman Sachs is “a great vampire squid wrapped around the face of humanity” is obviously wrong, and their bonuses are fully justified.
In this guest blog entry Brett King, blogger at Banking4Tomorrow and author of the new book Bank 2.0, looks at what it means to live in an age where the internet is THE bank ...
In a quick straw poll recently conducted via Linked In we had a set of responses that confirms pretty much all the other data we are seeing in relation to channel adoption and utilization. The key issue is that despite the obvious data and conclusions, Internet is still seen as either the poor cousin of Branch banking, a necessary ‘burden’ or normally as a transaction channel for cost reduction – rather than what it is today…a customer channel.
The question we asked in the LinkedIn poll was very simple. Which Channel is the most important for your day-to-day banking needs? The answer was clearly Internet banking.
Poll Results - Which channel is the most important for your day-to-day banking?
Now, the conservative bankers amongst us might think that asking for people to participate in an Internet survey guarantees results skewed towards the ‘internet’ and to be honest this is not a rigorous piece of multi-variate research. However, even if you factor in that in most developed economies Internet Penetration is at 65-75%, that Internet Banking is hovering around 40-50% of the populatio and that the highest demographic of users of social media online are the coveted 35-44 year old age bracket, why would you bother arguing that Internet is not a significant channel for retail banking today?Let us use some very simple logic. Even in the US where Internet Penetration looks as if it has started to flatten out in the last few years around the 75% mark, is it reasonable to think that Internet Banking is likely to decline in usage in the near future, or is it likely that as more people shift to internet banking via mobile phone that it will continue to increase?Patrick Chew, Head of Delivery from OCBC in Singapore, was reported in the Straits Times this week saying“Mobile banking customers are no longer only professionals, the technologically savvy or those who are better educated…these customers now come from all walks of life.” Patrick Chew, Head of Delivery, OCBC Bank SingaporeIn Singapore already OCBC has the majority of it’s customers on Internet Banking and expect within 2 years that approximately half of their customers will have migrated to mobile banking. Daniel Li, Director of E-Business at Citibank in Singapore, indicated similar plans, saying that one in 10 of their customers will be on Mobile Banking by the end of the year. Bank of America has had phenomenal growth in Internet banking with their user base now approaching 4 million users. A recent survey by mBlox showed that already mobile internet banking has surpassed both branch banking and traditional telephone banking in terms of usage. Internet Banking surpassed branch in respect to transaction volumes back in 2003, so that battle is long over.But do banks really know what they are doing online? Do they understand the value proposition given that Internet is now the primary channel for the majority of customers? It appears not.
Look at the table below. It illustrates number of page updates made to the primary domain of major retail bank websites in 2005 compared with 2008. In every case, mysteriously, the major retail banks have scaled back on their commitment to Internet since 2005 reducing the number of updates they have made by about 50-75%. This is a worrying trend – it most likely signifies three things. Firstly, banks are over the initial ‘buzz’ around internet, further reinforcing the perception that it is actually mainstream. Secondly, that they don’t know what else to do, all the initial experimentation, etc has been done – what new tools do we have in the toolbox to deploy? Lastly, there has been consolidation of a lot of content that just wasn’t useful online. But, this does closely correlate with budgets online – they aren’t increasing. If anything they are decreasing.
What happened? Reduction in web banking spend has been universal...
Branch expansion is once again slowing too in the US, UK and many other markets (see FDIC:Quarterly). This is argued to be a function of cost reduction and the effects of the recession, but we can’t discount behavioral shift as a key element of this development. Yet, traffic of each of these sites has increased significantly in the same period with Internet Banking usage doubling globally in the period 2004-2009.One global bank I met with in the last few weeks told me in confidence that they have budgeted US$800m for branch related costs this year, but less than US$8m for web, internet banking, social media, web marketing and mobile banking. What was the business case for spending 100 times more on digital versus branches – it is a function of existing infrastructure. The same bank realizes that today the Internet contributes as much revenue as the branch, and does 300-600% more transaction volume. But can’t conceptualize that Internet and mobile is underfunded.So let’s get this straight. The web is now the dominant channel for customers. Internet and Mobile banking are growing at significantly higher rates than branch banking, branch growth is leveling off and yet we are not leveraging non-branch channels for revenue. In fact, Bans are reducing spend on non-branch because of the financial crisis.There is something seriously wrong with this picture. First of all, banks need to realize that 80-90% of the daily traffic that comes to their site goes straight for the login button and that a great deal of time and effort needs to be spent on understanding how to sell behind the login to existing customers. I would argue as much time and money needs to be spent on cross-sell and up-sell within Internet Banking as we currently do training staff for the very same within branches – at least as much, if not more. Secondly, Banks need to better understand what customers actually want to do through internet banking and mobile internet banking. Let’s not assume it’s just checking account balances, paying bills and doing transfers. Let’s think about which products suit these channels and would make the lives of our customers easier.Remember the two key drivers for Internet usage are convenience and price. The key driver for mobile internet banking is still convenience, but increasingly mobility itself.
Banks are getting this wrong because they are measuring the wrong things internally. They are busy measuring how much revenue increased channel by channel, product by product, and they aren’t looking at the big picture nearly anywhere near as effectively as they should. They are still thinking like the bank of the 1990s when branches continued to be the primary channel because customers had no choice.
It’s a question I’ve asked before, but is becoming even more pertinent as I see new identity management programmes being rolled out that are fragmented, uncoordinated and, in some ways, nonsensical.
The point was brought home to me as I listened to the stream of discussion about identity management that took place as a workgroup at the EPCA conference in Paris last week.The work stream was titled: “e-identity: should banks take the lead?” and was moderated by Vincent Jansen of Innopay, the organisers of EPCA.
The presentation that caught my attention however came from Finansnæringens Fellesorganisasjon, which is Finance Norway (FNO) in English, a trade organisation for 180 banks, insurance companies and other financial institutions in Norway.
The presentation was a joint pitch by Eline Vedel of FNO and Semming Austin representing BankID Norge, a secure bank identity network established in partnership with FNO and the savings banks of Norway.
BankID is the result of a decade of collaboration in trying to create secure identities for the Norwegian markets, and now covers around half of the Norwegian population – 2.5 million people – as an eID and eSignature service.
The system uses a PKI as a shared service for the financial providers, with the main goal of BankID to provide security in digital services for online banking and shopping.
The scheme has four servicing firms who make it work:
FNO provide the overall scheme management;
Bankenes Standardiseringskontor (BSK), the banking standards office, provide the technical standards and security requirements;
BankID Norge provide management for all of the operational aspects of the scheme; and
I’m sure you’re with me so far, and it’s impressive that the service reaches so many people.
And it works.
Eline outlined FNO’s estimates for example of the growth of online banking and shopping in Norway, and its impressive:
Internet usage in Norway amongst citizens over 15 years old, according to FNO’s estimates:
In 2000, 48% of citizens have internet access, and 17% use internet banking;
By 2006, 79% have internet access, 68% are online banking and 26% are shopping regularly, defined as those who make more than five online purchases per annum; and
Today, FNO believe that 89% of Norwegians have internet access, 79% are online banking and 47% are shopping online regularly.
FNO put the doubling from 2006 to 2010 down to the success of BankID.
For example, BankID is used about 800,000 times per day on average. This is known because each time a secure interenet transaction is requested, the BankID downloads a Java identity to the user. In fact, they know more than this, as 60% of their 2.5 million users (2.2 million certificates, with a further 300,000 issued to users who have more than one banks account) use BankID for online banking, but 40% use it outside banking across 155 merchant websites representing about 5% of transactions. A third of the transactions are digital signatures by the way, rather than securing payments transactions.
Another innovatory point of the presentation talked about how BankID has moved beyond the internet as Norway’s largest mobile carrier, Telenor, funded the move of BankID onto mobile SIM chips in 2009. There are now over 9,500 mobile BankID certificates issued and many more expected.
Excellent.
So far, so good.
Then the pitch started to unravel as it struck me that every country has its own and sometimes multiple eID programs, as there are few unique programs and few co-operative programs across banking and government.
For example, Norway has several other eID programs.
Buypass AS was established in 2001. Jointly owned by Norway Post and the Norwegian Lottery, it is issued by the state lottery on chip cards to identify players and has over 13 million transactions per month among around 2 million users. It is also the major supplier to all of Norway’s key eGovernment projects. Hence, you now have a bank program – BankID – and a government identity program – Buypass.
This is quite common.
You then have other programs for identity in Norway such as MinID with 1.5 million users. As of October 2009, more than 1.5 million Norwegians are registered users of MinID for more than 50 services from mainly governmental and municipal sectors, such as the Norwegian state benefits system, the Nav, as well as the Tax Administration and Loan Fund.
Even more confusing is that there are very similar programs for identity management over the borders of Norway in Sweden, also called BankID.
BankID Sweden is the leading electronic identity in Sweden with around two million active customers, and 170 organizations providing 400 services for citizens from online banking to e-trade to tax declarations. The BankID is used government, municipalities, banks and companies for identification as well as signing.
Oh yes, I forgot to mention that not only does this BankID have no relationship with the Norwegian BankID, but its actually a completely different incompatible program.
Also, like Norway, Sweden has lots of other identity programs such as Nordea’s e-legitimation with 600,000 users, and the telco Telia’s elegitimation system with 500,000 users.
Meanwhile Denmark has a few of their own, such as NemID which aims to have 3.5 million users by the end of this year and NetID with 2.5 million Danish users. Meanwhile, Finland also has several programs, with TUPAS being the largest with four million users, and FinEID trailing some way behind.
The reason I’ve outlined all of these systems is, a little like my questioning of so many identities in the UK:
Why are the Nordics proliferating so many systems?
Where are the standards for interoperability and integration?
Why can’t governments and financial institutions co-operate?
Why can’t cross-border and pan-European schemes be agreed?
In fact, whole rafts of questions are begged by the systems the Nordics have introduced and the one that particularly bugged me related to the reasons why the Swedish BankID is incompatible with the Norwegian BankID? OK, the Swedes and Norwegians don’t like each other much, but is that really a good excuse?
Equally, why aren’t governments and banks co-operating on identity programs? The answer from the workstream is all related to liability – a government does not want to be liable for losses if someone uses a false identity. They’re fine with rescuing a lost citizen in a foreign land, but paying for those citizen’s false claims? Leave that to the banking system.
But if the banking system is liable for false identity claims, then surely a combined bank-government identity scheme has even more viability and appropriateness?
I just don’t get why, if my identity is meant to be unique, governments, financial institutions, merchants and municipalities want to give me so many different ones.
So yesterday I argued that PayPal and their brethren of social monies don’t matter. It was like unleashing the sceptical banker that I know resides deep within me, and it felt good.
Then I got a dose of new reality vision (maybe due to so many comments on yesterday’s piece) and it felt not so good, because PayPal and their brethren really do matter. In fact, they matter a lot more than we think.Most of their secret lies in the pages of the innovator’s dilemma, which I’ve written about before: The premise is that a new operator enters your industry offering something that looks irrelevant; before you know it, the irrelevant operators subsumes you and the industry by changing its economic paradigms. The best example is Japanese car operators in the USA in the 1950s who offered cheap new cars. Ford and GM thought they were rust buckets and dismissed them as such. However, Americans could suddenly buy new cars and they did en masse. The second hand car market disappeared and, over the years, the Japanese car manufacturers upscaled and produced cheap luxury cars. After half a century, Ford and GM were on their knees and the Japanese had won.This central tenet of theory is absolutely critical when we look at PayPal, Facebook credits, Twitpay and more, as these developments will be a dilemma for banks, in the innovator’s dilemma style. The question is: do the bankers see the threat?First, PayPal and their clan are not thinking about being the cream or froth on the cake. They are, instead, thinking about a new market dedicated to froth and cream that has nothing to do with cakes.Whilst bankers focus upon cake, PayPal and the new breed of payments processors are focusing upon cream.They have recognised that customers don’t want boring old stodgy cakes, but flexible sweet products that can go with cakes, meringues, biscuits, crumbles and even drinks: think cappuccino!So they are creating a whole new market for cream, or rather payments, that has nothing to do with traditional processing but sits alongside it today, and could replace it tomorrow.This new payments market is focused upon convenience, fun and the socialisation of money, rather than on the payments process or the need to pay. This is why it is so different – it’s the virtualisation of exchanging credits – and so yes, it is frictionless, flexible and free. More than this, it’s different.
Second, just like the car industry of the 1950s, it’s also insignificant as a dilemma right now. As mentioned before, PayPal are processing peanuts - $72 billion of transactions – compared to banks that process $4 trillion per day ... but give it time and you have to inevitably ask:
When do we take this market seriously?
When it gets to a trillion dollars a year?A trillion a month?A trillion a day?You see, PayPal are moving and extending reach into higher ticket items and into core merchant services.
And what happens if and when PayPal offer a cashback program? Oh yes, they already do.
So what would happen if PayPal started offering real incentives, as in undercutting banks if you use a PayPal account as your core payments account, rather than paying via card or withdrawing into a bank account?
They could easily do this, as PayPal don’t allow negative balances, and are rumoured to hold over a billion dollars in deposits on accounts at any time.That’s a significant figure to play with as a float.Third, and most important, who owns the last mile?This is the most critical question, and was raised in yesterday’s comments.After all, if your main interface to monetary movements becomes PayPal or Facebook, so much so that you forget that a bank or bank account exists behind that brand, then does anything behind it matter?So here’s the long-term play.PayPal becomes your primary interface to money.
After a while, using their banking licence, PayPal gains direct access to the electricity generators of monetary movement – the clearing, settlement and payments infrastructures of the world.
They move upscale from being peanuts processing for consumers to displacing acquiring and issuing banks from the payments process through an ever expanding range of services:
PayPal for Merchant Services
PayPal for Working Capital
PayPal for Supply Chain Finance
PayPal for Trade Finance
PayPal for Trading
PayPal for NYSE
PayPal for the London Stock Exchange
PayPal for ANYTHING!
BTW, it's not just PayPal at this point of time, but any firm that wants to operate in the cream and froth market.
At this point, you’ve realised the innovator’s dilemma.What started as insignificant small beans payments that appears to be froth or cream on your cake, has suddenly become core business services and major margin erosion as the new entrants upscale and redefine the model. The payments businesses erode and are substituted by new markets services.
To be clear, if you remember that PayPal currently generates around $800 million in revenue per quarter, or $3 billion a year, then compare this with today's other big boys. The world’s largest global transaction processors, such as Citibank, typically generate around $10 billion in revenues and $3 billion+ in profits.
So today, Citibank’s transaction services is three times bigger than PayPal.
In 2002, PayPal’s annual revenues were around $200 million.In 2005, they broke a billion.Today, they’ve reached three billion.They’re growing at an average of over 25% per annum.And they can keep growing as they expand services and upscale.What will inexorably happen is that the core of the payments world – the infrastructures, settlement systems and clearing houses - will remain. These do not need to be substituted, as it's just cables and pipework. But like the electricity and water companies, it's the owner of the interaction and therefore, the customer, that is key and will change. The owner of the 'last mile' as we refer to them. And that’s where our creamy new players are making their froth.You see they enjoy being the cream on the cake because they are defining two separate markets – exchanging virtual credits in a digital world versus making a payment.In conclusion, PayPal and their brethren matter because they are redefining payments and may be insignificant today ... but tomorrow?Meanwhile, bankers can cry: ‘Let them eat cake’ ... trouble is, what happens when no-one wants cake anymore?
Many of us get excited about new and different toys in the payments world.
From Jack Dorsey’s twittering Square to PayPal’s billions of payments, we think the world is changing dramatically. SMS texting payments in Africa and credit exchanges on Facebook add weight to our arguments for change in the core of bank processing.
We then use these illustrations of small change to make allegations about big change. We speculate that everyone will be using twitter for payments via PayPal’s core system within the next few years, for example.I do it myself because it’s nice to see a bit of concern in a banker’s eye; a slightly less confident swagger in a global transaction processor; a jitter of confidence in a commercial banker’s pricing.But it’s all just a bit of noise when you look at the reality of these systems. It’s just cream on the cake. In fact, I would say that all of the online P2P consumer developments in payments are nothing more than a wart on the backside of the flea attached to the hairs on the backside of the cat, which purrs in the lap of the banker who operates just a small piece of the parts of the whole, that comprise today’s global payments industry.Oh yes, and that backside’s wart includes PayPal.Shock, horror, heresy but yes, it is nothing special. PayPal, Facebook Credits, Square ... even prepaid cards and mobile payments, it’s all just a little bit of froth or cream on the layers of the cake of the core banking industry, and its heart of payments processing.Let me illustrate it best by picking on PayPal (sorry mates).Today, PayPal deals with around $80 billion worth of transactions per annum – they broke $20 billion in transactions processed for the first time in Q4 2009, processing $21.4 billion in transactions for a revenue of $795.6 million.That sounds significant, doesn’t it? For them, it is as PayPal is a major growth machine that has eaten its parent, eBay, by becoming the de facto standard for online payments. PayPal's revenues hit a billion per year in 2005 - now they do that per quarter. The thing is that it is major for them but, in the scheme of the overall payments world, it’s not major at all.First, their revenues are peanuts. Assuming PayPal generates around $3 billion per annum in revenues this year, it’s still a long way off the largest banks that make $3 billion in pure profit in a typical year.Second, PayPal sits on top of the core banking infrastructure. It hasn’t created anything new. It’s just added a layer of cream to the cake of payments. It sits on top of Visa and MasterCard which, in turn, sit on top of bank accounts.So nothing has changed.This is why PayPal is cream on the cake, but not a core ingredient.The core ingredients are the infrastructures of clearing houses and banks, of counterparty systems and SWIFT messaging, of Real-Time Gross Settlement and Card Processing systems. PayPal is just a little bit of cream on those layers of cake.For this reason, although I love PayPal as a model of providing payments for new internet and mobile services, from a payments context it is nothing serious.As for Facebook Credits or other add-on services like Twitpay, which all use PayPal as their underlying service, these are just froth on the cream.
Third, even if you take them seriously, what are they actually doing? They’re providing a bit of payment functionality on top of the card and bank account functionality.
Actually no, they’re not even providing that. What they’re actually providing is a bit of account aggregation of payments for a small fee.
In other words, because banks and payments processors aren’t interested in sub-$10 payments processing, someone had to do it and that someone was PayPal.So PayPal scooped up all of these P2P small payments online, and that’s their core business.It’s not high value payments processing. It’s peanuts processing.OK, so PayPal does the odd airline ticket for $1,000 but, for every airline ticket, they process $1,000’s of more dollars for buying cables, DVDs, mobile phone covers and similar goods at $10 or less.Bring on Facebook credits and Twitpay and they’re processing $100s of more dollars for sharing a note, reading a page or downloading a song for $0.99 or less.In other words, they are just payments aggregation services.Like a telephone billing service, PayPal and its gang of payments aggregators offer small payments processing on a massively scalable platform. By doing this, it enables them to generate enough to warrant a worthwhile bank payment per month.But they are not payments processing, just aggregating payments like a telephone service.A telephone service provider processes 100s of transactions a month to generate a single worthwhile monthly payment through the banking system. PayPal, Facebook and Twitpay are doing the same thing for online services.This is why they are actually irrelevant, in terms of core payments processing.Core payments processing represents $4 trillion of debit and credit card payments per annum, significantly more than PayPal’s $72 billion for the year.
Core payments represents the almost $4 trillion in foreign exchange transactions performed every day.
That's over a quadrillion dollars worth of transactions per year.
A quadrillion dollars per annum makes PayPal look like a bit of detritus on the landscape of global payments volumes.This is not to say that PayPal are detritus. They are important, but they are not all consumingly the be-all and end-all of innovation or even change because, when it comes to payments, nothing much has changed. In fact, banks are starting to eat back into their business by launching secure online payments systems like iDeal and Rightcliq by Visa. And this is easy, when you have an industry that processes gazillions of dollars per year using standards, structures and systems which have globally stood the test of time.These standards, structures and systems allow the billions of transactions in global capital markets and corporate supply chain and person-to-person payments to operate.These are the core ingredients of the cake.So yes, add to this a little bit of cream on the cake, PayPal; or add to this a little froth on the cream, Facebook and Twitpay.But don’t mistake the froth and cream as core.It’s not.
It seems that I’m having a long whinge and rant all week, but I’m trying not to.
What I’m really trying to do is to get some answers to this crisis of confidence in the banks and, consequently, the banking system. This is nothing to do with the credit crisis, but the response of the banks to the credit crisis, which is to trash all trust and confidence in their ethics and approach.This is why there is this non-stop bleating about bonuses and interest rates. The banks justify this behaviour on the basis of all the other kids on the block are doing it so, if we didn’t, we would just get beaten up in the banking playground by the bonus bullies. This is what Stephen Hester said today:Mr Hester warned “that employees are leaving because it was offering lower bonuses than City rivals. He also said that profits at the bank, which is 84 per cent owned by the taxpayer, would have been about £1 billion higher if it had managed to stop staff leaving. The bank said it had ‘paid the minimum necessary to retain and motivate staff who are critical to the recovery of RBS’.”Trouble is, this doesn’t cut the mustard.MPs warned that the public would be astonished that the bank was paying £1.3 billion in bonuses given that it today reported a £3.6 billion loss for last year.
“Vince Cable, the Liberal Democrat Treasury spokesman, said: ‘Stephen Hester is trying to justify the unjustifiable. Most bankers owe their jobs to the taxpayer. His comments will just reinforce the view of bankers in many people's minds as greedy and selfish.’
“Shadow chancellor George Osborne echoed the views of Mervyn King, the Governor of the Bank of England, by telling BBC radio: ‘I do think the level of payment in the banking sector has got completely out of kilter with the rest of society. It is totally disproportionate to what doctors are paid, people working in industry are paid, teachers are paid and the like. We need to bring down pay across the sector — not just in one bank, across the sector — and things like a bank tax, internationally agreed, might help do that.’”
Oh yes, and I love the photograph the Evening Standard chose to run with that report.
Hmmm ... Hester, the fox killing, horse and hound man.
Nice.
Meanwhile, in the same paper, Chris Blackhurst writes about how we've blown our chances to rein in the banks:
“We somehow think that the bankers will take it upon themselves to lie down on the steps of St Paul's and seek forgiveness — and reform their ways and slash their incomes. They won't. They're human. Yes, they're pariahs, but they will carry on taking the money until they're forced to stop, until the authorities say bank licences will be relinquished if bonuses are paid.”But none of these arguments raging in the media address the real issue here.The real issue is not bonuses, profits, lending or interest rates.The real issue is a lack of internal market leadership within the banking industry.Nothing to do with regulators, politicians or press. The most significant failure has been the inability for the industry to act as a cohesive hole (sic: whole) to respond to the issues arising under their watch.Instead we act as a fragmented group of a thousand voices.Individual voices stand up and are counted, and some count more than others such as the Jamie Dimon’s, John Varley’s and Stephen Green’s. But nothing is co-ordinated or arranged in a way that makes sense or alleviates the public anger and distrust in the system.Take the example of the past week of banker’s bonuses.Initially, one bank – Barclays – set an example of waiving bonuses payments, as their leaders chose to repeat the actions of a year earlier and declined the multimillion pound pot they were entitled to. Reluctantly the rest then followed with RBS, Lloyds and now HSBC one-by-one agreeing not to award their leader’s bonus.The result is that they were accused of being lame sheep in doing so, just following the lead of one, and it just looked limp.It also rang of insincerity anyway, in that several of these leaders are purely deferring bonuses and have taken large swags of cash via other means (e.g. Bob Diamond’s $46 million payout on the sale of Barclays Global Investors last year) or just don’t need it as most are on million-pound plus packages. In fact, one cynic said that there would just be a top-up of their pension pots to compensate, and so no-one sees these token gestures as being anything other than that- ‘token’.Does this justify the payouts to their investment banking teams by making such sacrifices?No.Does it restore faith and trust and displace the anger and mistrust?No.So all it’s done is served as some form of internal justification for the continuance of mega-bonus payments to investment banking staff.The issue still lies with the press, politicians and regulators however: in this land of 1,000 voices, where no-one coordinated single voice resonates, where is the leadership to change the system?Take the example I’ve just given.What bankers should have done is worked together to create a co-ordinated plan across the sector pre-emptively and early on.For example, Stephen Hester (RBS), John Varley and Bob Diamond (Barclays), Eric Daniels (Lloyds) and Michael Geoghegan (HSBC) see each other often enough in front of Treasury Select Committees to be able to co-ordinate their responses.So why didn’t they all agree upfront to defer leader’s bonus payments, and announce this as a co-ordinated approach pre-results season?A joint announcement of rationale and reasoning would have been far more powerful than the sheep mentality manner of following the leader.Equally, Jamie Demon Dimon (JPMC), Vikram Pandit (Citi), Lloyd Blankfein (Goldman Sachs), Brian Moynihan (Bank of America) and John Mack (Morgan Stanley) see each other all the time in front of Federal Committees. So why didn’t these leaders co-ordinate responses to bailouts and bonuses?You may say they did, but not from an observer’s viewpoint externally.It looks like maverick individual actions and approaches, with no single voice to rally the industry to a resolution.Why these ‘leaders’ cannot organise themselves is beyond the ken.After all, if these global CEO’s of banks had created a co-ordinated and rational campaign to cap bonuses, waive their own, provide charitable donations, show how bank lending and bailouts had been atoned, then the media, public and politicians would not be baying for their blood.The fact that: (a) there is no single voice of leadership that is co-ordinated across these banks speaking on their behalf; and (b) these leaders have allowed banks to behave without change, as they were before and as if nothing had happened, is going to lead to a showdown.That showdown is not far away and, according got all my sources, will be far more draconian and vicious than any action that would have been taken if the industry had spoken with one voice, rather than thousand.But then, this industry’s ability to self-regulate with transparency and integrity historically has been pretty poor so this comes as little surprise.
Meanwhile, you only have to look at the fact that our poor old Queen has been forced onto the tube these days, to realise how hard times are in Britain ...
Over the past year, most of the banks I deal with have dropped the word ‘innovation’ from their mantra. It’s strange but true that the focus upon being innovative had been such a focal point during the 2000s and now it’s all over.
To illustrate the point, the Top 10 American banks used the word ‘innovation’ an average 1.2 times per annual report in 2000, rising to over six times per report by 2007.Heads of Innovation were popping up everywhere and innovation was the key to being different, attracting customers, growing business and increasing revenues.Now the Heads of Innovation have all gone and Innovation is at the bottom of the banks ‘to-do’ lists ... in other words, the Heads have become Bottoms.Banks have realised that the last thing they want to be is innovative.They want to be boring.So innovation has disappeared over the parapets as fast as Tiger Wood’s pants.But that’s not the end of the story.There will still be some innovation in banks. The question will be: which ones?Let’s roll back to the beginning.Innovation became a focus for banks because technology was moving at such a pace, and client demands with it, that any bank which was not seen to be innovative felt they would lose business.Hence, as is the way with banks, they all appointed a head of innovation, used the word ‘innovate’ in all of their customer marketing materials, and appeared to be innovative by doing funky things like using employees to advertise the bank and giving away pens in branches.That’s all the token gestures of innovation.Meanwhile, some banks were actually being innovative, but just weren’t talking about it that way.Banks such as Goldman Sachs who were creating incredibly innovative trading systems that ensure best price for their investors, which is why they get so much investment business, whilst creating huge market volatility.Banks like JPMorgan Chase who invented the whole concept and trading of Credit Default Swaps. By being the first mover to invent and then trade these products, JPMorgan were not only the first into profits from such instruments but the first out of the losses created by them, as were Goldman Sachs. Very clever.Banks such as Wells Fargo meanwhile, have made it a clear focus to engage customers using social media, and see this as a differentiation in the customer experience. Rather than having a head of innovation in this area however, they instead invest in creating platforms to engage customers in remote social interactions via blogs, virtual worlds, YouTube, Facebook and Twitter.That’s innovation, but it is not seen as token innovation but core developments in customer engagement.For the average bank however, innovation is not in their blood.This is because innovation demands doing things in a different way, and banks don’t like to be different. They want to be the same.They don’t want to break away from the crowd, but want to do things in robust, proven, low risk ways.They don’t want to be leaders but lemmings, all running in the same direction doing the same thing in a nice, safe, undifferentiated manner.They cannot invest in something new and different, because it has to have a clear business model, financial analytics to support the investment, clear returns on investment and absolute management buy-in and commitment.All of the above would never happen with something that is not proven, not clear, not justified, and unable to be supported by a strong financial business case.Hence innovation lies in a heap at the bottom of the bank’s corporate agenda.So what are we really talking about today, when it comes to innovation in banking?We are talking about banks that create cultures of being prudent risk avoiders, entrepreneurial innovators, excellent customer engagers, aggressive market makers or active acquisitors.These cultures sit at opposites with each other and rarely would you find a bank that could be all in one.For example, I wouldn’t put Wells Fargo in the bracket of prudent risk avoider as they see themselves as an excellent customer engager; Goldman Sachs are an aggressive market maker, as are JPMorgan, but they probably wouldn’t use the word prudent; Citi are now a prudent risk avoider having learned their lesson of being an active acquistor; and Lloyds TSB were always a prudent risk avoider until they became an active acquistor. These cultures are driven from the man or woman at the helm – a fish sets its direction from the head but also begins to rot first from the head – and it is the man or woman in the driving seat that creates the innovation and risk culture of a bank, not the label ‘innovation’.That is why you can find banks that are hybrids of this model – such as Barclays where John Varley has created a retail and commercial banking operation that is prudent whist Bob Diamond runs an aggressive market making operation in BarCap.There are other banks that demonstrate this mix, and it is purely a reflection of the management team.For example, HSBC is a prudent risk avoider under Chairman Stephen Green and CEO Mike Geoghegan, but is also an entrepreneurial innovator thanks to Chief Technology and Services Officer Ken Harvey.All in all, the lesson learnt for most banks is that innovation is not a function or label, but a culture and so it is gratifying to see innovation has been removed from the mantra of the banks as a label.Now let’s see which banks create innovative cultures over the next decade, and watch them grow.
Banks aren’t charities and yet the non-stop bleating about bonuses and interest rates would make you think they should be run as though they were not-for-profits.
But banks aren't not-for-profit; they are proprietary firms with stock listings. They are there to make money, not to exist for the public good.
So what’s gone wrong?Unfortunately during the past two years, the line between public and private has blurred, as evidenced by the Royal Bank of Scotland and Northern Rock, or by Citi and Bank of America in the USA, or HVB and Commerzbank in Germany, or UBS in Switzerland or ...The fact that these banks were bailed out by their respective governments, albeit temporarily in most instances, has blurred the media and public’s view of what they are there for.The media and general masses now think they own the banks or, at least, have some skin in their game. And sure enough, in the case of RBS and Lloyds, the UK taxpayer does have some skin in the game: 84% and 43% respectively.But that doesn’t mean the taxpayer runs the bank or that they exist for the public good.In the case of RBS and Lloyds, they actually now exist in a shadowland where they are competing with openly aggressive trading firms like Goldman Sachs and JPMorgan, whilst having to conform with the requirements of the Treasury and UKFI.This causes this schizophrenia between being openly competitive versus being humbly contrite.What a pain.But look at the bottom-line: these banks are still private firms with stock listings who have to serve their shareholder first.That’s why they are paying bonuses, restricting lending, avoiding risk and being competitive.Or that’s their thinking.This is why we find it so hard to determine the right approach to bonuses and remuneration.But take this a step further and we now have the journalistic and taxpaying community believing that they should somehow determine the interest rate setting policy and fees of the bank.For example, over the weekend, the Beeb got itself into a tiz over credit card interest rates. The question posed is why, when the Bank of England’s interest rates are at their lowest levels ever, are banks charging the highest rates ever on credit card balances?The answer is simple. The credit card portfolio runs as its own division with its own P&L. Today, more folks are defaulting than ever before. As the risks are greater and bad debts increasing, the interest rate has to rise accordingly.The media and public then say: but you’re paying out all these hefty bonuses, what about us? Decrease the bonuses so that you can reduce our credit interest rates.C’mon now and be serious. The investment bank doesn’t subsidise the card portfolio. They are separately run businesses with their own P&L and both are tasked with making a profit, so both run their book as competitively and profitably as possible.That’s why Barclays announced an increase in overdraft fees on deposit accounts just two days after saying that BarCap’s bankers would get an average bonus and pay package of just under £200,000 each for the 23,000 staff in that division.You see the latter achieved their annual objectives and targets, so that’s why they deserve it.And all of this is in a competitive battlefield where anyone can walk – both staff and customers.But it ain’t that easy.First, Barclays are justified in their actions because they never dipped into the taxpayer’s pocket, unlike RBS and Lloyds. Therefore, are RBS and Lloyds justified in providing bonus packages in the same way as Barclays? If they are privately held, shareholder-owned competitive banks, yes; if they are semi-nationalised, taxpayer-funded state-run banks ... In addition, the divisional components of the bank may be independently structured by their P&L but that argument doesn’t hold water when the bank would have gone under in the case of RBS, Citi and others, thanks to the failings of that very part of the bank that is now sharing the spoils amongst their staff at the customer’s and taxpayer’s expense.It is this blurring of the lines between a nationalised business that should operate in the public’s interest versus the privatised industry that operates in the shareholders’ interest that is causing all of the media and general debate today, whether it is about bonuses, remuneration, profits, fees, interest rates or any other aspect of banking.This half-hearted, schizophrenic shadow of an industry that doesn’t know whether it’s coming or going, and has no idea how to regulate itself or be regulated, needs a strong hand to steer it to an objective and vision for future operation.That vision appears to be one of an independent industry, run under free market principles with shareholder focus as its central tenet. If you don’t like it ... lump it.
I’m fed up with the argument about bonuses and cannot believe it still rumbles on after a year of debate and G20 meetings. With Barclays announcing record profits last week, and therefore increased bonuses, the media latched onto this angle more than the fact that Barclays, UBS, Goldman Sachs and others demonstrates reviving markets and a recovered financial sector.Sure, bonuses are irritating ... but only because we don’t get them, the guys who do are as reliable as stockpickers as monkeys, and no-one knows how to break out of this cycle of paying millions for a job that is demanding, but no more so than many.
So here’s my suggestion as to how it could be resolved.
First, set a regulatory limit on the bonus pool and the size of an individual's bonus payment.
For exmple, limit the bonus pool allocation to no more than 33% of the bank’s full year profit after tax across all bank subsidiaries, as shareholders and capital reserves must have an equal recognition. This means that profit should be apportioned equally - one third - to each constituency.
Then limit individual bonus payments to a cap of 0.1% of full year profits after tax.
For example, Barclays net profit was £9.39 billion in 2009, up from £4.38 billion a year earlier. £9.39 billion profits would create a maximum bonus to any one trader of £9.39 million. That may seem a lot, but it’s been a good year and is far less than some of the current payouts. Equally, if you take Barclays profits from the year before, it would have been £4.38 million. A mere pittance compared to today’s bonus culture but, if you have a level playing field, far better than today’s excesses. And this is looking at a decent bank result.Meanwhile, take a bank like Royal Bank of Scotland (RBS).The rules above would be extremely punitive for them. It doesn’t necessarily outlaw any bonuses within RBS, but it does challenge the bank as to how to create a bonus pool when there is no profit.
But look at the wording. It says the bonus pool ‘cannot exceed’ a third of group profits, not that it must be a third. Therefore, for RBS, they can allocate bonuses. In fact, they have to in order to retain talent and remain competitive.
Nevertheless, you would want to ensure that a loss-making bank allocated bonuses that were in the best interests of the bank. As a result, the stipulation should be that the bonus plan and allocations for all banks are approved by an independent panel comprising a cross-section of the shareholders of the bank. Approval of the plan must be agreed by a majority – greater than sixty-six percent – of the panel, and the panel must comprise a minimum of ten investors including at least three retail investors.
The selection and choice of panel members must be approved by the home regulator and, whatever the panel size, a minimum of one third must be retail shareholders rather than institutional.
This should ensure a bonus pool and payout that seems agreeable to all shareholders, and therefore should also keep the regulator and media quiet.
All of the above may sound reasonable (or not), but then you have the other key question which is: how would you ensure these caps are adhered to?After all, any government who contemplated the above would just find all of their banks moving to the Cayman Islands or Switzerland to avoid such punitive arrangements.OK, so let’s stop that one at the same time by declaring that, for a bank to operate in certain markets – especially the G20 nations – the bank must be registered in a country that has signed up to and been recognised as implementing the G20’s taxation agreement.This taxation agreement is based upon banks regulated under the new Tobin Tax regime (oh yes, if you didn’t think it was going to happen, it will!). From today’s FT:For years, taxes on capital flows were seen as a barbarous relic of the 70s, on a par with Demis Roussos and Baked Alaska. No friend of free markets dared support the idea of US economist James Tobin, dreamed up to curb currency volatility after Bretton Woods collapsed. That’s changing. Since Lord Turner, chairman of the UK’s Financial Services Authority, started stirring interest in taxing financial transactions last year, politicians in Germany, France and Australia have voiced tentative approval. Now Japan, through the musings of vice-finance minister Naoki Minezaki, might just be falling in line.So, the first thing is that the bank must be head quartered and file accounts in a recognised G20 Tobin tax location.Second, the banks’ accounts must be filed in that country and show a detailed breakdown of profits and losses using IFRS accounting, not GAAP (ouch, that might hurt).Third, and most crucially, the bank must declare any movement of funds or debt to a location that falls outside the G20 Tobin tax coverage, such as the Cayman Islands or Costa Rica. This is to ensure that complex debt equity swaps, such as the Barclays transaction that took place last September, are registered, regulated and monitored to ensure that this is legitimate tax avoidance and not evasion.All of the above would ensure that banks and their individuals on major bonus deals, could not just upsticks and move to a location outside the grip of the bonus rules as, if they did, they would effectively be removing themselves from the markets where they need to trade – the G20 markets.Anyways, it may not solve or cover all the ground required – as I’m no lawyer or accountant – but at least this would be a start.I think what’s bugging everyone right now is that this crisis began in August 2007 – almost two and a half years ago – and blew up into a full blown meltdown almost eighteen months ago in September 2008. So here we are, years after this all began, with bailed out banks, angry taxpayers, a full blown recession and all the news is of investment markets behaviours remaining unchanged.
That’s what’s bugging everyone ... so come on G20, pull yer finger out, get some actions started, and put an end to this never-ending bonus debate.
p.s. the last discussion of this issue at September's G20 summit ended up with a split view between France and Germany, and the US and UK.
Three times this week, I’ve come across dodgy dealings by banks in the Caymans to avoid taxation.The first is the Portuguese Bank BCP, or Banco Comercial Portugues SA to give it its proper name.In a detailed report in Bloomberg Markets Magazine, they recount the story of billionaire investor Jose Berardo who blew the whistle on the bank’s management team.
The accusation is that, from 1999 to 2003, BCP loaned €590 million ($843 million) to 17 companies based in the Cayman Islands that it controlled, without accounting for the debt on its books. The Cayman firms then purchased 5 percent of the bank’s stock to boost its value, falsely it’s claimed. This all backfired when BCP’s share price dropped, as did most Portuguese stocks, between 2001 and 2002.
The share price drop meant that the Cayman firms couldn’t pay back the loans but he executives at BCP allegedly disguised the bad loans as real estate losses, all of which inflated the bank’s earnings and propped up their flagging share price. Result: five executives received €24 million in bonuses that they didn’t deserve, according to the prosecutors.
This is all being contested by the management team, who have been ousted thanks to Senhor Berardo’s actions.The second report came up when researching this week’s news about Barclays. In a deal last September that sounds remarkably like the issues at BCP, Barclays sold off $12.3bn (£7.5bn) of toxic assets to a Cayman Islands fund which it created with 45 of its former staff. The deal is financed largely by Barclays and involved two of its top bankers, Stephen King and Michael Keeley, leaving to set up C12 Capital Management. They also took a team of staff from Barclays Capital with them to C12, and receive a $40m annual management fee from Barclays to run it.What does C12 do?Well, it’s based in New York but managing a Cayman Islands fund called Protium, and it’s Protium that purchased the toxic loans from Barclays funded by Barclays.Finally, in this week’s Private Eye, the old Cayman question came up again.This time Private Eye notes that one of the banks I like a lot, Nationwide Building Society, were embroiled in a tax issues with Her Majesty’s Revenue & Customs (HMRC) for the last five years, and it finally came to a decision at a tax tribunal last week. The tribunal reviewed documentation which showed that the Nationwide used an elaborate scheme through ABN AMRO to gain a tax repayment amounting to some £15 million in 2003, by channelling funds through two Cayman Island companies called Bluewater and Blauzoom.Nationwide has been arguing that the laws HMRC are using to require the £15 million be paid back did not work and, luckily for the Nationwide, the tribunal agreed.Laws will be changed and Caymen to that!
The UK Government recently ordered changes to the Financial Services Compensation Scheme (FSCS), as announced in the Banking Bill of 2009. The Bill resulted in a new regulation from the Financial Services Authority (FSA), Policy Statement 09/11 (Download FSA PS09/11).
PS09/11 rules that, from 31 December 2010, all financial firms must provide a Single Customer View (SCV) of all accountholders, so that they can pay back all deposits, regardless of debts, to those accountholders within seven days of a bank default. It also demands that banks keep a SCV in order that any customer with holdings over £50,000 across all bank operations, including all subsidiaries, are informed and aware of these holdings all being with the same bank. Finally, this is required so that the FSA can demand a list of all customers’ deposit holdings on demand and within 48 hours should a bank fail.In practice, this is going to cost the UK’s banks millions of pounds, as the cost of the SCV demands major system changes across all core systems including data cleansing, tagging, linking and increased storage costs to accommodate new data fields. These fields, there are 25 of them, create a standardised aggregate view of all deposits across businesses, products and relationships, for all financial firms (in the UK). According to the FSA’s consultation process: “the set up and maintenance costs of new IT systems for quick claims processing are estimated at £891.8m over five years. Firms' obligations to tell customers about the FSCS scheme, along with telling customers which trade names are covered by a particular authorisation, would have estimated set up costs of £34.6m and ongoing annual maintenance costs of £4.2m.”For full details of the cost implications of this change to the Scheme, read Ernst & Young’s 67 page analysis.Meanwhile, adding insult to injury, not only is this new reporting going to be checked for the quality and method of implementation across UK financial firms, but it will also be used to assist examining a banks’ liquidity (PS09/16 www.fsa.gov.uk/pubs/policy/ps09_16.pdf), stress testing (PS09/20 http://www.fsa.gov.uk/pubs/policy/ps09_20.pdf), living wills and more.By 31st July 2010 firms must show their plan for the SCV to the FSA and by 31st January 2011, they most provide a customer report illustration to the FSA.Great.And they are not alone. The European Union has proposals for a similar Deposit Guarantee Scheme, as does Australia (APRA’s proposed scheme, Download DP-FCS-for-ADIs-Jan-2010) and the USA.Again, a range of disconnected global activities in response to a once in a century occasion when the banking system collapses.So is it worth it?This was the core of a debate we had at the Financial Services Club last week with:
Peter Taylor, Director, Retail, British Bankers' Association;
Martin Gibbon, Head of Risk Technology, Financial Services Risk Management, Ernst & Young; and
Rekha Modi Gomes, Compliance Director for the EMEA Consumer Region, Citi;
Chaired by PJ Di Giammarino, Chair of the Capital Markets Chamber at the FSClub.
Various issues were identified, with the over-riding problem being the timescales and the clarity of the required change. This is not unusual, as all regulations are too aggressive in implementation timeframe and too poorly understood to be clear, and this one is no exception.
For example, many banks have multiple systems developed over decades, with some sourcing customer addresses as a data field from a core shared data dictionary whilst others have the field stored as a customer code in a flat file, for example. Integrating such disparate systems in a short timeframe is going to be nigh on impossible.The core therefore is not the addition of new data fields or reporting customer details, but the changes to the enterprise customer data model, the restructuring of the operating model for data quality and verification, the model for resolving technical issues and providing technical support and more. Equally, if this was required by a bank, why haven’t they done it before? Because there’s no business case.And, because there’s no business case, it is incredibly difficult to build momentum to support such a massive data restructuring project for simply achieving a regulatory tick in the box. Therefore, there has to be a need for using this change program to improve a bank’s ability to cross-sell, up-sell and deepen the customer relationship.But again, this has never happened in the past.For example, I worked with a bank in 1989 to re-engineer their mortgage process to gain a SCV. The mortgage process was chosen because it went across all divisions – credit, insurance, deposit accounts and money transmissions.We gave up after a while because it was too difficult: “too many disparate systems across too many silos” was the response from the Executive. In fact, the real reason was that the silo-owners, the functional heads, were resisting the change as they felt it would lose their powerbase. That was even thought the CEO supported the project!I bumped into the Board Member of the bank in question recently and asked if they had ever tackled that mortgage process. “No”, he said. “Still too many different products across too many different systems and divisions with too many baronial empires”.Similarly, I used to market data warehouses that were building enterprise SCV for 1:1 marketing, cross-selling and up-selling. Did anyone want one? Not really. Sure, they could all see the advantages of a SCV, but the internal empire barriers were too great to ever achieve an ENTERPRISE anything.Maybe this time, it’ll work because the regulator demands it but this will still be a challenge.But I do wonder when one panellist stated that the banks view this as a regulatory change with no business case, and that the regulator only has a narrow SCV of the customer’s deposit holdings, with no interest in their credit exposure.In other words, this is disjoined-up regulation at a domestic, regional and global level.Shucks.So why aren’t there solutions out there to make this easier?Probably because the operating model of days of old prohibited the SCV. For example, most large banks are the result of the merger and acquisition of lots of smaller banks in the past. That’s why there are so many disparate old systems around, is the excuse of many.So what’s the result? Where’s the answer? How do we solve this?Although the debate never got around to an answer on this, my own answer comes back to data standards and reference data. The fact that the UK is adding 25 new data fields is great, but we’ll probably find that each European member state adds 15 to 31, dependent upon their country (a bit like IBAN and BIC); whilst Asia and America do their own thing.We need to co-ordinate global standards, particularly as the banks that are too big to fail are the ones with a footprint across all of these regions. Are we seriously asking these global banks to make multimillion dollar changes to their core systems that are different and distinctly separated in every country and region?Ridiculous.
No wonder the debate concluded with over 60% of the audience rejecting the idea of SCV being achievable.
Recent Comments