The Financial Services Club's Blog

Revising MiFID and RegNMS for HFT

Gawd, I hate acronymns and look at that!  Three in one blog entry title!!!

Anyways, for the nerdy-nerd equities guys, this will grab their attention.

It's all to do with trading in European and American stocks and shares using High Frequency Trading (HFT) systems, and the regulations therein with EU MiFID rules applying over here and USA RegNMS rules applying over there.

These rules are going to be overhauled soon thanks to the Flash Crash, that dreaded thing that caused US stock markets to go haywire on May 6th.  There has been lots and lots written about the Flash Crash of May 6th, but there’s not been a great deal saying it was a good thing ... until you meet JPMorgan.

In this week’s Eye on the Market, they identify five things they like about the Flash Crash, namely:

[1] Stock-specific circuit breakers.

The U.S. has been slow to install circuit breakers on major exchanges, relying instead on “clearly erroneous trade rules” that cancel trades after the fact. In Asia and Europe, circuit-breakers have been around for a while. In Asia, trading is restricted outside of pre-specified daily bands of 5%, 10% and 15% (different by market). In Europe (e.g., Deutsche Bourse), trading is halted for 5 minutes after a 3%-10% move, and then reopened. In the wake of the Flash Crash, 10% circuit breakers are now applied to a few stocks as part of a pilot program (they have already been triggered on Citigroup, Anadarko and the Washington Post Company). If we are going to exist in a world with automated robots doing the lion’s share of daily trading, circuit breakers may be needed to prevent unintended and unmanageable meltdowns.

Another topic under discussion by the SEC: prevent HFTs from having “unfiltered, naked access” to the exchanges by requiring them to live by the same pre-trade risk management controls that clearing members do. Why? As noted by the Chicago Fed, “high-frequency trading has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment”.

[2] More balance to the HFT discussion.

HFT supporters claim they are providers of liquidity to the market, and that HFT makes U.S. markets more efficient than ever. Suggestions to the contrary have been deemed “utterly laughable” by firms defending them. However, the Flash Crash highlights the uncertainties around these assertions.

While volumes have tripled in the last few years, there’s a big difference between volume and liquidity (the ability to transact without moving the price). In an industry barometer survey1 conducted by the Tabb Group in May of this year, barely half the participants had a high degree of confidence in the US equity market structure; 73% did not believe the market structure is “orderly”.

One of the survey recommendations: HFTs should be required to register as broker-dealers.

To be sure, there were weaknesses in the old specialist system as well2. But specialists were required to maintain a fair and orderly market, and post quotes that were part of the National Best Bid and Offer system; their reputations mattered. HFTs have no such requirements (no minimum shares or minimum quote times); one proposal would require quotes to be valid for at least one second. The SEC has broadened the trader reporting system in order to analyze HFT activity more closely.

[3] Proposals requiring HFTs to act more like the floor specialists they’re replacing.

With the advent of HFTs, cancelled orders have soared. Today’s ratio of 30 cancelled orders for each one executed means that 97% are cancelled.

To curb abusive practices, some market participants recommend applying a fee to HFTs for an excessive number of cancelled orders. The increase in cancelled orders is one reason we do not agree that increased order depth on S&P 500 stocks at the NBBO is a clear indication of greater liquidity, as some market research alleges. Quotes pulled within a nano-second of being posted, and which are part of an algorithmic order detection exercise, don’t seem like liquidity in the traditional sense. Ameritrade’s representative on the recent SEC Roundtable referred to this as “opportunistic liquidity”.

[4] More discussion around HFT “co-location”.

Some HFTs co-locate computer servers inside stock exchanges3 to minimize the milliseconds (or nanoseconds) required to scan existing orders, and have algorithms act on this information. As trading execution and IPO listing fees declined, exchanges have tried to make up the difference by selling access to market data. Some exchanges have products which give clients a faster look at quotes, in exchange for a fee. As a result, some HFTs end up with access to information sooner than institutional or retail investors who rely on more standard venues (such as SIP Quotes).

The search for co-location benefits has existed forever (in polite company, “order anticipation strategies”). Broker-dealers in past decades argued that being closer to floor traders on the CBOT was an advantage to their clients. But historical parallels can lose their meaning when the instruments of battle change: one HFT computer can reportedly decode more than 5 million messages per second. The Flash Crash has increased the debate around whether co-location confers advantages to HFTs, and whether there should be obligations and responsibilities that accompany them.

[5] Asset managers learn that “cheapest <> best”.

After the NYSE moved to decimalization in 2001, bid-offer spreads fell almost in half on S&P 500 stocks (less so for the Russell 2000 stocks, where HFTs are less active). Schwab retail commissions fell from $35 in 2003 to less than $10 in 2009. This trend is confirmed by broader research from the American Association of Individual Investors. So if the prism of success is bid-offer costs and commissions on individual trades, the battle has been won.

But is that the right prism to define what makes an optimal marketplace? Part of the HFT industry tracks the order flow of larger investors who leave electronic footprints4. Using algorithms which include spraying the tape with thousands of quotes, the intentions of large investors is ferreted out. This can result in higher trading costs for such investors, and by extension, their clients, who include 401k investors, and pensioners participating in state and corporate plans. Quantitative Services Group computes analyses of HFT impacts on execution costs. They estimate that HFT tracking algorithms can drive execution costs up 1.5 to 3 times, even when institutional investors parcel trades into smaller orders to avoid detection.

There’s lots more of interest in their report, which you can read in full and download if you want:

JPMorgan's Eye on the Market

Meanwhile, you may note that a lot of it is about High Frequency Trading (HFT), which I’ve written quite a bit about recently:

• Who's afraid of HFT, HFT, HFT?
• High frequency trading in jeopardy thanks to flash crash
• More Banking Statistics: Algo and High Frequency Trading

as have many others.

This means that this area is going to get regulated, and it will mean significant restructuring.  For example, back in January, the SEC started a consultation through the Concept Release - a request for public comment on securities issues - on HFT and more.

Key areas under review include:

Market Quality Metrics

What are the best metrics for assessing market quality for long-term investors and have these metrics improved or worsened in recent years?

Fairness of Market Structure

Is the current highly automated, high-speed market structure fundamentally fair for investors?

High Frequency Trading

What types of strategies are used by the proprietary trading firms loosely referred to as high frequency traders, and are these strategies beneficial or harmful for other investors?

Is the overall use of any harmful strategies by proprietary firms sufficiently widespread that the Commission should consider a regulatory initiative in this area?

Co-Location

Do co-location services (which enable exchange customers to potentially route trades faster by placing their computer servers in close proximity to an exchange's computer system) give proprietary trading firms an unfair advantage?

If so, should the proprietary firms that use these services be subject to any specific trading obligations?

Dark Liquidity

Has the trading volume of undisplayed trading centres (such as dark pools) reached a sufficiently significant level that it has detracted from the quality of public price discovery?

If more individual investor orders were routed to public markets, would it promote quote competition in the public markets, lead to narrower spreads, and ultimately improve order execution quality for individual investors beyond current levels?

Are a significant number of individual investor orders executed in dark pools and, if so, what is the execution quality for these orders?

Lots of comments have been received on the Concept Release, and its conclusion cannot be far away.

Now we have a European response to this area with Kay Swinburne, rapporteur to the Economic and Monetary Affairs committee of the Parliament, producing a draft report last week. This report provides indication of much of what might be in the revised MiFID and very little is left untouched.

Jeremy Grant over at the Financial Times, has picked out some of the more interesting nuggets from Kay’s report:

• She suggests it may be necessary for “informal market makers” – read: HFTs – to be subject to mandatory liquidity provisions;
• Calls for an “ongoing regulatory review” of the algorithms used by HFTs;
• Seeks an examination of HFT to determine whether market flow generated automatically is providing “real liquidity” to the market and what the effect of this is on overall price discovery;
• Suggests that, “in the interests of equitable treatment”, rules need to be introduced so that MTFs (multilateral trading facilities”, like Chi-X Europe) are subject to the same level of supervision as exchanges, under certain circumstances;
• Calls for new provisions under Mifid for “broker crossing networks”, including requirements that they submit to authorities “orders matched in the system”, and “details on access to the system”; and
• Suggests a minimum order size for dark pools.

This is pretty dramatic stuff and Jeremy finishes his column by referencing David Doyle, a regular speaker at the FSClub, returning to the London meeting on 12th January 2011 for our annual EU regulatory update.

David presented on the key changes in MiFID at a conference at the London Stock Exchange last week, stressing that “the whole review of MiFID will have as its driving principle investor protection – that is, the interest of the retail investor, not the operators of exchanges, dark pools and HFTs.”

Too true David, too true.

If you’re interested in more of what David had to say, here are his slides:

Mi fid, david doyle, july2010

View more presentations from Chris Skinner.

Rethinking the Customer Experience

Just got a really interesting survey from Deloitte looking at the future of financial services. The document is based upon a survey of 200 industry execs, and garners their views across a broad brush of areas.

Interestingly 89% of those surveyed believe their firm survived the crisis as expected or better than expected. I expect you can guess who’s in the 11% who thought their firm suffered badly.

Now most of them are looking at recovery and 88% are positive about the future ... I expect you can guess who’s in the 12% who aren’t.

Anyways, there are loads of question in there, but here’s a few charts that really intrigued me.

In answer to the question: what strategic objectives of your business do you think have experienced the most long-term damage from the financial crisis and economic downturn? more bankers than securities folks were worried about their ability to continue operating as they did in the past.

In fact, it amazes me that 66% of bankers and 75% of securities personnel are therefore answering this question as ‘business as usual’.

What planet are they on?

Similarly, when asked what positive opportunities have resulted from the financial crisis and economic downturn? the answer is overwhelmingly that competitors have been squeezed out of the market but, more intriguingly, Europeans are far more focused upon cost reductions than the Americans.

Now, I keep hearing that this crisis was caused by US investment banks ... so how come it’s Europe that’s cutting the costs?

And what are they going to do strategically about it?

Well, most are going to focus upon better measurement of risks.

No wonder we all hear stuff about liquidity risk and real-time risk management these days.

Finally, most of the banks agree that it is customers and their relationship with customers that has been hit hardest by this crisis.

Therefore their #1 focus is to rebuild relationships.

How will they do that?

By focusing upon improving the customer experience.

Now then, who’s doing that? What examples are out there of customer experience improvements?

Aha, I know one.

Checkout BBVA’s ATM of the Future:

BBVA's ATM of the Future from Chris Skinner on Vimeo.

Fascinating stuff.

More Banking Statistics: Algo and High Frequency Trading

Yet another blog posting on stats, and this one was inspired by Wikipedia of all places. I was looking for some stats on High Frequency (HFT) and Algorithmic trading, and stumbled across a great range of facts and figures.

First, we need to just say that HFT and Algo Trading are different.

Algorithmic trading just refers to all and any form of trading using programmed systems that automate the trade cycle.

HFT is a more specific area, and uses algo tools to move equities fast. In other words, the holding of stock in an HFT strategy might be for seconds or parts of seconds, whilst algo focuses upon those plus holdings for the medium and long term.

So there is a difference.

That’s why, when Wikipedia quotes Aite Group as saying that high frequency trading firms account for 73% of all US equity trading volume in 2009, they’re wrong.

OK, as usual, Wikipedia have got it wrong as, according to Reuters who should know, high-speed trading “accounts for about 60 percent of U.S. equity volume”.

Bloomberg agree, quoting TABB Group who state that HFT accounts for 61% of equities volume, up from 35% in 2007.

There’s the key point. HFT is big news, especially when it causes trillion dollar rises and falls.

This is well illustrated when we think about my old forecast that the markets will be run by a man and his dog: the man’s there to feed the dog and the dog’s there to stop the man touching the keyboard.

Don’t think that’s true?

Back in 2006, 40% of all orders were entered by algo traders at the London Stock Exchange, rising to 60% in 2007 and now estimates believe that around 80% of trading is automated thanks to so many MTFs.

Long live the man and his dog!

On that note, I’ve used this analogy for a long while now (see Question 4 of Euromoney’s 2007 Christmas Quiz) but, in researching this stuff again, was surprised to see this conclusion of an interview with yours truly in June 2007:

“As brokers and exchanges scramble to adjust, those who face the biggest risks from algorithmic trading may very possibly be small-scale investors — those most reliant on market stability, good governance and fair access to information and technology.

“‘Many of the algorithmic trading strategies include risk strategies untested by market downturns,’ warns Balatro's Chris Skinner. ‘A lot of the traditional market stabilizers are being taken out’ by the trading speed and fluidity enabled by algorithmic trading, he adds.

“The biggest stabilizer of all, he notes, is perhaps the role of local and national financial regulators.“But in the new era of algorithmic trading, in which trading technologies and strategies are closely-held competitive secrets fiercely protected from scrutiny, Skinner says regulators will have a tough time gaining sufficient information to ‘understand what they are regulating.’ Especially if it's happening in 10 or 20 jurisdictions simultaneously. It all starts to make Enron's famously complex trading strategies look simple, he adds.

“After all, Skinner notes, if major Canadian banks find it necessary to outsource their algorithmic trading expertise because it's too expensive to go it alone, how likely is it that our notoriously parsimonious financial regulators — with their laughably small technology budgets — will be able to ensure the world's increasingly fleet-footed algo-experts always play fair?”

How prophetic?

High frequency trading in jeopardy thanks to flash crash

No one could have missed the markets flash drop in May.

On 6th May, US markets fell into a trillion dollar freefall. Accenture’s shares fell from $41 at 2:30 that afternoon to just one cent each by 2:47 whilst Apple’s shares soared 40,000 per cent to reach $100,000 each during the same twenty minute period. Overall, the US stock market lost 9 per cent of value before rebounding just as fast. The result is that the SEC is bringing in rules that will stop a freefall by freezing any equity whose price moves more than 10 per cent in any five minute period. This may deal with the issue but does it deal with the cause?

For over a decade electronic trading has progressed from simple puts and calls to hugely complex structures. A decade ago, FIX Protocol was designed to streamline connectivity between buy and sell side, whilst today it is designed to allow millions of trade offers of indications of interest and order cancellations to take place in real-time, low latency operations.

This point was brought home to me in conversation with Thomson Reuters in the UK, who tell me that, in 2000, they were following 5,000 trading changes per second. This figure had increased to 550,000 changes per second today, and the exchanges expect this to reach over a million by the end of year. In New York, the figures are ten times this level with the US Options Exchange claiming to track four million messages per second across the US trading markets, peaking at ten million per second.

Algorithmic black box structures have stretched the point further, by moving from simple trading of stocks to complex trading strategies that seek arbitrage opportunities at every point of the trade lifecycle. For example, these complex layers of trading strategies have allowed the rise of cross-asset class trading, where a simple trade call for Microsoft stock can be hedged with a link to other tech stocks, such as Apple and IBM, mixed with FX pricing movements and the speed of rises and falls on the Dow and S&P 500, all in real-time. This is why we find the interlinkage and complexities of trading created by such technologies are rapidly becoming more precarious.

A point that was obvious to me back in August 2007 when Goldman Sachs' systems messed up losing thirty percent of the value, or $1.5 billion, of their flagship global equity funds in a week. Goldmans' CFO David Viniar said that this was because they were "seeing things that were 25-standard deviation events, several days in a row." A 25-standard deviation event is meant to only happen once every 100,000 years.

It was obvious that systems seeking arbitrage opportunities could get their models wrong and, since the implosion of liquidity in 2008 when Lehman Brothers failed, we know how fragile these systems can be.

It has not stopped the ongoing march of investment innovation however, with the latest sprinkling of low latency for high frequency trading added to the melting pot.

For example, the CIO of NYSE Euronext said to me recently that the fastest processing in the investment world processes in about 250 microseconds today, or 0.00025 of a second.

In other words, in the time it took you to read the last sentence, about ten seconds, about 40,000 trade movements could have flowed sequentially through the system.

And all of those trades movements need to be time stamped, recorded and indexed for client and regulatory reporting purposes, which is why firms ranging from Barclays to Instinet to Credit Suisse have all received fines from the FSA recently for incorrect time reporting of trades.

And every nanosecond is the difference between getting the trade executed or losing the trade execution opportunity to a competitor. So this march of high frequency complex arbitrage-based automated trading will continue.

Unless regulators stop it that is.

The fact is that the SEC and FSA in the USA and UK respectively are really concerned about such developments, particularly with the issues created by ‘flash orders’, where a sell side firm might change prices in real-time between a client’s order and its execution in order to make a buck at their expense.

Similarly, regulators are fearful of things they do not understand or hear stories about that sound like in appropriate use of information systems, such as ‘dark pools’. Dark pools, where orders are placed unseen by the lit markets, are actually good for liquidity according to institutional investors and trading institutions, but have an issue just due to their title: ‘dark’.

Dark is scary and that’s why rumours of the new European revision of the Markets in Financial Instruments Directive might crack down on dark pool trading structures and worse.

All in all, we are living through a moment in time where the steady march of technology to create innovative trading opportunities are likely to be reined in by regulatory authorities who fear irrational and unexpected market movements in real-time.

The question is: how much of a brake can they put on such innovation?

My answer would be: not much.

After all, most regulations result in unexpected consequences, e.g. MiFID moved a third of all European equities trading from traditional exchanges to high frequency automated trading pools. Do they really want to reverse this trend?

I don’t think so.

So it’s all about checks and balances ... or is that cheques and bank balances?

Microsoft's latest wheeze: let's blow up the network!

I got a critical update automatically downloaded to my PC this week by Microsoft's never-ending update factory.

The PC went into the usual "don't turn off the power whilst I get my knickers in a twist" update load pattern and rebooted after a few minutes.

As it's a Windows 7 PC, it rebooted fast - about five minutes - compared to my old Vista machine.

Fandabodozy.

A few days later, I'm on the road using the PC and it's unable to get wifi access.

It seems to be connected but the wifi icon has that little yellow exclamation mark over it, to show something's up.

I click on the icon and it tells me that I'm connected to the hotel's network but the hotel's network is not connected to the internet.

The hotel tells me the wifi is free and is working fine for everyone else.

They cannot work out the problem and what really got me is that, after troubleshooting network problems, Microsoft offer additional help:

 

But the help is all based upon online support, online searches and such like.

That's no good when you can't get onto the internet because the wifi connection is working but not connecting.

Darn.

So I get to the airport and the wee laptop picks up the network and gets me online ... but very slowly.

Then I get home and it picks up the home network but can't get online again.

Something's up.

After trying 300 things including jogging round the laptop twice, I decide that restore time has come.

I go back to the OS of two weeks ago and the problem is solved, network fine, no issues.

You guessed it, Microsoft's critical updates from the never-ending update factory had blown the wifi connection.

No wonder Microsoft's building Windows 8 using Apple's strategies.

Who's afraid of HFT, HFT, HFT?

At the conference in Santander, I was particularly taken with a presentation by Jorge Yzaguirre from the Bolsas y Mercados Españoles (BME).

BME is the Spanish company that deals with all of the organisational aspects of the Spanish stock exchanges and financial markets, as well as providing clearing and settlement and technology consulting in 23 countries focused upon trading systems.

Jorge presented in Spanish with English slides so I didn’t get much of the words, but the slides speak volumes.

The discussion was all about that American flash crash on May 6th.

This was the one when Accenture’s share price went from $41 at 2:30 p.m. to just one cent at 2:48 p.m.

Tsk, tsk.

I’ve read lots of explanations of the crash, and it boils down to bad programming or a virus it seems that caused a glitch in the system.

For the best explanation looking at all this stuff, checkout Nanex’s website.

The flash crash illustrates the fragility of our markets and how exposed they are to massive data spikes and bursts.

What would happen if crossing systems were seriously cross?

Well now we know and sure, we’re working on addressing such issues, but what I liked about Jorge’s presentation is that it’s the first time I’ve seen someone present what happened (rather than just reading it).

I also like the charts he used, so here’s a wee selection.

The market indices went into a meltdown in the afternoon of May 6th.

With the Volatility Index at the Chicago Board of Exchange zapping skywards.

The brown stuff hits the fan at 2:48, when Accenture’s share price hits rock bottom.

As did Procter & Gamble.

And Exchange Traded Funds (ETFs) such as iShares.

Around the same time, shares such as 3M hit bottom.

As did IBM.

And Intel.

Meanwhile, some equities rocketed, such as the price of Sotheby’s, that auction house.

Going, going, that’s a gonner!

Overall, the volatility was massive as electronic liquidity provider’s black box algorithms traded intermarket sweep orders aggressively between the market makers and taker robots.

Which is why daily liquidity replenishment points –  a NYSE volatility control built that automatically converts the markets' to “slow” or Auction Market only mode temporarily, allowing specialists, floor brokers and customers to supplement liquidity and respond to the stock’s volatility (see comments) – went through the roof.

So there you have it.

Jorge did put a load of other slides up there, but I think this collection gives you a good flavour of what happened.

Now you may think this is a one-off, but our globally interlinked trading systems often spike and move in rapid cycles.

Just take a look at this chart which illustrates the ups and downs of the markets over the last five years, and take particular note of September 2008 when Lehman Brothers collapsed.

No wonder the non-rocket scientists, general investor, market participants and now legislators all fear High Frequency Trading (HFT) systems ... and why the ruling now is that any move in a stock price by more than 10% of its value in either direction in a five minute trading period, will result in a stop trading break of five minutes to ensure it's not some gaming going on.

Oh and yes, the whole thing was Apple's fault anyway.

The post-Facebook webolution: checking in

As usual, some good stuff in Wired Magazine this month.

One article stood out for me in particular, which is about the rivalry between Foursquare and Gowalla. I’d heard of Foursquare but not much about Gowallla, and now see the next rise of web usage in more clarity.

Both sites are about checking in with your mates and being able to track where they are, what they are doing and whether there’s anything interesting happening nearby. Like seeing the GSM signals of all of your friends in real-time.

Sure, Google Latitude was a good start point for this stuff, but there’s now many new ways of socialising this physical and virtual network. For example, you arrive in London and know that someone had recommended the Comedy Club ... but which one. There’s quite a few in London and you might not get the one that was recommended.

But it goes further as these sites link mobile, social, gaming and location. Like a Facebook with rewards. The idea is to get badges for visiting locations, and awards for achievements. So, if your peer group think McGinty’s Bar is cool, then you’ll get an award if (a) you get to McGinty’s and (b) you down a shot of whisky chaser at the rear bar. All of which can be tracked in real-time and checked by your friends through the geolocation services.

In other words, you set challenges and take challenges, and get badges on your social profile for achieving.

Great stuff.

What really stood out in the article though, is this chart from John Battelle, who cofounded Wired US and wrote “The Search: how Google and its rivals rewrote the rules of business and transformed our culture”.

As you can see, the chart shows the five revolutions tracked through the connected network and could be reworded as:

1. Buying stuff
2. Finding stuff
3. Building a community
4. What are you doing?
5. Where are you doing it?

On that basis, I think I could speculate about a few more cycles of revolution to come:

• Who are you doing it with?
• How are you doing it?
• Can I come too?

Or something like that anyways.

The iPad Prototype circa 1990

Twenty years ago, I worked at a firm called Wang.

Long forgotten now, Wang could have been Microsoft or even Apple ... but that's another story, and one that should make for a classic case of how to screw up a good firm when the founder leaves.

Anyways, Wang led the world in office automation and had great solutions for Word Processing, Image Processing, Networking, Database Management and more.

In the late 1980s, as leader of their UK Imaging Systems, I received a prototype unit which I still have to this day.

It was called Freestyle, an 80286 Intel Processor Tablet-PC.

The idea was to use a pen, rather than keyboard, for input.

The pen-based input allowed the user to write and draw whatever they wanted and Freestyle's clever software would convert your writing and doodles into compute files and Word documents.

Here is that unit:

Strangely enough, twenty years later, it's not that weird.

It's an iPad ... without the 3G or internet stuff basically.

It's got a speaker - the dots below the screen - and a microphone input - the dots in the top right hand corner.

It's got a black and white screen with a stupid stuck-on guide, but bear in mind it's a prototype unit.

It's got printer, VGA and screen projector connections et al:

... as you would expect.

It's even got your headphone socket for playing that funky music:

So yes, it's a tablet-PC in the earliest days of PC's pre-internet.

In fact, looking at my prototype unit and it's functionality, it's an iPad before the iPod and internet age.

Very visionary.

Oh yes, and if you want to learn more, here's my colleague from those days, Dr. Stephen Levine, explaining how the concept of Freestyle worked back then:

This was the PC rather than tablet version back then and jeez, I'm feeling older!

Nope, scrub that, I'm demonstrating vision by sharing my very first iPad ... twenty years before it was released!

Let the iWars begin

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):

Sourced from icrossing

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.

Whatever.

Mobile, Mobile, Mobile

View more presentations from Paul Golding.

Accenture's marketing team strikes again

After Tiger Wood’s disastrous PR with golf clubs wrapped around teeth, Accenture had to rapidly come up with a new campaign to reignite their brand.

So I arrive at Heathrow this morning and here it is:

Brilliant.

Inspired.

Bodacious.

Not.

Quantum leaps are all well and good, but my immediate thought was Quantum Analytics.

The Quants are being blamed for the failure of the world’s woes when High Frequency Trading systems sent global markets into a see-saw that went up and down faster than Paris Hilton bungee jumping.

From the Wall Street Journal:

The ridiculous downdraft of shares of consulting firm Accenture PLC, which momentarily fell to one cent in Thursday’s trading, was one of the things that really got investors’ attention.

So we decided to do a bit of digging on what happened.

Shares of the firm had been slipping from $41 at 2:30 p.m. to below $39 just before 2:48 p.m. Thursday. Then things unraveled.

The shares went from $38.05 at 2:47:43 p.m. to $32.62 when a trade of 3,780 shares was routed through NYSE Arca Exchange.Then, things got sharply worse.

At 2:47:50 p.m. a 100-share trade went through Nasdaq at $5.34. Like many of the trades previously, this one was labeled as an “Intermarket Sweep Order,” according to Thomson Reuters data.

Hmmm ... methinks Accenture’s marketing team has excellence in foresight.

Another P2P Payments system

With the general frustration folks appear to have with bank fees - not sure why as banking has to cost something, doesn't it? - I just got wind of the new Currency Exchange for P2P transactions.  Here's how it works:

Or, if you prefer, in text form:

"CurrencyFair is the people's exchange."

For example, "Jim is an Aussie living in London. He still has a flat in Sydney and he rents it out. The rent he gets he has to exchange into pounds to help finance his flat in London.  But while he is trying to change dollars into pounds, Shirley wants to turn her pounds into dollars. She's retired but wants to help out her son-in-law who has just started a business in Brisbane. We bring Jim and Shirley together ...

"You can browse and choose the deal you want because it's a market. That means if anyone does try to charge above the odds for their Pounds or their Zloty or whatever, they'll never sell them. It's as simple as that."

Or, if you prefer, here's how it works in picture form:

 

To secure everything, Currency Fair works with Bank of America.  As they say:

"We're no friend of the banks. Except one.  We are a friend of Bank of America. All your money is held in segregated client accounts with Bank of America, the largest bank holding company in the United States by assets. That's bank speak for your cash is safeguarded by being held separately to ours."

Interesting choice of Bank of America, although BoA did have a 'vision' unit - they used to publish the Future Banking Blog - and that could be the reason why.

The only downside of Currency Fair appears to be that it has been created by a bunch of Irish, Welsh and Ozzie ex-banking backpackers - that must be the reason for the sheep in the picture above - but hey, you can't win 'em all.

Postscript: American Express exchange rates at Heathrow Airport ...

Hattip to @thebankchannell and @ashdonaldson

Not an ash cloud, but a cash cloud

Overheard this week, a conversation between a bank’s CIO (the Technogeek), CFO (Mr. Bean) and CEO (The Governor).

TECHNOGEEK: So times are tough and we need to manage costs. I suggest we do that by using cloud computing and software-as-a-service tools.

THE GOVERNOR:  Can you talk English, technogeek?

TECHNOGEEK: Sorry, Governor. What I’m talking about is that we place all of our computing needs into the world of on-demand services.

THE GOVERNOR:  And what does that mean, I’m still not getting you.

TECHNOGEEK:  Well, it means ...

MR. BEAN: Look, let me have a go nerdyman. Sir, it means that we will save lots of cash.

THE GOVERNOR:  Sounds better. How does that work?

MR. BEAN: Well we bung all the stuff that costs lots of money in his compute operations and give it to Google or IBM or someone.

THE GOVERNOR:  That’s not so good. Isn’t that dangerous?

TECHNOGEEK:  No sir, because they will run that as we need it. Let me try to explain in a simple analogy. If you were opening a bank account, you wouldn’t open a high net worth premier account on day one would you?

THE GOVERNOR:  Well, I would, because I’m a high net worth premier ...

TECHNOGEEK: Sure, I know you would, but what I mean is that you wouldn’t open the bank account with all the bells and whistles on day one, because you don’t know what bells and whistles you need.

THE GOVERNOR:  No geekyboy, we would sell them that account with all the bells and whistles as we can then charge fees for that stuff.

TECHNOGEEK:  Of course sir, but in a computing sense – where we want to avoid investment and capital expenditure this year – what this cloud stuff means is that we can open a basic account on day one and then just pay-as-we-go.

THE GOVERNOR:  Oh, like a mobile service.

TECHNOGEEK:  Yes, that’s what I meant.

THE GOVERNOR:  So why didn’t you say so. Mr. Beancounter, is this a good idea?

MR. BEAN: Yes.

THE GOVERNOR:  A man of few words. What I’m asking is that I don’t like pay-as-you-go – my mobile is on a corporate monthly direct debit account – so why would we put our computing into that sort of arrangement?

MR. BEAN: Well, it means we can have unlimited compute capacity and just pay for what we need and use, rather than buying a massive great system in-house and paying for it all up front.

THE GOVERNOR: But don’t you pay more long-term?

MR. BEAN: Why do you say that?

THE GOVERNOR:  Well, this sounds like some sort of rental system and my mum used to rent her telly. It was good in the 1960s, but she’s now using a 1960s TV and paying 2010s rental prices. That doesn’t make sense.

MR. BEAN: Of course not sir, but this is not the same. We pay for what we use and the partner we choose – Microsoft, Cisco or whoever – has to maintain the infrastructure to today’s standards. Equally, we’re not really renting anything, we’re just paying-as-we-go. It’s different.

THE GOVERNOR:  It may be different, but if it’s not renting then it’s pay-as-you-go and that means, in my mobile service, that I don’t get a free phone every 18 months so it’s not as good a deal after all.

TECHNOGEEK:  I think rentals and mobiles might be confusing things here. Let me have another go at clarifying.

MR. BEAN: Good luck.

TECHNOGEEK:  Sir, today we have millions of dollars wrapped up in creaking systems that are not cut out to handle the 21st century demands of our corporate and retail customers.

THE GOVERNOR:  So? That’s normal for a bank, isn’t it?

TECHNOGEEK:  Yes, but it shouldn’t be, and we believe we can make a difference by doing things differently.

THE GOVERNOR:  Ah, so this might grow our business.

TECHNOGEEK: Absolutely right sir. In fact, it will not only grow our business but allow us to deal with any eventuality.

THE GOVERNOR:  How so?

TECHNOGEEK:  Well, the idea is that – and let’s take a practical example – we could take our payments processing, for example, and place that application on a kind of bureaux service with Amazon, and they would run the computing for us.

THE GOVERNOR: Amazon? The bookseller?

TECHNOGEEK:  Yes, but they do a lot more than that these days and are one of the largest providers of computer services in the world.

THE GOVERNOR: A bookseller?

TECHNOGEEK:  Yes sir. Anyways, we put everything out to Amazon and they run our computing power for us. We then pay them per transaction and, depending upon our daily volumes, we then pay for what we use.

THE GOVERNOR:  Like an electricity bill or something like that?

TECHNOGEEK:  Spot on sir. Just like electricity, we pay for our computing power and services on a ‘as used’ basis. That way, we never have to buy a great big server farm or whatever, but can be completely adaptable to volume, scale and business demands as they ebb and flow.

THE GOVERNOR:  OK, I think I’m getting it now. We have a mobile pay-as-you-go service that works like an electricity bill that we rent from a book seller.

TECHNOGEEK:  Hmmm ... not quite.

MR. BEAN: Look sir, I think you’re almost there. The bottom-line for me, and what convinced me, is that we never have to buy any hardware in the future. We just get that power on an as needed basis and it will save us about twenty squillions dollars a year.

THE GOVERNOR:  Oohhh, that sounds good ... but what happens if there’s a problem?

TECHNOGEEK:  A problem with what?

THE GOVERNOR:  Well, let’s say that Google or Amazon give our information away or accidentally delete it or lose a transaction.

TECHNOGEEK:  Why would they do that, sir?

THE GOVERNOR:  Because they’ve done it before – look what happened to my emails with Bunty in Googlemail – and I’m just not sure that a third party can be trusted with our data.

TECHNOGEEK:  Oh, you’re worried about privacy and security?

THE GOVERNOR: Absolutely. Aren’t you?

TECHNOGEEK:  Of course I am sir, but we’ve got that covered.

THE GOVERNOR:  How?

TECHNOGEEK:  Well, in our contract, it makes it clear that the data we provide to the service provider must be protected.

THE GOVERNOR:  And what happens if it’s not?

MR. BEAN: We get paid squillions.

THE GOVERNOR:  Can you trust them though?

TECHNOGEEK and MR. BEAN together: Yes.

THE GOVERNOR:  Alright, alright. Well let’s test it out with a toe in the water in some area that isn’t too sensitive, like employee payroll.

TECHNOGEEK:  Can’t do that sir.

THE GOVERNOR:  Why not?

TECHNOGEEK:  Because, you know ...

THE GOVERNOR:  What?

MR. BEAN: Bonuses sir.

THE GOVERNOR: Oh shoot, yes. So what do you suggest we use this for?

TECHNOGEEK and MR. BEAN together: We have no idea, and hoped that you would come up with something sir.

Happy Fridays!

 

Why payments innovations are rubbish!

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

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

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

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

Why all payments innovations are rubbish

View more presentations from Chris Skinner.

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

Spanish Banks leading in innovation - now the iPad Bank (UPDATE)

It surprises me how often I find Spanish banks surprise me.

First, BBVA launch the first really cool Bank 2.0 apps two years ago.

Then Caja Navarra launches a fantastic hybrid Zopa-Bank styled P2P lending service.

More recently, Santander created a really interesting head office campus full of robots.

And now Banco Sabadell is one of the first, if not the first bank to launch an iPad banking service.

My good friend Pol Navarro, Director for Innovation at Banco Sabadell, tells me that they decided to do this because: “since we launched our mobile portal, at the end of 2009, we've seen a tremendous usage from iPhone users - about 60% of access - so we decided to develop a specific app for the iPhone/iPad.”

Certainly, that seems to be indicative of a core focus upon the customer as, in just three months since its launch, Banco Sabadell’s Mobile Service (BSMS) is being used by more than 13,500 customers of the bank and is expected to exceed their target of 35,000 customers this year.*

According to the bank’s blog – yes, they have a blog! – the “new version of BS Mobile for iPhone IPAD and includes all operations currently available in the BS Mobile service (consulting accounts and cards, transfers and transfers, purchase / sale of securities, signature files, etc. ..) for both the segment private customers and companies, taking advantage of new capabilities for interaction and usability that Apple devices offer and improving current features:

Tracking all current procedures of the customer (card applications, loans, etc ...) to give the best customer service and information wherever you are.

• Higher quality maps and greater precision in the location of offices and ATMs, as well as Street View.
• New presentation of the application, Touch and more intuitive.
• Ability to save favourite operations and menu customization operations.
• Keyboard shortcuts to the operations of accounts, cards, data transfers and your personal manager.
• Option to call me back for easy access to the Contact Center.”

UPDATE: New and improved video

In addition, Pol tells me that they “think that the iPad has its own space, for consuming digital content online/offline (airplanes, garden, home, etc.) ... the iPad version, has some specific functions, adapted to the terminal’s screen size, user interaction, maps navigation, etc.”

They are also developing the iPad further: “for example, product simulation of loans and mortgages, investment portfolios, video calls with your sales rep, etc. Also this kind of gadget can be used internally, for sales rep, private banking advisors, etc. We are just investigating in this side.”

All in all, Spanish banks never fail to impress me with their first mover experiments in social and mobile finance.

Definitely not a case of mañana my friend.

* Banco Sabadell has €82 billion in assets with 1,190 domestic branches and 9,466 staff

PayPal, Microsoft and Google's visions of the future

Today seems to be a day about future trends.

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

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

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

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

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

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

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

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

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

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

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

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

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

Fantastic.  Everywhere you go, you pay with PayPal.

What happened to Visa and MasterCard I wonder?

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

Recognise the voice?  Here's a clue:

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

Something slightly wrong about that?

Your soul is mine

I know that many of you will have read the story already but, just in case, it is worth posting here for posterity and for the record. 

LONDON, ENGLAND, April 03, 2010 /24-7PressRelease/ --

Gamestation has discovered that more than 88% of the British public do not read the terms and conditions of a website before they make a purchase online.

As a result of the research, Gamestation has announced that on April 1st, in a test of its customers, it will include a clause in the terms and conditions stating that the customer grants the retailer the right to 'claim their immortal soul'. The online customer will be offered the opportunity to opt out of forgoing their soul by ticking a box in the small print. As a reward for their vigilance, they will receive a GBP5 discount voucher.

Result?

90% of customers agreed to the terms and conditions without reading them (either that or they were happy to surrender their souls).  They then received an email  stating: “Little did you realise that upon your last purchase from Gamestation.co.uk you also granted us a right to claim your humanity [...] To avoid future fatalities, always check the terms and conditions.”

 

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

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

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

MEFTEC 2010 Presentation from Chris Skinner on Vimeo.

And the original slides, in case you missed them:

Branches are dead, the future is social

View more presentations from Chris Skinner.

And an audio file to go with it if required:

Download Chris Skinner, EBF2010 (45MB)

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

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

Leveraging technology through turbulent times

As mentioned yesterday, I should be in Bahrain this week chairing the MEFTEC conference. As the chap in charge, the organisers asked me to write a welcome note and so, in the spirit of Imagineering that we’re there, here’s my note for this year:

Welcome to MEFTEC 2010, the sixth year that Bahrain has hosted the Middle East’s largest financial technology conference and exhibition.

This year’s conference has the theme ‘Innovation amidst regulation’ as a result of the imminent implementation of new rules and regulations across the global banking markets. The G20 summits and the never-ending announcements of rules related to liquidity and capital reserves seem to rumble regularly, and yet little has yet been implemented. This will change in 2010 through the next five years or more, as the US Federal Reserve and UK Treasury work closely with the Finance Ministers of all countries to agree the correct approach for future operations.

South Asia, Middle East and Africa – the SAMEA Region – has clearly been affected by this crisis with the visible default on the Dubai’s debt in November, just as the Burj Khalifa opened. Less visible has been the stress on SAMEA banks, with many smaller banks suffering from Non-Performing Loans (NPLs). Ratings agency Standard & Poor has said it believes that 2010 will be another difficult year for Gulf-based banks, for example, due to the issues in cleaning up the loan books. In their most recent figures, about one-third of S&P’s ratings on banks in the GCC have a negative outlook.

"We see a growing disparity in credit quality among banks in the Gulf, between the stronger Saudi and Qatari banks on the one hand and the relatively weaker Dubai, Kuwaiti, and Bahraini investment banks on the other," said S&P credit analyst Mohamed Damak.

Even with Saudi banks being viewed as having strength, it is only the larger Saudi banks. For example, the Kingdom announced in February that the global financial slowdown and the ensuing local debt default crisis have exposed the vulnerability of small and medium banks in Saudi Arabia, as they have chopped off a large chunk of their funds for bad loan provisions.

The result is that NPL to total loans ratios doubled between 2008 and 2009, reaching 5.4% on average by September 30th 2009 compared with 2.7% at year-end 2008.

This change in focus means that SAMEA banks, like Western banks, are cutting back on loans and risk, and gearing towards the new macroprudential supervisory structures the G20 are developing for global management of financial markets. These macroprudential supervisory structures demand change in five areas:

• Liquidity Management
• Bank Corporate Governance structures
• Capital Adequacy Reserves
• Risk Management
• Procyclicality measures

And all of these will have impacts on internal systems and controls. For example, real-time risk management, liquidity management and counterparty positioning will be a clear focal point for next generation systems developments. Equally the whole nature of trade and liquidity reporting, requiring ever increasing levels of bank transparency in processes, will be a key focus.

Alongside all of these regulatory developments are innovations of course, such as the distribution and delivery technologies focused around mobile telephones and particularly the iPhone.

Therefore, in setting the theme of this year’s MEFTEC around “innovation amidst regulation”, there are a number of technologies that we see as key to addressing the regulatory and innovatory requirements of the 2010s.

Specifically, there are four technology areas we have handpicked for focus, namely:

• Mobile Services
• Social Media
• Cloud Computing
• Low Latency

These four technology buckets play a critical role in all aspects of society and banking. This is not the say that the list is exhaustive – video, biometrics, security and fraud systems and more are all just as critical. Just that these four are top of mind for 2010.

Equally, this does not reflect the business imperatives around risk management and reporting, Islamic banking, microfinance and remittances, infrastructural change for payments processing and more. But that these technologies can provide support and address the needs for change in these business imperatives.

A brief review of each of these technology areas shows the impact they are having on these business needs.

Mobile Services

When M-PESA launched in Kenya, it transformed a country from zero infrastructure for monetary movements to a wirelessly connected country that now had instantaneous and cheap payments processing. The results have been transformational. Before the mobile remittance service launched, Kenyans could only move monies from Nairobi to the remote villages by paying a driver to physically transport the cash. That was expensive and fraught with dangers of theft and loss. The M-PESA service launched in 2007, in a partnership between Safaricom (a division of Vodafone) and the government. Within a year the service had 1.5 million users and today has eight million. 10% of Kenya’s GDP moves through the mobile remittance service and it makes Vodafone’s Safaricom the largest bank in Kenya.

That’s transformational.

Equally transformational has been the iPhone, where the apps have created a massive new market for microtransactions. The iTunes store saw over a billion downloads across 100,000 apps within nine months of launch, and today has exceeded four billion downloads. These downloads cover everything from entertainment to news, flight times to buying and selling stocks and shares. The result is that a bank is clearly now in people’s hands 24*7 and the phone itself is more important as a lifestyle accessory today than a watch or a wallet.

That’s transformational.

In looking at such transformations, we have to ask: what is your bank doing to exploit these opportunities?

Social Media

In the last five years, along with the mobile transformation, there has been a revolution in communications via technology. The social revolution. This social revolution is reflected in key developments demonstrated by the massive societal move to use Facebook, and its localised equivalents. Facebook has over 400 million users. It is the largest communication, entertainment, news and discussion channel on the planet. It has more influence with more people than their teachers, bankers, politicians and business leaders.

That’s transformational.

Alongside the march of Facebook has been the correlated developments of Twitter. Viewed by many as a transient phenomena, the reason why Twitter hit the news is that it provides the news, in real-time. The typical users of Twitter are actually over 35-yeras of age, and they use it to keep up with the BBC, Al-Jazeera, CNN and other news services, as well as the most influential voices in their business and social communities. The fact that Twitter allowed the world to be informed of the Haitian Earthquake, the G20 protests and the Iranian revolts in real-time demonstrated the power of connections to any individual on the planet in real-time globally.

That’s transformational.

In looking at such transformations, we have to ask: what is your bank doing to exploit these opportunities?

Cloud Computing

For many years, banks have been seeking to maximise the efficiency of operations by leveraging compute power. In the 1970s, the compute power was expensive and much of it required bespoke in-house developments. During the 1980s, it became distributed and more specialised applications could be deployed. The 1990s saw the advent of large-scale client-server systems and the origins of today’s outsourced structures. Throughout the 2000s, outsourcing became more complex with nearshore and offshore management structures and the idea of compute power now being a complicated soup of internal and external resourcing.

Cloud computing merely takes this towards a logical conclusion and, as some folks refer to it, makes the original mainframe in-house service an outhouse service. What they mean by this is that you can now plug into massively scalable compute power with your own applications on a pay-as-you-go basis. You have the control of the mainframe structure, but with the flexibility of usage that is purely based upon compute power being used when and as you need it.

That’s transformational.

It moves capital expenditure for computing off the table, as it’s now just operational expenditure on a variable cost basis,

That’s truly transformational.

In looking at such transformations, we have to ask: what is your bank doing to exploit these opportunities?

Low Latency

During the past few years, the world’s investment markets have revolutionised thanks to algorithmic trading. But it didn’t stop there. Algo trading moved into high frequency trading, and the result has been a massive focus on speeds and feeds and the need for minimal latency, or delays, in the way trades are processed and executed.

This low latency focus led to a battle over speed between execution venues and stock exchanges, with BATS in the USA stealing a march on NYSE and NASDAQ whilst Chi-X in Europe beat the living daylights out of the London Stock Exchange, Deutsche Bourse and NYSE Euronext.

Now all is dark pools, high frequency trading based upon nanoseconds of processing. And if you’re not in the front nanosecond, then you’re dead meat.

That’s transformational.

But it goes way beyond processing trades on city servers to financial markets general. For example, recent legislation in some countries dictate that processing payments must take place in real-time. Elsewhere, risk management reporting and liquidity management positioning must be delivered in real-time. In fact, financial services per se – from consumer’s self-servicing online to corporate cash management positions to treasury management overall – are all changing from batch to real-time.

That’s transformational.

In looking at such transformations, we have to ask: what is your bank doing to exploit these opportunities?

The World of Me (Part Two)

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

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

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

Guess what?

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

... so what can one do?

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

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

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

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

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

Today ... it’s near enough free.

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

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

Branches are dead, the future is social

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

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

Branches are dead, the future is social

View more presentations from Chris Skinner.

And an audio file to go with it:

Download Chris Skinner, EBF2010 (45MB)

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

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