The Bankwatch

Two down, and approx 88 to go if current estimates are correct. There is an update due in August, and I would not be surprised to see the 90 estimate increased.

FT.com / Companies / Financial services - US regulators seize two more banks

Two weeks after the Federal Deposit Insurance Corp seized IndyMac, the Office of the Comptroller of the Currency said it closed First National Bank of Nevada and First Heritage Bank NA of California.

Off banking topic; thinking about disruption, and systemic economic change its worth reflecting and remembering how GE was held up as the MBA case study for many years in the 90’s for their management approach, yet the environment has still shifted away from their manufacturing roots, and caught them off guard.

FT.com / Companies / Energy Utilities Mining - GE launches radical shake-up

GE’s shares have underperformed the S&P 500 Index in the past five years and are down 23 per cent in 2008, emboldening some investors to press Mr Immelt for more dramatic changes, including a possible break-up of the conglomerate.

New report from McKinsey [free] on open innovation, or co-creation of products and services. The usual examples are offerred, from Linux, LEGO, Missha, and ATLAS (Scientific).

next step in open innovation - The McKinsey Quarterly - next step in open innovation - Information Technology - Networking

# Cocreating products and services with customers, however, is uncertain territory fraught with challenges and questions—for instance, who owns the resulting intellectual property? Nonetheless, smart companies are now beginning to encourage their customers to help them develop the products and services consumers really want.

There is discussion of governance, and some skepticism that the model will transfer from software to general innovation. Much of the content is a straight lift from “The Cathedral and the Bazaar” but its a good read and offers a summary of many of the issues.

Interesting new service from Yodlee, offerring same day bill payments, something thats hard to do today. Whats interesting is that there is an additional charge for same day payments. This means in effect that the delayed payments that exist today, are now hard wired as the standard, and anything faster costs more.

Finextra: Yodlee launches expedited payments offering for online banking sites

With Yodlee PayToday, financial institutions can take immediate advantage of the opportunity to generate new fee revenue by offering their customers the convenience of guaranteed, same-day electronic payments to hundreds of national and regional billers across multiple biller categories, including: credit cards, mortgage, auto finance, insurance, utilities, cable and wireless.

This has to be the most depressing piece on the true underbelly of the subprime situation in America.

Note how lenders have shifted to fee revenue to optimise the high personal debt situation.

Given a Shovel, Digging Deeper Into Debt - NYTimes.com

Lenders have found new ways to squeeze more profit from borrowers. Though prevailing interest rates have fallen to the low single digits in recent years, for example, the rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 — a difference that adds billions of dollars in interest charges annually to credit card bills.
…

“Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset,” said Julie L. Williams, chief counsel of the Comptroller of the Currency, in a March 2005 speech that received little notice at the time.
…..

For decades, America’s shift from thrift could be summed up in this familiar phrase: When the going gets tough, the tough go shopping. Whether for a car, home, vacation or college degree, the nation’s lenders stood ready to assist.
…..

But as happens with many debt-laden Americans, an unexpected illness helped push Ms. McLeod over the edge. In January 2006, her doctor told her she needed a hysterectomy. She had health care coverage, but she could no longer work at a second job.

Mint has officially joined my list of top disruptive services in financial services. Till now, I only had one. These statistics below from TechCrunch suggest staggering and unique opportunities, data sharing potential, and the opportunity for shared user generated advice. The other disruptive service for similar reasons, is Wesabe.

Mint Adds Support For Mortgage And Loan Tracking

further expanded its services by introducing support for mortgage and loan tracking. Users will now be able to keep tabs on their loans from over 1,000 supported institutions
…..

Mint has seen extremely quick growth since its launch at TechCrunch 40, and is now monitoring a total of $11 billion in assets, with 350,000 registered users
…..

Mint will eventually be able to move money around, but that functionality won’t be coming until 2009

Thought provoking and well prepared new report from the prolific team at Deloitte. Following is a brief summary and analysis of the report, then my take on the conclusions. [hint: no-where in this report does the word internet or social media appear - is that right or wrong?]

Financial Services in 2010 - Deloitte Touche Tohmatsu [produced June 2006]

The worldwide market for financial services is evolving rapidly, and is likely to look very different by the year 2010. This study from Deloitte Research identifies major market drivers and operational challenges that financial institutions will likely face over the next four years and pin-points the strategies and practices recommended to create the “Hallmarks of Success.”

Hallmarks of Success
These are characteristics Deloitte Touche Tohmatsu (DTT) expect to be exhibited by the winners in 2010:

1. Global markets and a business model to match
2. Mass efficiency and focussed premium service
3. Consolidation (mergers) with a purpose
4. Winning the struggle for growth through stronger customer relationships
5. Transparency and compliance as a performance springboard
6. Cracking the IT value code

Market drivers

1. New asset classes
2. Aging population
3. Payments
4. Emerging markets

Some key quotes:

• on customer retention and growth: successful organisations will embed innovation into … strategy, processes, people …
• on transparency and compliance: .. using transparency and compliance as a way to win hearts and minds of investors
• on general observation: we expect evolutionary progress … unlikely to see revolutionary change … highly regulated and high barriers to entry
• on market driver - new asset classes: the major impact of new asset class firms is likely to be on the business models of traditional capital players
• on market driver - aging population: .. large influx of retirment related funds .. people who neglected their nest egg trying to catch up … seeking higher than average returns
• on market driver - aging population: next wave of retirees .. more
• will the consumer identify their relationship with the FI as peer to peer? [Anyone from Deloitte care to explain this one further?]
• On market driver - payments: each market area of the financial services marketplace has its won separate infrastructure .. plumbing is duplicated .. opportunity to eliminate or truncate paper
• on market driver - emerging markets: exportable, repeatable model
• more top performing FI’s need to commit themselves to enhancing customer experience through service innovations .. even where the cost is high [example Commerce Bank - 30% annual growth / exceptional service/ below market returns offered on products]

Summary:
DTT see a shift to payments and away from product. Product margins in traditional products will continue to become thinner, with greater competiion for yields. The markets will be awash with boomer money, and this will both force competiion for returns, and development of new assets classes that offer better returns.

People still need to move money however, and the focus on payments and revenue from that source, as well as eradication of duplication and costs will be a focus.

The few, and getting fewer big Banks (DTT expect to see 700 banks disappear worldside by 2010) will require globalk scale to achieve growth targets.

Relevance to Bankwatch:
I see the market drivers as a mix of drivers and outcomes:

1. New asset classes - outcome
2. Aging population - driver
3. Payments - outcome
4. Emerging markets - outcome

This where I get on my internet bandwagon. Internet changes everything, and now that it is pervasive it is easy to forget that. Internet has flattened old hierarchies, made information free, and eliminated distance. That is a revolutionary driver of customer expectations, and customer buying methods. It has also had the impact of opening previously closed kimono’s and exposed old style advertising for what it is … management of peoples opinions. Internet has allowed people to form their own opinions and that empowerment is fundamental to many changes we see now.

I would respectfully suggest one market driver is therefore ‘customer empowerment’.

Another driver, comes from the way customers are continually required to manage their own affairs, at the ATM, the pin pad, online banking, bill payments, office card access, airport check in, car rental drop off, quick hotel checkout, travel booking. This frequency of self service is now pervasive and required several times daily for everyone. Organizations have become impersonal and are represented by their self service touchpoints. Self service has been underway for a long time, and internet has only sped up that process.

Customers apppreciate self service, but the sheer pervasiveness of it, means customers are contunually, comparing and evaluating it. Without realising it, customers are comparing your bill payment web process flow, to the Hilton quick check out, the credit card pin pad machine to your ATM, etc etc. People do not interact with products; they interact with self service touch points, and that is where the vlaue is experienced, or value is lost.

So my next driver is the advent of ‘the experiential economy’.

Why are customer empowerment, and customer experience important? I believe they help us understand why the items I marked as outcomes above.

Payments come across as obscure to many, but if we think of them not as SEPA, or as interchange, but as customer experience, the complexity falls away. If ever anything is crying for innovation it has to be payments.

Similarly the need for new asset classes is driven by a surplus of worldwide liquidity seeking higher returns, but those new classes do not just apply to the hedge fund type money referred to in the report. In fact the report mentions the current vlaue of hedge funds at $700 Bn, and 15,000 funds so its relatively small. The real money, and the war for Banks will be in the new asset class expectations of the mass affluent (as the report recognises). Their experential needs must be taken into account, and that includes how they expect to interact with their FI. I note one item mentioned in the report ‘peer to peer’ [refer above] and I suspect that while it was not discussed, one of the authors may have intended this point.

Anyhow, great report, worth taking the time to read and digest, and hope this was of some value.

Ron raises an important and fundamental point here. As a Bank what is the approach to incorporate social media into you business strategy?

Twitter / rshevlin: @edolan FIs do NOT need a S…

@edolan FIs do NOT need a SM strategy. they need to figure out how SM fits with (or chgs) their biz strategy. Big difference.

Icon_red_lock
7 minutes ago from twhirl in reply to edolan

First off I accept that the end goal is a business strategy that includes all appropriate components. However trying to fit a social media strategy into the overall business strategy would truly be trying to fit a square peg into a round hole, and here is why.

Traditional business strategy at the Bank is probably based on a set of goals and objectives like increased share of wallet, focus on certain segments, fast follower, product leader, integrated channel management, etc, blah blah, etc. Those goals will translate into sets of tactics and initiatives.

This is where it falls down. By incorporating SM into the strategy without first understanding it and defining it assures us that it must first get a lable that can be applied from the existing strategy. The conversation with the product guy (PG), marketing guy (MG), and technology guy (TG) will be something like this. btw, this contains actual examples, but identities are hidden to protect the innocent:

• PG; where is this SM?
• Me; it everywhere man … its online
• PG; oh so its in online banking?
• ME; not exactly, it might be in Facebook
• TG; are you a lunatic? Thats not 128 bit secure
• Me; well, we won’t actually sell it there, we will talk to people and have conversations
• MG; are you a lunatic? What about our brand. People won’t see our logo!
• PG; I don’t get it. Where do you want me to sell it again?
• Me; [trying vainly] our SM will have multiple facets, including eg, a blog, a product design wiki, a data analysis tool using the Wesabe API, we will be lending on Prosper.com, talking in the forums changeeverything.ca, seeking customer advocates in all the social media sites and ….. [cut off]
• TG; are you a lunatic!! Those are not secure. Maybe we could do an RSS feed. [turning to the MG] I have a team working on them, and should be ready in 2010, if we can just get that darned XML to be less than 4 Megabytes
• Me; can we go back to SM and how we fit it into the strategy
• MG; are you a lunatic!! How can we control the message
• PG; where do you want me to sell it? And whats an RSS feed?
• TG; we have an internal policy on blogs. It has been reviewed by 85 people so far and getting close to completion. We will be advising the CEO that we avoid blogs. Too risky. One guy in marketing started one internally, and we had to shut down our people from commenting on it. Phew that was a close one!
• PG; where do you want me to sell it?
• Me; home for a Laphroaig

A sobering and powerful post on the power of social media for financial services. [hat tip mmpartee]

Such advice is interesting. At first glance one might ask whether it is serious. On the other hand would this not at least make a person sit up and take note. And what if others chimed in and the average response was that the advice was correct?

If we consider the development of Linux, where people participate and improve the system because they want to. Such selfless assistance is natural and a proven model.

Cogent Thoughts » Blog Archive » Social Media vs. Advisors (round 1)

A complete stranger whom I’ve never met told me the other day that my retirement plan was not appropriate for my investment objectives. I met this “stranger” on wesabe.com, a site that describes itself as:

“An online community of real people just like you, with real financial goals and concerns.”

Just in case you have trouble quantifying globalisation, and why it matters, I thought Tanger Med, a new container terminal, and commercial development in Morocco, is the ideal example, and offers staggering consequences for us all.  Stay with me here

Investment in the Mediterranean | The Med’s moment comes | Economist.com

LOOK southward from the southern tip of Spain, across the strait of Gibraltar. There, only 14km (nine miles) away through the slight sea haze, arises the vast construction works of a new seaport to the east of Tangier in northern Morocco. Tanger Med (pictured) opened its first docks last July. Handling 3.5m containers a year, it is already as big as Felixstowe, Britain’s biggest port. A second terminal opens this summer, and within seven years its annual capacity will rise to 8.5m. It will be the largest container port in the Mediterranean, not far behind Europe’s biggest, Rotterdam (although merely one-third the size of the Asian giants of Singapore, Shanghai and Hong Kong). Similar ports are being finished in Algeria, Egypt, Malta and Tunisia.

What struck me here is, the location, the scale, and the fact it is unheard of in North America [or at least by me]. 

While we worry about Banks failing, inflation increasing, increased unemployment, and the price of gas [petrol] here is a development in Morocco with staggering statistics:

• larger than Britains largest Felixtowe [container terminal]
• closing in on Rotterdam [largest in Europe]
• Similar ports are being finished in Algeria, Egypt, Malta and Tunisia
• Auto manufacturers are building factories alongside to take advantage of the terminal, and the low wages

This from the article:

Renault and Nissan started preparing the ground for a huge car factory costing €600m. The Franco-Japanese alliance aims to build low-cost cars and vans not just for Europe but for markets around the world, mostly in emerging economies where the basic Renault Logan has already proved a winner. Annual output will start at 200,000 vehicles, but will double within a few years.

Renault (France) and Nissan (Japan) in Morocco! 

So we have a new, extremely cheap, efficiently located distribution capability, with new centralised manufacturing capacity being built around it.  You can see where I am going with this. 

Relevance to Bankwatch:

I posted earlier today that the next phase after the current banking crisis, will be a raft of takeovers. But thats not an endgame … what is really NEXT.  I suggest it is innovation  .. true innovation in the sense of new things we have not yet thought of will appear.

One thing we do know from history, is that disruptive innovation is not just created from new technology, but often after turbulent events that shake things up, such as economic crises.  Thats when people and companies dig deeper, do more with less and look for creative solutions, not just more of the same.  It is just easier do do new stuff when the chips are down, because risk already exists. 

This is where the dreaded innovation comes in.  The only message Tanger Med has to offer Banks is that there is always someone somewhere willing to do the same thing better and for less.  If I am the CEO of GM, Toyota or any large auto manufacturer Tanger  Med worries me.  Yes there are the political problems in North Africa, and a host of reasons not to go there, but here we have a situation where the Southern Mediterannean (MEDA) is a close second to China in foreign investment, and closing fast.  This is driven largely by lower production costs, as well as sea route access.  Note that North America is a bit investment player here, but may well feel the consumer impact.

Where does that put Banks? 

1. Where are the MEDA’s for Banks? 
2. Who will come along with a Tanger Med that so dramatically undercuts Banks in cost and easy distribution that it leaves Banks’ so far behind, they cannot catch up?
3. Which banker is certain there is no Tanger Med set of financial services just over the horizon? 
4. Tanger Med Bank … not just a cheaper version of the same thing, but located and built differently … something so different that Banks are wrong footed?

Perhaps I am dreaming in technicolour, but I am sure that GM in 1975 did not see cars being produced and shipped from North Africa at fractions of the costs in Detroit.

Thoughts and predictions welcome!