BankerVision

BarCamp Bank London

On 5July this year, there will be a BarCamp Bank in London. For those of you not familiar with the term "BarCamp", it refers to the idea of an "unconference" - a get together where there are no set agendas, no set speakers, and no sales pitches. You show up, ready to present (anyone who wants to can) and get a slot in the agenda on the day.

The London BarCamp Bank follows other BarCamps which have been held in Seattle, San Francisco, Paris and New York. Those were pretty successful, so I suppose it is surprising that we've not actually held one in London to date. Especially, since London is a financial services hub.

Fixing that has been the work of Frederic Baud and Thomas Barker and many others. The event will be held at the city offices of Sun Microsystems in the City (address on registration site)

The history of BarCamps is quite interesting. They started in 2005 in Silicon Valley where several volunteer convened invitation based conferences were already happening. The first one based on a wiki - and therefore open to all - was organised from conception to the day itself in a week, and drew over 200 people.

There's a great description of this on Wikipedia, and now there are BarCamps on all kinds of different topics. Including, obviously, banking.

I'll be attending. The event is on a Saturday - no, not a mistake - Bar Camps are always on weekends. I'll have a presentation on why you shouldn't give innovators too much money. Naturally, the group will decide whether that presentation actually makes the agenda or not on the morning of the event.

The rest of the agenda is being discussed online presently here and you can register your attendance at EventBrite. 

I hope you'll make the effort to attend. Everyone is welcome.

Author of Visible-Banking blog joins Lloyds TSB

I have to admit, when I wrote a few weeks ago that Christope Langlois "has been doing a rather good job lately of being everywhere and covering everything... makes me wonder how he copes with is day job", I was being ever so slightly disingenuous. You see, we'd already made the decision to hire Christophe then, and he joins my team at Lloyds TSB today.

Actually, I am not the first to break this news. Elton Cane, at FinExtra, made reference to our new addition to the team some weeks ago. Interesting the way things get around in this new world of blogs and social media.

Anyway, we're very excicted to have Christophe, and we're all looking forward to watching how he develops Visible-Banking moving forward from this side of the fence.

Financial services gadgets

Jim Bruene, on the Netbanker blog analyses the usage data for Google Gadgets and makes the point that there is an opportunity for banks to do widgets themselves and get them out for very small investments in code.

He argues:

Most of the gadgets at Google were developed by outsiders. In its instructions to developers, the company claims you could write a gadget in five minutes (see instructions here). Even if it took five days, the payoff could be impressive. For example, the only financial brand with a Google gadget is Quicken Loans <quickenloans.com> which posted an attractive rate tracker and payment calculator. Although its gadget had only 7,000 pageviews last week, that's still 350,000 annualized. An impressive return for a trivial programming expense.

I think that, whilst it might be simple to do a rate tracker and payment calculator, the real game is played when you deliver personal content to an audience of one. Such as, for example, the balances of your accounts. I don't for one minute underestimate the technical and security challenges inherent in this, by they way, but the sort of thing I am going to have blinking at me constantly on my desktop is not going to be the latest credit card rates from my bank.

On the other hands, alerts and transactions delivered as I work would probably interest me. I am, for example, a very heavy user of alerts on my American Express card, and have them set up to email for every condition they support.

Actually, the more I think about this, the less I would be interested in a widget that shows only my balances with one bank. I would like one that shows me my whole financial picture, updated as and when transactions arrive.

Probably, that means that the widget I want will come from someone like Wesabe. That would have the added advantage of providing tagged transaction information as well as well as all that great user-generated content that provides targeted advice.

In the meantime, I did a Google search on the terms "Financial Services" and "Widget", and came up with quite a few early rate-tracker type offerings. Let me not decry these early first steps, but I just can't see very many people deploying these to the desktop (perhaps to some targeted blogs, though). I'm ready to have a widget/gadget on my desktop, but will be waiting until it talks to me personally about things I care about.

Bank of America gives credit to illegals

I awoke this morning (I am presently in the US) to an interesting story on Fox News: apparently Bank of America have a programme that enables an illegal resident in the US to get a credit card, albeit with higher fees and rates than an ordinary citizen.

The reaction of the stock market was that Bank of America shares rose 1%.

Fox put together a team of "business experts" to discuss this strategy live on the Cavuto show (he's on video on this topic here). And, as was probably inevitable, the discussion rapidly degenerated into two basic camps: the rational thinkers who argued that serving niche markets is a sensible business move, and the right-wing mob who suggested that a credit card programme for people without a social security number devalues citizenship and is a "slippery path to amnesty".

I wouldn't for a moment dream of deconstructing the social forces behind such a debate. I am not a US citizen, and the question of illegal immigrants from Latin America isn't something I'd feel all that qualified to discuss.

I think, however, that the market reaction is a rational one. Expanding the customer base and selling more cards is good business. If you take away the citizenship question - and lets face it, this is a credit card not a green card - what is the difference between this and any other kind of sub-prime lending? Doesn't sub-prime have a good economic rationale?

Bank of America are offering a legal product that serves a niche segment of the market. They are pricing the product in such a way that any segment specific risks are covered. And by so doing, they facilitate the economic activity of what is presently a largely invisible part of the economy. It is this last point which I think is most key. Offering a regulated product to illegal immigrants is one way to make things more, not less, visible to agencies.

I suppose that Fox and other media may stir up a consumer backlash which might hurt Bank of America, and that this programme will be swiftly canceled if US citizens burn their Visa cards.

I have to wonder, however, since these illegal immigrants are in the country anyway, if facilitating their economic activity in this visible and auditable way, might not be more positive than negative.

Update: Ken, prolific commenter on this post has posted his own views on the matter at MeAndMyDrum.

How institutions are doing on brand

After reading this post by ING corporate blogger David Garceran Nieuwenburg this morning, I thought it might be interesting to examine the way that financial services brands have been changing, both in terms of their rankings against other major brands, and in terms of brand value. Using the top 100 brands data published annually by BusinessWeek, I tracked back to the start of the brand surveys in 2000.

One of the first things I noticed was that, in 2001, there were four financial services firms in the top 100. By 2006, though, there were 9. This is surely a sign that banks are taking notice of the value of their brands and working hard to increase their power to differentiate from them. Actually, that's hardly a new finding: I remember being in a session with Tower Group analyst Jerry Silva some time last year where he suggested that, increasingly, the name of the game is brand rather than product management. The same as it is for, say, a beverage company like Coca-Cola.

In any event, all these new entrants to the table came in between 2001 and 2004. In 2005 and 2006 there weren't any new entrants from financial services companies at all. That surprising, since if brand management is the name of the game, why aren't more banks getting the nod? In fact, looking at the top 10 financial services companies in the world (by assets), only four: UBS, Citi, HSBC, and JP Morgan Chase appear at all.

Excepting UBS, there's an also interesting split here: retail banks in the group are increasing their brand awareness relative to other brands in other industries, whilst investment banks aren't.

Anyway, regardless of how a brand stacks up against those in financial services and other industries, everyone is doing pretty well getting their brand equity up. Even Morgan Stanley, where I've indicated a downward trend seems to have recovered from the last two years of brand value decline.

What is eye opening in all of this is not who is on this list, but who isn't. Where is Detuche Bank, with a market capitalisation of 1,144 billion? Royal Bank of Scotland (1,119 billion)? Bank of America (1,110 billion)? Surely these are institutions which ought to be worried when their brands - so central to winning customers and driving differentiation - don't seem to cut the grade with the other big players?

I await the 2007 results with eagerness.

Zopa on the BBC

Last night, Zopa made the 6 O'clock news on the BBC (watch the video here). If you've been reading this blog for a bit, you'll know that I think that Zopa and Prosper are fundamentally in a position to change the way that the business of banking is done.

I've made the point that the key thing that will hold back both of these sites is getting enough lenders to make sure that all the loans are funded. According to Deutsche Bank research, only 30% of loans are fully funded on Prosper.

Clearly, mainstream television coverage can only help Zopa get more lenders.

But then I noticed this little announcement on the Zopa blog yesterday:

Capital Guarantee product for lenders

This might be a couple of days later (We’re awaiting final regulatory clearance, but the system is all built) - but we’re delighted to be able to offer an insurance product for lenders that guarantees your money back - no matter what happens with bad debts.

We know this won’t appeal to all our lenders, but we think that the option of a totally secure Zopa (subject to a small insurance premium) will make Zopa attractive to a new segment of consumers - which will benefit all Zopa members.

Whenever I've tried to explain Zopa and Prosper to people - especially those who aren't bankers - I've always run into the wall of explaining how the sites distribute the risk of the loan across multiple borrowers. Obviously, I am either a very bad explainer or this is a concept too bankery for the layman (personally, I lean towards the former).

With a capital guarantee option, Zopa neatly sidestep the issue of bad debts.

It will be interesting, however, to see if layering the cost of the premium into the deposit will actually reduce the return to a level which is close enough to the top rates of the high street banks for it not to matter any more.

Computing in the cloud and banking

Recently , I saw this little gem of news. Apparently BNP Paribas is using an on-demand computing service from IBM to run its risk application. According to the story, they rent the capacity they need, and can increase or decrease it depending on what they're doing.

Now, these risk application are fairly compute hungry. I actually did some work with some of these once-upon-a-time, and frankly, you start running into some upper limits of the hardware quite quickly. The problem is that you have to perform millions and millions of little calculations in what can be quite a small time window. And the smaller the time window you can run in, the better the information you can give to your people doing transactions. On the systems I worked on, we were running up against hardware limits (mostly as a result of an expanding portfolio) just doing an inter-day run. But the business wanted intraday, and it just didn't seem that there was any real way to deliver that within the constraints of the cycles we had available.

That's why the BNP Paribas deal is rather interesting to me. What is the result when you can buy any number of cycles you need just when you need them?

When you start adding hardware, it is rather accepted that you get decreasing returns (in terms of work completed) for each additional cycle you shove at the problem. So when you add hardware, you get more done, but not as much as gets done as the last time you added hardware. The economics of this means that at a certain point, the value of the additional work done by a cycle is less than the acquisition cost of that cycle. So you stop acquiring.

So the benefit of the IBM deal to BNP Paribas is that it lets them go way, way down the curve for cycle acquisition, probably to the point where they have some real competitive advantage. When you are sharing the cost of cycles, you definitely get more bang for the buck. Its no different when you buy electricity: perhaps the power station is capable of running every air conditioner in the land a few degrees above freezing throughout the during summer, but I don't have to pay for that capacity.

BNP Paribas is no small time bank. Neither are any of the large financial services players who are likely to make the news in deals of this magnitude with IBM or, any other vendor.

But have you been watching Amazon and their compute on demand service, EC2? Its amazing. With a web service request, you can order, load, and execute a Linux image that does anything you know how to code. Need more capacity?Send off a web service call.

You pay for the instances based on the amount of cycles, bandwidth and storage you use. It means that anyone can offload capacity to Amazon at any time, without a long term, IBM style contract.

So if you're a bank, running the risk application- essentially lots of machines doing Monte Carlo - in the cloud means you can go down the economic curve just as much as BNP Paribas and IBM. In fact, it would seem to me that BNP Paribas could have gone to Amazon and gotten as much or more for their money.

Let's work this out using information gleaned from various Google searches.

We know the BNP deal is for 2500 machines (with an option for up to 2500 more), and that the current capacity is being shared by one other customer at present (Aura, a telco, I believe). The deal is a "multimillion dollar commitment", over three years, but there is also talk of it being some kind of JV.

I've not been able to find the dollar value of the BNP Paribas contract, but at the IBM site, I found out that the lowest blade server they make - the HS20, can be bought for $1609. That's a server similar in configuration to the virtual one that Amazon provides. Let's be conservative and say that the bulk discount shaves off 30% of the price of this server when you buy 2500 at once. Upfront, that's $2.8 million dollars in infrastructure. Add to that a data centre, management staff (2500 expensive machines? They are hardly just going to leave them in the racks when they die, unlike Google), and it would be reasonable to add a few more million. Let's say 2 million per year just to keep the calculation going (there is talk in the articles I found of 450 staff).

They are sharing the capacity with one other customer at present, so we can reasonably say only 50% of the cost goes to BNP. With these numbers, my back of the envelope calculation is $4.4 million over three years.

Now let's calculate the same thing for Amazon EC2. Firstly, it costs ten cents per compute hour. For 2500 machines, that's $250 an hour for all those cycles. Storage is extra, and so is bandwidth that is used outside Amazon. For this application, these are likely to be not that significant, so we can ignore them.

Let's assume that BNP does inter-day, processing only, and that the run takes all night. Therefore they use that capacity for 12 hours. In other words, the facility costs them $3000 a day. There are 52 weeks in a year, but markets are open for only 5 days of each week. Ignoring holidays, we have to do 260 runs a year, for an  annual cost of $780,000. Over three years, that would amount to the grand sum of $2.34 million dollars. For 2500 machines available on demand.

Now I know that some of this is drawing a long bow in the absence of real data, but it seems to me that BNP could have bought the cycles for less cash by going to Amazon than IBM. And it would have been easier to get capacity at Amazon- and for a shorter period of time. IBM don't have a web service call to bring up new machines images (they sell hardware!), and I bet they can't bill in increments of ten cents like Amazon.

If I am close at all, then this suggests to me that compute in the cloud is something that bankers should be thinking about, and not just for risk calculations. Any time there is a huge server farm that sits idle most of the time - Internet banking is another example - there are powerful economics available to offload those servers.

I guess the next question is whether any bank would dare to offload servers to Amazon the way they would to IBM? I'd not be surprised to see innovative banks doing it, frankly, once Amazon have proved themselves a bit more.

Update: This post has been picked up by Finextra and is published here.

More synergistic deals?

I've just read this report, in which Citigroup chief executive Charles Prince suggests he might consider "supplemental deals... that extend the franchise". Coming on the heels of the JP Morgan/Bank of New York branch swap (read my post on that here), I find such comments interesting.

Citigroup - like Bank of New York - has some issues in its  retail business in the US. According to the report, revenues were down 9%, largely attributed to a flat yield curve, the usual excuse retail bankers use in these situations (I previously mentioned this here).

Now I'm not suggesting that Citibank might replicate Bank of New York and get rid of its retail business, but "extending the franchise", coupled with the Federal Reserve lifting its ban on Citigroup buying anything "significant" does seem to me to open the door to the bank acquiring retail banking business in North American markets where it is weak.

Or doing the same thing in international markets, like the UK.

Anyway, my point with all this is that Citigroup - the worlds largest bank - can easily afford to go out and buy practically anything it sets it's sights on. The fact that acquisitions are talked of in terms of "supplementary" and "extending the franchise" suggests to me that the bank - like Bank of New York - might be considering synergistic acquisitions for capability rather than the big-bang-big-bank thing that less clever institutions have done.

Anyway, it will certainly be interesting to watch - and guess - who Citibank will be casting their eye over.

Bank of New York branch swap

So Bank of New York is finally getting rid of its ailing retail bank, according to this report from Reuters. Not that this is surprising, but the structure of the deal is... they are swapping their retail banking business, including about 360 branches and the whole loan book, for the corporate trust business of JP Morgan. For a nett loss of shareholder value.

Why would any bank do this?

Here is one reason: sensible M&A activity is becoming less about buying customers (vis, the acquisition of Abbey in UK by Santander in Spain) and much more about buying capabilities that are synergistic to the business. In the case of JP Morgan and Bank of New York, it was possible to do so without buying everything.

I think that this will be the future of the M&A landscape, at least for now, since there are fewer rational targets for the brute force, buy everything-in-sight approach we've been seeing in recent times. Bigger is not better when the integrated whole is little different to the parts, excepting the sign above the door. Certainly numbers of the business get larger, but do they increase proportionally?

You'd think that acquisitions which target synergistic capability are likely to be much more profitable in the long term since they increase the resiliency of the core revenue lines of the bank... and may even result in new innovation as two cultures merge.

So Bank of New York has reduced its overall value by an amount today as it gets rid of the things it didn't do very well. But moving forward, I'll bet we see quite stellar performance from this institution, as it is has adopted the sensible strategy of focusing on what it does best.

Rather than getting its hands into every pie possible and then wondering if it is a gourmet chef.

Multichannel, new branches, and growth

Further to my post yesterday, Accenture (reported by Finextra here) have started to circulate their new report on the outlook for retail financial services. The interesting points in their research? Four out of five banks (global data) consider delivering multichannel integration a priority. About the same number prioritise branch renovation highly. And almost everyone is expecting annual growth rates of above 5%.

Interesting data. Whether many of these multichannel projects actually contribute to that 5% growth rate remains to be seen. And I've already remarked on branches for the sake of branches (read that post here).