Next: Algorithmic Banking?

Algorithmic trading has made the headlines, most often negatively. The underlying idea is that computers can make, on a broader scale, better decisions than a trader. On the other hand, criticism is rising to curb a practice that some consider contrary to the benefits of the market.

But, on a different scale, I believe algorithmic based decisions could be a major next step in banking and PFM. PFM is about helping bank customers better understand their finance and make the right decisions. Goal setting plays an important part in this process, as it ties into financial life decisions and monthly budget. But the actual movements of money from for example checking account to savings could be intelligently made by a predictive money management tool.

For most people, the key cash movements of their budget are fixed: income and rent. On average monthly budget for food could be almost equivalent. With these components, as a first step, you could imagine programmed decisions that would move extra cash the day before a salary should be deposited to a savings account, preventing the misuse of extra liquidity. On the other way around, in case of over spending, the program could decide to allocate expenses to a credit card / credit line and automatically add that line of credit as a savings goal in the next month budget, making an arbitrage between the cost of credit and savings rate. An alert based system would warn the customer of any change or even ask for approval if needed. Different algorithm profiles could be defined depending the volatility of previous months budgets, taking stronger savings options for people with controlled budget and protecting more people with more volatile income and spendings. Personal accounts could work more like bank or company themselves, which try to optimize their cash for maximized returns.

But automated decisions to prevent an account for running a debit balance are going against a bank culture of generating revenues from penalty fees on their customers. This is challenging for banks, especially since running different banks algorithms against historic account data could help provide what-ifs scenarios to compare how 2 banks would fare. Algorithmic banking could generate a change in banks behavior and business models.

Do you think algorithmic banking is not far from us?

Does Color hint at Payment Social Graphs?

I read daily (and fanatically) Fred Wilson’s blog AVC. How he can manage to publish a daily post and of this level of quality is a mystery for me. On top of that, he has created an incredible community of commenters, which one up each post with their own insights. Thursday’s post The Implicit Social Graph, mused on Color and the underlying assumptions on social networks future.

To summarize, contrary to what Facebook is trying to achieve, Fred’s point of view is that there cannot be a single social graph and that multiple ad-hoc graphs, especially implicit graphs will develop. Implicit graphs are social graphs based on an underlying common activity but moving in terms of members and relationships. They are especially important since maintaining social graphs is difficult and a struggle for users. To quote Fred Wilson:

I believe we will have at least dozens of social graphs in our lives. But even more, I believe that we will have social graphs that come and go and that are formed implicitly not explicitly.

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SiaaS : Simple as a Service

In a twitter exchange, I discovered that the creators of Monopoly were launching a new, “simplified” version of their famous game and that their new game could be a paradigm for financial services:

Yes, but simplifying by adding intelligence behind or simplifying by dumbing down? RT @shamir_k: Interesting take http://bit.ly/geKvyp

In the same time, Jack Dorsey explained in an interview with Technology Review his philosophy of product design

All this feels surprisingly satisfying. Square is elegant. The user’s flow through payment or application has been reduced to the fewest possible steps; the app has minimal features. This emphasis comes directly from Dorsey, who says, “I’m really good at simplifying things.” He espouses a tremendously attractive belief that good industrial design wins customers’ trust by disappearing.

He explains, “People think of design as being visual, but to me it is editorial: ‘What can we take away to get to the essence of what we’re trying to do?’ What I love about a really well-designed product is that you don’t think about it. Steve Jobs is a great editor: when you use an Apple phone, its form fades away and all you think about is the content. I want a similar thing for Twitter. With Square, we’re trying to accept payments. We have two groups we need to address: our users—the merchants—and their users, consumers. We want the merchant to be focused on taking a payment. And for the consumer, for me, I want to be able to walk into a coffee store, enjoy my coffee, and walk out and eventually question whether I had paid or not.

1+1 = Simple as a Service. What if a successful strategy for companies was to provide simplicity? But then what is being simple? Not all companies with a minimalist offer or product qualify as a SiaaS company: simplifying for their customers has to be part of their DNA, how they see and improve in their industry.

A relevant example is probably Southwest airlines:
- A single website to find tickets – http://southwest.com
- One plane type – One seat type
- Price include 2 checked bags
- Free food offer, which has remained the same where other companies have changed.
Simple flying, efficient service to go from point A to B. While other airlines have slowly degraded their offers, Southwest’s has not changed to the best of my knowledge.

Take in comparison most of other airlines trying to cut cost: variable fees for bags, no food or pay for it, multiple seat types with various prices. All these things makes it difficult to evaluate the total price of a flight by confusing customers.
Not simpler : dumbed down.

As web based services allow innovative approach in User Experience (in a relatively restricted framework) and because financial services have been built knowingly or not around complexity, several startups are attacking entrenched incumbents by using a SiaaS approach:

Square – start accepting credit card, the simplest way to make money
I have written a lot about Square (here) but there global approach is targeted towards making things simple, not just only the payment:
- Simplified sign in without the previously required checks and controls
- 1 small and simple device
- Really easy interface
- Beautiful receipts (because being simple is not dumbing down)

Betterment – invest better
Betterment offers a simple approach to investment account, by allowing users to create a portfolio of treasury bonds and stocks (via ETFs) and automatically reallocating the proportion of each products.
- Simplified allocation process: expected returns (positive and negative) via sliders on allocation and time frame
- Peer comparison via a simple speedometer
- Single fee structure: no fees for reallocation, no minimum balance (to be fair, the echo on the fees amount is sometimes negative with 0.9% being high, but it depends on how the betterment account is used)

BankSimple – a bank that doesn’t suck
While not launched yet (covered on this blog here) Banksimple aims at simplifying banking. There will be strong emphasis on UI, as described in the following post by Bill DeRouchey, BankSimple’s creative director : read

“Usually people are forced to do a lot of mental math about how much money they ‘really’ have at any given monent,” says DeRouchey. “We do that math for them. Our UX philosophy is, let’s do all that stuff — let’s make it nearly impossible for you to fail with your personal banking.”

How to create your SiaaS startup?
+ Beautiful design
+ Easy to understand pricing
+ Complex competitors
=Value to your customers

What criteria would you add? Do you have other example of SiaaS companies?

Finovate Europe 2011 : Part 2 [A social world and the rise of the amateur]

With companies like Etoro, Stocktwits, Cortal Consors with Hopee or Fidor, one of the key theme for Finovate Europe was how financial service can be changed by being developed around the interaction of its users.

One of the consequences of this approach is the possibility for successful amateurs to become a direct competition to established business model.

- EToro (voted Best of Show) is an online Forex broker with a major twist. By implementing social trading, it allows users to copy specific trades from others or even follow a specific trader.

As seen in the image above, EToro also has added a gaming perspective to trading, by creating traders ranking and watch lists. For now it seems that what is driving the platform dynamic is mainly the game mechanic, but it could be expected that leading traders may be remunerated at some points for their financial advice (in a way close to Covestor for example).

Note:
* When copying a trade, users get a close equivalent to the precedent trade, but not exactly the same one (but teh same trades when following)
* Etoro assured me they have set a killswitch so that if you follow a trader going “rogue”, they will disconnect its followers’ trade. (more…)

Finovate Europe 2011 : Part 1 [Overall impression and PFMs]

As you may have seen on this blog or twitter, I had the chance to participate to Finovate Europe. Thanks to all the Finovate team for inviting me to the event. While we were 2 bloggers on the list (with @BankerVision), I believe I was the only one physically present that day. And yes blogging is what I do on Tekfin.

The event:
35 demos, 7 minutes each, only demos, no powerpoint let’s just say Finovate is a packed day.
Overall, each company made it through their time with a relatively good presentation. For some of them, I wished they had more time, especially when they are not really feature based but propose a all new business to explore. In most cases, the question of the business model is not discussed at all (more so frustrating when the presenter is a startup and not a Big Co)

Maybe there could be slightly less companies and a selection of 5-10 best of show which would have to present another time?

Thanks also to Chris Skinner for “Ricky Gervais”ing his hosting role, and overall providing insightful and funny comments.

Its a PFM world in Europe
Was it too much? Or a sign of the importance of PFM for banks for the coming months and years? Nonetheless PFM dominated the presentations with no less than 8 different companies (on 35 though). Now, it should be reminded that:
- Europe did not have a Mint. With its success story, media coverage and final sell to Intuit, Mint helped put the PFM in more minds than any competitors in the US
- A limited number of banks proposes PFM so far in Europe, especially major banks (contrary to Bank of America for example)
So it is clear the PFM should be a key item in the list of innovation banks want to push in the near future.

One of the common themes was, for providers going the white label way, the development of a specific back hand for banks to manage their communication campaigns. Most of the time it includes some kind of filter (income, existing products, socio-economic data) to allow for targeting. Also included is a tracking dashboard to provide the kind of feedback an internet based campaign has (click through rate, etc.) (more…)