3615, L’arrivée d’internet dans le monde de la finance – [French]

Sean Park and myself had the chance to be invited to the swiss radio show 36 15: http://www.facebook.com/3615emission to speak Finance innovation and startups.

While recorded in the English speaking swiss radio, it is in French only (well frenglish …)

Accounting and Banking: design issues

I am no designer, nor a marketing specialist but as a bank customer (with different banking relationships) I can tell you I think my banking experience is pretty bad. Because I switched to a more corporate finance job, I finally realised what could be the root cause of this issue : accounting.

Accounting to be honest is not the most sexy topic, though it serves its use. It allows keeping track of a corporation financial situation by embedding control in the way it is done (double entries) as well as allowing a common language for several people working on the same topic or transitioning. Also in pre-computer era, it was built in relation with its support : books. Accounting on paper makes sense.

Good design (at the time)

But since I am not a corporation / nor an accountant by trade / nor doing my personal finance on paper, why are banks sending me banks statements in the format of accounting statement?

This makes no sense. Accountants must represent 0.01% of the population of bank customers.

Mint is a good example of design applied to financial information (while not the first and the best one). This makes much more sense than the previous statement.

Other startups, such as Simple [Note: Anthemis is an investor] are trying to redefine how financial information should be presented to customers. The first difficulty is to bring understandable information to each spending transaction. A better identification of the vendor and its category is key, notably for searching past transactions (also keeping more than 2 months of transactions helps).

Additionally, presenting not only an historical account of financial transaction, but also a forward looking view of a customer financial situation is moving from an accounting statement to a personal finance overview. This is not new as startups such as Rudder (http://mashable.com/2008/10/13/rudder/), have tried to show forward looking information. The concept of Safe to Spend balance used by Simple is in the same concept.

Fast Company has an interesting review of Simple design decisions: http://www.fastcodesign.com/1665303/first-look-banksimples-iphone-app-aims-to-reimagine-your-money

Other interesting design choices used by financial services that could be added to this post?

Why we need brilliant banks

I have been a strong advocate of disruptive startups in Financial Services on this blog, dismissing some of the banks effort to try and move as quickly as more nimble competitors. But in all respect, for these innovative startups to launch their services, we need brilliant established banks and payments players. That is why I was surprised to read Finextra’s post Citi slaps down Bank 2.0 rivals in Innotribe face-off.

Banking is, as it should be, a highly regulated industry. After all, its all about money:

Money
It’s a crime
Share it fairly
But don’t take a slice of my pie
Money
So they say
Is the root of all evil today

More than banking only , its Financial Services that need to be regulated, for the best interest of all parties (and no the bankers are not the most important one). There is no better example than seeing the young UK P2P lending industry calling for regulation on their activities http://blog.zopa.com/archives/2010/07/26/need-for-regulation/ and proposing a self regulating framework http://blog.zopa.com/archives/2011/08/17/we-proudly-present-the-p2p-finance-association/  while waiting for the regulator to define its own. P2P Finance Association

Financial Services, to work in a global way also need a level of coordination only achieved through mature players and global coordination. Swift is a prime example. The Society for Worldwide Interbank Financial Telecommunication, is a cooperative owned by its members. It operates the pipes that allows banks to communicate with each other. The most known feature is probably payment, but other messages types are supported, from buying securities, to informing of the merger of 2 companies. In most of the world (the US being one exception). Swift is the common language of most financial institutions.

These skills (operating in a regulated environment, coordinating with different players) are very important, because without them, in the current environment, there can’t be any Banksimple, Wepay or Square. These Financial Services disruptors need a ground of base services (secure holding of funds, ability to communicate with other financial institutions) to propose innovative front-end solutions to their customers. There is no point in reinventing the wheel if you can find satisfactory services with a provider and focus on your core.

But this is where we need brilliant banks / financial institutions. Because what happens when they are not is a total disruptions of their business. The recent post of Kosta Peric, head of Innovation at SWIFT, comparing bank to bank payments and Paypal payments is a prime example: http://copernicc.wordpress.com/2011/09/26/money-transfer-experiment-chapter-1-paypal/. Paypal wins easily on the transfer of small amounts between countries.

It’s difficult, for some part of the financial services industry to realize that a winning strategy for them would be to become highly qualified service providers, top notch commodities. That there is a play in becoming the efficient platform of front end services, to be more like a water service company for a major city. I believe (or assume) that is what Citi has in mind when they announced the release of their B2B API:

If banks want to enhance their own brands they need to scale. And the best way to do that is to open up application programming interfaces (APIs).“Banks need to harness the power of the developers out there,” says Citicorp’s Benjamin. 

Disclaimer: My employer Anthemis is an investor in Banksimple. We have recently invested in an innovative licensed bank in Germany Fidor Bank http://www.reuters.com/finance/stocks/F5RG.DE/key-developments/article/2403061. I am a huge fan of Square.

Building a new bank [Part 1]

Chris Skinner has a great post over at Finanser named “So how would you build a new bank?”. Read it in details over there but to summarize his starting point is to:

Deliver something that current banks do not.

While I mostly agree with his conclusions on the key aspects of a new bank (mobile, etc.) , I tend to follow a different logic when looking at this problem.

Starting from the customer, what services does a bank provide?

- Secure holding of assets. While the branch made sense for this when safe deposit boxes where still offered, in a time of electronic money, a physical location is definitely not of the same importance in creating security. Let’s also assume your customer deposits are insured (FDIC etc.) so this is more a default than a differentiator.

Then, what makes an new online bank feel secure?

From a pure reputation perspective 2 first possibilities: for a newly licensed bank, solid investors with a strong reputation (for example Vernon Hill for Metro Bank), for an “unlicensed” bank, a wholesale banking partner with pedigree at being a financials services partner. But , outside of the big names, an additional factor is to take into consideration: peer review and advocacy. As the web as “given everyone a voice”, making sure that existing customers are advocates of your services has become key and the major factor is delivering on your promises (it sounds cliche, but the song remains the same). Because of this, it may be difficult for financial services startups to manage interest vs reasonable user base (Square is a good example, with the main complaint at the beginning being of people not receiving their dongle, not people having issues with the service). Which links to the second point.

As shown by Mint.com, the trust factor is also created via the core services provided and the fact that those work, all the time ( http://www.quora.com/How-did-Mint-build-trust-with-its-early-users ) .

When building a new bank, uptime of core funtionalities is priority 1. But it does not mean that all aspects of the offer have to follow the same rule (or our new bank would be the same as an old bank, in its incapacity to iterate quickly and propose new functionalities to its clients). Josh Reich’s (of Banksimple) post on the topic is an essential read to understand how the standards set by banks for their systems is responsible for their best and worst.

To quote a fictional Mark Zuckerberg:

Okay, let me tell you the difference between Facebook and everyone else, we don’t crash EVER! If those servers are down for even a day, our entire reputation is irreversibly destroyed! Users are fickle, Friendster has proved that. Even a few people leaving would reverberate through the entire userbase. The users are interconnected, that is the whole point…

Next: Receving and making payments

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?