Category Archives: Personal Finance

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 BanksimpleWepay 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?

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.) Continue reading Finovate Europe 2011 : Part 1 [Overall impression and PFMs]

Big Data & Social: advantages of incumbents

I was reading the slides of Mary Meeker, the famous (now former) Morgan Stanley analyst, on 10 Questions Internet Execs Should Ask & Answer and among all the available information noted these slides on the unusually high level of innovation within incumbents. It is an interesting statement and it could in some ways be the basis of a different way to view banks and financial institutions.

It seems that big data and social will be two of the major factors that will shape the user experience in the future, including in regards to banking and financial services. For both these aspects, size matters and banks have what it takes to make significant moves in those directions (even if it may be more difficult in the social space)

– The basis of Big Data is … a lot of data. And most likely, when talking about human experience, it means a lot of humans. Banks, with their numerous accounts, transactions, information have the basis for providing a meaningful experience.
Citi, through its partnership with Bundle, is making good use of its aggregated anonymized information to provide important financial references to the Bundle PFM users (compare yourself with other users, identify most relevants shops and restaurants).
On the other hand, we can see that Mint has started the same logic with Mint data, however it comes at the cost of important investments to increase its user base and therefore obtain more meaningful data. (The relative monopoly of Yodlee makes it an exception where a new entrant has managed a relevant size, however an important investment was none the less needed to reach it.) Banks literally sit on a pile of opportunities from the information they can collect from their users and should work on providing improved experience to their customers by analyzing it.

Social and Finance is a trick question and it is not sure that people want to share their financial details with others. However, social and the social graph is becoming much more. An interesting point taken from Mark Zuckerberg’s interview at web 2.0 (video here) is that they could have done social plugins for website earlier on, but they needed to reach a certain level of pervasiveness to make it a relevant user experience (what is the point of having social websites with no social interactions due to a limited user base?). Banks, because of the way they already have created relationships with people, communities, small businesses have the basis for building relevant social relationships for their customers.

On that perspective, the “prototype” of Banksquare: the new sharing service from your bank as envisioned by Chris Skinner gives a possible path for building this experience with the existing network available. Connecting local businesses, people, offers, reviews in a meaningful and valuable way (for example an exclusive offers for a bank client from the businesses served by the bank?) is something financial institutions should start working on.

Note: on that point however, having a large user base is a necessary but not sufficient basis for creating a social network. Google’s failure with Buzz is a good example.

To conclude: Yes incumbents have some of the characteristics to become relevant in a more data driven and connected world, it is time time for them to kick into overdrive to do so.

Included under the slides of Mary Meeker

Is it time to challenge Banks’ business model?

image 

BankSimple motto

The crisis has had a profound impact on how people perceive banks. Because they are identified as the root of the crisis and because they have played an extremely negative role during it (mortgage foreclosure, collection, limited credit) there is a strong resentment against banks. This is especially true for retail banking activities which have been recently put under the spotlight for how they handle credit cards, debit cards and fees.

 

To name of few of the recent weeks highlights:

– The New York Times has a detailed article on how banks are trying to push people into overdraft fees opt-in program

– A video on YouTube of a person who used to work in the collection department of a major bank (BofA) has also gained attention: link to Finextra blog

This resentment has generated some changes in the retail banking industry:

– From the regulator which has passed bills recently that further protect the consumer

– From the bank themselves that are trying to self police as shown by BofA announcement of the suppression of overdraft fees.

 

However, some new players think this environment allows them to try and challenge existing banks on their core business model:

Virgin Money, for its launch in the UK as a bank has announced that that it has plans to bill a monthly fee to clients and thus wave other fees such as credit cards.

BankSimple , an “under the radar” startup aims at creating a new retail bank that would not charge overdraft, transfer, monthly fees, and minimum balance fees.

– On a side note The Boring Bank of Cambridge (personal shout out for the best bank name) promises to make bank trustworthy again but nothing much is known of its business model so far.

 

Do you think these challengers have any chances to grab market share with such strong incumbents?

Introduction to Semantic Web’s “Wave Hits Financial Services”

Semantic Web has published a very interesting and detailed blog post on disruptive innovation in Finance listing the main activities of banks (by source of revenue) and the players that may challenge the incumbents.

Here is a spreadsheet summarizing the bank’s activities listed as well as the disruptive innovations and key players.

Link to the companies listed:
http://www.prosper.com/
http://www.zopa.com/
http://www.lendingclub.com/
http://www.receivablesxchange.com/
https://www.paypal.com/
http://seekingalpha.com/
http://stocktwits.com/
http://www.covestor.com/
https://www.kaching.com/

I would personally add a fourth category: Wealth Management. I think players such as Mint and Simplifi are opening a new market for wealth management, making it affordable/free for people to have a comprehensive view of their wealth and make informed investment decisions.

Gen Y and Banks: key numbers from the Cisco Study

Cisco through its Cisco Internet Business Solution Group has published a very interesting and detailed study on the expectations of U.S Consumers towards their banks, especially for the younger generations: Gen X and Gen Y. Here are the key learnings for me but I really encourage you to read it in detail and make your own selection (Give me your feedback in the comments!)

All graphs and statement are quoted from the CISCO study, my personal comments are in blue.

Continue reading Gen Y and Banks: key numbers from the Cisco Study

Klublax is going under administration

Techcrunch is reporting that Klublax, A Mint like Personal Finance website in the UK has gone into administration. Here is the official mail:

Dear Kublax Customer

It is with great regret that we announce the closure of our service as we have been forced to take the business into administration. Over the course of the last 6 months we have been trying hard to raise funding which would have allowed us to launch our enhanced new product and develop our offering further. Unfortunately we now have to admit defeat.

We are sorry that we have not been able to repay your trust in Kublax and particularly disappointed not to be able to launch the new enhanced version of the service which was being shaped to a very large extent by your Feedback on the current service.

Kublax’s partner, Yodlee, will be deleting all user data, including online banking details from its servers. Once deleted no further information will be gathered and stored for Kublax customers. Your transactional data will also be completely erased from our servers by close of business on Friday 19th February. We will not pass your data on to any third parties.

If you wish to contact Sridhar or I you can reach us at the following email address – [email protected]

Many thanks again for your support and we hope that Kublax was able to help you make slightly better sense of your finances over the last year or so.

Tom and Sridhar

Sean Park at Park Paradigm is providing some insights (as an early stage investor) on what may have been the cause of this demise. As for any startups product & execution is key and Klublax may have failed on convincing investors of their capacity on that part, as implied by Fred Destin in a tweet:

@maxniederhofer @nauiokaspark #1 reason is unstable team

Remaining competitors on the UK landscape are:
http://www.lovemoney.com/
http://www.moneydashboard.com/
http://www.simplyfinance.co.uk