On the weekend, I read a rather alarming commentary by David Stockman European Banking System is on the Verge of Collapse. While this analysis clearly highlights the fragility of bank balance sheets, it doesn’t dig deeply into the graver issue facing the Eurozone policy makers and indeed the world –  that of hypothecation. As has been highlighted in the past (MF Global may be apocalyptic for the eurozone), the deeper concern is the amount of leveraged collateral that exists in the markets that has very little, or zero underlying asset foundation. In the sort-term, such leverage should give our children cause for concern. However, perhaps this is just the beginning of a more slippery slope.

The almost constant press commentary and hype about mobility and mobile/internet payments causes me to consider a potentially similar situation of hypothecation and re-hypothecation occurring in The Future of Money.

While regulation is inherently expensive and potentially limits free market activity, it can also (if applied prudently) act as a sound governor of irrational activity – witness the lack of attention afforded to AIG, Lehman’s and MF Global in the UK, and their excessively leveraged use of collateral.

Why is this relevant for the Future of Money and mobility? Mobile and Internet commerce have enabled the expansion of financial services activity beyond the boundaries of the banking industry and remit of regulators. Multiple participants (Telcos, Payment providers, Retailers and even private individuals) offer products and services that are bought, sold and financed outside of the traditional financial services market. They and their activities are unregulated and potentially unchecked due to the consumerization of IT and the power/reach of the Internet. Moreover, the enabling currency of these transactions is not necessarily fiat-based, ie government issued national currency.

As the euro crisis unfolds and individuals face difficult living conditions and austerity constraints, they may well turn to new, digital currencies (loyalty tokens, gaming credits, bandwidth etc) as a means of survival, continuing to conduct commercial activity, barter etc. And, much of this activity may be leveraged and the means of payment used as collateral.

So, now to the point of hypothecation and the question for our grand children:

• in a totally unregulated and poorly audited market,
• where digital content and value can be created and exchanged in real-time by anyone,
• without the frictional cost of an intermediary,
• where potentially there is no underlying asset to back the exchange for value.

Is the Future of Money facing an apocalypse of digital new money hypothecation?

Of course, this may be a stretch and is perhaps an insignificant concern in the current crisis. However, as policy makers debate the “solution” to the current malaise, keeping one eye on emergent trends may help defer an unfortunate legacy.

What does this mean for our clients?

• The rush to connect with innovative payment schemes, providers and commercial channels should not abrogate responsibility of senior executives to monitor carefully the viability of counterparty relationships, and the extent of any “new money” hypothecation.
• Applications to manage collateral must account for new mediums of exchange and systems must be capable of managing new money
• The criticality of developing a holistic strategy for mobile financial services incorporating the Future of Money is essential to maintaining sound fiscal management.
• Companies should emphasize their account services (statements, fraud protection, etc.) as they launch payment services that support digital content, social gaming, social commerce, etc

 Remember to read our latest research: CIOs Should Address the Impacts of the Euro Crisis on Their Enterprises Now and The Euro Crisis: Four Scenarios and How CIOs Can Prepare for Them, as well as attend the January 19^th webinar on this topic: Euro Crisis Webinar and contribute to our survey: Euro Crisis Survey

Social networking, online chat, blogs and mobile services are among the leading-edge communication and networking technology phenomenon that have become increasingly embedded in the fabric of daily life for many people in terms of peer-to-peer (P2P) interaction and, to a certain extent, for retail banking.

Recent Gartner survey data indicates that some of these capabilities also have gained a foothold with commercial customers in several regions.

The challenge for banks is now twofold: (1) to make these capabilities an integral part of their services where wanted, and (2) to determine how to leverage these services to increase bank revenue with commercial customers.

I would love to hear your thoughts on this topic, as well as invite you to the upcoming event.

Newswires in Canada are full of the announcement from the Federal Finance Minister Jim Flaherty about changes in the rules governing credit cards: http://www.nationalpost.com/related/topics/index.html?subject=Jim+Flaherty&type=Person

On the surface these changes reflect some of what has already been proposed by U.S. lawmakers, (http://blogs.gartner.com/kristin_moyer/2009/04/29/transparency-communication-with-proposed-credit-card-regulatory-changes/ ), but importantly are absent any limiting of interest rates and interchange fees.

The new disclosure rule is limited to cases involving new cards that come with a promotional or “teaser” interest rate; the higher rates, which usually kick in within six months, are already spelled out when consumers sign up with a new card, but banks will now have to send a reminder notice 30 days before the promotional rate expires.

These changes create a more level competitive playing field for banks, as outlined in the Time Colonist: http://www.timescolonist.com/business/Critics+credit+card+rules/1618961/story.html, especially the requirements concerning the grace period on payments – and increases competitive pressure in the market by bringing the bigger Canadian banks into line with the second tier players

However, none of the +25 million Canadian cardholders, using an estimated 68.2 million credit cards, will get a break on basic card fees and stubbornly high interest rates, commonly set at 19.5 per cent for premium cards and up to 28.8 per cent for retail credit cards.

The impact on the roughly 25 million Canadian customers who have credit cards is therefore somewhat muted and focused only on clearer communication, via the inclusion of a summary box in each statement that will spell out key features, including the interest rate and how long it will take to pay off the balance, if they only make the minimum required payment. Deeper impact to spending habits relies on consumers (a) understanding these notices; (b) presupposes this “new” transparency will influence behaviours and mitigate poor budgetary practices. On the basis that none of the banks actually have integrated comprehensive budget planning capabilities with payment mechanisms, such as online banking tools, it seems to us as if the impact on debt levels will be largely insignificant.

Why is this important? Regardless of the interest rate and fee cushion that will still be afforded to banks, the increasing numbers of consumers signing up for social networking sites and tools such as Mint, Wesabe etc (Help Bank Customers to Help Themselves and Their Banks) should signal to banks that: customers need/want to analyze their spending habits and managing their debt levels more effectively, before it ends up in the bank’s credit card collections center.

From a strategic planning perspective, in terms of meeting this competitive pressure, and in light of the increasing role of social networking in the industry (A Social Media Strategy for the Banking Industry)  banks need to refocus their development resources on tools that (Social Banking: It’s All About the Money and Customer Focus) and (New Retail Banking Vendors Bring Social Computing to the Savings Account) help consumers better manage their financial health. With the cushion of high interest rates and fees the probability of this occurring is slight at best.

The application itself was not our specific area of interest;  - what really got us thinking was the recognition that these conversations within the social networking communities are staring to have a real impact on businesses. That social networking capabilities are finding their way into enterprise solutions for business. Just as Web 2.0 technology such as mashups has found their way into enterprise technology solutions. Instead of attempting to guess or forecast what customers might like or dislike about existing products and services, by first listening to and then engaging in real life conversations taking place within social media, institutions can obtain real, actionable feedback. And, they must listen to customers where customers are gathering  - whether they are on Facebook, bebo, Twitter. 

So where to now for banks and financial services companies? We’ve set out our thoughts in this area in a number of research notes – most recently we have defined need for banks to develop their own coherent social media strategies in A Social Media Strategy for the Banking Industry . However we’re interested in your own thoughts on this matter. What role do you see for Twitter, Facebook and the like in helping to shape the financial services market? Can these social media sites really help customers to communicate more effectively about financial services products, or will such customer  discussions be restricted to the personal financial planning sites like Geezeo, Mint and Wesabe?  Will banks listen?

What else I heard? They aren’t looking to banks for the answers.  They are looking for tools that will help them solve their money problems.  The latter is not necessarily exclusive of the former.

The World Economic Forum held in Davos, Switzerland announced 34 Technology Pioneers today. The WEF defines a “technology pioneer”:

To be selected as a Technology Pioneer, a company must be involved in the development of life-changing technology innovation and have potential for long-term impact on business and society. In addition, it must demonstrate visionary leadership, show the signs of being a long-standing market leader – and its technology must be proven.

Technology Pioneers are companies from around the world that develop and apply the most innovative and transformational technologies in the fields of information technology, renewable energy and biotechnology / health. The work undertaken by these companies holds the promise of significantly affecting the way business and society operate. Each innovation is another step in society’s attempt to harness, adapt and utilize technology to change and improve our world. The World Economic Forum identifies between 30 and 50 companies as Technology Pioneers every year.

Three of these pioneers are related to financial services.  What’s interesting is that these pioneers are in the areas of social network, peer-to-peer lending, and mobile banking and payments.

Mint – is a personal finance social network that  has 600,000 users who, according to Mint, are tracking $50 billion in transactions and $15 billion in assets.

Qifang – a social network and platform that connects Chinese students who are seeking loans for university with lenders (banks, companies, non-government organization, non-profit organizations, philanthropists and individuals seeking investment returns)

Ngpay – An Indian mobile commerce service that lets consumers use mobile phones to shop, arrange travel, view a bank balance, transfer funds, pay their bills, use direct debit to shop, and donate to charity.

What’s interesting here:

• All three technologies are driven by consumers, not by banks. All three are establishing their brands first with consumers, not banks.
• All three technologies continue to evolve and mature, worldwide, rapidly.
• All involve personal financial management – Mint by managing expenses, Qifang by providing credit to students via student loans, and Ngpay by enabling consumers multiple ways to pay with a mobile phone -including direct debit from a bank account.
• Two of the three pioneers are social networking communities and platforms. I’ve identified these types of platforms as an emerging technology provider for social banking
• One of the pioneers is about mobile – but it’s not a mobile banking vendor. It offers consumers mobile shopping and commerce – with banking and payments capabilities to facilitate their shopping and personal finance management.

Consumers: managing their finances, in communities and on their mobiles. And banks are not central to their accomplishing this goal.  Yet.  Ever?

It is for many banks.  We hear the following almost daily from banks from around the world:  “P2P volumes are low, so I don’t have to worry about it.  Right?”

No – this is changing.  Some FSNs that support P2P lending are reporting an increase in uptake in Q3 relative to Q2 of this year, by as much as ~50% for the number of borrowers joining and ~40% for the number of lenders joining.

 P2P lending is not the death of banks.  However, every deposit dollar/euro/yen/renminbi/ real/rupee/ruble/etc. counts right now.  Money that consumers are putting into P2P lending sites is money consumers do not have in deposits.

What should banks be doing?  At a minimum, develop a strategy for social networking and P2P lending.  Some banks are doing this and have a lead on the rest of the pack because of it.  Don’t get left behind.

Are your locations as easy to find, all in place? Do you make the links between your online locations?  Are your tattoos clear?

Sure, your bank has online listings of branches and ATMs, printed brochures, automated listings over the phone. You probably also have e-mail and phone contact information buried somewhere on your website too.

If you use or create social networks, blogs, other online communities – whether it’s Facebook, Twitter, or your own bank-started communities:  have you made it easy for your customers to find you in all these places?

Traditionally banks have assumed that customers – or prospective customers, will seek out the bank, rather the other way around. Sure, I can hear you saying, anyone looking for us can use Google to find the bank’s website. And, indeed, searching for your website isn’t so hard. But how do they find you on Twitter? Facebook? YouTube? Nettby? Skyrock? Sonico? Bebo?

I’m suggesting that one way to reach customers you want (and it’s not just 18-24 year olds on these networks) is to make your tattoos clear. Like Caja Navarra which recently put links to the bank’s presence on social networks on their home page.

If social media is all about connections, banks like Caja Navarra are connecting the bank to itself, seamlessly linking all of the bank – whether its video, photos, Facebook groups – online, and seamlessly linking customers to the bank.

All of these links and connections lead back to the bank of course. Maybe the first step to get those coveted younger customers, people who use social networks and tools, to the bank, into the branch, is to make it easy for them to find you. Wherever they are. Transparent links. Easy to see, easy to find. Like those Jolie tattoos.

I asked our babysitter, who is in her early 20s, about e-mail and this is what she said: “E-mail is just not how I communicate with my friends.  It’s all about texting.  I can talk to my friends and text at the same time.  I rarely check my e-mail.”

Then she went on to say, “My poor boss.  She’s, you know, in ‘your group’ (read:  “geezer,” ouch).  I text her, and it takes her like…30 minutes to text me back because she doesn’t really know how to do it.”

One of my colleagues said to me, “Oh yeah, I can text and drive at the same time.”

In Copenhagen I saw people riding their bikes home from work (in the cold!) and texting at the same time, with gloves on and as they were approaching a stop light.

As bankers, we need to figure out how our customers want us to communicate with them.  Increasingly, this will likely be through text messaging, social networking, avatars, blogs and other Web 2.0 technologies.  Some banks are experimenting with these technologies, but as an industry I think we are moving too slowly towards the 21^st century.