Stat of the Week

Here’s this week’s stat of the week, courtesy of the International Data Corporation (IDC) Worldwide Quarterly Smart Connected Devices Tracker.

Do you have an interesting industry stat you think should be featured on Banking.com? Let us know in the comments section or Tweet @bankingdotcom.

Stat of the Week - 6 24

This Weeks Reads: Data, Innovation, Mobile Banking Success

Below are interesting stories the Banking.com staff has been reading over the past week. What have you been reading? Let us know in the comments section below or Tweet @bankingdotcom.

Social Banking: The Upcoming Phenomenon?

Spain’s CaixaBank bills itself as the leading financial group in its market for both banking and insurance. It’s also just become quite interesting for another reason: It claims to be the first bank in Europe to develop and release a Facebook app that allows enables customers to check bank accounts and even conduct transactions via the world’s biggest social network. And just to draw a little more mileage out of the innovation, the institution will also support small donations to specific charities with this method.

All in all, this is a relatively small deal for now, but what are the chances it will get bigger in the near future? Here’s a hint: The bank will soon extend these services to include other operations, such as person-to-person payments, according to the bank. Other institutions are jumping on the bandwagon too: The ‘Pockets’ service from India’s ICICI Bank (incidentally also billed as a first of its kind) lets customers perform a range of services on this platform, from tracking accounts to sending money to ‘friends.’

Moving west a little, the banking industry in Ireland is also watching Facebook closely, but for somewhat different reasons. This is because just this spring, the global behemoth formally applied for a license from the nation’s central bank to become an e-money institution, giving it the power to issue its own currency. What this means exactly is still a little fuzzy, but some see it as perhaps a more legitimate version of Bitcoin. Speculation has it that the company will focus on remittances, a gigantic market in serious need of transformation.

For the record, even a corporation as traditional as Wal-Mart recently launched a service that enables unbanked consumers to transfer money. While that could worry Western Union, it’s likely a niche service for a niche market. Facebook, however, is another beast altogether—with its global reach and instant access, even a minor nudge could shake the foundations of the banking industry.

Facebook’s attempted strides into the financial services industry, however tentative, have been explored on this blog before, specifically with regard to Facebook Credits. That refers to the virtual currency members can use to buy virtual goods in any games or apps of the Facebook platform that accept payments. Even without getting extensive coverage, the practice earned prominent mention in the company’s IPO filing.

More recently, the company appears to have been moving away that strategy and towards money. In fact, it has been quite active for some time now in helping application developers work on payment processes that uses local currencies. In other words, like many good innovators, it has been hedging its best.

But if that’s what Facebook is doing, what are corporations on the financial services side doing to ensure they don’t come out on the losing end?

It’s easy to see why social media in general could be a boon for communications and a headache for everything else. J.P. Morgan, for example, recently fielded hundreds of angry Tweets after putting in place policies to identify potentially risky transactions. The thinking is that in the old days, when customers had to actually go online, or even draft a letter, when making a compliant, there were fewer complaints; now, when it can be done with a few stabs on the smartphone, there are far more coming in, and each expects a response.

Sure, most predictions about user adoption of new technologies turn out to be wrong. We have no idea which innovation will take off, what changes it will induce. But it’s probably safe to say that the army of social media channels, including Facebook, has changed everything, and it will change banking. Facebook is clearly doing its part to speed the process, and some banks are doing theirs. But are there many that should be doing more?

Stat of the Week

Here’s this week’s stat of the week, courtesy of the Accenture 2014 North America Consumer Digital Banking Survey.

Do you have an interesting industry stat you think should be featured on Banking.com? Let us know in the comments section or Tweet @bankingdotcom.

Accenture Stat of Week 6 9 14

This Week’s Reads…

Below are interesting stories the Banking.com staff has been reading over the past week. What have you been reading? Let us know in the comments section below or Tweet @bankingdotcom.

Reserve Banking: The New Radical Idea

Question MarksBanking is by nature a very conservative industry. Change is slow, incremental and deliberate. That’s why, as we’ve noted here before, bad times are sometimes attributed to financial instruments—such as credit-default swaps—that disrupt long-held industry processes and practices.

That’s why the current buzz over ‘reserve banking’ is so interesting. Even the term seems innocuous, but the scenario it proposes is nothing short of revolutionary. And on an even more curious note, the idea has conservative proponents who would normally be expected to eschew such ideas, and liberal critics who find it too radical.

While it’s not exactly a new idea (dating as far back as FDR and the New Deal), it just received a boost from John H. Cochrane, Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. In his paper, “Toward a Run-Free Financial System,” he suggests that banks be mandated to back every move they make—loans, bonds, everything.

Let’s put it another way: Even a gradual shift toward such a system would change banking as we know it.

Just to be clear, this is not some wild-eyed theorist who spends more time on Karl Marx than Adam Smith. Cochrane’s work includes extensive research on shocks in macroeconomic fluctuations, and he is respected for his studies on asset pricing (his book on the subject is standard text in graduate courses). But with his new paper, and the attention it’s getting, he’s effectively lobbed a grenade into the school of conventional thinking.

This is a densely complicated subject, but at its heart, it’s based on the premise that most modern banking isn’t founded on real money—banks making a loan to a consumer or a business don’t exactly hand over the money in cash, or set aside that amount in the vault, just to be sure they can cover it if the loan goes bad. Instead, they credit the recipient’s account with that amount. In a way, these transactions create money rather than passing it along. Putting it crudely, it’s sleight of hand backed (to an extent) by the taxpayer via the Federal Deposit Insurance Corp.

The system works. . . except when it doesn’t. Banks creating deposits as a byproduct of their lending can be extreme. Economist Martin Wolf, who seems to support at least some major changes, notes that in Britain, the ‘creating money’ approach “makes up about 97% of the money supply,” a potentially perilous environment. It can go badly wrong and cause a run on the bank, or even calamities like we saw with Lehman Brothers and AIG, among others, in 2008.

On principle, reserve banking would likely eliminate such disasters, since the institution would be required to ensure that it had enough assets on hand to cover every eventuality. But the new proposal, and others like it, call for a level of transformation that has many industry observers spooked. Even Nobel Prize winner and columnist Paul Krugman, normally a harsh critic of many industry practices, voices doubts about such sweeping changes.

There’s no question that this is a wild idea, and it’s surely not going to be implemented anytime soon. Even incremental changes—say, mandating financial services institutions to keep more in reserve than they do now—will take a major legislative push, which will surely be opposed with heavy lobbying. However, the very fact that such ideas are being discussed should be seen as a healthy sign.

The banking industry has long weathered criticism for not changing with the times, for unfairly risking depositors’ assets, and for representing free-market capitalism while counting on taxpayer-funded bailouts when things go wrong.  The odious phrase ‘too big to fail’—and it’s even more repellent sibling, ‘too big to jail’—have entered the pop culture lexicon, to our detriment. In this content, a change beginning with perception is good.

One scholarly proposal won’t cause a transformation of any kind. But change is healthy, and debate about change is a great place to start.

 

This Week’s Reads…

Technology M&As: The Beats Go On

If it takes gangsta rap to spark fresh interest in the intersection of investment banking and technology, then so be it.

The ongoing fascination with Apple’s $3 billion purchase of Beats Electronics is entirely understandable, because it’s a cool story.  However, it also says a lot about what’s going on between finance and tech.

128px-Beats_by_Dr._Dre_-_logo.svg (2)On the one hand, there’s Apple, a company that’s become synonymous with innovation and raging success. It wasn’t always this way: the technology pioneer went through some serious lows, especially compared to archrival Microsoft, before reemerging as a consumer electronics giant that now has $160 billion cash on hand, nearly to be precise. And then there’s Beats, which makes audio products and offers a listening service. The company’s had some diverse owners: One is the Carlyle Group, the asset management powerhouse, whose executives have included the first President Bush, his Secretary of State James Baker, the former Prime Minister of Thailand, and a raft of financial services, business and media luminaries. But overshadowing them all is co-founder Dr. Dre, who earned early fame with gangsta rap, which of course drew the wrath of the Bush administration.

But putting aside the strange bedfellows, the high-profile deal offers a good reason to take a fresh look at the moribund investment market. To be sure, it turns the spotlight on many key elements in this market—the consumerization of IT, evolving drivers for content adoption, changing tastes expectations in key demographics and the premium placed on innovation and marketing (not always in that order).

However, as PC World points out, this is not the only silver lining in the cloud. In fact, to stretch the metaphor, cloud technology—along with software-as-a-service (SaaS) and mobile offerings—is fueling a strong drive in tech mergers and acquisitions.

The Global Technology M&A Update from EY (previously known as Ernst & Young) reveals that a curious blend of opportunity and disruption—two cornerstone elements of the tech market—came together to boost global technology M&A aggregate value by a staggering 65% in 2013. The number shot up to, $188.2 billion, which clearly hearkens back to the glory days of the dotcom bubble.

To be sure, global technology M&A volume actually declined for the year, but cloud and SaaS registered a spike—a hint as to where the future is headed. Big Data remained almost as big, with advertising and marketing technologies—packaging analytics and social networking—nudging deal volume. Security and health care IT (which often seem to go together) moved along as well. The folks in our line of work had good times too—financial services technology drove value to the tune of some 100 deals.

And while all this represents a look back, the look forward is nice too. The Apple-Beats combo aside, the first quarter of 2014 saw considerable activity in M&A circles, which is unusual for this period. The most recent report from PriceWaterhouseCoopers points to 57 deals closed in the first quarter, up by more than a third over same-period 2013. More specifically, many technology companies have not yet adapted their offerings to mobile, cloud and SaaS models, at least to the extent possible. As these pressures continue to mount, look for more wide-ranging deals to fuel technology M&As.

Any comparison to the raging market of 20 years ago—when dot-coms with no profits or even revenue received massive valuations from otherwise perceptive investment bankers—are not only premature but grossly unfair. But just as technology and finance have always boosted each other’s fortunes, it’s good to keep a wary eye on this market, even as it offers reason for optimism.

 

Image courtesy of Monster Cable Products, Inc., via Wikimedia Commons

The Mobile Cash Crunch

Hand on mobile phoneWe love cash—literally. We love it so much that we’re willing to eschew the alternatives afforded by modern society. All these millennia into human evolution, and those crinkly, dirty pieces of paper that have passed through countless hands still have a place in our hearts and wallets, and bring a gleam to a mugger’s eye. By contrast, the credit card is so modern, an ultra-fast option that’s both convenient and safe, and helps build a financial history. But it’s not to new either. In fact, the idea goes back to at least 1887, when it gets 11 mentions in the Edward Bellamy novel “Looking Backward.” And today, 127 years later, it’s the only real alternative to the coin of the realm.

Let’s put it another way: Why haven’t mobile payments taken off?

It should be a no-brainer, since we use mobile apps for just about everything else. Apple passed the 1 million figure for the iPhone App store back in October 2013, and devices and apps exist to help us in every facet of our busy lives: shop, communicate, get healthy, get richer, get away on vacation, do our jobs, slack off, play games, and just plain kill time. Mobile banking in multiple forms has revolutionized our industry.

Yet the most fundamental form of human transaction—paying for goods and services in person—still relies on cash and credit cards. We can punch a button on the phone and get it done, more conveniently and a lot more safely. But we don’t.

It’s not as if there hasn’t been any progress. Consumers spent $235.4 billion through mobile payments in 2013. That, according to research from Gartner, represents a hefty jump over the $163.1 billion spent this way the year before. The numbers for 2014 will surely be higher still. However, the numbers are considerably lower for the United States: about $37 billion in 2013, up from $24 billion. And if even that seems big, consider this: The U.S. GDP for 2013 approached $17 trillion.

In other words, the potential for mobile payments is gigantic, and the reality is minuscule. Could it be that the technologies to support such a transformation aren’t here yet? No quite the contrary. In fact, we have a wealth of options available—and that might be the problem.

Remember, we first got to see Google Wallet exactly three years ago this month, and the expectation was that it would revolutionize basic transactions. It didn’t. More recently, we’ve had a steady stream of alternatives, from Square and Clinkle to Belly. Tech vendors and financial services have teamed up to offer joint options, such as Visa’s payWave on coming pre-loaded on Samsung Galaxy phones. Apple will presumably come up with a mobile wallet of its own at some point. Yet so far, the many ripples have not turned into a splash.

The chicken-or-the-egg question is particularly valid here. As recent reports have noted, merchants are wary of making the necessary deals and installing the technology in their stores until there’s enough of a critical mass in the public. But by the same token, most consumers can’t be bothered to download the relevant apps—even when they’re free—and go to the trouble of finding which store accepts which option.

Many other fields face similar compatibility issues, from games to stock trading, yet there’s typically more growth—a slow evolution followed by a spike. In mobile payments, despite the tremendous potential, widespread adoption has been stymied by competitive offerings.

So what’s the answer here? Should we still be waiting for a killer app from a particular vendor? Should the current technology entrants try to get together and create a common platform that enables compatibility but potentially hurts innovation? Should financial services vendors form an agreement of their own and force tech companies to go along? Should the government get involved?

We likely won’t have an answer for a while. But it’s worth noting that the time for the mobile wallet has come, and perhaps will soon be gone.

 

This Week’s Reads…