Bright Light on a Shadow Economy

As rumors go, this one was not exactly a barn-burner. A customer of a small lender in Yancheng, a prefecture-level city in northeastern China, had asked to withdraw his money, which totaled a little over $30,000. He was denied. Not exactly a big deal, and by accounts it wasn’t even true.

But what happened next is definitely newsworthy. The rumor spread rapidly—from one person to dozens, then to hundreds. Social media inevitably played a part, with at least one user passing on the story via Weibo, the nation’s microblogging service. Soon enough, hordes gathered outside the bank asking if it was out of funds. Staffers from the institution and even government regulators stepped in to control the situation, reiterating that the story was completely unfounded. To show that the bank wasn’t out of money, stacks of bills were propped in the window for all to see.

It didn’t work. The crowds kept growing, and they wanted their money back.

In a triumph of capitalism, all of the bank’s branches were kept open. Armored vehicles brimming with cash were brought in to appease the depositors, some of whom, witnesses reported, were carrying bags and baskets with which to take home their savings.

Of course, the problems didn’t end there. If this bank was in trouble, how safe were others?

As the crisis entered a second day, and then a third, another institution became the victim of the same rumors. Rural Commercial Bank of Huanghai, which is close by, tried hard to combat the stories, with a brightly flashing electronic sign outside the main branch and a video message from its president. A statement issued jointly by representatives of the China Banking Regulatory Commission and the Zhejiang Sheyang Rural Commercial Bank assured depositors that the banks’ capital position was strong.

This being China, it’s hard to establish just how many customers actually took their money out. It seems likely that at least some of the panicked depositors were elderly folk with memories of the collapse of rural credit cooperatives, which wiped out many people’s savings. The concerns were perhaps justified: The cooperatives were part of the shadow banking sector, which promised unreasonably high returns to unwitting consumers, and many inevitably failed.

The consensus seems to be that it’s a different world now. But is it?

Hands with String

To be sure, China’s banking sector is tightly regulated. Bankruptcies are almost unheard of, which is why this most recent run on the bank caught everyone by surprise. But it did happen, so can it happen again, and perhaps on a much larger scale. To put it bluntly, as some have, is there a potential bomb of Lehman-like proportions ticking away?

China is now so integral to the global economy that it’s certainly a fair question. Some signs are troublingly familiar:  For the last five years—by no coincidence at all, not long after the banking crisis in the United States—the government has actively promoted a credit boom. The market responded with gusto, and the numbers are astonishing.

However, this is all in the Chinese economy, and the most unnerving element in the equation is that a significant majority of this credit is not exactly transparent or otherwise above board. In fact, it’s estimated that at least two-thirds of the financing came from financial institutions that are not banks. At least some of those vast funds supporting the infrastructure building bubbled up from the shadow sector. Could the boom be followed by a bust?

The banking crisis of 2008 was arguably halted by a cash infusion, the infamous bank bailouts. Thanks to its considerable lending over the past decade and more, the central Chinese administration appears to have the resources to conduct a similar rescue, if one is needed. For all the posturing in foreign policy, not to mention the stark philosophical difference, China and the U.S. both have nothing to gain and everything to lose by letting important institutions go under.  The run on the bank in Yancheng was no more than a ripple, and there’s no danger of a flood.

However, the Chinese banking economy still represents a queasy mix of free-market capitalism and heavy-handed socialism, with the latter having more power. This kind of structure is historically unprecedented, and it would be naïve to think that we have all the answers.

 

How Bitcoin has Gotten Involved in Property – Three Interesting Tales

Bitcoin has been hitting the headlines a lot of late and becoming an increasingly common form of transaction.

Of course, one of the most intriguing things about the currency is the significant accumulation of worth. In the last 12 months it has hit highs of 1,000% of its 2012 value. On the way there’s been a real rags to riches story, many of which seem almost akin to the gold rush or oil prospecting of the 20th century. We’ve heard all sorts of stories of people who purchased the crypto currency a few years ago end up with millions made from a few dollars.

Along the way we’ve seen a number of people that have accumulated large sums of money, use Bitcoin to invest in property. This has led to a number of interesting and intriguing – so let’s have a look at the Bitcoin property tales.

 

Norway

Norway has done well throughout the economic malaise the rest of the world found itself in the throes of. However, it didn’t stop a Norwegian man Kristoffer Koch put $22 into Bitcoin in 2009. Mr. Koch remembered he had the assets after hearing of the dramatic rise of the currency. Turns out he had over 5,000 Bitcoins and used part of the windfall to purchase an apartment worth a quarter of a million dollars. At current levels he still has millions left over – not a bad call on a $22 investment.

North America

One of the biggest headlines we saw when the currency began making headlines back in March was that of Taylor More. More sold his him for $400,000 in Bitcoin – he received around 5,750 Bitcoins at a cost of around $60 a coin. It was a risk at the time but it’s paid off handsomely and the coins are worth a lot, lot more than the price of the home now. It was a very quick thinking, smart move but a gamble nonetheless. These new millionaires with appreciating assets are the sort of people who can help to buy your house.

China

China has really taken Bitcoin to its heart – well until recently that is. The Chinese government has stopped its banks from trading the crypto currency and is becoming increasingly stringent on its use. However, before things went a little downhill, the Chinese were investing in Bitcoin and also real estate.

In fact, one real estate development could be purchased in Bitcoins. The Shanda Group was offering Chinese people the chance to purchase apartments from its 300 unit block for one Bitcoin to 1,000CNY. This resulted in plenty of Chinese offloading Bitcoins and though the value of the Bitcoins went up afterwards they have fallen since and the developer will have lost out significantly. It’s a quite obvious showing of the gamble Bitcoin investment is.

However, it was a bit of a watermark moment as it was the first time the currency was used en-mass to purchase property.

 

Bitcoin is an interesting idea and one that’s set to cause plenty more news in the property market and also in the world of finance and investment. It’s been used for a number of interesting areas and though it may not be the future of money, it’s certainly intriguing nonetheless.

 

Cormac Reynolds has written for a number of sites and is a strong believer in Bitcoin and it as a means of transaction for property among other areas.  

Bitcoin: Virtual Currency with Real Concerns

Every once in a while, a technology-related capability that has the potential to be a game-changer seems to get overtaken by the hype. Sure, people are using it, but far more people are hearing and talking about it, to the point where the feature becomes old even before it has a chance to thrive. And while it’s always hard to predict the future of any emerging capability, this gap between reality and hype makes it even harder.

Which brings us to Bitcoin, the digital currency that functions exclusively within a peer-to-peer network. Launched only in 2009, it still has a relatively small user base and yet has stoked furious debate in very different circles. And at the heart of it all is a central question that will generate discussion regardless of what happens to Bitcoin itself: In this increasingly digital era, when there are technology aspects to every kind of commercial transaction, what will money itself look like in the future? In 2014, expect to hear many different answers.

Piggy Bank Entering BankWith Bitcoin in particular, some strands of the story make for compelling reading. At one end of the spectrum, the high-profile online black market known as Silk Road was shut down by the FBI amid charges of drug trafficking and murder, and seized Bitcoins featured prominently in the news coverage. However, savvy consumers can also use the currency to buy burgers, bouquets and Beatles albums at stores around the world.

Of course, the practice is still far from mainstream. There are currently only about 12 million Bitcoins in circulation, yet the level of penetration is as varied as it is remarkable. Just a few weeks ago, the University of Nicosia (UNic) became the first academic institution to accept this kind of payment for tuition. The Winklevoss twins, famed for their role in the creation of Facebook, are major investors in Bitcoin, and continue to promote the currency. A young couple recently completed a worldwide journey financed exclusively with Bitcoin. And in another sign of the perhaps surprising welcome the practice has received in the United States, the New York State Department of Financial Services is considering licensing Bitcoin traders, while usage is already booming in China.

So how much does the financial services industry figure have to do with all of this? By most accounts, not much—and that’s a problem, one that will likely keep growing.

On one side, some of the businesses involved in the Bitcoin trade, or using it as the core of their operations, still need good old-fashioned bank accounts, perhaps even bank loans. This is proving to be a major hurdle. For their part, lenders are understandably concerned about the legality of the entire process. Financial institutions must always operate under more stringent compliance mandates than their counterparts in most other industries, and given the relative newness of this practice, the lack of regulations—not to mention the outright opposition in many legislative bodies—makes it a virtual Wild West. The accompanying volatility doesn’t help either: The price of a single Bitcoin has gone from $20 in early 2013 to $1,100, and is currently somewhere over $600. Those are some pretty big swings by any measure.

This has unsurprisingly caused a sharp disconnect between two key constituencies, banks and venture capital firms. Some high-profile VCs such as Accel Partners, General Catalyst Partners, and Union Square Ventures have taken the plunge into Bitcoin-related initiatives, while Bank of America apparently froze the account that funded the operations of virtual-currency exchange Kraken.

The technology underpinning all this is equally critical. The Bitcoin Foundation, which “standardizes, protects and promotes the use of Bitcoin cryptographic money for the benefit of users worldwide,” acknowledges the need for quality software at every level, particularly top-tier cryptography, to ensure the viability and promise of this protocol. And in an open-source environment, that can be a challenge.

On this blog, we frequently focus on the connection between financial services and technology. Sometimes it’s about specific advances in mobile apps, at others it’s about the operating philosophies that drive the two industries. Bitcoin makes for a perfect test case in all of those scenarios—do we try to lead the way, with advocacy, best practices and support centers, or do we wait to see which way the market is headed?

One thing is clear: How institutions and individuals in our profession deal with this new form of disruption will say a lot about our industry as we move into the future.

What We’re Reading: Mobile Home Banking, Payments, Online Lenders

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.

  • Mobile Home Banking: How 5 Banks Take to the Road (slideshow)

American Banker

Wells Fargo’s (WFC) mobile ATMs were used for disaster recovery after Superstorm Sandy hit the East Coast last year. PNC Bank opened a temporary pop-up branch in Atlanta to test out a relatively unexplored market for the Pittsburgh bank. Fifth Third Bank’s (FITB) “ebuses” provide job hunting tools, credit counseling and financial education resources for customers. In past years, BankUnited’s (BKU) bank on wheels has included an ATM and teller window.

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  • The Promise Of Payments

Bank Systems & Technology

Payments are a classic illustration of a long-standing paradox around technology’s role in banking. Technology has enabled banks to process payments more quickly, efficiently and securely, to profitably offer payments products and services (such as credit and debit cards) to a wider array of consumer and corporate customers, and to make effective payments handling a foundation of multifaceted and revenue-generating client relationships. Payment technology also has created many challenges for banks.

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  • Many Online Lenders Driven From Business

Credit Union Journal

After years of futile attempts to drive high-cost online lenders out of business, at least one state’s regulators appear to have hit on a successful strategy: cutting off their access to the payments system. Since Aug. 5, when New York state regulators put a target on 35 specific lenders that it said were not licensed to make loans in the state, at least nine of the companies have halted operations. Key to the state’s effort was a letter it sent to more than 100 banks in which it pressured them to prohibit online lenders from accessing customers’ checking accounts. The banking industry has largely been mum about how it has responded to the regulatory edict, but it appears banks are falling quickly into line, according to American Banker, an affiliate of Credit Union Journal.
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  • Giant reality-check

The Economist

“China’s banks are not real banks,” says Andrew Rothman of CLSA, a broker recently acquired by China’s CITIC Securities. The country’s biggest financial institutions are so closely held by the state that they are, in effect, arms of the treasury. Cosseted by rules that protect them from competition, they deliver huge profits in good times: bank profits as a share of China’s economic output equalled nearly 3% last year, whereas the highest ratio achieved in recent decades by American banks was only 1% of GDP (in 2006). In bad times the state is there to clean up, just as it did during a surge in dud loans in 1990s.
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  • Enterprise Gets Serious About Cloud Computing

ReadWrite

The use of the cloud within the enterprise is still growing at a healthy pace, but in a much more disciplined manner than in recent years. New data suggests that cloud computing is becoming less of an experimental tool but a production workhorse in the enterprise. The data comes from just-released 2013 State of the Enterprise Cloud Report, an eight-page whitepaper from Verizon to positively portray its Verizon Terremark unit within the cloud market. Even taken with that grain of salt, the data within was interesting, such as: [Since January 2012 to June 2013], the use of cloud-based memory increased by 100 percent, and cloud storage by 90 percent.

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  • Gartner: Only 38% of Organizations Use Cloud?

Talkin’ Cloud

A report by IT research firm Gartner, Inc.  found that only 38 percent of all organizations surveyed in the report use cloud services today. But we wonder: Does the report reflect the fact that many employees use cloud services — Dropbox, Box, Google Apps and more — on their own and without corporate approval at work? Regardless, cloud use continues to rise. According to the report, 80 percent of organizations said that they intend to use cloud services in some form within 12 months, including 55 percent of the organizations not doing so today.

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