Money, banking & insurance

Northern Shock

Late last year there was a cartoon in the Daily Telegraph (UK) showing a bank cashier pointing a gun at a customer and saying ‘Leave your money where it is’.The sign above the cashier said ‘Northern Rock’. If you don’t live in the UK the fiasco surrounding Britain’s fifth largest mortgage lender may have gone unnoticed, but in Britain this was the first run on a bank since 1866. So what went so wrong?As recently as July, Northern Rock’s Chief Executive was publicly talking about a ‘robust’ credit book. Two months later the bank was effectively insolvent.But there were warning signs well before all this. For example, Business Week warned about the consequences of cheap money in February 2007 while in early March The Economist magazine commented that there might be trouble ahead when you can buy a book called ‘House Flipping for Dummies’ (‘Flipping’ being the American colloquial term for ‘doing up’ a property quickly, in order to sell it on). The issue with regard to Northern Rock is essentially that the bank used the global wholesale money markets to fund its growth rather than relying on the slower method of using its own local deposits. Interestingly, the bank did little or no business overseas but the connectivity of global lending meant that it was still exposed to far-away risk, specifically the complexity and confusion surrounding securitisation (that is, the process of turning debt into marketable securities). Implications? Securitisation and ‘structured’ financial products aren’t going away any time soon but what is likely is that there will be demands for greater transparency surrounding the securitisation process.

Co-operative Banks

In the Netherlands, 83% of agricultural produce comes from co-operatives, as does 55% of Italian agricultural production and 21% of Spanish healthcare. Most surprisingly of all, perhaps, so too does 50% of French banking. Even AAA-rated Dutch bank Robobank (assets US$575 billion, 9 million customers and operations in 37 countries) is a co-operative. Could this co-op fever spread? The idea is hardly new and goes back to around 1800 when a group of Scottish cotton mill owners created a legal framework and organisational structure that allowed profits to be shared between employees and customers. The idea was then spread further by a group called the Rochdale Pioneers in Britain in 1844. What’s interesting about the co-operative movement is just how relevant the idea is to the 21st century.The genius of the co-op idea is not simply that is spreads money further afield but that it bridges the gap between social and economic interests. Decision-making within a co-op tends to be highly consensual and communication is woven throughout the organisational structure. Moreover, co-ops tend to be embedded in a local context and are highly aware of social and environmental impacts. Hence they are trusted.
They also tend to think long term and are surprisingly open to learning and experimentation. Given all this, the co-op would seem to be an ideal model for banks in the new millennium.

The Pre-Pay Trend

What’s next in terms of payments? The astonishing growth of eBay-owned PayPal (150 million accounts worldwide and growing) suggests that electronic funds transfer (EFT) or micro-payments for the masses is more than a passing fad. As a result, we are seeing the slow demise of everything from coins and paper money to cheques and paper bills and statements. Another related trend is the growth of the prepaid smart-card channel. You’d think that the recent sub-prime tsunami would have put the banks and credit card companies off this market for good but offering basic transactional services to people unwilling or unable to use credit cards and bank accounts is still good business. Take, for example, News International’s move into the pre-paid card business. Rupert Murdoch’s UK tabloid Sun newspaper recently joined forces with Mastercard to offer its 3 million daily readers (and 10 million online readers) a newspaper-branded payment card. Some consumer groups have condemned such cards because they allow minors to access inappropriate paid online content. Others argue that the fees connected to these cards – either to withdraw cash or top up the cards – is excessive. Nevertheless, pre-pay is something we’ll be seeing more of.

Swipe & Go

In the UK, consumers make GB27 billion worth of cash transactions per year of which 80% are under 10. Observers have been predicting the death of cash for years but the fact of the matter is that the use of cash is actually growing each year due to the convenience of ATMs and security concerns relating to online payments. However, the times may be changing. Barclaycard has recently launched a contactless payment card called One Pulse in the UK that allows people to pay for items costing less than 10 by just swiping their card over a card reader. Apacs – a UK card industry trade body – estimates that there will be over 10 million such cards and over 100,000 card readers in stores across the UK in the very near future. Will contactless payments catch on? Undoubtedly. The highly successful Oyster cards used on London’s Underground are contactless payment cards and contactless will take off in any retail environment where things get very busy and people value speed and convenience over and above service or choice. Thus supermarket fast lanes (10 items or less) will probably be entirely contactless within a couple of years. Indeed, contactless payments using mobile phones are already commonplace in Japan and countries like the UK, US and Australia are seriously lagging behind when it comes to adopting this technology. In Turkey, MasterCard even sells a watch that incorporates contactless payment technology. BTW, here's an idea for the supermarkets. Why not introduce a special premium priced check-out lane using contactless payment cards called something like 'Fast Lane'. Everything would cost 5% extra but everything would move 20% faster.

Pre-Paid and Disposable – the Virtual Visa Card

A business called Heritage Building Society in Australia has introduced what’s being called a virtual Visa card. The pre-paid card is targeted at people that do not have a regular credit card and incorporates a number of interesting features including a disposable card number that can only be used once, thus increasing security. It would appear that the product is aimed primarily at young individuals with poor or patchy credit histories but it could also appeal to tech-savvy members of Generation Y that don’t like physical banks.

A Universal Credit Card?

Here’s an interesting new idea. On average people carry nine plastic cards on their person, many of which get regularly damaged or lost. But why carry around such a plethora of plastic when the technology exists to merge them all into one? No idea what I’m talking about? A US-based IT expert called Jonathan Ramaci has invented something called the iCache – which looks like a cross between an old iPod shuffle and a USB thumb drive. The user registers all of his or her cards online and then downloads each card’s inner security settings and workings onto the single device when they are needed. Hey presto! The Swiss army knife of credit cards.