Brett King

Archive for January, 2010|Monthly archive page

What DAVOS needs to do, but won’t

In Groundswell, Media, Retail Banking, Social Networking, Strategy on January 26, 2010 at 23:14

We’ve all read a great deal about DAVOS World Economic Forum (WEF) over the last few days discussing what the leaders of the planet will need to achieve. While the environment, and responses to crisis like Haiti will be sure to be a feature, the world in general will be looking for Davos to achieve is some progress on reforming the global financial system.

Considering the G20 and G7 and others have had a shot at this there is some indication that at DAVOS this year reform of the global financial system will continue to be the hot topic. The focus will likely be on the role of regulators, the flow of capital, interconnectedness of global capital markets and trade, and the way banks should work responsibly to free up capital and encourage liquidity. The forum is unlikely to get into specific discussions on the creation or structuring of financial instruments or speculative trading practices, rather sticking to the core principles of how the financial system can be better managed to prevent future problems.

The World Economic Forum is by invitation only and those that are invited are the undisputed world leaders in their fields. Typical participants include government representatives of the world’s top economies and fastest-growing small countries, heads of state like Vladimir Putin and Wen Jia Bao, government ministers for finance/economics, leaders from international NGOs, cultural and sports leaders such as U2’s Bono, and thought leaders like Bill Gates and Al Gore. The most influential voices and minds in the world today.

Wen Jiabao, Klaus Schwab - World Economic Forum Annual Meeting Davos 2009
DAVOS-KLOSTERS/SWITZERLAND, 28JAN09 – Wen Jiabao (L) , Premier of the People’s Republic of China and Klaus Schwab, Founder and Executive Chairman, World Economic Forum, captured during the session ‘Special Session with Wen Jiabao, Premier of the People’s Republic of China’ at the Annual Meeting 2009 of the World Economic Forum in Davos, Switzerland, January 28, 2009. Copyright by World Economic Forum swiss-image.ch/Photo by Monika Flueckiger

Looking through the World Economic Forum Programme for this coming weekend there are some incredible speakers and topics. James Cameron will be there to talk about directing Avatar. Reid Hoffman (Linkedin), Evan Williams (Twitter) and Owen Van Natta (MySpace) will be there to discuss the growing influence of social networks. Tim Brown (IDEO) and Gary Hamel (Author, MLab) will be there to discuss management innovation. Brian Moynihan, CEO of Bank of America, and others will be there to discuss redesigning capital markets. Bill and Melinda Gates will be there to discuss their foundation, and Melinda Gates will be discussing education for girls and how it effects economics in the developing world. This is just a small snapshot of the amazing depth to the forum, but something is missing.

The issue of customer advocacy and how input from customers is integrated into the strategy of an organization is completely absent from the forum. While management innovation, risk mitigation and big picture regulation and reform are being discussed, the voice of the customer is likely not to be heard this year at Davos. Why is that significant? When it comes to the financial crisis perhaps the most significant voices namely, the consumers who have been affected by the global financial crisis with job losses, foreclosures or mortgage repossessions and general economic challenges, are silent due to their absence. Interestingly while seeking to ‘fix the system’ the forum doesn’t actually appear to have any mechanism or sessions dedicated to these issues which are the primary outcome of the financial crisis.

While I agree that the system is broken, new thinking is required on how to ensure that the changes protect customers and not just reduce institutional risk and government exposure. There is no apparent discussion on innovation and compensation for financial institutions so that the massive profits that have been yielded, despite the financial crisis, can be injected back into the system in a more constructive way than through the bonus checks of bank senior executives. We should be seeing sessions that tie the financial system to economic improvement through corporate social responsibility and better initiatives for the disadvantaged, and sessions that motivate global financial brands to do more to support microfinance and give the unbanked more accessibility to finance in the developing world. These are all problems of which there are reasonably simple solutions if there is the will.

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The wrong type of innovation

In Retail Banking on January 20, 2010 at 00:55

The financial crisis of recent times was arguably triggered by innovation in the financial services sector around creative financial instruments. These so-called CDOs and ABS’ ended up being unhinged from the underlying ‘assets’ that defined them and as such allowed a bubble of securities and subsequent contractual trades by professionals and institutions creating ‘value’. The fact is that this innovation probably started with the various rounds of deregulation of financial services, including the repeal of the Glass-Steagall Act in 1999. While some argue that this deregulation actually prevented a worse meltdown of the financial system, I would argue that regardless it allowed the creation of innovative financial instruments that ultimately led to the creation of a new class of speculative bubble – as if we need more excuses for those.

“The academics who dominate modern central banking were ideologically committed to the notion of efficient markets and to exclusive reliance on inflation targetting regardless of imbalances arising from easy credit and soaring asset prices – a spectacular case of one-club golfing.”
John Plender – Financial Times

When you talk to bankers about innovation, this is what typically comes to mind either product innovation or financial instrument innovation. These have long been held as the staple of bank value creation as it is essentially all about creating margin and margin comes from either capital appreciation, smart hedging bets or from new products that are heavily differentiated. What doesn’t immediately come to mind for most bankers is customer innovation or more specifically, innovation in serving and reaching customers. When it comes to innovation in, let’s call it, the engineering or mechanics of financial services – institutions have rightly led. So much so that now products are so innovative that they are simply impossible to explain to the average layman.

The amusing thing is that on the front of customer innovation banks rarely lead, in fact, in most cases they are dragged kicking and screaming into new ways and means of interacting with customers. Just take a look at a couple of quotes that illustrate the point:

“I thought in rural Tennessee we would not be confronted with Internet banking in my lifetime. I was wrong…”
John L. Campbell, CEO of First Community Bank of East Tennessee, 1997

“The do-it-yourself model of investing, centered on Internet trading, should be regarded as a serious threat to Americans’ financial lives.”
Merrill Lynch Vice-Chairman John “Launny” Steffens, Sep 1998

In the last 10 years significant disruption has occurred within the retail banking sector from both a transactional and revenue perspective. Firstly, the internet created a dramatic shift in just a few short years turning the mix of transactions on its head – to the point where internet banking transactions exceed branch transactions by 2003 in most developed economies. Secondly, increased mobility is now leading customers to do so much more of their banking on the move, and yet the vast majority of banks still don’t support mobile banking in any way, shape or form. The reliance on physical distribution channels is a severe restriction in the ability of retail banks to create real change, but customers are pushing ahead this time – without banks.

Initiatives like PayPal which now makes up 48% of online payments, but didn’t originate with Visa or Mastercard, and to this day is rarely supported by traditional banks. New payment mechanisms like Jack Dorsey’s Square, Incase, Verifone, Mophie that are seeking to fill the gap in retail payments where the card providers and banks have just been too slow to adapt. Online social lending networks like Prosper and Zopa, creating non-bank lending opportunities for those who are fed up with the brutal approach to lending approvals championed by the big banks.

The next 10 years disruption in retail financial services will rapidly accelerate. The likelihood that we will see a complete deconstruction of retail banking is fairly certain. While a banking license remains the barrier to entry currently, Richard Branson has shown that such licenses are simple commodities in the burnt husk of a banking sector that we have post-GFC. In the more ubiquitous arenas of payments where cheques and credit cards have dominated, banks are suddenly going to find their part in the value chain disappear – along with physical cheques (or checks), credit cards and cash.

The solution is simple, but will be painful for banks who are like slow moving glaciers in an era of accelerating climate change. Unless we see organizational reform to rebuild banks around customer engagement and interaction, it doesn’t matter how advanced the financial mathematics and instruments get – in the end if your customers are finding ways to work around your inadequacies you might just find you have no business. In markets like the US and the UK the long-held ‘tradition’ of banking is actually frustrating change. This is not something that can be regulated – it is a mind-set, a philosophy. Anytime bankers think they can do what they like without listening to the voice of their customers it is just further evidence that they have lost touch with those that matter – customers who generate revenue and shareholders that fund growth.

Customers are no longer willing to wait for banks to innovate, and as a result they are moving on and looking for workarounds that simply don’t include the big institutions. Some have said banks are too big to fail…well quite obviously they are too big to innovate where it matters.

“What Jay Leno, Conan O’Brien and the banks have in common”

In Groundswell, Media, Retail Banking, Social Networking, Strategy, Technology Innovation on January 17, 2010 at 01:19

It has become clear over the space of the last week that NBC, Jay Leno and Conan O’Brien really did not anticipate what has transpired with viewers over the last few months. Jay’s show at the 10:00pm time slot on NBC was an experiment to see if Jay’s popular show could survive in the Prime Time slot, but it was also about NBC looking to cut costs as Jay’s show was inevitably less expensive that a series that could be slotted into that time.

Some have commented that the failure of Jay’s show is that late night shows are becoming formula and that since Jay Leno and David Letterman reinvented the format in the 80’s that nothing much has changed. Others argue that the late night format is just better suited to ‘late night’ and that the prime time experiment has failed. But the truth is that this is a symptom of a far larger problem facing NBC and the networks.

In the last 5 or 6 years, traditional media has been progressively facing the challenges of a changing landscape. In 2003 and 2004 the emergence of TiVo produced the so-called “TiVo effect” where consumers first had the opportunity to skip advertisements through the use of technology. In recent times surveys have showed that the majority of viewers would pay for ad-free TV over having to watch Ads.

The emergence of YouTube and sites like Hulu has produced a change in viewing behavior too, where users select content on demand and tend to surf through content fairly rapidly a few minutes at a time, compared with sitting watching a longer show. Then we have the whole download element where users are using Bittorent and other tools to download movie and TV shows – some estimates put the percentage of web traffic related to Bittorrent downloads sometimes exceed 50% of total web traffic.

Consumer behavior in respect to media has been undergoing a dramatic change. Traditional media companies like NBC, and content providers like Jay Leno and Conan O’Brien are not really sure about how to make the transition to what will come – we can’t say for sure what will come in the future, except that it will be different. Newspapers are facing even more acute pressure.

In 2008 the Internet surpassed all media except television as the primary source for national and international news (Source: EIAA Mediascape); this has taken its toll. In March 2009, the Seattle Post-Intelligencier or the “PI” as it was known, a 146-year old newspaper, closed down, citing rising costs, falling revenues and declining circulation. Since just January 2008, at last count, 53 regional newspapers in Britain have folded. Of the top 25 newspapers in the U.S. in 1990 (the year newspaper employment peaked), 20 of those newspapers have seen declines (on average reporting circulation down by more than 30per cent), and two have been closed down or declared bankrupt. New York Times reported a 30 per cent fall in advertising revenue, resulting in a $35.6 million loss for the 2009 third quarter alone. Newspaper mogul Rupert Murdoch and his contemporaries are grappling with this very change right now.

This is purely indicative of the changing behavior of consumers in respect to sourcing content, news, and entertainment. While movie cinemas continue to post record revenues, traditional media such as TV, Radio and Newspapers are under significant pressures from these changes in consumer behavior. While networks and advertisers are hoping beyond hope that ‘things will return to normal’ the fact is that these traditional media sources are in terminal decline – especially free-to-air TV and newspapers.

One of the reasons bank’s have fallen into trouble with consumers is that they too, like traditional media, have not anticipated the massive changes in consumer behavior. Banks continue to believe in the branch as the primary channel and traditional methods of engaging customers such as direct mail, telemarketing and direct sales. While they see disruptive change coming, they don’t really know what to do to tackle those changes, so they choose to ignore it and hope that traditional methods see them through.

Unfortunately, the disruption to media and to banking is yet to play out fully. In the end we’ll likely be left without newspapers, free-to-air TV (cable and subscription services may service), and radio. Traditional marketing mechanisms for the bank will be reduced purely to occasional branding campaigns, whereas broader marketing efforts will be focused much more on target consumers at the point-of-impact.

Needless to say, before this decade is over, Jay Leno, Conan O’Brien and the big banks will probably have a lot more to worry about than dwindling numbers – they need to find a method of more effectively adapting to the way consumers wish to receive their content, rather than attempting to re-arrange the message on existing media.

New Did You Know – BANK 2.0 Video uploaded

In Retail Banking on January 14, 2010 at 12:42

Check out the draft of the new promo video for the book which looks at some of the changes in banking, disruptive technologies, and some interesting facts you might not be aware of!

Stay tuned for more of BANK 2.0 very soon…

Bank Bonus – Expect Smoke and Mirrors games

In Groundswell, Retail Banking, Social Networking on January 12, 2010 at 10:56

With such a huge public backlash against Wall Street firms and Big banks as they unabashedly prepare for a big bonus season (At least $47Bn at last estimate), it is no wonder that these guys are having to think of some PR strategies that might soother the ire of the general public, shareholders and the politicians.

Some of the public anger stems from the idea that big bonuses are being given out after banks were bailed out with money from the government’s Troubled Asset Relief Program (TARP) and other similar programs around the world. Even though firms aren’t use bailout funds to make bonuses, these banks benefited from borrowing funds from the government at almost 0% interest and then investing those funds to make a solid return – rather than lending it out to consumers as was intended.

There are two core strategies you will see the Banks deploying in the coming weeks to stave off criticism about the huge bonuses payouts:

Hey, we’re giving lots of money to charity…
JP Morgan has done extremely well throughout the crisis, so Jamie Dimon and the team there are preparing for a very healthy bonus pool. Dimon was very strong in his criticism of the UK windfall tax on bank bonuses and even threatening Chancellor Alistair Darling that if JP Morgan wasn’t exempted they might drop the plans for their £1.5Bn European Headquarters in London. Well JP wasn’t exempted and thus far there is no news over whether the threat to pull out will eventuate. Well JP Morgan has already started to send out messages to compete with the bashing they are getting over bonus payouts.

The three most recent corporate announcements from the bank include the following: JP Morgan Chase donates $2.25 million for security cameras at Chicago schools — 18 December; JPMorgan and Facebook to make $25,000 donations to 100 small and local charities— 17 December; JPMorgan gives $5 million to Feeding America, the nation’s largest hunger-relief organization — 14 December

Taking a leaf out of JP Morgan’s books Goldman Sachs is also considering expanding a program that would require executives and top managers to give a certain percentage of their earnings to charity.

Charity begins at home – how about we see shareholders getting some dividends and customers getting some fee relief I say!

It’s not really a bonus if it’s stock…
Banks justify their payment methods with large bonus schemes because so many of their top performers have their pay directly linked to portfolio or bank EPS (Earnings per share) performance type KPIs (Key Performance Indicators). They argue that top bankers will leave to go to the competition if they don’t provide the big bonus packets. Bankers at the top of the pay grade get most of their remuneration this way and thus have become dependent on it for their big ticket annual expenses like kids schooling, housing, etc

But in 2010 some of these guys won’t be getting hard cold cash. Banks are expected to pay more of their bonuses out in stock to executives this year rather than cash. Getting paid in cash circumvents ‘tax’ issues related to bonuses, and means that banks can list the cash component of the bonus as a separate item – reducing the ‘cash payout’ figure on the balance sheet and more importantly in the public domain.

Come on guys – we’re not stupid. We may not be able to understand credit default swaps or barbwire swap hedging contracts, but we do understand when you elect to simply change the payment method for executive bonuses!

The loan voices of restraint
Still, there are a select few on Wall Street and in the UK High Streets, including Morgan Stanley CEO John Mack, who won’t be taking any bonus this year. In fact, the Wall Street Journal says this is the third consecutive year that Mack hasn’t taken a bonus. Bravo!

Hey – I’ve got an idea…why don’t the banks who are considering massive bonuses restructure their remuneration systems and restrict the massive annual bonuses, instead of attempting the smoke and mirrors trick with already angry consumers, shareholders, MPs and Congress representatives…