Brett King

Archive for December, 2011|Monthly archive page

2011 in review

In Retail Banking on December 31, 2011 at 23:16

The WordPress.com stats helper monkeys prepared a 2011 annual report for this blog.

Here’s an excerpt:

The concert hall at the Syndey Opera House holds 2,700 people. This blog was viewed about 48,000 times in 2011. If it were a concert at Sydney Opera House, it would take about 18 sold-out performances for that many people to see it.

Click here to see the complete report.

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My address is no good for identity verification

In Economics, Future of Banking, Strategy on December 21, 2011 at 23:50

There has been a 25% decline in the total mail volume for the USPS (United States Postal Service) from 2006-2011, resulting in a $5.1 Billion loss in 2011 alone. Since 2007 the USPS has been unable to cover its annual budget, 80 percent of which goes to salaries and benefits. In contrast, 43 percent of FedEx’s (FDX) budget and 61 percent of United Parcel Service’s (UPS) pay go to employee-related expenses. The USPS has 571,566 full-time workers, making it the US’s second-largest civilian employer after Wal-Mart. It has 31,871 post offices, more than the combined domestic retail outlets of Wal-Mart, Starbucks, and McDonald’s. It’s also more than double the number of branches of the combined retail distribution points of Wells Fargo, Chase and Citibank. The problem is that 80% of those USPS offices lose money annually.

USPS' Rapid Decline started in 2007 and has been shocking

Why the decline?

The decline in first-class mail in the US has accelerated in recent years. The USPS relies on first-class mail to fund most of its operations, but first-class mail volume is steadily declining—in 2005 it fell below junk mail for the first time. The USPS needs three pieces of junk mail to replace the profit of a vanished stamp-bearing letter.

Junk Mail, or as Advertisers call it “Direct Mail”, promotion is rapidly declining with projected declines in the range of 39-50% estimated for the period 2008-2013.

Email, Internet Bill Payment and Statements, SMS alerts, and other information delivery mechanisms are much more timely and cheaper than “Snail Mail” today. Environmental awareness and ‘do not mail’ lists have contributed to the decline also. The couponing business, which has supported the ‘junk mail’ industry for the past two decades in the US, has been decimated in recent times by the daily deals industry. Jeff Jarvis predicted this shift back in 2009.

It shouldn’t be a surprise that the USPS is in major trouble.

What does this have to do with banking and IDV?

At least 80% of non junk mail I receive these days is from financial institutions that I have a relationship with (an even then it is often bank ‘junk mail’). This is despite my best efforts to eliminate snail mail as a formal method of communication with those service providers I choose.

Most banks still ask me for my address, and require verification of that address through some utility bill. This is a requirement of most regulators too.

The problem is – no bank has ever, as far as I know, actually verified my address is real. In theory, a utility bill is one of the easiest documents to compromise via identity theft, and/or fake with photoshop and a laser printer.

Why do banks collect my address?

The initial reason had nothing to do with regulatory requirements. The main reason initially was to send me my replacement cheque book, or send my regular monthly statements. Today, with snail mail all but disappearing, why do I still need to verify my address with the bank? I actually don’t want the bank sending me snail mail, and my physical address has nothing to do with my ability to pay for credit or the likelihood of anti-money laundering.

From a compliance perspective, sending you physical mail is one of the riskiest activities a bank can undertake today, because not only is it not secure – it actually increases the likelihood of fraud. If there wasn’t a legacy snail mail process, it is unlikely in the extreme that compliance would approve a process as risky as snail mail today.

Do we need an address?

Today your address is just a common data element shared as part of your profile. It is insecure. It can be easily compromised. It bears no relevance to the likely risk or otherwise of your suitability as a customer. It is unverifiable.

It doesn’t make sense to have address verification associated with a customer from an identity perspective.

There must be a better way. Why not use the guarantor method? Why not get trusted associates to vouch for you, as they do with new social networks likeConnect. Why not ask a new applicant to get an existing customer of the bank to vouch that he is real, and trustworthy? Why not take a photograph of the applicant and match their picture to their drivers licence or passport photo using facial recognition, along with cross-checking a government database?

There are a dozens of activities I could undertake which are safer, more reliable and more verifiable than a physical address.

Identity doesn’t need an address. Identity is about verifying you are real, and an address doesn’t do that.

Keep it as a data point, by all means. But let’s stop kidding ourselves that an address is a requirement for KYC.

P2P a force to be reckoned with

In P2P Lending, Social Networking on December 14, 2011 at 09:28

No one could doubt that peer-to-peer lending (or P2P Lending) has landed big time in 2010, but it looks as if the best is just about to come.

The US leader Lending Club will issue more than $250 million in loans this year – greater than the last four years combined – for a total of nearly $450 million since inception.  Their last $100 million increment in their total loan portfolio growth came in just 4 months from the period July through November 2011.  Their returns have been stable throughout the market turmoil of the past few years – thanks in part to their focus on prime credit consumers – with an annualized default rate below 3%.

Prosper has seen 370% year-on-year growth in their business in 2011 lending over $70MM this year and bringing their total to more than $260m to-date , with a default rate of around 5.2%. Compared with BofA whose default on credit cards has been at an annualized basis of around 5.98% this year, down from a peak of 14.53% in August of 2009.

Zopa out of the UK has already lent more than £180 million (US$280m), which means they are now approaching a 2 per cent market share of the total UK retail lending market. The impressive thing about Zopa’s achievement is that their default rates are running at just 0.9%.

So who are lending from P2P lending networks?

If you believe the propaganda from the establishment, P2P lending is risky and only offers opportunistic financing to weak credit prospects – those that can’t get loans from traditional players. However, the reality is something entirely different.

The risk profile of P2P borrowers is often grossly overstated, and often the majority are healthy lenders simply looking for a better deal. That’s why P2P defaults are often as good as, if not better than, the majors.

“We can offer low rates in comparison to our banking competitors in part because we focus only on a select subset of customers — the most credit worthy borrowers — and our fair pricing is commensurate with their risk.”
Renaud Laplanche, CEO, Lending Club

The P2P lenders have also done considerable work on understanding the behavior of lenders, thus they don’t look just at the credit score (a lagging indicator of a default risk), but also at the future likelihood of a default.

“I think our low defaults aren’t just because of P2P but because we built a better credit model, taking more account of over-indebtedness and affordability than banks”
Giles Andrews, CEO, Zopa

These better models are helping P2P to thrive.

Tis’ the season for P2P Lending

There are times like Thanksgiving week in the US where P2P Lending is predictably slower than normal, but there are also times when P2P faces natural growth in demand.

“We’re gearing up for 50% increase in lending in January 2012, now that we’ve proven the viability of our business model.”
Giles Andrews, CEO, Zopa

I met with Scott Sanborn, the Chief Marketing Officer for Lending Club earlier in the year in San Francisco, but I got together with him via phone last week and asked him if there was seasonality to their lender’s behavior.

“We’ve always got a pop in January. Primarily because approximately two thirds of our loans historically are used to settle credit card debt.”
Scott Sanborn, CMO, Lending Club

Last week the Federal Reserve released its latest G19 report on consumer credit. Revolving consumer credit increased marginally (0.5%) for the first time in September of this year, and that trend has continued in October. Revolving credit card has been on the steady decline since 2008, down from a peak of $972Bn to a low of $790Bn in August of 2011. In 2009, that meant that every month saw a decline of close to $10Bn in revolving credit in the US. That trend has changed course in the second half of 2011 as borrowers return tentatively to credit facilities.

Revolving Credit has been on the decline since 2008, but this Christmas is set to rise again

Historically, December and January credit card debt always tends to shoot up due to Christmas shopping habits. Online lending around the end of the year has also been steadily increasing due to the primacy of the online channel, so it’s no surprise that as P2P awareness improves that P2P lending is set to rise this Christmas season too. The difference this Christmas, compared with the last 3 years, is that with revolving credit flattening out the spike in January is stacking up to be the biggest in P2P’s short history.

P2P – Maturing or Mature?

The other difference (in the US particularly) is that we’re seeing more sophisticated investors participating in P2P transactions, meaning that there will be an abundance of cash to support the demand for P2P credit. In fact, the major P2P players in the US are seeing institutional investors, high-net worth investors and the like looking to put cash into P2P. Not just to get a higher deposit rate, but to get that rate with only marginally greater risk – if at all.

Players like Zopa, Lending Club and Prosper are anticipating their largest January yet. In fact, this season is likely to be larger than the 2008-2010 lending seasons put together for the P2P market. If anyone had any remaining doubts about the viability of P2P lending, then I think we can put that to bed this season.

As the song goes… “It’s beginning to look a lot like Christmas!”

Customers will never use Facebook to login to their bank!

In Engagement Banking, Future of Banking, Groundswell, Mobile Payments, Social Networking, Twitter on December 7, 2011 at 07:16

We’re experiencing a massive shift in consumer behavior right now with the explosion of Facebook, Twitter, YouTube, and other community collaboration and social media platforms. A world where Facebook has 800 million inhabitants and a President who is a college dropout (albeit Harvard).

We’re seeing the global domination of mobile across the entire world, where before long every person on the planet will have a mobile phone – and soon that phone will be a wallet. Smartphone owners will be the majority in just a few years as smartphones are virtually free on contract, and unlimited data is bundled free. Already the average smartphone user spends more time using Apps than they do using an Internet browser on their computer.

The traditional players amongst us say that such things don’t really change the fundamentals, that “it will take time for people to trust these new mechanisms”.

I’ll never login with Facebook to my bank.

I won’t pay with my mobile phone unless I understand how secure it is. This NFC technology is too new and there’s no common standard.

Huh?

The same people who said this probably said…

I’ll never use email, there’s nothing like calling someone or a face-to-face discussion to solve a problem

I’ll never use an ATM machine, I don’t trust a machine to give me money.

I’ll never get a cell phone – I don’t want people to be able to call me whenever and wherever I am.

I will never put my credit card details on a website online – are you crazy?

I’ll never bank online. Not in my lifetime…

I’ll never need a Facebook account – it’s a waste of time, it’s just for college students.

Really?

If you are saying you won’t do something that millions of other people are already doing, that’s a sure sign that it’s going to disrupt the hell out of your business and you’re in trouble.

If you’re not planning to work differently, if you’re not thinking differently, then you’re just out of touch, you’re just one step away from irrelevance. You’re fighting the flow upstream and getting pushed towards disaster.

The one constant of the internet-enabled world is that you have to be ready to change constantly. Resistence is not only futile, it’s stupid and very costly in the long run. It’s cheap and easy to be social right now, same for mobile – it won’t be in the future.

Right now you have two choices.

Start experimenting with how to adapt to these new methods

Start figuring out what people want to talk about on social media. When they’re using their phones at a store, for searching on products, when they check-in, tweet or update their facebook status.

Start talking to them. Start sharing content that isn’t marketing messages pushed down their throat, but helps them.

Start trusting consumers to talk to you about your brand, your products and about what they want from their bank or services provider. Understand you can’t control the conversation, but you can and should participate in it.

Open up new products and services based on social media. Get consumers to give voice to their needs and help you form those ideas. OCBC, DBS, First Direct, ASB, Comm Bank are all trying different types of crowdsourcing to develop better relationships with their customer base.

OR… Ignore the obvious, get ready to be displaced

Our customers don’t feel safe using Facebook for login!

But some of them might… how long before most of them will? How do you meet your KYC requirements and keep customers safe when allowing them to do this? Are you going to wait till everyone else is doing it, or are you going to learn how to do it properly and securely now. Are you asking your compliance teams to find ways of figuring out how to do this stuff safely?

It will take years for the mobile wallet and NFC to take off!

Right now Google and Apple are eating your lunch and you don’t even know it. You are getting ready to write off the one device that is most critical for connections and context with your customers in the later part of this decade. Someone else is going to own your customers, and as banks we’re going to be paying the likes of Google to include our branded card in their wallet, or our products and services and messages on their platform.

We already have to ask permission from Google and Apple to give our customers our App.

Don’t want to change! You will…

The fact is most of the last two decades we’ve been facing constant change, and no one organization has been able to resist the shift because customers decide how and when you’ll engage with them.

Customers have already decided they want their mobile device to be their bank. They’ve already decided that they want to discuss your brand and your service capability in the open community of social media.

Now it’s time for you to decide that you want to stay relevant to your customers. Or ignore the obvious and go away.