Tuesday, 30 March 2010

Small Is Big In The Post-Credit Economy

Phillip Bond of ResPublica made an interesting comparison on Newsnight between the current economic situation and the Industrial Revolution. He says we lack the decentralised application of capital and encouragement of local entrepreneurs that drove the industrial revolution, although we do have (in the internet) the equivalent of the old periodicals that allowed everyone around the country to learn what worked and did not work in other industries.

This comparison is a little thin. There are lots of theories as to how the Industrial Revolution(s) were unleashed in Britain so successfully (putting aside the 'dark, satanic mills' of course; and child labour; and pollution; and the spread of disease through overcrowding in the cities - apart from those things, the revolutions were a success). But all the theories make Phillip Bond's comparison more instructive in terms of the economic drivers he left out,  rather than the few he mentioned. 

The UK is not in the midst of plundering a massive colonial empire to fill the coffers back home. The banks tried the modern equivalent, but quite literally failed, leaving the economy desperately short of capital. There is not a vast horde of 'cheap labour' - i.e. convicts, slaves and droves of peasants forced off agricultural land. Though there are many employable people out of full-time work who are looking for opportunities. There is little manufacturing that might be improved by inventions that vastly increase productivity. And Britain is not in transition from a low-tech agrarian economy to a relatively low-tech industrial one, where yesterday's farm worker can readily operate any machine without hours of training and health and safety supervision.

In the quest for sustainable capitalism, I suspect Britain will go through another cottage industry phase - a pre-Industrial Revolution, if you will - in which people come to grips with this new post-credit, post-capital reality. The trick is to find small opportunities that pay enough, rather than giant opportunities that pay a fortune. Some of the ensuing small businesses will no doubt grow very large, and eventually the whole cycle will repeat. But even if the pundits are right in saying these cycles are happening faster and faster, it will take a decade to repair the public finances. Life is what happens while you're making plans. For examples of the sort of small opportunities I mean, take a look at Fab Labs (actually invented at MIT): 
"Fab Labs give people the tools they need to create technology, to be creative and make the stuff that they can't buy in the shops. Manchester led the first industrial revolution and now it is at the centre of a new industrial revolution where anyone can make anything, anywhere using digital manufacturing."
But even low cost opportunities require funding. So where is the diffusion of capital to meet these diffuse capital requirements? 

All 3 would-be chancellors last night pushed banks to "lend" more money to small businesses. But what's needed is investment - venture funding that can be lost outright - not credit that operates as a drag on cashflow that would be better reinvested in the business. Trouble is, neither taxpayers nor banks can afford that sort of support in the next few years. Even venture capital funds, which generally raise money from institutions and the wealthy, are finding it tough.

Start-ups have generally always been funded from a lot of different sources: owners' savings, seed capital from angels, venture capital and deals with suppliers. In times of scarcer capital, these sources are going to fragment further, so that it will take many more capital providers to service each opportunity. Similarly, the lack of returns on bank savings deposits and other investments may mean that small venture funding becomes a more common investment amongst those with surplus cash. Already we've seen that at Zopa. Other internet platforms could help in reducing the complexity arising from many sources of capital chasing the same opportunity. A great example are those that enable invoices to be paid early, so that small suppliers can afford to sell to large companies, which are commonly extending the time they take to pay their bills.

After all, necessity is the mother of invention.

PS: It was interesting to see some of these themes in the second part of Paul Mason's Newsnight piece on Britain's economic problems, particularly the idea that we should focus on opportunities that pay 'enough' rather than a fortune - optimising rather than maximising profit.

Wednesday, 24 March 2010

Accept That We're Ruined, Plan How To Rebuild...

Following this morning's Spectator Business function - and the subsequent damp-squib budget announcement - you could not help but conclude that the UK's public finances are in ruins, yet politicians on all sides want us to wait until after the General Election before they begin to take any action (the Lib Dems would wait til 2011). They're in denial, and anxious that the electorate remains in denial too.

But there is no point waiting for the politicians. We're missing a golden opportunity. The election should not be about expressing anger and blame for New Labour's systematic destruction of the public finances. Instead, the election should be a choice between competing visions for how to rebuild the economy. All sides must be forced into saying how they would do it.

To make the most of this opportunity, we must first resign ourselves to the parlous state of our finances and accept the world has changed.

So let's accept that Britain isn't simply 'facing economic disaster'. It is one. Britain is not 'in decline'. It has fallen. There is nothing more we can do to 'save the country's finances', because there are none to save. Politicians can't make 'savings' here that may be 'spent' there. As Liam Halligan pointed out, the only choice is between more appalling over-expenditure, or less of it.

Let's also accept this wasn't an accident that might somehow rectify itself. Patience Wheatcroft (now at the Wall Street Journal), rightly points out that David Cameron has been too nice in merely saying Gordon Brown has merely failed to repair the roof. He should've been constantly and furiously berating Gordon for "removing the roof tile-by-tile": grabbing pension money, auctioning mobile spectrum for insane prices that damaged telco balance sheets, concealing public infrastructure costs in government-guaranteed PFI programmes, growing the public workforce by 20%, and deliberately borrowing more and more so that, in the bitter end, the Bank of England was forced to print £200bn.

But Cameron blew his chance. The time for anger and blame is over. We have to resign ourselves to the fact that we are stuck - our kids are stuck - with a £170bn public deficit, £80bn of which is a seemingly immovable millstone...

In planning how to proceed, we should not be distracted by hand-wringing about "cuts" and "higher taxes", and the timing of those. They must happen. But there are other critical issues that remain unaddressed. For instance, where is the incentive for investment in new export markets to redress the ever-widening trade deficit and the fact our biggest export market (the Eurozone) is in a similar, and worsening economic state? The UK must have some strengths and opportunities, and we need the political leadership focusing on those rather than playing for time.

Rant ends, for now ;-)

Friday, 19 March 2010

Role of Social Media in Consumer Finance

Recent discussions about whether new entrants are pushing banks to the back office of the consumer finance space have prompted me to update several previous posts on the role of social media and brands vs facilitators.

Of course, "social media" refers to the co-operative mix of internet and mobile  network services that are themselves increasingly networked. Look at all the platforms or applications that enable people to send and receive Twitter "updates" for example. This enables sharing of content amongst users at a time and location that suits them and whatever activity they're engaged in at the time. Unlike the off-line media, we can  even have all our social media available on one screen. So any single social medium is merely a hint of something very much larger:

Anyone who believes we can predict the social network service that people will choose to manage their finances will be disappointed. Human physiology may be reasonably predictable, but human behaviour is not. There is no "mass" of consumers, no bell-curve to accurately describe their behaviour to enable us to predict with any precision how each person is likely to behave next. Even Twitter could disappear in a sudden puff of user indifference, like others before it. Black Swans are lurking - surprise events that have a huge impact and which we rationalise by hindsight.

Yet it's tempting to try to explain the social media as a reflection of numerous trends that signify a desire to assert control over our own personal lives and experiences. Perhaps this at least explains the birth of social media, if not the basis on which it will be sustained.

At any rate, the commercial challenge the social media currently presents for any business is how to facilitate the individual's desire for control, rather than be shunned for failing to do so or even for trying to resist or subvert that desire. This means presenting services that are designed bottom-up and which are highly flexible and adaptable, rather than inflexibly geared to suit the product provider's top-down view of the world.

To distinguish the two approaches, one might call providers of bottom-up, adaptable services 'facilitators', and the providers of top-down, inflexible products 'institutions'.  Another way of summarising the difference between them is that facilitators primarily exist to solve their customers' or users' problems, while institutions are primarily driven by the need to solve their own problems (like 'delivering value to shareholders').

The requisite flexibility and adaptability is delivered by the "architecture of participation" of the kind created by various Web 2.0 facilitators and their users that has enabled us to break down and personalise the one-size-fits-all experience traditionally offered by music labels, book publishers, retailers, package holiday operators, banks and political parties. Such facilitators make the difference between us 'raging against the machine' on customer 'help' lines in a lone, fragmented way and achieving real change by acting as individuals, yet in a concerted fashion.

In the social media environment, the consequences of institutions putting their own needs ahead of their customers can't be overstated. The institution risks tapping into the dark side of the trends mentioned above, and being exposed in a borderless environment of interested, active people. In public policy terms that means being exposed to the sense of frustration and disillusionment responsible for both the plunge in faith in society's institutions and declining articipation in formal politics over the past 30 years, and the corresponding increase in political awareness, informal political action and consumer activism over the past decade. In terms of change theory, people have recovered from their shock at the parlous state of  'the system' and are doing something about it. Similarly, that sense of frustration and disillusionment marks the turning point between vicious and virtuous circles of consumer sentiment and related publicity. This was a key difference between President Obama and the other guy.

This is nicely illustrated by the "Influence Ripples" graphic from David Armano's "Logic and Emotion" blog.

What struck me about this graphic was not so much the ripple effect of conversations about a product, but the 'aerial' view of the customer community (specifically in the case of Twitter, blogs and other "Level 2 Ripples"). This would seem to be a great tool to communicate about, and focus resources on, the architecture of participation users are relying on to personalise their use of a provider's products - a 'virtuous circle' - or bitch about them - the 'vicious circle' of adverse comment.
There are several instances of this dynamic at work, driven by privacy concerns (Phorm, the Data Retention Regulations) content ownership (see the ripples emanating from Facebook's revision to its privacy and content ownership terms) and straight "us vs them" (e.g. Ryanair's collisions over its 'idiot blogger' remark, which viciously spiralled on reports they were going to charge £1 for answering nature's call).

The dynamic relationship between facilitator/institution and its customers is extremely complex, largely because it is driven by the activity in which each customer is engaged at the time of interaction, as well as the stage at which each individual customer has reached in his or her relationship with the facilitator/institution or its product(s). The  following (rather crude) slide is my attempt to illustrate this complex dynamic in the consumer finance context (click to enlarge):

Finally, this dynamic is perhaps even more critical for B2B product providers to understand. Not only may their immediate business customers have their own social media presence (even if only to relate to retail customers), but the B2B service provider's own product is also part of the end user's experience. If the B2B provider's element of the consumer service or experience is unsatisfactory, sooner or later that fact will show up in the 'ripple analytics', and the B2B provider will come under intense public (and published) pressure to resolve the issue. This is happening increasingly in the area of public sector projects, for example, as taxpayers become alarmed at the terrible state of the public finances.

In this environment it's pretty much terminal for a business to ignore the social media or the supporting facilitators, and not to see itself as part of the social media mix. In fact, since we have the Webby Awards honouring business excellence on the internet, why don't we offer Webley Awards for businesses that don't get it (as in the old imperialist who retires to the library with his service revolver and a bottle of port)?

Tuesday, 16 March 2010

Gordon: Retail Bankers' Hero To The End

Funny that Gordon Brown has chosen the last possible minute before his last ditch General Election to announce that UK banks will finally allow credit cardholders to repay their highest rate charges first - especially when President Obama let this cat out of the bag in May 2009.

When finally implemented, this long overdue requirement will apparently save UK cardholders up to £500 million a year. So it's far less amusing that Gordon Brown appears to have been rather passive on the issue of excessive bank overdraft charges, worth £2.6bn a year. The 20% of overdraft customers with a claim have had to wait years while the Office of Fair Trading has fumbled around in the courts at taxpayers' expense before meekly announcing a 'wait and see' approach to the problem earlier today. No last minute offer of regulation from Gordon there.

Of course, the end of 'negative payment hierarchy' on credit cards is an affordable goodwill gesture for banks. They aren't really in the business of lending money anyway, as the Bank of England found in its February Trends in Lending Report. They're in the business of hoarding it to 'repair their balance sheets' (which largely seems to involve paying bonuses and lobbying for regulatory restraint). By the same token, however, now is not a good time to lose billions in overdraft fee income, regardless of the fact that cash-strapped customers need it more, or that it's a rounding error on the bailout costs to date.

In other words, Gordon Brown is not really committed to ensuring fairness, even when there's a General Election on the line.

Monday, 15 March 2010


These guys have a real job to do in Barcelona

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