The Complex Job of Producing Simple Financial Services

There has been a futile tendency amongst regulators to view 'simple' retail financial services as merely 'basic' or 'vanilla' versions of existing products. And the Treasury's aspirations in this area have not improved, at least as of February 2012.

Perhaps ironically, the route to simplicity and transparency is much harder than producing a complex product that no consumer really understands. To produce a simple retail financial service involves first understanding the complexity of the consumer problem being addressed, then figuring out the simplest, most consumable service that will solve it. That's the role of a facilitator. By contrast, those producing complex products are unlikely to be focused on the consumer's problem in the first place, let alone understand it - they're focused primarily on solving their own problems at consumers' expense.

The path to simplicity involves disruptive innovation and critical thought to remove not only the complexity but also the intermediaries ('institutions') who've failed to solve consumers' problems cost-effectively to date. Trial and error, testing and learning, flexibility and adaptability are all key characteristics of this process. Yet our financial services framework is intolerant of them. In fact, a new service could launch and undergo several iterations in the time it takes to get it authorised by the regulators in the first place. Tiny factual differences have seismic regulatory implications in the type of permission or licence needed, and this adds to the time-lag and legal advice involved. We must figure out how to make the process of decent innovation easier.

Having waded through all this treacle to actually produce an innovative, simple product, there is then the challenge of explaining very simply how it works - and on a low budget. I recall Richard Duvall saying that £60m was spent on the launch of Egg, while the marketing spend dedicated to the launch of Zopa was £35k (though the phenomenal PR benefit from launching something truly new was priceless). But perhaps that isn't as much of a disadvantage as you might expect. While we see plenty of pointless, fluffy TV ads for expensive banking products, we don't see much marketing effort devoted to the 'basic' versions. As Professor Devlin found in his research for the Treasury, low fees and ease of switching has dampened traditional institutions' enthusiasm for creating and marketing simple stuff when there's so much money to be made from complexity and inertia.

At any rate, we need to celebrate the really simple, clear and transparent explanations of how our new financial services work. I've set out some examples below from my own experience. Some relate to services that are in beta or brand new, some established. To demonstrate the ability of TV journalists to explain things incredibly simply, I've also included just one piece of excellent coverage that removed the need for the business concerned to produce videos of its own.

Other top-tips on great explanatory clips are welcome.

Nutmeg




Abundance Generation




Elexu



Zopa



Funding Circle




PeopleFundIt

The Enemies of Growth

The Economist article on The Question of Extractive Elites certainly resonated with me last week, as it did with those involved in the subsequent discussion on Buttonwood's notebook. It's another way of looking at the difference between 'facilitators' and 'institutions'.

In “Why Nations Fail: The Origins of Power, Prosperity and Poverty”, Daron Acemoglu and James Robinson, suggest "extractive economies" experience limited growth because their institutions “are structured to extract resources from the many by the few and... fail to protect property rights or provide incentives for economic activity.”

"Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ulimtately short-lived."

Acemoglu and Robinson place certain 'third world' economies into the "extractive" category, but place the developed world into an "inclusive" category on the basis that their institutions tend not to be extractive. But as Buttonwood notes, there are elements of developed economies that fit the description of extractive economies, citing banks and the public sector as the most likely candidates - although I would add the institutions that comprise the pensions and benefits industry as another example. And we should define "public sector" quite broadly to include political parties, unions, quangos and so on.

These extractive institutions tend to be linked, since the public sector is not only capable of extracting resources in a way that starves business or crowding out private investment, but it is also responsible for regulating the private institutions that are themselves extractive.

As previously discussed, high levels of public spending and national wage bargains are partly to blame for throttling the UK economy and preventing the development of manufacturing, particularly in regions which struggle to capitalise on the lower cost of living to keep wage costs down. The tax and regulatory framework favours banks and regulated investment institutions over new entrants. 

The current UK government is trying to spend less, but it's refusal to regulate means extractive frameworks are not being overhauled. Of course there is a danger that the new entrants seeking a level playing field may be tomorrow's "extractive institutions". But that would at least imply significant creative destruction in the meantime. Ideally the rise of "extractive institutions" would be kept in check by more dynamic regulatory intervention, but future overhauls may be required.  

That is the politicians' job. But they, too, have a tendency to be the enemies of growth.

Crowdfunding Politics And The Public Sector

In Lipstick on a Pig, I looked at why facilitators will triumph over institutions in the markets for retail financial services. I'm now working on the next book in the series that will demonstrate similar outcomes in the public sector. Political parties, unions, government departments, churches and the European Commission are all in the frame. Do they exist to solve citizens' problems, or to solve their own problems at citizens' expense?  

Thanks partly to the Leveson Inquiry and a vengeful Rupert Murdoch, we're building a great picture of self-interest, greed and fear of transparency in key parts of the UK public sector. Riding hard on the heels of Horsegate - which perhaps typifies the alleged link between politics, journalists and police - we've of course had the allegation that Peter Cruddas, former Conservative Party Treasurer, claimed that a donation of at least £200,000 would get you to dinners with David Cameron and George Osborne, as well as the opportunity to get your policy concerns fed into the "policy committee at number 10." Cruddas claimed "my job is to get the donors in front of the Prime Minister." The Tories say "No donation was ever accepted or even formally considered by the Conservative Party" on the cruddy basis that Cruddas was suggesting (my italics). Cruddas has resigned. 

You might also consider that the Cruddas Affair has overtones of the 'Cash for Honours' allegations. And clearly politics is Big Business because campaigning, in particular, is expensive.  The UK's political parties spent over £30m on the 2010 general election (down from over £40m in 2005). And that's nothing compared to the estimated $6bn that will be spent by candidates trying to win the coming US election (as opposed to $5bn last time around).

But let's not confuse the activities of the party officials with those of party MPs and Peers who are acting in their capacity as UK government ministers. The party people can't speak for the government. The Cruddas Affair, like the Cash for Honours idea, smacks more of a lame attempt at positioning the allure of political influence as bait on the real - and less controversial - hook: the chance to hobnob with other wealthy donors in a grand setting. You could equate the plight of anyone who climbs aboard that bizarre bandwagon to investors in Madoff's ponzi scheme or 'stupid Germans from Dusseldorf' who offered insurance against sub-prime mortgage defaults. The truth is you may not need to pay any money at all to get policy suggestions into a committee at number 10, depending on the quality of the suggestion. And the sort of people who could afford large cash donations could also simply pay lobbying firms to push their pet policies around Whitehall and Westminster to greater effect. They might even simply buy lunch.  

All of which tends to suggest that the managers of political parties have little genuine interest in policy at all, let alone solving the problems of ordinary people, and are instead merely preoccupied with choosing socially attractive candidates and wealthy fools to pay for their election. 

But enough sunlight appears to have shone into this murky world for the political leaders, at least, to realise that offering to pimp the PM or sell a peerage won't really bring in the dosh. Nervously, they are casting around for an alternative. As recently noted in the Guardian, all three UK political parties last year dismissed recommendations by the oxymoronic Committee on Standards in Public Life to limit political donations to £10,000 per donor per year, require union members to opt-in to their subscriptions being used to fund the Labour Party, to provide £3 of public funding per vote, and to allow tax incentives for small donations. Now Labour have suddenly suggested that a cap of £5,000 would be sufficient, while the Tories want a cap of £50,000 - which happens to double as a membership 'fee' for their clubby "Leader's Group" though "50 City donors" gave them more than that in the year to June 2011 (isn't it notable that these figures are stale by time of publication?). 

In other words, the major parties lack confidence that an open, transparent appeal to ordinary citizens will yield the necessary war chest. Could this be because they don't believe their policy offering is compelling enough to persuade enough citizens to part with just a few pounds each...?

This myopia has parallels with the political approach to the UK bank lending crisis. Even when 'welcoming' the evidence that ordinary people are directly funding each other's personal and business plans, the politicians still cling to the notion that Big Money will eventually pull through. As a result, they refuse to make the formal changes to the tax and regulatory framework necessary to level the playing field for non-banks, implying that this whole mass-collaboration thing is somehow just a sideshow. 

Of course, as discussed in Lipstick, the same malady affected many other 'institutions' who've lost out to 'facilitators' whose primary focus is solving others' problems instead of their own.  Just ask the ad agencies whether they think their clients find Google and Facebook more compelling recipients of advertising expenditure than the traditional media.

Refreshingly, some officials like the Bank of England's financial stability director, Andy Haldane, concur:

"In the UK companies such as Zopa, Funding Circle and Crowdcube are developing this model. At present, these companies are tiny. But so, a decade and a half ago, was Google."

And none other than the current UK Chancellor said in 2007:

“With all these profound changes – the Google-isation of the world’s information, the creation of on-line networks bigger than whole populations, the ability of new technology to harness the wisdom of crowds and the rise of user-generated content – we are seeing the democratisation of the means of production, distribution and exchange. … People… are the masters now.”

On April Fools Day, I suggested that smokers and drinkers might target the excise duty they pay on beer and cigarettes at specifichealth services. I wasn't being entirely facetious. There's no reason why a majority of voters shouldn't find it compelling to direct specific elements of their taxes or savings to specific public services, projects or even political parties. But enabling that to happen would require a little more ministerial interest in granting formal regulatory status to direct finance platforms. 

Will the lure of campaign crowdfunding prove too tempting to resist further? The Tories could offer dinner with Cameron at the Olympic Stadium.

 

A Pint and 40-a-Day Will Keep The IMF Away

I'm hopeful that the UK government's personal tax statement will end the cynical political ploy of leveraging middle class ignorance, fear and greed when introducing public spending programmes. Once we see exactly how our tax money is spent we'll get a decent perspective on the real issues. And we'll realise there's no point paying higher taxes only to get some of it back dressed up in the language of moral panic, like "Child Benefits", just so we can employ a few more civil servants. We'll start to insist that the cost of public services be cut or contained. Improved access to government data will mean we can track and demand progress.

Even better, we'll be able to target our taxes. Particularly those that are voluntary, like the excise duties on beer and cigarettes. Drinkers and smokers across the land will have a list of public funding options at the bar or on cigarette machines.

Toxic taxes crowdfunding toxin removal, rather than the purchase of toxic assets from toxic banks.

INT: TYPICAL [ENGLISH/WELSH/CORNISH/NORTHERN IRISH] PUB

REGINALD enters and approaches the bar, where GARY is cleaning a pint glass.

GARY

Evenin’, Reg.

            REGINALD

Gary. All good?

            GARY

Yeah, never bad. What’ll it be?

            REGINALD

Pint o' bitter.

GARY

Where d’you want it to go?

Gary points to the list of local, government-approved recipients of excise duty on beer.

REGINALD

(Peering through the gloom) Rehab centre.

GARY

Nearest?

               

REGINALD

(Pauses in thought) Nah, the missus is in there. Give it t'the one up the ‘igh street.

Gary presents the pint. Reginald hands him a £50 note.   

REGINALD

(Heading for the cigarette machine, muttering) Now for a pack o' fags to get me knee done.

Image from the Vreeland Clinic.