Fixed Interest

Well surprise, surprise. Even when setting the interest rate benchmarks that underpin global trade and finance, UK banks acted out of naked self-interest. The emails confirm a culture that was already evident from so many other fines dished out in the past few years, as the FSA has hastily sought to redeem itself and the Treasury for allowing the culture to develop in the first place. A culture where it's routine to forget the compliance department, forget the customer, forget the taxpayer, just solve the bank's problems at everyone else's expense. 

The interest rate swaps scandal is yet another 'new' case in point.

This is why any number of bank bailouts will ultimately fail. The banking model is not built to solve customers' problems. Banks are not facilitators.

We need to develop new models to take over as the banking model declines further. Otherwise we'll have no efficient means of moving money from those who have it to people and businesses who need it.

But let's not just blame the banks. Where is the Treasury in all this? Why was Barclays the first to be outed over the latest saga and not RBS, which is 82% state-owned? Was Lloyds involved? The Treasury seems rather passive and unable to appreciate the calamitous state of the financial system or - ironically - how to 'fix' it. It was also revealed in the Times this morning that the Treasury Minister, Mark Hoban, has previously resisted calls to regulate the London Interbank Offered Rate (Libor) - or Liebor, as it should be known - that is at the heart of the latest scandal. Coincidentally, he has also resisted calls to introduce proportionate regulation to encourage the growth of alternative financial models.

Fortunately, the House of Lords is taking a different view. It seems Parliament is going to have to be a lot more vigilant over our financial affairs in future.

"Show Me The Money!"

This week's 'technical issues' experienced by RBS/NatWest have been quite revealing. While the financial crisis has shown people how banks can suddenly fail to have enough money to pay depositors, this week has demonstrated how a bank could fail even when it's solvent. 

Solvency concerns are what led the UK government to own 85% of RBS in the first place. But systems failures add a more insidious dimension, especially in relation to high volumes of transactions. Securities trading system issues have tended to get most of the press in recent times - like the 2010 'flash crash', the cause of which is still worryingly uncertain. And we have seen poor record-keeping cause 'fraudclosure' problems in the US, when banks couldn't prove they had the right to force the sale of homes when borrowers defaulted on the underlying mortgages. RBS has also been among the banks fined for gaps in compliance processes. But the technical issues this week strike at the very heart of retail banking.  

Contrary to popular terminology, your bank does not hold 'your money'. The bank takes the money that is paid into your account and treats that money as its own. Your current account or business banking account is just a record of what you paid to the bank, what you asked the bank to pay out to whom, and the remaining figure - the 'balance' - which is the amount of money the bank owes you. The bank can pay that debt to you from whatever source it chooses to offer you (e.g. cash in an ATM or by transfer to others). In other words, at its heart retail 'banking' is really an accounting service, with payment services bolted on. And that accounting service - like, say, an email account - is really only useful if it is kept up to date - so you can see how much money has been paid in/out or is owed to you at any time.

But each bank's accounts don't exist in a vacuum. The entries in your account need to tally with the account records of other banks' customers you deal with, so all the individual debtors and creditors in the network know where they stand at the same time.

This makes RBS/NatWest's failure to process certain payments data last Tuesday and Wednesday nights completely unforgivable. It seems to have led to payments received not being recorded, and later payments not going out due to an apparent lack of funds. They say they "want to reassure customers that no one will be left permanently out of pocket as a result of this." But this misses the point of a bank account, both for its customers and the customers at other banks they deal with, and so on throughout the entire retail banking system.

Personally, I switched from NatWest years ago, when they wanted to charge me £12 for my current account. But perhaps RBS/NatWest call centres are receiving calls from others that go something like this:

On The Futility Of Cookie Consents

It's a month or so since the Cookie Law took effect and already it's an exercise in futility. I haven't clicked on a single cookie consent, yet I know my browser and hard drive are lousy with the things - both the helpful kind that improve my experience of using the web site I'm visiting, and the small proportion that feed information about me to third party advertisers.

There are two reasons for not clicking on cookie consents. 

Firstly, I don't reserve a single minute in my day for reading cookie consents. Life is short. Every second spent not reading cookie consents is a priceless investment in something potentially productive. Sleeping is a better use of time. Not reading cookie consents is in the same category as never watching American celebrity murder trials, or Big Brother or X Factor. Or... well, you get the picture. Reading cookie consents is a true waste of time.

Secondly, the Cookie Law is a one-size-fits-all requirement for user consent before setting all types of cookie - both those that will help you retweet this post and immediately return to read more, as well as those that will lead someone to conclude you have a passion biscuit recipes after you've read this post. I have no problem at all with the first kind, and it seems overkill to ask me to opt-in or out to them being set. I can clear them if I want to. And making me click "I accept" for all types of cookies doesn't even scratch the surface of the very specific, difficult challenges posed by the second kind of cookie: how and why the data about my movements is going to be shared with advertisers, and ensuring it is in fact used appropriately. Those challenges need the pragmatic, holistic attention of a WEF 'tiger team', not the overly zealous intervention of Eurocrats using data protection law as a means of delivering the single market fantasy.

Image from Jefferson Park.

Rethinking... Financial Services

How time flies when you're having fun. When not engaged in rethinking personal data, I've been experiencing the deep joy of rethinking financial services regulation, now that the Financial Services Bill has reached the House of Lords.

As I've explained in the other place, this is not about flogging a dead bank. This is about enabling the growth of new facilitators - the same kind of evolution towards cost-efficient and transparent financial services that we have already seen in other retail markets. The same evolution that Andy Haldane of the Bank of England has advocated - or Lord Young, for that matter.

My experience so far leaves me optimistic that the UK's creaking regulatory framework can be successfully overhauled. Unlike the MPs in the House of Commons, the Peers are less interested in the politics and more interested in the detail of what works and what doesn't. For that reason, the passage of the Financial Services Bill through the House of Lords provides a rare and invaluable opportunity to confront the government - and the Treasury - with all those gripes and suggestions that have been ignored for years.

So please take that opportunity - whether it's via comments on media stories, through the blogosphere or any contact you may have with the powers that be.

Next stop: Europe.

Image from The Philosopher's Magazine.

Why The Banks Have Not Been Googled... Yet

In March this year, Andy Haldane, Executive Director of Financial Stability at the Bank of England rather helpfully gave a speech in which he likened peer-to-peer finance platforms to the likes of Google and eBay. But the basis he gave for his comparison overlooked a fundamental difference in the UK's retail markets for financial services compared to those for online search and second-hand sales. Funnily enough, that difference lies in the regulatory and tax framework for which both the Treasury, and to a large extent the Bank of England, are responsible.

Specifically, Andy Haldane said (at pages 14 and 15):

...birth and death rates in banking are lower than among non-financial companies. They are lower even than in other areas of finance. Death rates among US banks have averaged around 0.2% per year over the past 70 years. Among hedge funds, average annual rates of attrition have been closer to 7% per year. Birth rates are similarly low. Remarkably, up until 2010 no new major bank had been set up in the UK for a century...

Commercial peer-to-peer lending, using the web as a conduit, is an emerging business. For example, 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. If eBay can solve the lemons problem in the second-hand sales market, it can be done in the market for loans.

With open access to borrower information, held centrally and virtually, there is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in time become the surplus links in the chain. Where music and publishing have led, finance could follow. An information web, linked by a common language, makes that disintermediated model of finance a more realistic possibility.

While it is helpful to find some official recognition of both the lack of innovation and the paucity and size of new entrants to the banking market, the root cause of this scenario does not lie in the lack of a common language or information web (though I've been longing for a semantic solution to price comparison sites for years now).

A clue to the limitations of Andy Haldane's hypothesis lies in his measure of Google's success - its stock market valuation - when a far better measure for current purposes is the scale of Google's advertising revenue. In 2001, Google's total ad revenues were about $67m. By the end of 2011, those revenues had risen to $36.5bn, up 29% on the previous year, and represented 96% of the big G's total revenue.

But here's the killer: Google's advertising revenues exceed the total revenue of the entire US newspaper industry, and are rapidly catching US television ad spend.

How did this happen? Well a clue lies in the fact that Google has 75% of search advertising spend. Google's search feature is second to none and is clearly a far better knowledge filter than the traditional media.

So let's assume, for argument's sake, that Andy is right to suggest that Zopa's platform offers the same kind of utility, convenience and empowerment to savers and borrowers as Google's search function offers to the average internet user. When Google was 7 years old, in 2005, it's ad revenues were about £6bn. Seven years after its launch, Zopa has enabled £200m in loans, and is still growing rapidly, yet this represents about 2% of the UK personal loan market, according to the company.

Is something else at play that would explain the small number of new entrants and their slower rates of growth in the markets dominated by banks?

As previously point out, the critical difference is surely that there is no regulatory regime presenting traditional newspapers as officially sanctioned and somehow 'safe'. No tax incentives to persuade consumers that its better for them in the long term to buy a newspaper instead of searching for stories online. No compensation scheme exclusively for advertisers who don't get what they expect from their newspaper advertising spend, leaving Google advertisers to fend for themselves. No taxpayer guarantee that allows newspapers to spend whatever it takes to maintain market share.

Banks, on the other hand, rejoice in all that protection, even though we know they are failing to fulfill their fundamental obligation to move money efficiently from those who have it to the people and businesses who deserve to use it.

Some of the peer-to-peer platforms have formed the Peer-to-Peer Finance Association and campaigned for a level playing field, so far to no avail. But given all the official protection from innovation and competition, it is unrealistic to assume that new financial platforms will thrive as they should without some alteration to the regulatory and tax framework to enable more rapid market entry and strong, responsible growth.

Image from Silverback.

How Much Will Geldof Fund Invest In Sub-Saharan Africa?

Even Bob Geldof has realised that investments beat donations in Sub-Saharan Africa. Over 25 years after launching the 'Live Aid' mercy mission, the "8 Miles" investment fund that he chairs has even taken a little money from good ol' CDC Group, Private Eye's favourite foreign investment vehicle. Presumably that means 8 Miles is a reasonable bet, since CDC hasn't exactly been adventurous to date. But reports over the past few months have varied in terms of the overall amount 8 Miles seeks to raise (£750m, £450m, £400m,  £630m, £290m) and how much has actually been raised (£200m, £125m). Is that simply salesmanship?

I'm interested to see how this turns out. I only hope it's not left to Private Eye to explain...

We Need A Lot More Little Things To Go Wrong

As Nietzsche said (I always wanted to begin a post that way), "That which does not kill us only makes us stronger."  Or as my first boss was fond of saying, "We only learn when things go wrong."

Both are right. But implicit in both sayings is survival and survivability. 

Survival of the fittest, building strength through adversity - this is how species evolve. It's what makes Kipling's poem "If" so stirring. It's the difference between all those 'best practice' presentations at corporate off-sites (let's be honest, they're about rescued screw-ups) and the whirring of shredders at Arthur Andersen. It's what turns complaints into fixes, features and products instead of fines.

Yet all the research suggests it's impossible to 'pick winners'. In fact almost all significant events in our history are Black Swans - surprise events that have a huge impact and which we rationalise by hindsight. We have no real idea which ventures will succeed and which will not until the facts and figures emerge. And even then we don't know how sustained that success will be. Indeed, sometimes we don't even know what success looks like, expecially with not-for-profit projects or organisations (including government departments - and the European Commission). In his book "Adapt" (a veritable bible on the importance of survivable failure) Tim Harford explains the need for built-in feedback to distinguish success from failure in such contexts. 

But, hey, the Euro had built-in entry criteria, and they were ignored because the politicians refused to countenance failure as an option.

And there you have it. Above all, as Harford emphasises, the critical thing is to accept the risk of failure, but to ensure that such failure is survivable.

Our political and economic leaders don't grasp this any more today than their forbears did when negotiating the Maastricht Treaty. Because they see it as their job to protect 'the system'. But by continuing to back the same institutions, the same systems, and essentially replicating and deepening the same old regulatory regime, they're merely resisting the tide of evolution. Rather than cutting their losses, they're busy hurling the big dice again, and again, and again like so many casino junkies.

It's impossible to mix too many metaphors in a situation like this. So here's another: if Necessity really is the mother of Invention, then we have to get her to a fertility clinic.

We need more trials and more errors of the survivable variety. In other words, we need a hell of a lot more little things to go wrong before the big things start going right.

Maybe we should make it our leaders' job to promote innovation instead of protecting the system?