Wednesday, 27 March 2013

Labour Is Still Pushing Financial Capitalism

When Gordon Brown (remember him?) repeatedly proclaimed the "end of boom and bust" he was declaring his belief - along with that of his fellow group-thinkers - that capitalism had found a way to become sustainable. But his support for unbridled growth in everything from investment banking to the Private Finance Initiative eventually revealed he was hooked on financial capitalism, rather than the 'real' capitalism of employment and productivity. Look at how ISAs, for example, have become a drain on the 'real economy'.

Ed Milliband has been trying to repair Labour's image with some lipstick apologies here and there, but old habits die hard.

Recently, the party released "An Enterprising Nation", a report by its Small Business Taskforce. To be fair, there are some good insights into the problems faced by small business, as you would expect from the membership of the taskforce. But, surprisingly, the report contains no proposals for short term solutions, or even medium term solutions. One suspects that either the collective intelligence had already fed all those ideas into the government, or the left wing political establishment doesn't grasp the need to foster an environment in which new businesses can start and thrive today.

Academic as they may be, perhaps the worst of Labour's long term ideas is that of a US-style Small Business Administration. It's an idea I first heard from them in November 2011. And as I pointed out then, the SBA programme had already gained a somewhat unhealthy reputation through David Einhorn's book "Fooling Some of the People All of the Time." Heavy application of the Labour lipstick has now branded this idea the "Spark Umbrella" (a nod to the many local German savings banks, or sparkassen, to which this programme actually bears no resemblance).

Basically, the idea is to saddle the UK with 20 lending vehicles, or "Sparks", funded with £10m of public money (naturally) and £90m drawn, no doubt, from the traditional City suspects. Each Spark would fund its lending to local businesses by selling the loans to the "Spark Umbrella" which would in turn finance the loan purchases by issuing bonds to investors eager to package those bonds into  another set of bonds to sell to... anyone stupid game enough to buy them.

The only way not to end up carrying the can for this, would be to emigrate.

But the UK already has an artificial, publicly subsidised channel for small business lending that limits innovation and competition in the retail financial markets. It's run by the UK's major banks. So we don't need another publicly guaranteed channel to crowd-out sustainable private alternatives. 

I mean, who would start a local lending business knowing that the government was about to launch a publicly funded competitor?

The government should foster an environment in which the private sector can generate alternative finance options, not simply create markets that are ultimately underwritten by the taxpayer.

The fundamental flaw in the Spark Umbrella is its reliance on securitisation (or vertical credit intermediation) to try to overcome the riskier nature of small business lending. That model is hugely expensive in terms of issuing and underwriting bonds that are prone to being mis-priced, particularly in riskier markets, as we have seen. It also creates huge scope for moral hazhard, and traditional financial institutions, intermediaries and speculators are likely to be the only potential winners - as Einhorn's book reveals. There is certainly no guarantee that the loans to small businesses will be competitive with other potential alternatives.

Anyone pointing to the US for solutions also has to understand that, like Germany, it enjoys a much more varied set of small business funding options than the UK, as Breedon reported. So it's possible that the SBA won't have crowded-out US private finance businesses in the way that Spark Umbrella would in our bank-dominated market. 

It's also worth noting that Spark Umbrella is purely debt focused, whereas only 3% of UK small businesses finance themselves by issuing shares.  

Of course, we already have a rapidly growing set of alternative financial services platforms that are beginning to solve the problems that the Spark Umbrella will not. Peer-to-peer lending and crowd-investing provide finance to borrowers and entrepreneurs in small amounts directly from many people at competitive rates from the outset, using both debt and equity finance. There is no need to create new markets for these platforms to grow. However, the government has been dragging its heels on the removal of regulatory barriers and perverse incentives, and that does represent an opportunity for opposition parties. 

True, the government has directed some of the Business Finance Partnership funds through peer-to-peer finance platforms. But that funding goes directly into the businesses who borrow - not through countless intermediaries in the financial markets. Labour needs to recognise the difference.

Tuesday, 12 March 2013

Monetizing You

Jaron Lanier, the computer scientist and writer, has been busy explaining that we need to reward each person for the data they reveal or post on the Internet, otherwise it will become unsustainable as an ecosystem. This idea perhaps chimes with the EU's requirement for much more explicit consent to 'cookies', futile as it has proved to be so far. Could we see the advent of paid-for marketing cookies, or will technology evolve to get rid of this problem entirely?

To date, the debate about the future of the Internet has largely been driven by investors, principally, who have insisted that online businesses generate short to medium term profits. Fearful of killing off a nascent commercial channel, most Web 2.0 giants have clustered around the advertising model, making their services 'free' to the consumer, and leaving advertisers to pass on the cost of marketing, as happens offline. Others have adopted the 'Freemium' model, in which perhaps only 10% of customers are relied upon to pay for extra functionality and so on, thereby subsidising a free ride for the rest. Indeed, Jakob Nielson has estimated that:
"In most online communities, 90% of users are lurkers who never contribute, 9% of users contribute a little, and 1% of users account for almost all the action."
But since the dawn of television, in particular, advertisers and ad agencies have been on a quest to figure out who sees their advertisements and how to target their ads ever more accurately. The open nature of Internet technology and the advent of the 'cookie' has made it easier to follow users from site to site, targeting advertising at them along the way, and some internet service providers have gone so far as to filter traffic as it passes through their services. 

Now it's one thing for advertisers to rely on data from your TV set, but people are understandably less comfortable about being followed around all day and having their every preference logged. Jaron Lanier says participants should be paid for that privilege, and I have to agree. Unless participants feel they are being compensated directly enough, they will stop participating online - to the extent they have the choice. This is not just a matter of persuading the 1% to remain high content contributors, or the 10% to actually pay for stuff in the Freemium context. The other 90 to 99% also need some recompense for agreeing to reveal evidence of their behaviour. Great service may be enough in some cases, but otherwise people will surely want a fairly direct economic return for disclosing their location etc., whether in the form of cash or some other sufficiently direct economic benefit, like genuine discounts or cost savings.

While a legal solution seems rather unlikely, the battleground is at least becoming more defined as the European Commission struggles to hold the perimeter of its (unduly broad) General Data Protection Regulation. Unfortunately, the media appears to be naively positioning this as simply big business against the individual, equating BT's interests with those of US retailers. But this fails to recognise that old world institutions, like the telecommunications companies and traditional media empires have the knives out for the revenue streams enjoyed by facilitators like Google, Facebook and others. Yet it's also important that the interests of consumers are represented in a balanced way, rather than by unduly paranoid consumer advocates or European Commission officials zealously toting their single market fantasy. The European Parliament isn't exactly the best candidate to stand in for the pragmatic consumer...

However, for any problem on the Internet it's always worth looking for an acceptable technological solution before a legal one.

The first is the addition of payment features within online games and other applications. In-app payments are increasingly common, but there is a lot more scope to make it easier to charge for content. It's not enough to be able to host advertisements on blogs or email. We need low-friction features to enable direct payment without erecting pay walls, like the TipJar on Vimeo. Others, like HonestyBoxx, are enabling people to monetize their advice by adding an application to their blogs and and personal web sites. But now that we've been forced to endure all these 'cookie' consent boxes that hover around European web sites, why not add payment functionality to sweeten the deal?

Of course, all these solutions suffer from being human-readable, and I believe that the Internet will evolve to remove the issue altogether. As I explain in my recent article for SCL, once product data is published in machine-readable format, the marketing challenge won't be to find customers, but to enable products to be found by customers' machines as required. In a 'Linked Data' world, our computers won't need to disclose anything about us. Our own personal 'spiders' can run around the Internet collecting and analysing openly available data and reporting their findings to us personally. As a result: 
 "a combination of Midata, Open Data and Big Data tools seems likely to liberate us from the tyranny of the 'customer profile' and reputational 'scores', and allow us instead to establish direct connections with trusted products and suppliers based on much deeper knowledge of our own circumstances."

Image from TheTechStuff.

Saturday, 2 March 2013

'Bank' of Dave Goes P2P

I've hugely enjoyed the documentary series tracing Dave Fishwick's valiant efforts to start a small community 'bank' in Burnley high street. 

I say 'bank' because, while it made for good television to say so, Dave didn't necessarily mean "bank" in regulatory terms. His goal was to enable local people to lend to other local people and businesses without profiting unduly. He rightly thought that's what banks are supposed to do, so he was determined to call himself a 'bank' to make the point. And his good-humoured, optimistic crusade has certainly rammed the point home.

While Dave also didn't necessarily set out to launch a peer-to-peer lending marketplace, his path to launch was eerily familiar to those who have done so. The FSA wouldn't speak to us either, prior to the launch of Zopa in March 2005, but was all too keen to discuss the detail afterwards. Fortunately we'd done our homework and didn't have to stop taking money. At least that made for good TV in Dave's case.

Since 2005 a dozen other management teams have also threaded their way through the regulatory maze to directly link savers and borrowers, or investors and entrepreneurs, via online 'P2P' lending or crowd-investing markeplaces. And it's good to see that Dave's journey has led him to adopt the peer-to-peer model on the high street. He may be facing the bricks-and-mortar problems that the online models solve, but at least he's shown there is very real demand for innovation amongst people who still manage their finances by walking around. And the benefits to the 200 local borrowers who are paying a net 5% to local savers are undeniable.

Unfortunately, there are still unnecessary difficulties in structuring these businesses, regardless of whether they facilitate loans or investments in shares or debt. The sources of that uncertainty were summarised here in January 2012, here in February 2012, here in June 2012 and here in July 2012. Industry CEOs and others met policy and regulatory officials to discuss these difficulties at a summit in December 2012, and again last month (as summarised here). The salient points were also explained again in my submission to the Parliamentary Commission on Banking Standards.

However, while it's clear there is plenty of shared frustration and many officials have been supportive in discussions, there is worryingly little sign of actual regulatory change.

We need a lot more war stories like Dave's.

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