The Beginning of The End of Consumer "Banking"

Funny to see a story from John Gapper in the FT this morning, saying technology will hurt retail banks but not kill them, only a few pages before First Direct admits it mis-sold complex investment products to consumers.  While I agree that innovation doesn't 'kill' anything, and must co-exist with what it is replacing, John seems to have a misplaced faith in retail banks' ability to maintain their direct relationships with consumers.  Banks are steadily being relegated to the back-office of retail finance.

 

John may be right to point out that banks lose money on the limited activity of offering current accounts, and possibly even savings account functionality, so that these are not attractive areas in themselves for technology businesses to enter. But of course you can't view those 'products' in isolation. They are just part of the 'bait and switch' routine that banks operate to persuade people to part with their money so the banks can earn far more from using those funds for their own ends.

To understand what the tech companies are doing, you have to consider how much money the banks make out of the end-to-end activity of robbing investors/depositors of yield while fleecing borrowers with expensive loans - and making everyone pay a lot for slow-cycle payment processing. 

 

It is wrong to say that technology companies are merely playing at the edges of 'banking' by offering payment services and person-to-person loans. This is all part of the strategy for disrupting the 'banking' sleight of hand.

 

Tech companies know that if they can provide a decent, transparent consumer experience to savers/investors on the one hand, and those who need the funds on the other, then they are in a position to cut the cost of moving money between the two. In fact, the money may not even have to move at all: the important issue is who is entitled to it, and whether it is available. 

 

You don't need a bank to keep the data and transaction records that tells you who owns the funds. It's all just data, as Marc Andreessen is quoted as saying. 

 

And it's far safer to separate the transaction processing and record-keeping function from the cash, which should be held separately from the processor's own funds. That's how e-money institutions, payment institutions, P2P lending and crowd-investment firms are set up...  They may rely on segregated commercial bank accounts for holding that cash, but the banks who provide those accounts have no control at all over which consumers own the money in them, or what those consumers choose to do with it amongst themselves.

 

In the EU, the regulatory support for such new business models began in earnest in Europe in 2000, with the advent of the first E-money Directive, and has snowballed with the Payment Services Directive in 2007, a new EMD in 2009 and the proposed revamp of the PSD. There are now hundreds of these payment institutions in the UK alone. And it's no coincidence that the UK has led the way in both creating and regulating P2P lending and crowd-investment platforms.

 

All of this spells the beginning of the end for consumer 'banking'.

 

 

Facilitators and Institutions Defined

The distinction between 'facilitators' and 'institutions' is a theme that has emerged quite strongly in this blog and is discussed in Chapter 2 of Lipstick On a Pig. In essence, I've defined "facilitators" as organisations that exist to solve their customers' problems; and "institutions" as organisations that exist to solve their own problems at their customers' expense.

To be more specific, I've extracted the following characteristics that I believe mark an organisation as being one or the other. Broadly, these characteristics group into themes of alignment, openness, adaptability, transparency and responsibility.

So, a 'facilitator' is organised to solve its customers’ problems, operates openly, adapts well to changing circumstances, is committed to transparency and takes responsibility for the impact of its activities on the wider community and society.

I update this post from time to time and am interested in any comments you may have.

Facilitators:

 Alignment

• exist to solve problems that their customers encounter day-to-day as part of wider end-to-end activities (i.e. customers don't 'pay' or 'bank', they make a payment as a single step in a much longer purchase process);

• don't presume to 'own' the relationship with people who use their products, and see customers as the controllers of that relationship;

• accurately define real problems, assess their real scale, identify root causes and implement proportionate, efficient solutions;

• view the world through the eyes and experiences of people who use their products;

Openness

• are prepared to work with complimentary businesses to support their users' end-to-end activities (including linking to material produced by others);

• seek feedback, welcome input and criticism;

• interact well with users in open forums;

• are 'free-rider tolerant';

Adaptability

• are highly adaptable and responsive to criticism; 

• allow ideas to develop from staff and users bottom-up, generating passion and connection amongst them;

• see uniqueness, change and adaptability as a source of competitive advantage;

Transparency

• work to simplify their products and users' experience;

• their terms and communications are clear, fair and not misleading;

Responsibility

• seek to make the world a better place in which to live, addressing the impact of their activities on the wider world.

Institutions:

Alignment

• Exist to solve their own problems at the expense of 'their customers';

• View the world through the lens of their own products (whether goods or services), rather than the activities in which users are engaged when acquiring or using those products;

• Regard themselves as controlling the relationship with users. 

 Openness

• Resist criticism and change – believing that their own processes, judgement and publicity should prevail;

• Impose their own views on staff and 'their' customers, top-down;

• Interact poorly with users (if at all) in open forums, experiencing 'vicious cycles' of adverse publicity; 

•  Are 'free-rider resistant';

• Mandate the use of their own add-on services, even where these are inferior those available from third parties; 

 Adaptability

• See running with the herd, or 'fast-following' as a source of competitive advantage;

• Demand that 'their' customers must become more capable if their products or experiences are to improve; 

Transparency

• Deliberately adopt complex pricing, conditions and 'pressure' techniques in their sales and marketing activities;

• Rely on cross-subsidies to distort the attractiveness of new products;

• Their terms and communications tend to be unduly complex and legalistic;

Responsibility

• Avoid addressing the impact of their activities on the wider world.

Red Tape Challenge To Liberate UK Economy

As part of its Red Tape Challenge, the Cabinet Office is now targeting laws that stifle the development of new business models for no good reason. 

So anyone who's run into bureaucracy in setting up an innovative business should submit their comments at: Red Tape Challenge for Disruptive Business Models.

Once the initial ten-week window has closed, highlighted regulations "will be immediately put on probation, and will be scrapped unless the responsible department can justify or satisfactorily modify the regulation in question."

The two examples cited show how 'red tape' may include the absence of a definitive permission, exemption or exclusion, in the existing regulations (the first example certainly being close to my heart):

"Zopa, a company that provides a platform for members of the public to lend to each other, who found that financial regulations simply didn’t know how to deal with a business that didn’t conform to an outdated idea of what a lender is...
A number of businesses have tried to disintermediate estate agents by providing a platform for customers to sell directly to each other at low or no cost. But Estate Agency regulations treat them as if they are traditional Estate Agents, and place burdens upon them that make very low cost internet-enabled business models unviable."

I couldn't see a ready guide to what else would be considered 'red tape', so it's up to you to decide. As a suggestion, one definition I've found repeatedly referred to is:

"a collection or sequence of forms and procedures required to gain bureaucratic approval for something, especially when oppressively complex and time-consuming."

My own view is that 'red tape' and 'bureaucracy' are the same thing: requirements that either have no purpose or exceed their intended purpose or effect. Examples would include data that is collected but never used. Or a financial system that prohibits diversification. Or financial regulation and tax laws that favour 'traditional banking' over new models.

I'll get my coat.

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)?

Does Individual Empowerment Risk a Social Void?

Oikonomics makes the excellent observation that "We consume not to conform and be like (or liked) but to be different and thereby feel that in some small way we are in control of our lives...However," he warns us that "instead of pulling together we begin to pull in our own individual direction leaving a void in the social world that needs to be filled if we are going to meet the collective challenges of the sustainability of our way of life."

I agree that control over one's life is the motivation for consumption, but I believe this enhances, rather than undermines, our ability to meet the collective challenges of sustainability.

I agree that (except for fads/crazes like yo-yo's or cabbage patch dolls), we really only consume what is useful in solving/controlling a real problem, and the trend is towards more personalised solutions. The challenge for product providers is how to facilitate that desire in a highly flexible, adaptable, bottom-up way, rather than dictate how it can be satisfied in a top-down, one-size-fits-all fashion. Brands need to be facilitators, not institutions.

I agree that this trend represents a growing 'void', but only to the extent that one size no longer fits all. We no longer share the same TV schedule. We don't all have the same experience of any web-based service that dynamically serves its home page to each user. We've unbundled our travel and music. Our computers and smartphones are each differently configured with different 'apps' [who ever thought 'apps' would end up a retail marketing term?!]. Each social network service 'feed' is unique. We are ignoring traditional, formal politics and congregating around single interest campaigns and informal deliberative processes.

And I agree that this growing diffusion of consumer experience is undermining the sustainability of our [current] way of life. In fact the tools that are enabling this trend, unleashing our ability to escape the institutional view of the world, have been a catalyst for the bottom-up realisation that the way of life preached by our institutions has become unsustainable.

Yet, for all these reasons, I must disagree that the utter diffusion of consumer experience risks creating a social void that threatens our ability to meet the collective challenges of sustainability. If anything, the trend has put us in a far better position to face those challenges in a concerted fashion than ever before.

Discuss ;-)

Big Media Must Make Itself Useful

Rupert Murdoch thinks search engines are getting a 'free ride' on News Corp's content. He also sees little value in 'occasional' visitors who are attracted by a headline they see on a search engine and click through. He says so much content is freely available online because the traditional media 'have been asleep'. Clearly, he wants people to use - and pay for - each of News Corp's media properties as an activity in itself, as in "I want to read the Sun," or "I'm going to watch Fox News now" rather than as an adjunct to their every day activities. To achieve this, he proposes withholding content from the search engines.

He's not alone. Lots of newspapers seem to be planning to reintroduce subscription services online, and there's plenty of discussion about what content might attract a premium.

Of course, many businesses look at the world through their own products, rather than what people are actually doing, or would like to do. Banks, for example, offer 'personal loans' and 'mortgages' quite independently of the use of the processes involved in actually using the money they lend. As a result, people have come to see their bank as just a very basic utility, rather than an integrated part of their lives. 'News' already seems to have gone the same way.

What the media and the banks of this world don't seem to 'get' is why search engines have become so central to people's behaviour.

People don't 'read' search engines. They don't even spend much time there, compared to their destination sites. So why do search engines dominate the advertising world? Because they are key enablers or facilitators of what people are actually doing or want to do. Even if some links are sponsored, a search engine doesn't try to determine what you see or do. Unlike the 'traditional media' or banks. A search engine enables you to efficiently answer the vast number of often quite mundane questions that confront you every day - 'Where are their offices?' 'How do I get there?' 'Can I get this cheaper anywhere else?' 'How many goals has Blogs scored this season?' 'Why are Australian animals so weird?'

No matter how much different content any one provider offers, it will never answer all of everyone's critical questions. And the more it tries to corral people and dictate what they see, the less they'll trust it to give them the information they want.

So the challenge for traditional media is not whether or not they charge for their content. Instead, opportunity lies in becoming more integrated with people's actual or desired every day activities. The more integrated the media are, the greater share of the consumer value chain they might command.

New Firms Best At Leveraging Social Media?

A hat tip to Mark Nepstad for pointing out Chris Perry's article on the challenge for any established business trying to leverage the social media. Just as the military potential of the aeroplane was not fully realised until the challenge was eventually handed over by the Army to a newly created Air Force, Chris suggests that marketing teams need to be re-engineered in order for businesses to realise the potential afforded by a phenomenon as 'revolutinary' as the social media.

But this misses the wood for the trees.

The rise of the Air Force and the success of Google, eBay, Amazon etc. illustrate that leveraging horizontal technological innovations is not achieved by shuffling the deckchairs in the marketing department of established organisations, but by forging new and separate businesses.

That leaves the challenge for the old guard to engage with the upstarts in order to leverage their greater success with the new technology. Time Warner (AOL), NewsCorp (MySpace) and even eBay (Skype) have famously demonstrated that acquiring one of these new firms doesn't necessarily result in successful engagement. So it seems that established businesses should both encourage new businesses to flourish around significant new horizontal innovations, and focus on co-operating with them to serve their customers, rather than outright ownership. Some, including the Wharton Business School, have called this 'coopetition'.

Figuring out how to compete by co-operating shouldn't necessarily entail wholesale reorganisation, especially when deep knowledge of the capabilities and shortcomings of your own business is key to knowing what's needed from the other party. Indeed it might be more beneficial to give managers and staff 'permission' to admit their organisation's shortcomings and figure out where they need help to adequately serve their customers, rather than to drive the organisation through complex wholesale change programmes.

At any rate, the scale of the challenge posed by horizontal technological shifts may at least partly explain why the average lifespan of a major western corporation is 40-50 years...

Role of Social Media in Financial Services

There's been a lot of excitement about recent "research" to say that only 10% of people on Twitter are responsible for 90% of the content, based on "a snapshot of 300,542 users in May 2009."

This is excellent news. Because if the basis for institutional people dismissing social media has become this hokey, the online world must have become truly mainstream.

We can stop referring to "Web 2.0" and just get on with it.

Twitter is interesting not because it's Next Big Thing, but because it's another popular way for people to engage with each other, either by publishing your own thoughts or reading those of others, but in a bite size format. The report that "figures from research firm Nielsen Online show that visitors to the site increased by 1,382%, from 475,000 to seven million, between February 2008 and February 2009" against Facebook's 228% growth for a similar period, suggests that it can afford to leave a few people behind.

But are they really being left behind?

You can't analyse Twitter in isolation, or say that it's really competing against anything or anyone. Twitter is not a divisible or competitive "channel" or medium. It's merely part of a co-operative mix of many different types of web site that are increasingly inter-linked and intertwined, enabling access to content from different people at different times on different platforms and networks, depending on where people are and what they're doing. Look at all the platforms or applications that enable people to send and receive Twitter "updates" - including Facebook - http://apps.facebook.com/twitter/.

We can have it all. At once. On one screen.

All of which is to say that Twitter - like any one of the other sub-networks on the Internet - is merely a hint of something much, much larger:

Interestingly, James Gardner, the Head of Innovation and Research in a major UK bank, says that, for banks, Twitter is a stunt. He says it's uneconomic for a bank to communicate through the medium because - I hope I don't summarise unfairly - it's too expensive for banks to create content that's relevant to people at scale. "Surely no one," he says, "thinks Twitter is going to be a channel choice that many customers are going to use regularly".

You mean there are predictable channel choices?!

Human physiology may be reasonably predictable, but human behaviour is not. Anyone who believes we can predict the means by which people will choose to manage their finances will be subject to a rare but cataclysmic event - a Black Swan, if you will - that could send them down the tubes (I've often wondered where "the tubes" go...). In reality, 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. We are merely guessing, because there is a point at which all those highfalutin credit scoring and other "models" break down, as even Lord Turner is now convinced.

Even Twitter could disappear in a sudden puff of user indifference, like others before it.

It's only one hypothesis, but to me the social media reflect numerous trends that seem to signify a (currently) rising desire to structure our personal lives and experiences as each of us sees fit. The commercial challenge that presents is how to facilitate that desire in a highly flexible, adaptable, bottom-up way, rather than dictate how it can be satisfied in a top-down fashion. Brands need to be facilitators, not institutions.

To illustrate this further, I'd suggest that the very complex dynamic process by which individuals might, say, save or invest could (rather crudely) be depicted as follows (click to enlarge):



or this:

In this environment it's an incredibly brave yet foolhardy commercial decision for any business to ignore Twitter. It may as well reach for the Webley now.

Hey, we have the Webby Awards honouring excellence on the Internet.. how about the Webley Awards for businesses that don't get it?

Sending Money Home More Easily

Hardly a month of the 21st century has passed without some breathless announcement of soaring growth projections in the mobile space.

Two of the more compelling financial use-cases for mobile phones are remittance (domestic and cross-border) and retail purchase. Everything else is nice-to-have if your phone will do either of those things.

Some would add "mobile banking" as a primary use-case, but it only seems to involve accessing the same old banking services via a different device/network. That's about as compelling as filling your socks with custard before putting them on each morning. You may as well use telephone banking. At any rate, "banking" isn't really part of any other activity we engage in, unlike "sending money home" or "shopping". "Banking" is an admin task, like sorting your paper clips or arranging your pens in order of length. Investing is much more fun, but doesn't seem to be sufficiently frequent to design mobile apps around it.

Of course, the retail use-case is fascinating, but it has to be so tightly integrated with the overall product location and purchasing experience that it's almost impossible to talk about except on a retailer by retailer basis.

So that leaves remittance as the use-case with general significance. I've followed it since 1999, when I left the comfort of a City law firm to join the board of earthport plc. I left in June 2001, 5 months after it floated on AIM, by which time the dotcom bust had reduced the pace of e-commerce integration efforts to a crawl and it didn't need an inhouse legal team. But it's a tribute to human nature that subsequent management teams have been able to keep earthport alive to take advantage of the current wave of development.

To give you an idea of why persistence is worthwhile, the GSMA has concluded that the remittance market in 2006 comprised some 200 million migrant workers in EU, US, UAE etc, who each sent home US$2k-5k a year in $200 increments to about 800m recipients. Some 32 countries accounted for only $100bn of an estimated $270bn of traceable funds (add to that about $185bn non-traceable). And that market was served mainly by Banks, post offices, niche MSBs (55%), Western Union (25%), Eurogiro (11%), MoneyGram(6%) and Vigo (3%).

But migrant workers queue up, debit card or cash in hand, to pay giant fees to send money home.

I'll spare you a discussion of the hype and plight of the 30+ providers out there, and merely point to three news items that suggest real progress towards more useful remittance services:

• Over 5 million Kenyans have infuriated the banking establishment in Kenya by signing up for M-PESA for USD 765m in local remittances.
  


• In January, earthport, an e-wallet payment service provider, saw the expansion of its relationship with Standard Chartered globally.
  


• On 12 March, Luup, an e-wallet payment service provider, announced a relationship with Deutsche Bank for Europe, Middle East and Asia.
  

Of course, several years back, the GSMA also allied itself with Western Union "to ensure faster development of Mobile Wallets suitable for implementation by Mobile Network Operators. ... initially targeting 30-40 Mobile Network Operators in markets where there is a high demand for remittances services to become early adopters of mobile wallets.” Indeed, I took the picture for this post from the announcement of Western Union's deal with Orascom, an emerging markets telco, in October 2008.

This news flow reveals that the incumbents in the remittance market have finally admitted they need new payment processing platforms to service the market effectively. And (alas, too late for my lapsed earthport options) m-wallets, or server-based solutions are the weapons of choice, rather than device-based solutions. The announcements also underline the importance of having a trusted local brand at each end of the remittance. In fact, it's easy to see that the trust level may be more important at the recipient end - where users may be less confident with technology. Finally, both ends of the remittance are highly fragmented and often based remotely, making the mobile phone the ideal touch point for payer and payee.

Hopefully we'll see M-PESA's "infuriating" success repeated by others across borders before too long.

WeBank: New Rules for The New Economy

It was an unusually broad church that came to hear whether people will replace financial institutions at WeBank last night. More network economy than financial services.

While it was excellent to hear from platforms as diverse Zopa, Kubera Money and Midpoint & Transfer (a proposed P2P foreign exchange matching service), the panel discussion was quite revealing.

For James Gardner, Head of Innovation in a bank, the question was whether peer-to-peer finance would ever become so successful that it would make it uneconomic for banks to compete in the markets for deposits and personal loans. Having spent considerable time trying to understand how P2P platforms will scale cost effectively, he doubts that banks will lose their grip on these markets. In particular, he felt that the cost of compliance with increasing regulation will constrain growth and fee income alone won't support the investment in resources required. However, various members of the audience were keen to point out that peer-to-peer finance is the product of a very different attitude to money than people's attitude to banking. For this reason the two should not be viewed merely in competitive terms.

Indeed, Giles Andrews (MD at Zopa), said Zopa lenders were not necessarily drawing on their savings, as opposed to investment capital, in their quest for greater personal control over their returns. However, Giles did say that Zopa was gradually taking market share from banks in personal loans, having disbursed about £31m worth to date, and doubling volumes year on year. Already marginally profitable on each transaction, the business itself will reach profitability once volumes double again. On this basis, he says there is no problem with scalability.

Umair Haque of the Havas Media Lab sees P2P finance as a reflection that our established institutional rules have become ineffective, and must be re-written, in much the same way as other online marketplaces and social network services have introduced their own new rules, customs and etiquette. So we should look not so much at individual players or business models but at what set of rules is needed for social and economic recovery.

For my own part, I agree that P2P finance is not about "banking". They are on different, diverging paths. But inevitably - and particularly in the current economic enfvironment - one is drawn to the notion that banking as we have known it is doomed. James Gardner's observation that banks can't see how P2P finance could possibly scale given current institutional constraints is quite telling. Perhaps it is that mindset that has given rise to frustration and innovation amongst non-banks, from hedge funds to payment service providers to retailers and even individual people. Everyone wants to do things differently to how banks have insisted they be done. Even formal regulation has opened up more lightly-regulated territory that was previously reserved for banks, such as e-money and payment service provision - endorsing non-regulated products at the same time. In this way, one can see how the new economic rules are being written around banking, rather than by banks themselves.

Bleeding Edge No Place For Bleeding Hearts

You may have seen some of the bleating about Google's decision to retire some of its services that never hit the mainstream. Such whinging must be ignored, as to heed it only risks making the difficult process of innovation harder still.

Having been involved with internet start-ups since 1996, of course I subscribe to Geoffrey Moore's variation of the "Technology Adoption Life-cycle", that there's a "Chasm" between innovators/early adopters using a disruptive product, and successfully selling it to the early majority.

As an innovator or early adopter, you are out to get new stuff for free (or pay for it to be exclusive to you - thanks KM), and be ahead of the crowd. You love to show off the latest stuff and brag about how you were there at the beginning. And you definitely earn those bragging rights for putting up with the pain of participating in alpha- and beta-testing, the inevitable crashes and other technological mayhem. You understand that if you aren't protecting yourself against the failure of new technology you only have yourself to blame. Either you never let on there's a problem, or you wear the latest outage like a badge of honour. But if you whinge about it, then you aren't really an innovator or an early adopter, and you lose your bragging rights. You've become a member of the early majority - where new products with bugs or in beta-test (as opposed to new releases/upgrades) are not tolerated, and ongoing support is expected.

Similarly, if you're eager to sell your business to Google or some other behemoth in the hope that it will magically transport your "baby" across the chasm, then you're setting yourself up for intense disappointment. Even the big guys struggle to cross the chasm (which is why Microsoft waits patiently on the majority side). Until you've crossed there's still a ton of work to do, which is why they'll call one of the clauses in your sale and purchase agreement an "Earn Out".

The bleeding edge is no place for bleeding hearts.

Rant ends ;-)

Closure of Zopa's US Credit Union Program Contrasts P2P Model

It's a sad day at Zopa, which has announced the closure of its US credit union programme due to adverse market conditions for credit union deposits and loans. My sympathy to the whole team.

But, by comparison, the steadily growing success of Zopa's UK P2P model starkly demonstrates the benefits of enabling simple, capital-efficient, transparent lending directly between responsible individuals, as opposed to the intricacies of even a straightforward savings and loan operation like a credit union.

And it's ironic that the US regulatory system could permit everything from NINJA loans to CDOs riddled with unquantifiable risks, yet fail to accommodate a model that has maintained such low delinquency in the UK for over 3 years now, and seems to be repeating that success in Italy.

Maybe one day US regulators will be more receptive.

Mystics and Revolutionaries - the Drivers of Innovation

You'll have gathered from the title "Pragmatist" and my explanatory blog, that I'm fairly sceptical when it comes to messages from our institutions, and I support positively disruptive innovation and innovators whenever possible.

Bob Mayo, of St Stephens in Shepherds Bush, is an innovator in one of the most conservative institutions on the planet, so I'm always fascinated to read his crisp observations in "Parish the Thought", Bob's weekly 200 word email. This week Bob hits on a theme at the heart of Web 2.0:

"The gospel passage for this Sunday sees Jesus feeding 5,000 hungry people with five loaves and two fishes (Matthew 14:13-21). Making the world a better place is not something limited to Jesus 2,000 years ago. Helping the poor and hungry and looking after those who are vulnerable or in need is the responsibility of us all. Nouwen (1994) says that we need to be ‘mystics’ and ‘revolutionaries’. The ‘mystic’ is concerned with changing the human heart and the ‘revolutionary’ is concerned with changing human society. In case you think of yourself as being one or the other, Nouwen also says that every real ‘revolutionary’ is challenged to be a ‘mystic’ at heart. ‘Mysticism’ and ‘revolution’ are two aspects of the same desire to make the world a better place to live. The whole socio-political world in which we live is geared against change. This should mean that we do not want to try. William Wordsworth talked about being as ‘impatient as the Wind’"

Two particular aspects chime with the disruptive trend we know as "Web 2.0". First, that the successful disruptive business models are motivated by making the world a better place to "live" - i.e. for individual people, personally. It's not about institutions, it's about each individual customer's personal experience and effort contributing in an "architecture of participation".

The second aspect is the idea that "the whole socio-political world in which we live is geared against change". One cause of our declining faith in our institutions is perhaps the realisation that regulations and rules (including the business rules by which institutions and big suppliers choose to transact with us) have tended to be written to suit the way institutions wish to do things, rather than what might suit us personally. We are told that these regulations and rules are hard to change, but become cynical when we see Parliament rush through laws that curb civil liberties or regulators move quickly to protect the banks but were slow to act when pensioners' money was at stake, or big corporates stop doing things overnight when ordered to do so by some other institution after years of consumer detriment and complaint. Yet inertia means that it takes such shocks and a lot of energy from people who are "as impatient as the Wind" to kick us all the way along the "change curve" to the point where we plan to do things in a different way.

The fascinating aspect of the digital revolution of Web 2.0 is that not only can facilitators enable individuals to harness technology to access more music or personalised holidays more cheaply, but it also provides a medium for generating and sharing the passion and connections necessary for us to find the things in the Long Tail of products that improve our own, personal lives.

Too Early to Call Time on Web 2.0

It's fascinating to see the mainstream business press calling time on "Web 2.0". Presupposing that the Web 2.0 tag constitutes a definitive cohort of businesses who must be earning substantial revenues today, if they are ever to be successful...

This as just another consequence of the credit crunch, rather than evidence that it's suddenly crazy to start a web business dedicated to enabling users to take control of their retail, entertainment, financial and other personal affairs. It's a sign that the institutional herd is headed for safe havens and wants a slow summer at the beach, free of write-offs and any doubt that it might be missing key opportunities through its inability to invest in the current tidal wave of innovation.

But the curtain is barely up on Web 2.0, and at this rate the FT's core readership will miss the whole show.

There is plenty of non-institutional money to be had - and you don't need much of it - to help start a Web 2.0 business. The angel world is also still awash with pre-Crunch bonus money and the likes of ex-Googlers cashing in their options to do help Facebook or do their own thang. Seedcamp is happening again, and (the ironically named) Techcrunch is alive with plenty of news, even from Europe. Remember, too, that venture funding is not required to build any of the infrastructure necessary for Web 2.0 businesses to flourish. The big corporates in the internet game have taken on that job, and are still investing heavily to create the bandwidth and computing capacity on which low cost, web development start-ups like Ooyala are feeding greedily.

Seems to me that September is going to see a whole new tidal wave of innovative business launches - so it's gonna be a pretty intense summer for some!

You and Your Lawyer - Law 2.0

I'm enjoying Nick Holmes' digests of Richard Susskind's forthcoming missive on the future of legal services - a plea for innovation amidst the rising tide of super-normal law firm profits. You could be forgiven if images of King Canute wash into your mind at this point, but the nub of the IT aspect of Richard's thesis is that:

"...there is remarkable scope for greater and beneficial deployment of ... disruptive legal technologies [which] do not support or complement current legal practices. They challenge and replace them, in whole or in part... If lawyers are barely conversant with today's technologies, they have even less sense of how much progress in legal technology is likely in the coming 10 years."

Of course, Richard is wasting his time and effort when it comes to the very law firms who need to listen most. Enormous profits provide no incentive to innovate, except perhaps to cut the costs of current processes and figure out new excuses to hike hourly rates. None is really organised to innovate. The trend away from the pretence of partnership and chatter about who will list on the stock exchange reveals that their true intent, ironically, is to mirror the ethos of their best and biggest clients. Economies of scale and profits, not staff or clients, are paramount, the argument being that only huge profits allow adequate investment in staff and various hallmarks of quality. Like extra sculptures for the foyer.

True, clients do get resentful as rates soar, and the big ones bully firms into complex discount arrangements that sub-scale clients ultimately pay for. But that's merely a corporate game of cat-and-mouse, not seismic innovation.

No, the only participants in Law 2.0 are going to be relieved clients, the lawyers who solve their legal issues, and law firms that do no more than what is strictly necessary to facilitate the interaction between the two in order to solve those legal issues. In other words, lean, rather than obese, intermediaries.

I began working through Lawyers Direct two years ago to top-up my salary while working at Zopa, the person to person lending marketplace (in fairness to them, it was perhaps my stints at Reuters, DLA and GE that drove me to become a serial disruptor). Lawyers Direct offers access to more than 60 highly experienced lawyers at half what their City rates would have been. There is a fantastic but small support team in a small office in West London. The lawyers work wherever and whenever they please, linked by email and with the same sort of online tools and intranet that any self-respecting law firm should have. The reduced overhead means that even after the lower charge-out rate, the lawyers still have the opportunity to take home the same salary as some of their City counterparts (the ones who really do the work of solving legal issues).

Vaporised is the monolithic concrete tower with its vast, wasted common areas, sculptures, reception, private dining rooms, gym, library and hordes of support staff. There are neither billing targets nor the anxiety and temptation that goes with them. There are no partners, committees of partners, managing partners or senior partners.

All that's left is a compelling, lean and efficient business model for clients and lawyers alike.

List that, and I'll queue for the stock!