Thoughts Ahead of BarCampBankLondon4

I'm looking forward to BarCampBankLondon4 on Monday, where we'll be exploring the impact of complementary currencies on the financial services landscape and the kinds of financial organisations needed for the new economy.

At the heart of many initiatives is the ability to cost-effectively and efficiently match those with surplus resources - e.g. cash or time - with those who need it, in a form that is consumable and takes account of the risks/rewards to both parties.

Liquidity is of course key - without adequate supply and demand there won't be a sustainable market for the resource in question. Yet most of the peer-to-peer initiatives are complementary rather than competitive, which also prompts consideration of the extent to which different initiatives might share platforms to reduce costs and access economies of scale more quickly than if they were separate. That would extend to marketing, customer service as well as the technology. A shared home page and familiar set of market rules could make it easier for more people to participate, perhaps offering voluntary time in one market, donations in another and loans in yet another.

Of Love Marks And The Institutionally Deluded

I'm reading Henry Jenkins' Convergence Culture at the moment, which discusses the attempts to transform brands into 'love marks' by developing more intense relationships with consumers.

I guess the increased interaction between the 'brand' owner and consumers might have the side-effect of facilitating the resolution of real consumer problems, or improving consumers' day-to-day activities in some compelling way. But the strategy seems to view the world through the products the provider has chosen to sell, rather than from the individual consumer's standpoint. And that implies the business ultimately exists to solve its own problems rather than those of its customers. In which case, the business is exposed to the downside of the trend towards increasing consumer power over the design and supply of the products they use or consume.

As a case in point, I had a conversation recently with someone who believes that the most important brand that is present during a consumer's purchase from a retailer is the brand on the consumer's debit or credit card. This of course ignores the fact that the consumer activity in question is 'buying a widget' of the right quality from a merchant one trusts, rather than merely 'paying'. Then I showed him the latest random survey of the UK's most trusted brands - although this one might be a little more reliable, to the extent that any of them really is. But clearly consumers think their retailers are doing more for them than their banks or card schemes.

Image from LoveMarks.

Shuffling The Deckchairs On HMS Status Quo

I've kept a beady eye on the 'progress' of the Commission on Banking, while holding out little hope that it will result in more than a shuffle of the proverbial deckchairs, rather than any wider solution to our general funding woes.

UK banking, as we know it, would be finished without ongoing taxpayer support of at least £512bn, according to the latest National Audit Office report. And that's assuming the economic headwind doesn't get any stronger.

But this figure doesn't include the subsidy banks get to help gather deposits cheaply, especially in the form of the Individual Savings Account tax-free savings programme. Banks are accused of abusing this privilege by offering a mere 0.41% average interest rate on the £158bn they attract with higher teaser rates. Of course, you can add to that practice the many £millions in fines incurred to date for such things as mishandling customer complaints, reporting failures, lapses in anti-money laundering controls and poor investment advice (keep up with the latest fines here).

So, if it weren't for the uncertainty about the extent to which the government will continue to bend the theory of evolution in their favour, the only way for us to really make money out of UK banks would be to bet against them.

Instead, the taxpayer safety net allows the Commission the luxury of merely wondering whether good old British banking might be delivered more safely (if still more expensively) via independently funded, ring-fenced subsidiaries.

What difference could this possibly make?

Testament to this bizarre preoccupation with maintaining status quo is the government's determination to ignore alternative models. For instance, the government has just meekly referred to Zopa, the UK's own world-first in person-to-person finance, as a form of "giving" (see page 15). That's weird, because with absolutely no government assistance Zopa has so far enabled over £100 million in person-to-person loans, representing 1% of the UK personal loans market. Lenders are seeing annual returns of 7.9% and a default rate of under 1%, while delivering market leading rates for creditworthy borrowers. Banks aren't offering anything like this service, even with the added government subsidy of tax-free ISA status. Imagine how much of the personal loan market would shift to the Zopa platform if people's lending returns were also tax-free? FundingCircle has already launched a similar model for small business funding. Could the greater liquidity enable mortgage funding in the same way? Such horizontal funding processes also offer a more transparent, low cost and efficient solution than the vertical intermediation model that operates in the 'shadow banking system'.

It's one thing to avert overnight systemic failure, but quite another to prop up exploitative, inefficient business models over the longer term in preference to more efficient alternatives. We should expect a more holistic approach to the UK's financing woes than the Commission on Banking is attempting to provide.

Today's Post Taken Aurally

The law's very own Black Swan, 1928

Rather than communing with my laptop, tonight I had the pleasure of discussing the challenges of emerging technology with the inaugural meeting of the SCL Junior Lawyers Group.

What differentiates this group is the desire to focus on the context for IT law and lawyers, rather than merely the law itself. As a result, the discussion that continued over drinks ranged from New Journalism, to the difference between facilitators and institutions, to the Cheetah Generation and Steampunk mobile, rather than merely the legal challenges posed by WikiLeaks.

The overriding questions seem to be: where will the key trends take the law and lawyers over the next 100 or 10,000 years? And how do we minimise our exposure to the downside - and maximise our exposure to the upside - of the next Black Swan?

Tweet your top tips using #legaltrends.

The Great Confidence Trick

When Bobby "Dazzler" Diamond said the time for bankers' remorse is over, I thought for a moment he was suggesting something more profound.

But of course he was merely attempting to inspire enough confidence to justify a quick bonus before reality bites harder.

A recent tour of the contrarian financial blogs did not make for pleasant reading.

US bank "earnings — like those from 2009 — will be skewed by falling loan loss provisions set aside to cover bad debt." Meanwhile, toxic assets remain on public books as delinquencies soar and the rules are bent to allow the banks to magically produce profits. Which may explain why at least one of the ratings agencies may finally be taking steps to curb the ratings of investment banks.

Even the US Commerce Department seems to be engaging in jiggery-pokery to avoid a 'double-dip'.

And while FT Alphaville speculated that the impact of the decline in the pace of US mortgage foreclosures might be good for the economy because:

- Fewer houses come to market, thereby propping up prices (or slowing their decline)

- Therefore fewer people go underwater on their mortgages

- Foreclosures have a devastating impact on the prices in the surrounding neighborhood

- Households preserve more wealth and are therefore more likely to spend rather than save

- Consumer confidence in housing increases

- More loan modifications (though how many successful ones is unclear)

- Time is bought for the rest of the economy to recover

On the other hand, [they said] this might not be good for the economy because:

- The problems in the housing market have simply been put on hold, not solved

- The excess inventory in the market won’t clear unless prices fall to a more natural level, and the sooner the inventory is cleared, the sooner the housing sector recovers and builders can get started again

- It’s unlikely that loan modifications will ever work on a large enough scale to make a difference

- Foreclosure delays are a distorting incentive on mortgage borrowers, who will be more likely to strategically default

[But] we have a nagging feeling that there are unintended consequences (or even straightforward expected consequences) that we simply haven’t thought of..."

Of course, the authorities remain timid in their approach to corporate and securities fraud, perpetuating collusion in the mortgage markets and prolonging the economic crisis.

Which encourages the aforesaid aggressive provisioning and selling practices:

"In its offer for the $1.5bn stock sale of privately held social-networking company Facebook, Goldman Sachs disclosed that it might sell or hedge its own $375m investment without warning clients. Under the deal, private wealth-management clients would be subject to “significant restrictions” limiting their ability to sell stakes while Goldman Sachs own holding can be sold or hedged at any time, and without warning."

Amazingly, today Goldmans pulled the offering, but only in the US. We gullible foreigners can always be relied upon...

As can pension funds, life insurers and other asset managers. So don't expect to retire.

Now, Bob. About that bonus...

Image from Sulekha.