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?

Travels In The Blogosphere

My humble apologies for letting a week go by without a word from the Pragmatist. But while taking care of business, I've at least been charting my travels in the blogosphere on Twitter. And The Fine Print records a few sceptical and irreverent reactions to:

• the eagerly awaited judgment on MasterCard's multilateral interchange fees (MIF); and

• the latest draft of the Financial Services Bill.

You might also keep an eye out for a guest post on the Nutmeg blog.

Just when the sun is shining at long last...

One Simple Way To Stop Kicking The Can Down The Road

We all know with calm certainty that it each European economy functioned without the Euro. 

We can argue that Germany has done much better under the single currency, and that Greece has always been a basket case whatever the currency. But these economies functioned. 

Whereas the sovereign debt crisis is driven by complete uncertainty about whether the 'Eurozone' economic union will ever be sustainable, and the conviction that some economies are definitely doomed without their own national currency.

In this situation one might have thought the ultimate route to relative economic stability would be to set a date by which the Euro will be withdrawn. Everyone would then unite to deal with that fundamental economic fact. 

Some might argue that the decision to form the Eurozone also encouraged unity and stability, as should efforts to maintain it. Yet it's obvious that including weak economies in the drive towards monetary union created moral hazhard, driving national fiscal and banking sector irresponsibility to the point of fraud. And there's plenty of evidence on the streets and in the polls to demonstrate that the maintenance efforts are divisive rather than unifying. It's difficult to see how a decision to return to national currencies would drive the same behaviour - in fact it may eliminate it entirely, or at least reduce it to manageable, local levels where the national politicians and their banks would be stuck with the consequences of their fiscal profligacy rather than everyone else. That may explain why some resist, while it's in the job description of European officials to support the Euro in service of the single market fantasy policy.

At any rate, there's one simple way to stop the politicians 'kicking the can down the road'. 

Remove the can. 

Image from JMK Advisors.