Does Ana Botín Have Any Clothes?

In a fawning interview in Monday's Telegraph, Ana Botin, CEO of Santander UK and billionaire's daughter, is lauded for having run a start-up and quoted as saying she will be “accelerating” the expansion of the bank’s small business lending. But does this really justify such fawning tributes, or does the emperor have no clothes?

According to BIS, the stock of lending to UK non-financial corporate businesses was £506bn in December 2011.  The department estimates a potential credit gap over the next five years of between £84bn and £191bn for the business sector as a whole, of which between £26bn and £59bn is estimated to relate to smaller businesses. BIS says bank lending may grow, but the ability of bank lending to increase may be constrained by the ability to raise capital and meet higher funding costs. The big four banks control over 90% of the business finance market, leaving the likes of Santander with very little indeed.

At any rate, the important factor here is not the amount that Santander actually dedicates to small business lending. It's the proportion that its small business lending activity represents of its overeall credit creation. Richard Werner, the economist, estimates that UK banks generally dedicate only 10% of their credit creation activity to productive firms. He says that it's critical to grow that proportion because credit aimed at productive firms is the only signficant driver of economic growth as measured by GDP - which is flat. Credit that goes to consumption only fuels inflation, and credit for the purchase of non-GDP assets simply drives up the prices of those assets. In Germany, by contrast, 70% of banks (about 2000 of them) only lend locally and supply about 40% of SME finance.

Against this backdrop, Santander's claims don't merit much attention at all. To achieve it's proposed 'acceleration' of lending to small businesses, Santander UK suggests it will use some of the £2bn capital allocated to its failed acquisition of 316 RBS branches and some of the £1bn it has drawn down as part of the public subsidy given to banks in the form of the Funding for Lending Scheme. The bank announced £500m additional asset financing last Thursday. Yet its gross business lending only stands at £10bn, even having grown 20% year on year since 2009. “This is net new lending,” claims, the CEO, but then says this represents switching from other banks. So it may not be net new lending to SMEs generally, i.e. funding that is going to SMEs who can't otherwise get it.

So, while she talks a good game, Ana Botin and the bank she runs have no clothes. 

Image from ElaineByrne. 

Will Midata Turn Institutions Into Facilitators?

The government's warning shot over Midata presents an interesting challenge for some of the UK's institutions. But will it make them focus on solving consumers' problems - transforming them into 'facilitators'? Or will they merely continue to solve their own problems at consumers' expense?

The government wants the suppliers of energy, mobile phones, current accounts and credit cards to provide each of their consumer and small business customers with the records of what they bought, where and for how much. That transaction data must be released in computer-readable format to enable it to be analysed, either by the customer or the customer's authorised service provider. This would help prevent those suppliers from gaining an unfair pricing advantage over consumers, for example, and make it easier for consumers to figure out the product right for them.

Factors the government might consider in deciding whether to expand the programme to other sectors include: 

• the market is not working well for consumers, e.g. consumers find it difficult to make the right choice or their behaviour affects pricing it's difficult to predict that behaviour;

• there's a one-to-one, long-term relationship between the business and the customer, with a stream of ongoing transactions;

• consumer engagement is limited, e.g. low levels of switching or competition; and

• suppliers don't voluntarily provide transaction/consumption data to customers at their request in portable electronic format.

Yet these factors merely hint at the characteristics that an organisation should display if it is to succeed in the future economic environment. In broad terms, the targeted institutions will need to be organised to solve their customers’ problems, operate openly, adapt well to changing circumstances, remain committed to transparency and take responsibility for the impact of their activities on the wider community and society. I've explained these themes in more detail here.

 

The current targets of this programme have a long way to go!

 

I should add that I am involved in the Midata programme, as a member of the Interoperability Board and on the working groups considering issues related to data transmission and law/regulation.

Unload The "Digital Wallet" Before Someone Gets Hurt

And that's not all...

The term "e-wallet" or "digital wallet" has always caused a physical reaction. But what started as a small twitch over my left eye in November 1999 now involves diving under a table. The term has become so loaded with giant concepts like 'identity', 'privacy', 'authentication', 'security', 'payment' and 'funds' that it's simply too dangerous to wave around in meetings.

We need to focus on more of the detail if business presentations are to have any meaning and projects are to deliver anything.

The term 'digital wallet' is impossible to define, anyway. The Oxford English Dictionary has no home for it, and it's wise to ignore suppliers' self-serving, product-specific definitions. Th'internet merely yields a confusing mish-mash: [my emphasis] "a system that securely stores users' payment information and passwords..." (investopedia) and "encryption software that works like a physical wallet during electronic commerce transactions." (webopedia). Unhelpfully, the Free dictionary explains "the wallet data may reside in the user's machine or on the servers of the wallet service. When stored in the client machine, the wallet may use a digital certificate that identifies the authorized card holder." 

Such definitions are confusing because they keep jumping the rails from party to party, feature to feature and function to function, each of which has different implications for transaction flows, data flows and funds flows (to the extent payment is even involved). 

Perhaps the only consistent aspect in the use of the term 'digital wallet' is the sense that it refers to a specific individual, or at least it should be capable of doing so. Otherwise, the term means so many different things that it's useless. FinVentures defined it to mean, "A consumer owned and controlled account that can store any electronic form of what is normally held in a physical wallet, including: payment, ID, coupons, loyalty, access cards, business cards, receipts, keys, passwords, shopping lists, …etc." Indeed, a 'digital wallet' could be a feature within an application or service, or an entire application or service, a database, a set of permissions and so on. It could reside on virtually any digital device, including a smart card or just a microchip. It could enable a specific person to initiate or conclude any kind of transaction, or merely be used in the course of intiating or concluding such a transaction.

So when you next hear the term 'digital wallet', seek cover behind a large, heavy object and try to defuse the situation by asking: 

• which parties are involved;

• which party is agreeing to do what, how do they agree, what actions are taken as a result and by whom;

• where the related data is stored and where it flows; and

• where any related funds are and where they flow.

It could save a lot of time and money.

Image from Tenets in DM.

Stop The Moral Panic Over Corporation Tax

MPs and the media have a responsibility to put the corporation tax issue into proper perspective.

The outrage is not how 'little' corporations pay. It's how much tax the rest of us pay, and how much the public sector wastes while failing to improve services. The media, MPs and campaigners should be focusing on how to make domestic spending programmes narrower and better targeted, rather than second-guessing international tax treaties over which the UK has little control.

Similarly, we can't lose sight of the need to incentivise foreign private sector corporations to operate in the UK. They employ people, generate income for local UK suppliers and compete with UK-based businesses to keep them from charging us whatever they like for goods and services.

But this is not 'the big story' either. 

The real story on the growth and employment front is that the government must do more to foster an environment in which entrepreneurs can thrive and expand their businesses. According to the Institute of Economic Affairs, just 6% of new firms create over half of all new jobs in the UK. Compliance costs, product market regulation and employment protection have remained a constant drag on the ability to grow businesses, despite efforts to eliminate red tape.

Attacking a few foreign corporations over their tax affairs won't help the government spend tax revenues more effectively or enable UK entrepreneurs to thrive. Especially when, ironically, those same foreign companies happen to provide British start-ups with plenty of meeting space, low cost server capacity, online marketplaces, software and customers...

Old Lady Suffers From Undue Deference And Group Think

In March I related a story about the unduly deferential meeting protocol at the Old Lady of Threadneedle Street, and hoped it was more welcoming of critical thought than the rule suggested. However, three recent reports have confirmed the worst.

Not only were the terms of reference for those reports criticised for being too narrow and avoiding contentious issues. But, according to the FT, Bill Winters also found a "tendency [among less senior staff] to filter recommendations in such a way as to maximise the likelihood that senior staff will find the recommendation palatable." And David Stockton "criticised the bank for its opacity and a culture that discourages independent thought."

Naturally, I detect a certain lack of enthusiasm in the Governors' response:

“We welcome these three Reviews. The Reviewers have given us an independent perspective on some of the key challenges the Bank has faced in responding to the financial crisis and have given us a great many ideas to consider that could improve the Bank’s performance. We are starting programmes of work to evaluate the recommendations and to plan changes.  We will report regularly to Court." 

At least they aren't alone. The IMF suffered from 'groupthink' for years, and auditors have been struggling to understand the meaning of 'scepticism'.

Come to think of it, Auntie seems to suffer from the same maladies, along with most of Britain's institutions.

In fact "maladies" is strangely apt to describe two ailing institutions called 'Auntie' and the 'Old Lady'. It also sheds new light on the reason for the apostrophe in m'lady…