Hey Eric: Lend Your Euros Directly To Other People

Like previous financial crises, this one won't end until individual and collective confidence in banks and the financial system is restored. And while it's all very well for the Eurozone's political masters to be demonstrating their 'political will' to hold the Eurozone together at individual taxpayers' expense, their latest attempt at restoring confidence has not exactly impressed Spain's debtors...

But such bail-out headlines merely the typically dominant institutional narrative. The real question is whether the Euro and EU institutions actually have the confidence of EU citizens - especially taxpayers. A recent poll suggests they do not: only 42% of Europeans trust the European Union - reflecting a general disenchantment with EU institutions over the past few decades. Meanwhile, in sharp contrast, bottom-up facilitators that enable citizens to participate in shaping and personalising their own services have done very well.

This is reflected in the behaviour of EU citizens on the economic front. The implications of the one-size-fits-all Eurozone monetary policy seem to be regarded as just as unfair by German taxpayers and the French savers supporting Eric Cantona's suggestion for mass bank-withdrawals on 7 December as by those hitting the streets of Greece and Ireland. The Guardian quotes Valérie Ohannesian, of the French Banking Federation, as saying Cantona's appeal is "stupid in every sense". Yet, crucially, she did not explain why people should feel more confident about leaving their money on deposit, or why it is fair that banks receive taxpayer bail-outs while taxes increase and spending is cut. In the absence of any other narrative, each bail-out undermines our confidence even further, to the point where we hit the streets and seriously consider suggestions like Eric Cantona's.

But it doesn't have to be this way. There is a bottom-up narrative emerging, and our politicians need to focus on it.

Eric Cantona's confident call for mass withdrawals hints at the fact that people are prepared to put their money where their mouth is. But it would be futile for those with surplus cash languishing in low interest savings accounts to withdraw it all and hide it under their beds. Instead, they should join those who already put their money to work helping others, by lending it directly on peer-to-peer lending platforms to creditworthy people and businesses at a decent rate that also represents a decent return.

Swiss Tailwind For Personal & Small Business Social Finance

Banks will find it more costly and less profitable to offer short term unsecured personal and small business finance under Basel III rules, according to a recent McKinsey report.

To comply with the new rules, Banks face a long review of their businesses and products to reduce risk, use capital more efficiently and minimise the need for market funding by the end of 2012.

Which is more great news for participants in the 'capital light' social finance business models, like Zopa and Funding Circle in the UK.

As I mentioned in the context of the proposals to regulate vertical shadow banking functions, people using these 'horizontal intermediaries' benefit from:

1. Loan amounts being split into small one-to-one loans at inception, rather than having to wait for the slicing, re-packaging and grading involved in asset-backed securitisation;
2. A direct, one-to-one legal relationship between borrower and lender for the life of the loan, enabling better control over debt adjustment and collection, where that becomes necesary;
3. Lenders retaining day-to-day control of the management of their money and credit risk, minimising the capital required by the intemediary;
4. The intermediary not needing to slice and re-package debt to alter loan maturities, since lenders can manage this by assigning loans of unwanted duration to other lenders;
5. The intermediary having no balance sheet risk, and therefore no temptation to engage in expensive and complex regulatory, tax or other arbitrage;
6. Transparency in the original underwriting decision and loan performance against grade - making lenders' due diligence easy, and removing the moral hazard of the kind we see in vertical intermediation models, where the endless slicing and re-packaging makes due diligence hard.

For these reasons, one might expect banks to allow their depositors to lend directly to their personal loan and small business customers. But it seems unlikely the banks could feed themselves on the scale of fees their nimble competitors can afford to charge. And they would soon face calls to allow the peer-to-peer approach for mortgages and larger corporate loans - by which time other nimble providers may well beat them to those segments too...

Image from Gogherty.com.

Usual Suspects Bottom Out EU Consumer Scoreboard

You may wonder why a blog focused on how we seize control of our consumer experiences devotes so much space to our frustration in the personal finance space.

Because, as the latest edition of the EC's Consumer Markets Scoreboard confirms, it's our biggest source of angst.

Bank current accounts and credit products, investments, pensions and securities all feature in the bottom 20% of the "Market Performance Indicator", with investments, pensions and securities coming in lucky last.

Real estate services, internet service provision and railways also get a pasting; as well as secondhand cars, clothing and footwear, meat, and house maintenance/ improvement goods.

An incredible 31% of consumers find it fairly easy to compare investments, although only 34% of consumers think they deliver what's promised. A naive 26% of us are as likely to trust investment providers as used car salesmen.

Yet 76% of us don't bother to switch providers...

As a result, until the usual suspects get their act together, we face an endless stream of edicts emanating from the Brussels bureaucrats, adding more and more to the complexity for both providers and consumers alike. A great deal more proactive work in this area by providers may help stem this tide. Switching providers might also help.

In the meantime, internet service providers and the "meat market" can also expect the joy of EC market study questionnaires.

So What Happened To The Van?

We've all heard the story of how 10,000 students were too busy protesting about education fee increases to stop a bunch of photographers taking snaps of someone surfing on an old van the police conveniently abandoned in Whitehall on Wednesday. But where's the van now?

If in its coverage of Wednesday's generally peaceful demonstration the UK's biggest selling newspaper thought the van was so important that it should run the headline "Student mob in cop van rampage" the people should be told what happened to it.

Or is a poor old orphan police van set upon by a few nutters just another victim of lazy, sensationalist journalism?

Call for Self-regulation of Limited Network Payment Schemes

The UK Treasury is calling for self-regulation to ring-fence funds relating to stored value in “limited network” programmes, citing examples such as store cards, coffee shop cards, fuel cards, transport cards, membership cards, and meal and other voucher systems. The call is part of the Treasury’s consultation on the second E-money Directive which imposes similar obligations on the operators of 'general purpose' stored value programmes. While limited networks will remain exempt from E-money and payment services regulation, the Treasury will consider “whether further [regulatory] action is warranted” if what it sees as adequate self-regulation does not emerge. Consultation ends on 30 November.

Potential reasons cited by the Treasury for segregating limited network funds from operators' own corporate funds include:

• Apparent uncertainty as to the scope of the limited network exemption;
• A large number of consumers/businesses rely on limited network programmes and may suffer if programmes fail;
• A limited network failure may harm the reputation of other limited network programmes as well as regulated e-money providers; and
• Limited networks enjoy a cost advantage over regulated general purpose stored value programmes, partly through not needing to ring-fence funds equivalent to the outstanding stored value.

Whether each of these is really a problem is very much debatable. Guidance can clarify what is considered in or out of the regulatory scope, and the existence of 'grey areas' at the perimeter is no argument for definitively expanding the scope by requiring self-regulation. Of course, not all customers or businesses rely on all limited network programmes, or even the programmes of the same type. Similarly, the failure of one programme does not necessarily reflect on them all. That's clear from the collapse of retailers that entirely rely on pre-payment Farepak (Christmas hampers) and WrapIt (wedding gifts) which have provided the genesis for concern in this area generally, though neither was a stored value programme. Finally, why shouldn't there be cost advantages to running a programme whereby value can only be spent within a limited network, rather than one where stored value can be spent anywhere? The latter is always going to be much larger in scale and purpose, and entail far more operational risk.

While the evidence of detriment is less than clear, positive reasons not to introduce requirements to safeguard customer funds in limited network schemes include:

• The potential for additional requirements to be imposed in the course of the proposed self-regulatory exercise that needlessly increase the cost of operating the network;
• No one operating a dodgy scheme would sign-up for stringent self-regulation;
• It may be far more costly and onerous to ring-fence funds in certain types of limited network programmes than others, so some operators may be unfairly discriminated against by not signing-up on legitimate economic grounds; and
• Increased costs associated with self-regulation may result in fewer limited network payment programmes for customers to choose from and higher retail prices for customers overall.

A proportionate alternative might be to focus on improving the management of operational risk in businesses that rely entirely on pre-payment for specific items, as Farepak and Wrapit did. A nice, long chat with their auditors might also be in order...

Image from Newbusiness.co.uk