Predicting the end of the world
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: a waste of desert sand;
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Wind shadows of the indignant desert birds.
The darkness drops again but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
Interesting new pilot program from Bank of America. After the debacle of their $5 debit card fee last year, they desperately need a successful, consumer-friendly initiative that works. The new BankAmeriDeals might be a small step in the right direction.
Reuters has the details, more here and here. Couponless redemption and the ability to close the redemption loop automatically is clearly the way forward in a social, Web 2.0 world. Amex launched a similar product with its ‘Link, Like, Love’ Facebook tie-in last year. Amex’s solution worked pretty well, but I think BankAmeriDeals could become a compelling offering for a few reasons:
-Scale: This is the first real ‘Bank Groupon’ attempt. BofA has the customer base and scale to make this a really big, nationwide program. As with all two-sided markets, getting both sides on board will be the challenge but BofA has the scale to try and do this right.
-Breadth: The program will likely work for both debit and credit cards (in fact, the focus might be on the former, as a means to recover from Durbin. Having said that, one of the articles talks about how BofA will ‘not make any money’ on BankAmeriDeals, which should be taken with a grain or two of salt), which means attracting a wide customer base, which, in theory, should make this a better proposition for merchants as well
-Security/Privacy: I’ve used Link, Like, Love in a limited way. I never felt comfortable ‘liking’ pages on Facebook though, and I can see a lot of consumers preferring to reveal preferences on the BofA website, rather than on Facebook.
-User Experience: I believe this is really key, because hosting the deals on your own bank’s website vs. Facebook means you are putting offers in front of the customer when they are checking their bank balances or transferring funds, etc. (rather than looking at news feeds, weekend party pictures, etc.). I’m much more interested in, and more likely to accept, a coupon when I’m already thinking about my finances rather than when what I really want to do is to get Facebook friends updates.
Meta-Commentary on the Financial Crisis
The financial crisis has produced a tremendous amount of reporting, analysis and recommendations on what happened, what went wrong and why, and how to fix it. Financial journalists and reporters have been kept busy, and almost everyone seems to have written a book about the crisis. Michael Lewis created an entire new trend of ‘financial disaster tourism’ with his series of Vanity Fair articles from Iceland, Greece, Ireland, etc. (Parenthetical note: The quality of these articles did exhibit a markedly downward trend, though. I can’t understand why he expended so much prose on scatological matters in his dispatch from Germany). Sometimes, it’s hard to detect what is worth reading from the rest in all of this material. The signal-to-noise ratio has been trending down almost monotonically.
I’ve personally spent a fair amount of time consuming and reflecting on much of this commentary. I liked some efforts and wasn’t that impressed with others. Andrew Ross Sorkin‘s blow-by-blow, meeting-by-meeting account of the events will always serve as good reference (it reminded me a bit of William R. Shirer’s ‘The Rise and Fall of the Third Reich’. It has been more than a decade since I read the latter, but I was struck by Shirer’s description of how, in the immediate aftermath of WWII, he felt he was writing an almost journalistic account of events, without the benefit of true hindsight as well as the passage of time to leaven his analysis). Gillian Tett’s ‘Fool’s Gold‘ is an illuminating account of the origins of credit derivatives. I liked the emphasis on regulatory capture in ‘All the Devils are Here’. Still, this represents a sampling at best, there is much that I haven’t had the time or awareness to read or think about.
In this context, Andrew Lo (whose textbook was the foundation of an econometrics course I studied many moons ago) has now done us all a service by reading and summarizing 21 books about the financial crisis. Lo has written a very readable and enjoyable paper, covering books by Cohan, Farrell, Michael Lewis, Roger Lowenstein, McLean and Nocera, Morgensen and Rosner, Sorkin, Tett, Zuckerman and Hank Paulson (the ‘journalist’ set). On the academic side, he covers ‘Guaranteed to Fail’, ‘Animal Spirits’, ‘The Squam Lake Report’, ‘The Great Crash of 2008′ (a book I hadn’t heard of previously), Gorton, Simon Johnson’s ’13 Bankers’, Rajan, ‘This Time is Different’ (one of Lo’s favorites), Roubini, Shiller and Stiglitz. Phew!
For the books you haven’t read yet, it provides several precis that will save you the time and effort of reading the originals (alternatively, it could pique the interest and make you want to read a couple more). Lo’s basic theme is that there are multiple narratives on the financial crisis that provide multiple perspectives. Some may even be contradictory, although this does not necessarily mean they are less valid–this is because there is shockingly little agreement or understanding of the basic facts, let alone the causes. He documents some compelling example of this lack of common understanding, many of which have not been fully acknowledged even today.
One that struck a particular chord with me was the ‘investment banks were too highly leveraged’ theme. At the time of Bear Stearns and Lehman, I was a strategy consultant and was working with a number of banks, trying to help their Treasury teams manage liquidity in the lead-up to and aftermath of the crisis. I remember putting together a chart that showed Lehman’s debt-to-equity ratio increasing through the noughties to 33:1 just before it went bankrupt. We used that chart in a number of presentations. As Lo shows, leverage in the investment banking sector was much higher in the 90s than it was in 2007/8. Of course, our chart didn’t go back that far.
I believe this only re-iterates the importance of the size of banks pre-crisis. Leverage was arguably too high, but that’s a pretty weak argument by itself. It was the combination of leverage (at fairly normal operational levels for broker/dealers) and an explosion in size of bank balance sheets that may have been the real problem.
In any case, Lo’s paper is well worth reading. I particularly liked his use of the phrase ‘predatory borrowing’. At a time when ‘predatory lending’ is seen by so many as one of the obvious causes of the crisis (never mind that it’s a very amorphous and poorly defined term to begin with), I think it’s important to remember the other side of that transaction. Homeowners looking to flip their home for 2x the price (i.e. the ’99%’) were at least as complicit in creating the problems in the mortgage market as lenders or any of the other participants. It’s easier to blame the few, but unfortunately that brings us no closer to the truth.
Addendum:
Credit where it’s due: Tyler Cowen used the phrase ‘predatory borrowing‘ four years ago. I probably read his column but forgot the reference until Andrew Lo’s paper reminded me.
On the subject of attributing quotes correctly: Lo’s paper also does quote-hunters a great service by noting that Keynes is, in fact, not the author of a phrase commonly attributed to him (‘The market can stay irrational longer than you can stay solvent’). Read the paper or look here for more.
2012 in Payments: Looking Forward
2011 was an interesting year in payments, with a number of important developments, e.g.
- Google Wallet making its debut, with more to come in 2012. You have to pay attention when any of Google / Amazon / Facebook / Apple make any moves, because they have the ability to really move/motivate the market
- An explosion in shopping-/payments-related apps (e.g. RedLaser, Shopkick, Foursquare, Starbucks’ app, etc.)
- The game-changing introduction of the Durbin final rule, the impact of which has not even fully played out yet. Banks have been forced to attempt to correctly charge for an unprofitable product (checking accounts) now that the revenues from debit are gone. Some chose to introduce a transparent, clear fee ($5 a month) and got burned for being transparent. Checking is still unprofitable though and the end result of the BoA debacle will be that checking account costs disappear into the murky, hard-to-understand world of hidden fees. The ‘two networks’ requirement of the Durbin rule hasn’t even kicked in yet, so expect more turbulence ahead as the impact of that requirement plays out
2012 will also be an important year for the main payments players. Here is a quick look at what’s likely to be the top story for each of the firms over the next 12 months:
PayPal: 2012 is a big year for PayPal, when they are looking to build out their physical POS presence. I think there are compelling reasons for consumers to adopt a new PayPal-based payment mechanism (BillMeLater, the so called ‘empty hands’ checkout option of paying using a phone number and PIN, etc.) but the benefits to merchants are less obvious. One merchant-friendly approach is to try and ensure a substantial share of PayPal transactions are funded directly from consumers’ bank accounts through ACH. That would reduce the ‘acceptance cost’ to merchants vs. interchange, and could be one strategy to winning acceptance. There are, of course, the ever-hyped benefits of superior customer/marketing insight, better data and visibility, etc. but these elements do not differentiate physical POS PayPal from competitors (e.g. Square can offer many of the same benefits)
American Express: Amex was first out of the blocks with its take on the digital wallet, Serve. While they’ve been guarded about take-up among consumers and traction with merchants, Serve could be a great platform for a bunch of reasons:
- Extend customer base to the mass-market segment. Serve will help Amex capture consumers at a younger age, it likely appeals to the tech-savvy segment (with, for example, its P2P money transfer capability), and is also a product that appeals to the belt-tightening US consumer post-recession (since Serve is a stored-value product)
- Build to scale rapidly through mobile carriers: I think Serve has a winning strategy with their partnerships with Sprint and Verizon. The Serve app will be pre-loaded on smartphones and tablets from these providers, which will enable the Serve platform to scale rapidly
- Attract new partners/developers: Amex has said that Serve will remain in ‘test and learn’ mode for much of the year, as they look to build out their base of partners and 3rd party developers.
Visa: Visa’s V.me was announced a couple of months ago, and they have currently opened up a ‘developer sandbox’ for interested parties to test the APIs and V.me functionality. At the same time, Visa is a partner in Google Wallet, it’s part of ISIS (which will itself start to introduce its mobile payments solution in the second half of 2012), it is, of course, an accepted payment method on PayPal… in short, Visa has its fingers in multiple pies, which is an effective way to hedge your bets when things are changing so quickly. As V.me moves from ‘alpha testing’ to pilot/beta, it will be interesting to see how the solution works and how it stacks up vs. the rest
Mastercard: Mastercard has been relatively quiet on the digital wallet front, although they were the first partner to Google Wallet (Amex, Visa and Discover joined later). They announced an interesting collaboration with Intel to enable NFC payments on a computer (essentially you will be able to wave your card/phone at your laptop to enable a payment). Mastercard also invested in MFoundry, and we’ll be keeping an eye on moneto as well.
So a lot to look forward to in 2012. We’ll have more to say about a number of these players (including Google and Facebook) and their initiatives in the weeks and months ahead.
Chart of the Year
As someone who worked in strategy consulting for many years, I always felt particularly satisfied when I pulled together a chart that neatly encapsulated a key message. A good chart cuts through to the core of an issue, clarifies and explains in an elegant, compact Tufte-like way.
This may explain why I particularly enjoyed the recent compilations of ‘charts of 2011′ first from the BBC and then from multiple others, including The Atlantic. My favorite chart by a long margin is the one showing interest rates on 10-year European government bonds. It explains the comeback of political risk in the Eurozone, captures the problems faced by the PIIGS and shows why the ‘golden era’ of Eurozone stability in the early 21st century was an illusion. Both the BBC and The Atlantic included versions of it, and it is a great example of a picture speaking 1k+ words.
Google’s new indoor maps will soon make George’s iToilet app a reality!
Immigration Reform
This return to active blogging is marked by a good day. The markets are showing a spot of irrational exuberance (how does improved access to $$$ address the European sovereign debt issue, which looks less like a liquidity issue and more like a solvency issue with each passing day). Today was also a good day for the US House of Representatives. Given the gulf that exists between the Democrats and the Republicans today, it is encouraging to see that an effort to improve immigration law has actually passed the House.
Unlike the Bloomberg piece linked above, I think the impact will not be an unqualified good–any redistributional scheme produces winners and losers (and clearly cannot be Pareto optimal). Are Indian IT workers better than, say, Swedish entrepreneurs for the US economy in the short, medium and long run? Hard to say.
It’s unlikely that anyone can tackle true immigration reform in the near future, but today is still a good day. It helps to restore the belief that the US will always resist the inward-looking, xenophobic and ultimately destructive tendency of some countries to seal off the borders during a recession (e.g. Europe, and even the UK, where the tier-based work permit program has been eliminated).
